The Liberal government is making further concessions to small-business owners even as a Senate study has concluded that Finance Minister Bill Morneau should scrap his controversial tax plan entirely.
As members of Parliament bolted for the exits for a six-week recess, Mr. Morneau stood in the House of Commons foyer to announce his latest revisions to tax changes he first proposed in July. The latest adjustments include new exemptions for certain family situations, but the minister is sticking with his plan to have the new rules take effect on Jan. 1.
Mr. Morneau said family businesses will have enough time to decide how they want to handle issues such as dividend payments to family members under the new rules, given that taxes for 2018 are not filed until 2019.
"They'll have 12 months to figure that out," he said. "We think this is entirely appropriate and consistent with past practice."
Finance Canada released a host of technical guidelines on Wednesday that outline how Ottawa will administer new rules aimed at restricting the use of "income sprinkling" by business owners and their families as a way of paying less tax. As expected, the rules outline how the government will decide whether or not income sprinkling by an owner to a family member is reasonable, based on criteria such as labour and financial contributions.
However, the government also announced new situations in which family businesses could be entirely exempt from the new income-sprinkling rules.
The provisions include new exemptions for adult family members who work at least 20 hours a week for the business and for adults 25 and over who own 10 per cent or more of a corporation that is not a professional corporation, such as a law firm or doctor's office. Another exemption applies to sprinkling income from an owner to a spouse in cases where the owner is 65 or older. That provision is meant to provide business owners with an option along the lines of pension-income splitting that is available to other Canadians. That change was praised on Wednesday by the seniors-advocacy group CARP.
Conservative and NDP MPs said it was unfair of the government to announce further changes less than three weeks before they take effect with no opportunity for further Parliamentary debate.
The income-sprinkling provisions were one of three main elements of a package of proposals related to incorporated small businesses that generated considerable controversy after they were first proposed in July. In October, Mr. Morneau announced that Ottawa would not be going ahead with one aspect, a plan to restrict the conversion of dividend income into lower-taxed capital gains.
The third element, a restriction on the use of an incorporated small business as a vehicle for making passive investments, is also going ahead with some changes. The minister announced revisions to that plan in October, including that it would exempt the first $50,000 a year in passive income, which is equivalent to a 5-per-cent return on $1-million in savings invested.
The minister has promised to provide further details on the passive-investment plan in the 2018 budget.
Earlier on Wednesday, the Senate national finance committee issued a report that sided with critics of the government's approach. Following months of cross-country hearings on Mr. Morneau's proposals, the committee concluded that the entire package should be shelved.
"Most witnesses told our committee that the proposed changes should be withdrawn in their entirety," the committee report states. "We are inclined to agree. We are not convinced that the government has made a good case for its proposals."
The senators said the government should start over by launching a comprehensive review of Canada's tax laws along the lines of the 1966 Royal Commission on Taxation, known as the Carter commission. Should the government insist on moving ahead, senators say the government should push back the start date by at least a year, to Jan. 1, 2019.
Finance Canada documents state that Wednesday's changes reduce the estimated number of incorporated small businesses affected by the income-sprinkling provisions from 50,000 to about 45,000. Also, the amount of revenue that Ottawa expects to collect from income sprinkling changes has been reduced from the original July estimate of $250-million a year. The government now expects the measures will raise $190-million in 2018-19, increasing to $220-million in 2022-23.
The Senate committee is made up of five Conservatives, five independents and two Liberals. Two of the independents – André Pratte and Éric Forest – indicated that they did not support the committee's recommendation that the government should scrap the tax proposals entirely. The two Liberal senators did not respond to requests for clarification of their positions.
Some business groups and accounting bodies stated that while Wednesday's changes address some concerns, they also raise new questions and leave little time to act.
"There are attempts at simplification but the changes are not simple," said Bruce Ball, vice-president of tax for the Chartered Professional Accountants of Canada. "There is no reason why these changes have to be rushed through now."