Tax change could be $6B windfall
CHANGES TO PASSIVE INCOME RULES COULD NET FEDS $6 BILLION
The federal government could eventually rake in up to $6 billion annually in new revenue as a result of a proposed change in the tax rules for incorporated small businesses, Parliament’s budget watchdog estimated Thursday.
A parliamentary budget office report concluded changes to passive investment rules would add up to $1 billion to federal coffers in the first couple of years, rising to as much as $4 billion in 10 years and as much as $6 billion in 20 years.
Those estimates were disputed by Finance Minister Bill Morneau.
“We’ve been clear, this is not and has never been a revenuegenerating exercise,” the minister’s spokeswoman, Chloe LucianiGirouard, said in an email.
“It is about ensuring that wealthy individuals do not have an incentive to incorporate just so they can get a better tax rate than the middle class.”
Only once final details of the proposed changes are unveiled in the 2018 budget will it be possible to accurately predict the impact on the federal treasury, LucianiGirouard said. Nevertheless, she added that the government believes the measures will “likely generate significantly less revenue than what the PBO has estimated.”
The PBO report comes amid continuing opposition to the proposed changes in tax rules for incorporated businesses — even after Morneau last month scaled back the plan in a bid to quell an outcry by doctors, lawyers, accountants, shop owners, farmers, premiers and even some Liberal backbenchers who contended the changes would hurt the very middle class the Trudeau government claimed to be trying to help.
But the PBO’s report backs up Morneau’s contention that the plan would impact only a tiny percentage of wealthy businesses — at least when it comes to the passive investment proposal for Canadian-controlled private corporations (CCPCs).
“In terms of distribution, the impact of these changes is likely to be highly concentrated on a relatively small share of CCPCs, which hold the vast majority of passive investment assets,” the report says.
The tax rule changes are aimed at ending the ability of wealthy individuals to use incorporation to gain what the government maintains is an unfair tax advantage. The most contentious proposal would limit the ability of a corporation to make so-called passive investments in things unrelated to the business, like real estate.
In response to criticism, Morneau revised the proposal last month, adding a proviso that the change would apply only to passive investments exceeding an annual income threshold of $50,000 — a change the government maintains would allow businesses to save up to $1 million for contingencies and future investment in growth and impacting just three per cent of the wealthiest private corporations.