Morneau not swayed by tax-plan backlash
Finance minister defends decision to close loopholes for private corporations
OTTAWA— Finance Minister Bill Morneau is standing firm in the face of loud opposition to proposed tax changes for people with private corporations, which he says will “level the playing field” in the Canadian tax system.
The changes have been blasted by the Conservative opposition in Ottawa as a “small-business tax grab,” while a newly formed coalition of more than 40 groups representing lawyers, doctors, businesses, farmers and others has called on Ottawa to drop the proposed reforms.
But the government is sticking to its guns, arguing the changes are meant to close tax loopholes available only to people with private corporations. The Liberals say these allow people with corporations to shift income to family members and shield savings inside a business to avoid taxes. They also contend that it’s unfair that people can use corporations to transform income into capital gains, which are taxed at a lower rate than normal earnings.
Speaking to reporters from Vancouver on Tuesday, where he met with business owners as part of a country-wide consultation on the proposed changes, Morneau said he hasn’t heard anything so far that would make the Liberal government change course on the tax changes.
“Of course people would rather keep the system the way it is if it’s providing them with personal advantage,” he said. “We don’t want to be in a situation where there are two classes of Canadians: one class that can incorporate, another class that can’t; one class that as a result has lower tax rates, the other one that has higher tax rates. That’s not, in our estimation, a sustainable long-term future.”
Conservative MP Pierre Poilievre, the party’s finance critic, accused the government Tuesday of misleading Canadians in its contention that people with corporations have unfair tax advantages. Poilievre said there are already rules to prevent improper “income sprinkling” to family members and that small-business owners should be allowed to save money within their corporate structures.
“What Minister Morneau is proposing is not solving a tax-avoidance problem; it’s solving a revenue-shortfall problem,” he said.
Morneau announced the proposals in July, with a 75-day consultation period. He said at the time that the government wants to close tax loopholes that — while legal — are being used by a wealthy few to avoid paying their full share “through fancy accounting schemes.”
The first loophole involves socalled “income sprinkling,” where someone with a private corporation pays part of their income to members of their family — who are ostensibly employees — to avoid paying a larger percentage of income tax.
Finance officials estimated that 50,000 families are avoiding taxes in this way, causing the government to miss out on $250 million per year.
To address this, the government is proposing a new “reasonableness test” to ensure that income is transferred to family members for legitimate reasons, not just to spread money to pay lower taxes.
Ottawa also wants to crack down on “passive income” that accrues from investments parked within a private corporation — money that can be shielded from the higher, personal income tax rate and is not subject to the contribution limits of other savings mechanisms, such as RRSPs.
The final loophole targeted by Morneau involves Canadians with private corporations who transform portions of their income into lowertaxed capital-gains earnings.
Groups arguing against the changes have said it is unfair for the government to change tax rules for private corporations without warning or engagement.
Corinne Pohlmann, senior vicepresident of national affairs at the Canadian Federation of Independent Business, said Tuesday that many of the 109,000 entrepreneurs with her organization have expressed “anger” at being characterized as “tax cheats.”
She said it’s not fair to compare salaried employees to business owners with private corporations, who don’t have paid vacations, sick days or company pensions.