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tax changes

Liberal MP Wayne Easter speaks during Question Period in the House of Commons on April 30, 2009.Sean Kilpatrick/The Canadian Press

The Liberal chair of the Commons finance committee is rebuking his own government's rollout of proposed tax changes, stating that it was a mistake to portray small-business owners as tax cheats.

Liberal MP Wayne Easter said Ottawa's midsummer announcement caught farmers and other business owners off-guard and triggered an unprecedented backlash from his constituents.

"The communications was just god-awful," he said in an interview. Mr. Easter singled out the Department of Finance's July 18 discussion paper, which explained the changes and outlined examples where small-business owners do not pay the same amount of tax as salaried employees.

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"Whoever drafted that doesn't have a clue about the amount of effort that goes into being a small business or how it's established," he said. "The communications made people feel that they were being accused of abusing the tax system."

Mr. Easter said it would have been better to launch a much broader review of the tax system with extensive debate over options for reform.

The government's proposals include measures aimed at restricting the ability of small-business owners to "sprinkle" income to family members for tax purposes in cases where the members do not work directly for the business. They would also restrict the use of small businesses as a vehicle for making unrelated passive investments, and a third change would limit a business owner's ability to convert income into capital gains.

Other Liberal MPs are urging Finance Minister Bill Morneau to extend his Oct. 2 deadline for consultations on the government's controversial tax package. The comments this week from Liberal MPs indicate that strong concerns remain inside the Liberal caucus, even after last week's efforts by Mr. Morneau and Prime Minister Justin Trudeau to address the criticism when MPs met for a caucus retreat in Kelowna, B.C.

Toronto-Danforth Liberal MP Julie Dabrusin has sent a three-page letter to Mr. Morneau outlining an extensive list of concerns that she has heard from constituents since the package was announced on July 18.

"Hyperbole or not, as proposed, the magnitude of the changes requires further consultation and time for Canadians to be properly engaged in this consultation," she wrote. "I would like the government to commit additional time so as to further understand the impacts of the proposals."

In an interview, Ms. Dabrusin said she stood by the position that the deadline should be extended. Ms. Dabrusin said Liberals had a good discussion last week and that the letter is in response to Mr. Morneau's stated desire for feedback on the proposals.

Nova Scotia MP Darrell Samson said the tax changes continue to dominate discussion in his riding. While he said he feels MPs' concerns about the changes are being taken into account by the Prime Minister and Mr. Morneau, he thinks the issue still deserves more study.

"Many people in my constituency are saying that the time frame is short and the summer was less active than it would be in the fall," Mr. Samson said. "If we could extend that deadline, it would be a positive step."

Liberal cabinet ministers are gathered this week in St. John's for a cabinet meeting to plan the fall session of Parliament and look ahead to the second half of the Liberal government's mandate.

Mr. Morneau said he has been talking to Canadians at events and they are beginning to understand the importance of eliminating tax advantages that are available only to the wealthy.

But widespread concern remains among people who own small businesses.

Newfoundland Premier Dwight Ball spoke to the Prime Minister and his cabinet behind closed doors in St. John's on Tuesday and said one of his main messages was that communications around the tax changes must be clearer.

"There is a disconnect right now," Mr. Ball, a Liberal, told reporters after that meeting. "What we've been asking for is some clarification of what those proposals would look like, what the impact would be on small communities and health-care professionals in our province."

Mr. Morneau said he is hearing plenty of misinformation about the proposed tax changes.

"We want small businesses to continue to invest, to grow the economy. We want to maintain the low tax rate for small businesses in this country, the lowest among G7 countries," he said.

The next month will be spent talking to business owners and their champions, including chambers of commerce, he said.

"We expect when you make changes that might impact the wealthiest's tax situation that we're going to hear about it. And we are certainly hearing about it," he said.

Tax expert Kevyn Nightingale, an accountant with MNP, said MPs are right to call for additional consultation.

He said the government's policy objectives are sound, but the proposals are so vaguely worded that they will create all sorts of unintended consequences.

While the government says its proposals are targeted at specific tax practices used by high-income earners, Mr. Nightingale said the reality is the proposed changes will likely require years of court battles to sort out if they are implemented in their current form.

"I think that that's a fundamentally bad way to run tax," he said. "One crucial aspect of tax is people's ability to understand the law in advance of what they do and when they file their tax returns … if people can't do those things with any degree of confidence, the system falls apart."

With a report from Laura Stone

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