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 at the House of Commons foyer to announce his most recent adjustments to tax changes he proposed in July. The most recent adjustments consist of 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 are going to have sufficient time to determine how they would like to manage problems such as dividend payments to family members under the new rules, given that taxes for 2018 aren’t filed until 2019.
“They will have 12 months to figure out that,” he said. “We think that is entirely appropriate and consistent with past practice.”
Finance Canada released a plethora of technical guidelines on Wednesday that summarize how Ottawa will administer new rules aimed at restricting the use of “income sprinkling” by business owners and their families as a method of paying less tax. As anticipated, the principles outline how the authorities will decide whether income sprinkling by an owner to a relative is reasonable, according to standards like labour and financial gifts.
However, the government also announced new scenarios in which family businesses might be completely exempt from the new income-sprinkling rules.
The provisions include new exemptions for adult family members working at least 20 hours each week for the company and for adults 25 and over who have 10 percent or more of a company that’s not a professional company, like a law firm or physician’s office. Another exemption applies to extort money from an owner to a partner in circumstances where the owner is 65 or older. That provision is intended to offer business owners with a choice along the lines of pension-income dividing that’s available to other Canadians. This change was commended on Wednesday from the seniors-advocacy group CARP.
Conservative and NDP MPs said it was unfair of the government to announce additional changes less than three weeks before they take effect with no chance for additional Parliamentary debate.
The income-sprinkling provisions were among three chief elements of a package of suggestions related to integrated small businesses that created considerable controversy after they were first proposed in July. In October, Mr. Morneau declared that Ottawa wouldn’t be moving ahead with one aspect, a strategy to limit the conversion of dividend income into lower-taxed capital gains.
The next element, a limitation on the use of an integrated small company as a vehicle for making passive investments, is also going ahead with a few changes. The minister announced revisions to this plan in October, including that it would exempt the first $50,000 a year in passive income, which is equal to a 5-per-cent yield on $1-million in savings spent.
The minister has promised to give additional details on the passive-investment program from the 2018 budget.
Earlier on Wednesday, the Senate federal finance committee issued a report that sided with critics of the government’s approach. After months of cross-country hearings on Mr. Morneau’s proposals, the committee concluded that the whole package ought to be shelved.
“Most witnesses told our committee that the proposed changes must be withdrawn in their entirety,” the committee report says. “We tend to agree. We’re not convinced that the government has made a great case for its suggestions.”
The senators said the government should begin over by launching a comprehensive review of Canada’s tax legislation along the lines of the 1966 Royal Commission on Taxation, called the Carter commission. Should the authorities insist on moving forward, senators say the government should push back the start date by at least a year, to Jan. 1, 2019.
Finance Canada documents say that Wednesday’s changes decrease the estimated number of integrated smaller businesses affected by the income-sprinkling provisions from 50,000 to about 45,000. Additionally, the amount of earnings that Ottawa expects to collect from income sprinkling changes has been reduced from the initial July estimate of $250-million annually. The government now expects the steps will increase $190-million in 2018-19, increasing to $220-million in 2022-23.
The Senate committee consists of five Conservatives, five independents and two Liberals. A couple of the independents — André Pratte and Éric Forest — indicated they didn’t support the committee’s recommendation that the government should scrap the tax proposals entirely. Both Liberal senators didn’t respond to requests for clarification of the own positions.
Some business groups and accounting bodies said that while Wednesday’s changes address some issues, they also raise new questions and leave little time to act.
“There are efforts at simplification but the changes aren’t easy,” stated Bruce Ball, vice-president of taxation for the Chartered Professional Accountants of Canada. “There is not any reason why these changes have to be hurried through now.”