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Federal Conservative leader Andrew Scheer makes a campaign stop in Thorold, Ont., on Tuesday, Sept. 24, 2019.Nathan Denette/The Canadian Press

Conservative Leader Andrew Scheer said he would reverse most of the Liberal government’s changes to small-business-tax rules, although tax experts say the big winners would be business owners with more than $1-million in passive investments.

Mr. Scheer, who held his announcement at a bar in Thorold, Ont., in the riding of Niagara Centre, said he believes governments should “get out of the way” and allow small businesses to create jobs and build the economy.

“Treating small businesses like big corporations so they can tax them more is just more proof Justin Trudeau doesn’t get it,” Mr. Scheer said. “He doesn’t get you.”

In 2017, Liberal Finance Minister Bill Morneau came under heavy criticism from business owners, opposition parties and some Liberal MPs after introducing an extensive and complex package of proposed tax changes.

The changes were based on a 2015 Liberal campaign pledge to review the rules for incorporated small businesses so that they are not used by high-income earners as a way of paying less tax.

After months of controversy, the Liberal government backed away from most of that initial plan, but some elements went ahead with revisions aimed at addressing business concerns.

The Liberal government did go ahead with a change that restricts the use of income splitting – or sprinkling – by incorporated small businesses. The 2018 changes require business owners to prove that a spouse or child is receiving income because of actual contributions to the business, rather than simply as a way of reducing the family’s overall tax bill. Mr. Scheer’s change would exempt spouses aged 25 and older from these rules. This would reduce federal revenues by more than $30-million a year, according to an independent analysis produced by the Parliamentary Budget Officer.

Mr. Morneau’s 2018 budget also significantly scaled back the scope of new restrictions on the use of an incorporated small business as a vehicle for making passive investments, meaning investments that are not directly related to the business. As a result, a company’s access to the lower small-business tax rate starts to be phased out on passive investment income over $50,000, which is equivalent to a 5-per-cent return on an investment fund of $1-million.

The Finance Department said the changes would apply only to the top 3 per cent of businesses that report taxable passive-investment income.

The PBO said the Conservative plan to end this policy, in addition to a related measure that applies to the taxation of dividends, would reduce federal revenues by $500-million in 2020-21, growing to $668-million by 2028-29.

Dan Kelly, the president of the Canadian Federation of Independent Business, praised the Conservatives for responding to the widespread concerns of the small-business community.

“This is a really good package of changes for small business owners,” he said. “Certainly the anger over the 2017 tax changes has not gone away on the part of the small-business community. It’s still a pretty raw nerve with a lot of business owners who felt very alienated from government policy making.”

Mr. Kelly said that $1-million in passive investments is not much when considering that a business owner may have many employees and will use that money to manage difficult financial times and as a way of saving for retirement.

However, retired accountant and tax expert Allan Lanthier, who has followed the debate closely, said the kind of businesses that would benefit from Mr. Scheer’s announcement are not what most people would consider to be a small business.

“That’s helping a small business that has more than a million dollars of portfolio investments that are not required in the corporation’s business. So that’s not helping the plumbers, welders or the florist guy down the street," he said. "I don’t think there’s a sound policy basis for reversing that Liberal change.”

Mr. Lanthier said the arguments in favour of tax breaks for business owners who have large passive investments are at odds with the original purpose of giving small businesses a lower tax rate than big companies.

“The policy reason for the small-business deduction is to help fund and grow the business and create more employment in the business. It’s not to fund the owner’s retirement,” he said.

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