“We’re not increasing the tax rate on small businesses. We want to keep that low. We want to keep that as the lowest small business tax rate in G7 countries,” Morneau told the media during a roundtable discussion Wednesday in St. John’s.
“We are going after advantages that accrue to people that are earning over $150,000 in their company and advantages that increase as they have more and more money that they annually put into a passive investment inside their company.”
The changes focus on three areas: income sprinkling, whereby a business owner uses a private corporation to spread income among family members to create tax savings; converting income into capital gains, allowing the business owner to benefit from a lower tax rate; and holding passive investments inside a private corporation, which is essentially using the company instead saving accounts, also granting a lower tax rate.
“We’re trying to get at the advantage that a wealthy Canadian might have by parking investment income, in many cases, significant investment income, inside their company and getting the advantage of the small business tax rate instead of the personal tax rate on those investment returns,” Morneau said.
The minister, visiting the province with Prime Minister Justin Trudeau, along with other ministers and the province’s members of Parliament for a cabinet retreat, said some groups are presenting a “significant amount of misinformation” that is causing added and unnecessary concern among small business owners.
“We will continue to explain to the 66 per cent of small business owners that earn $73,000 or less that these changes won’t impact them,” Morneau said.
“We’ll continue to explain to the individuals that have these private corporations that earn $150,000 or less that the passive investment income doesn’t provide them an advantage in excess of what they can get through their RRSP and tax-free savings account.”
As for business owners who live off dividends and capital gains and don’t have the flexibility to invest in RRSPs, Morneau says the changes are forward-looking and will deal with future earnings.
Nest eggs inside corporations, he says, are not the focus.
“We will consider the best way to get to a new system that recognizes that people were using legitimate means to organize themselves in the past, and we see that those legitimate means of organizing themselves might create a very unequal situation in the future where a growing subset of people can arrange themselves in one way and the rest can’t, meaning that the burden of our tax system falls heavier on the people who aren’t able to organize themselves in that way,” he says.
As for the dollar value the changes could potentially drop in the government’s coffers, the income sprinkling is estimated near $250 million, while the passive investment is likely to result in significantly more.
“But until we determine the best way to implement and gone through the consultation, until we actually create draft legislation, we can’t estimate that (with) enough clarity,” the minister says.
Prior to meeting with the media, Morneau met with representatives of the St. John’s Board of Trade and some of its members that have concerns about how the changes will impact them.
Chairperson Dorothy Keating was appreciative of the opportunity for a face-to-face meeting with the minister, but came away feeling as though their concerns weren’t afforded the proper respect.
“I feel this is a fait accompli,” Keating says.
“I think he has very much checked the box today that he spoke with the business people of St. John’s, but I really don’t think he listened.”
Keating says the board will continue to be vocal on the subject and continue work on its submission for the public consultation, which is due Oct. 2.
“It’s like someone built a boat and there’s leaks in it and they know there’s leaks in it and they’re putting the boat in the water and going, ‘When I get in the water, I’ll figure out where leaks are. I’ll fix them then.’”