Morneau to unveil changes to controversial small business tax proposals

Sources, speaking on condition of anonymity because they weren’t authorized to speak publicly, say Morneau wants to demonstrate to anxious Liberal MPs that he’s heard their concerns about his tax reform plan and is addressing them.

The proposed reforms were intended to put an end to measures which the government contends have allowed wealthy individuals to use incorporation as small businesses to unfairly reduce their income tax burden.

They triggered an angry backlash from doctors, lawyers, accountants, shop owners, farmers, premiers and even some Liberal backbenchers, who maintained the reforms would hurt the very middle class Canadians that the Trudeau government claims to be trying to help.

The changes are expected to ensure the reforms are targeted more clearly at the wealthy.

They’re also expected to address concerns that the reforms will disproportionately impact women, inhibit the ability of small business owners to save for a rainy day and make it impossible for farmers, fishers and others to pass their businesses on to their children.

Morneau has acknowledged changes are required to address some of the concerns raised and to ensure there are no unintended consequences.

Speaking briefly Friday outside a meeting of the International Monetary Fund in Washington, Morneau referred to Monday’s caucus briefing as “an important discussion.” He referred several times to continuing the discussion, suggesting that whatever he announces Monday won’t be the end of the story.

“I’m going to continue this discussion. We’re going to talk about what we think is important and that is that we get it right,” he said.

Morneau acknowledged that the government has to do a better job of reassuring middle class Canadians that they won’t be negatively impacted by the proposals.

“The fact that farmers won’t be impacted, we need to make that clear. The fact that, you know, small businesses will be able to continue to invest in their business, which is what we want, and won’t be worried about passing their business to the next generation, we’re going to communicate that clearly.”

As originally proposed, the plan would restrict income sprinkling, in which an incorporated business owner can transfer income to a child or spouse who is taxed at a lower rate, regardless of whether they actually do any work for the company.

Read: Clamping down on income splitting

It would also limit the use of private corporations to make passive investments that are unrelated to the company and curb the ability of business owners to convert regular income of a corporation into capital gains, which are taxed at a lower rate.

The proposals were unveiled in mid-July but it took about a month for the backlash to materialize. Since then, the Liberals’ popularity has taken a hit in some public opinion polls and the governing party’s backbenchers have become increasingly anxious.

A number of Liberal MPs, including finance committee chair Wayne Easter, have complained about the messaging surrounding the proposals, which they say portrays small business owners as tax cheats.

The Conservatives have used the furor to accuse Morneau of hypocrisy, targeting small business owners while doing nothing to deal with legal tax avoidance strategies used by large corporations like Morneau Shepell, a human resources company headed by the minister until his appointment to cabinet in 2015.

That line of attack was bolstered Friday by news that for two years, Morneau failed to disclose to the federal ethics commissioner that he and his wife are partners in a private company that owns a family villa in southern France. CBC News reported that holding property through a private company is useful in avoiding inheritance taxes in France.

Morneau’s ownership of the villa was disclosed but the involvement of the private company was not until last month, when CBC began to ask questions about it.

Morneau called the failure to disclose the company an “administrative oversight.”

“In fact, I disclosed the asset originally when the commissioner asked me to disclose all my assets. The administrative structure that I was advised to purchase the house with when I did so as a foreigner was something that we just gave information to (her) more recently, just because it was an administrative oversight.”

Jocelyne Brisebois, a spokeswoman for Dawson, declined to say if the ethics commissioner is looking into the matter

Under the Conflict of Interest Act, Dawson has limited power to do anything about it in any event, other than impose a fine of up to $500.