Feds tighten tax rules for small businesses and passive income

The Liberal government moved to tighten the tax rules for small businesses in the federal budget Tuesday as it fine tuned the changes that prompted an uproar last year.

However, Finance Minister Bill Morneau still faces the challenge of corporate tax cuts in the U.S. that have prompted worries that companies will choose to invest there instead of Canada.

In the budget, Morneau opted to hold the line on corporate taxes in Canada, choosing to help businesses in other ways, including with spending to help women-led businesses grow, innovation and diversification of trade.

“We know businesses are concerned about the outcome of North American Free Trade Agreement talks and tax changes in the United States,’’ he said. “We will be vigilant in making sure Canada remains the best place to invest, create jobs and do business — and we will do this in a responsible and careful way, letting evidence, and not emotion, guide our decisions.’’

The minister faced a backlash over his initial plans to change small business taxes last year before backing down on some of the proposed changes and reviving a promise to reduce the small business tax rate.

In the budget this year, Ottawa moved to gradually eliminate the amount eligible for the preferential small business rate as the amount of passive income rises above $50,000 with the small business deduction limit reduced to zero at $150,000. It also moved to limit the advantages that some businesses can obtain when they pay certain dividends.