Small business still concerned in spite of tweaks to tax changes, Morneau hears

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Two weeks after announcing a major overhaul of his controversial small-business tax changes, Finance Minister Bill Morneau is being told his plan still faces strong opposition.

Mr. Morneau appeared on Wednesday before the Senate's national finance committee, which has been holding hearings on the topic for weeks and intends to continue its work on a cross-country tour this month.

While many business lobby groups initially said they welcomed Mr. Morneau's changes to the proposals, the Senators have since heard from business owners and tax experts who say the plan would still hurt the economy.

"A consensus is developing that these should be abandoned and that what we should be doing is reviewing the complete tax system in Canada," Independent Senator Doug Black told Mr. Morneau on Wednesday, summarizing what the committee has heard to date.

The Finance Minister acknowledged some concerns still need to be addressed. He said the government will provide more detail over the coming months and in next year's budget.

"We believe we've found a balance," he said.

Mr. Morneau released a package of proposals in July for consultation. He said the changes were to prevent high-income Canadians from using small business corporations as a way to pay less tax. One proposal would limit the ability of a business owner to pay less tax by "sprinkling" income to family members who do not make a "reasonable" contribution to the business. Another would have limited the conversion of dividend income into lower-taxed capital gains. A third proposal was presented as an effort to restrict the use of small business corporations as a vehicle for making passive investments, such as buying and selling shares of other companies that are not related to the business.

The proposals prompted a major outcry from business owners. Mr. Morneau responded in October with a week of announcements. He said the government would abandon the measure related to dividends and capital gains. He said he would move ahead with the provisions on income sprinkling but with a clearer definition of a "reasonable" contribution. Thirdly, he said an exemption would be allowed on the first $50,000 a year in passive investment income, which is equivalent to a 5-per-cent return on savings of $1-million.

He also said the government will cut the small business tax rate to 9 per cent from 10.5 per cent by 2019.

Mr. Morneau said on Wednesday the government intends to release more detail on the income sprinkling proposals over the next two months. He also said the government is planning to release draft legislation in January on the passive-income proposals before the next budget. The budget, which in the past two years has been tabled in March, would include the passive-investment changes. Mr. Morneau suggested critics of the plan should wait until all of the additional details are released.

"The design has not yet been completed," he said, noting that the government has not yet announced how much revenue it expects to raise from the passive-investment proposals. "So perhaps I'd ask you just to suspend disbelief for a few months until we get to our budget."

Tax experts and business owners have told the Senate committee that complying with the income sprinkling and passive investment proposals in the revised plan would create major accounting challenges.

Laurent Proulx, who employs 40 people as the owner of the Le Canadien restaurant and related businesses in the Quebec town of Notre-Dame-du-Bon-Conseil, testified before the committee last week. He said the fact that he was willing to drive for hours to address a Senate committee should highlight his level of concern.

"In my opinion, taxing capital that has accumulated in a business is highly detrimental to economic growth," he told Senators last Wednesday.

Joanne Sirois, the president of an insurance company in the small Eastern Ontario town of Casselman, expressed similar concerns at the same meeting.

"There are still serious problems with the government's plans," she said.

University of Calgary tax expert Jack Mintz told the committee on Tuesday that while the Liberals said the changes are about fairness, he believes the government is also seeking to raise revenue.

"What was forgotten was growth," he said. "I think the passive income rule needs to be dropped. It's just not workable and it will create significant harm to the economy."