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

Four North Okanagan students receive scholarship

Transferring from one post-secondary institution to another is no easy, or inexpensive, task

Snowfall warning between Merritt and Hope

As much as 20 centimteres of the white stuff is expected along a stretch of the Coquhialla

Gallery celebrates long history of art appreciation

Gallery Odin, at Silver Star Mountain, is gearing up to open their 16th annual Winter Exhibition

Traffic stopped on Highway 97B due to crash

The incident took place south of Mellors Store.

Comedian/magician visiting Lake Country

Wes Barker is performing at Creekside Theatre, Nov. 25

Drones used in search for clues about missing women

A volunteer search party was supported by professional drone operators

Coquihalla closed both directions near Merritt

Detours are available via Hwy. 8 and Hwy. 1

VIDEO: The Last Jedi is going to be the longest ‘Star Wars’ movie yet

Newest movie in the franchise will beat Star Wars: Episode II - Attack of the Clones

REPLAY: B.C. this week in video

In case you missed it, here’s a look at replay-worthy highlights from across the province this week.

PHOTOS: Procession and funeral for Const. John Davidson

Thousands attended celebration of life for Abbotsford police officer

B.C. Liberal leadership candidates debate different paths for party

Third debate held Sunday, Nov. 19 at Nanaimo’s Vancouver Island Conference Centre

Vernon poet makes poetry prize shortlist

He’s been involved with the craft since the ’70s, gaining recognition along the way

Studio e is all about excitement and energy

Vernon studio hosts open house with concert, paintings, wine and cheese

LIVE: BC Liberals kick off leadership debate in Nanaimo

Candidates’ forum is at noon at Vancouver Island Conference Centre

Most Read