Tax changes needed to avoid ‘two classes of Canadians’: finance minister

Entrepreneurs, including in B.C., say incentives allow them to take on risks of opening companies

Federal Finance Minister Bill Morneau says income-tax reforms are needed because small business owners have an unfair advantage that could create two classes of Canadians for tax rates and retirement income.

He said the current system means business owners who incorporate their companies pay lower taxes while a second class of citizens ends up with a higher tax bill.

Proposed changes introduced in July would do away with “inappropriate” tax planning methods and deal with unintended consequences benefiting the “privileged few” whose numbers have grown significantly, Morneau said on Tuesday.

“We’ve had a 300-per-cent increase in the incorporation of professionals in the last 15 years,” Morneau told reporters after meeting with small business owners in Vancouver as part of cross-Canada consultations.

Small business owners in Canada pay the lowest income tax of all G7 countries and that provides investment opportunities to fuel job creation, but loopholes in the current tax system aren’t sustainable, Morneau said.

Incentives such as “income sprinkling” unfairly allow business owners to reduce taxes by shifting some of their earnings to family members who don’t have to work in the company, he said.

“Now we have a situation where a single woman who has two children, aged 12 and 14, and has the same amount of income as a married woman who has children who are 19 and 20 can find herself in a higher tax rate. So we see no reason why that should be so.”

RELATED: Proposed small-biz tax changes too broad: Wyper

But entrepreneurs say current incentives allow them to take on the risks of opening their own companies and, unlike salaried and public-sector employees, they don’t have a guaranteed pension or employment insurance protection.

Morneau said so-called passive investment income rules that allow a small business to build up a fund are unfair because that’s being used as a retirement-planning vehicle to defer tax on significant amounts of cash while others must abide by the limits of registered retired savings plans.

“If small businesses want to leave money in their business to potentially invest in the future of their business we understand and encourage that,” he said. “We just want to ensure that there’s no situation where they have a much, much better retirement income as a result of tax planning not available to other Canadians.”

Morneau also said he’s against small businesses converting regular income into capital gains and paying half the tax rate, so that provision would also be changed.

The consultation period on the tax changes will end on Oct. 2.

Conservative finance critic Pierre Poilievre called on Morneau to back down on the policy reforms.

“Prime Justin Trudeau and Finance Minister Bill Morneau are creating two classes of taxpayers,” he said in Ottawa.

“What minister Morneau is proposing is not solving a tax avoidance problem, it’s avoiding a revenue shortfall problem. Minister Morneau has spent the cupboard bare and he’s now looking to raise taxes on small businesses to pay for it.”

Poilievre said Morneau has not explained a planned reasonableness test to ensure small businesses are legitimately claiming the work of family members, and companies would be forced to spend time and money explaining themselves to bureaucrats.

“Family members regularly contribute to small businesses, to family farms and to other enterprises, and there’s nothing wrong with them being appropriately compensated for that work.”

However, Poilievre could not explain why professionals including doctors would need such an advantage, saying only that he doesn’t accept the government’s characterization of passive investment.

Doctors have been vehemently opposed to the proposed changes, and Morneau noted they negotiate agreements with provinces.

“My response is the tax code is not the way we should be deciding on how to compensate people,” Morneau said.

Camille Bains, The Canadian Press

Like us on Facebook and follow us on Twitter.

Just Posted

Regional district voters call for change

Election results in for RDKS, school board — recount ordered for Terrace Rural

Incumbents and acclaimed mayors win elections all across B.C.’s north

Fraser Lake saw their first female mayor elected

Mayoral results from across B.C.

Voters in 162 municipalities in B.C. set to elect mayor, council, school board and more

Every vote counts: 10 tightest races in B.C.’s municipal elections

Peachland saw their election decided by just one vote

Election 2018: City votes are in

All incumbents re-elected, with two newcomers

B.C. sailor surprised by humpback whale playing under her boat

Jodi Klahm-Kozicki said the experience was ‘magical’ near Denman Island

Outdoor retailer MEC vows to boost diversity after online complaint

Mountain Equipment Co-op was criticized for perpetuating a white-only picture of the outdoors

Trump vilifies caravan, says he’ll cut Central American aid

Despite Mexican efforts to stop them at the Guatemala-Mexico border, about 5,000 Central American migrants resumed their advance toward the U.S. border Sunday in southern Mexico.

Federal carbon tax rebates will exceed the cost for most people affected

Officials say 70 per cent of people in those provinces will get back more than they end up paying out as fuel costs rise to incorporate the carbon tax.

Rotating strike in Toronto will have ‘significant impact,’ says Canada Post

Canada Post union announces rotating strikes in four Canadian cities.

Cancelling Saudi Arabia arms deal would cost $1 billion: Trudeau

Canada has added its voice to global calls for answers, with Trudeau telling the CBC in an interview today that the Saudi government’s explanation of what happened lacks credibility.

Former B.C. sheriff caught in sex-related sting pleads guilty to lesser charge

Kevin Johnston will be sentenced on Nov. 6 for his role in communicating online with a person posing as a 14-year-old girl.

WWE star Roman Reigns announces he has leukemia

Grappler formerly played in CFL

China opens mega-bridge linking Hong Kong to mainland

The $20 billion bridge took almost a decade to build while incurring major delays and cost overruns

Most Read