Canadians are losing faith in their Minister of Finance and new tax reform proposals

Last week, Finance Minister Morneau presented the government’s new positions on tax reform. In fact, following numerous claims after the first announcement of the measures, the Canadian government decided to reconsider and adjust its position to offer better answers to entrepreneurs, private business owners, doctors, farmers, tax experts etc.

What is changing in new government proposals for small businesses compared to previous ones?

With the first measures announced in July, hard-working small business owners felt attacked by the government and had taken its proposals as an accusation to be potential “tax cheats”. Entrepreneurs across Canada were opposed to these proposals. According to them, these changes would slow down investments and prevent them from preparing for potential difficulties within the company. They were also afraid of not being able to earn a living properly or at least as well as before with these new measures.

In response to concerns and demands, the government is reconsidering various proposals ant wants to establish measures with a constructive impact on the community. In that sense, the government has backed down on several announcements that had been made before. Finance Minister Bill Morneau pledged that the government’s tax changes would not adversely affect small businesses owners and the investing community.

First, Morneau announced the restriction of provisions against income-sprinkling — which allows business owners to transfer income to a child or spouse who would be taxed at a lower rate — so as not to affect the lifetime capital gains exemption.

Then, Morneau has unveiled gentler tax proposals for private corporations. In fact, the government revealed plans to cut the small business tax rate from 10.5 per cent to 9 per cent by 2019. During his Hampton stop Finance Minister said new proposals will affect only the very rich. According to him, his proposed tax reforms will now target the “unfair” tax advantages used by the wealthiest Canadians, and the huge majority of private corporations (97%) will not be affected by the reforms.

Morneau said that the government will introduce a threshold for passive investment income of $50,000 a year, so small businesses can hold on to money for retirement and other purposes. The government has said that its taxing of passive investments will be targeted, and that it will work with the venture capital and angel investment sectors to identify how this can be best achieved. The initial proposal aiming to repress passive investment income was one of the most controversial elements of his reform plan.

“We understand that many, many small businesses are using their corporations to save for the future by making passive investments. For the vast number of corporations, this isn’t a problem. But in a very small number of cases, it gives wealthy people an unfair advantage over and above everyone else.”, he said.

“What we’re talking about is the critical importance of maintaining the ability to access capital from angel investors. We want to make sure there’s capital available so businesses can grow…that point was important to us. We heard we needed to get that right”, Morneau said.

Morneau also said that they have decided to fully drop one of the three main proposals: the restriction against converting income into capital gains so as to save in the tax rate. “We’re going to take a step back and reconsider that aspect of our tax proposal” Morneau said. This proposal would have made it more difficult for business owners to bequeath their business to one of their children. Moreover, people were afraid that the first proposed reforms would lead to more cost to their business especially when they wanted to keep this business in their family. So the government has set aside this measure that would have negatively impacted the transfer of family businesses from generation to generation.

Damage is already done: small businesses have lost faith and trust

For many people this reverse on tax reform is insufficient and also leaves an important mess even bigger than before.

In this case, the fact that the chief reformer himself, Finance Minister Morneau, owns an important business — Morneau Shepell Company — allows people to doubt his good faith and to ask themselves if there is not a form of conflict of interest that can have a role here. In fact, he is involved in policy decisions that have the potential to benefit a business in which is an active shareholder.

People are saying that members of the government are out of touch with the average Canadian. This is one of the reason they do not believe in the new proposed measures. They feel it is not going to fit their needs and suit their situation.

Nevertheless, several organizations like NACO, CVCA, and the Council of Canadian Innovators (CCI) still believe in negotiations with the government to find a better plan with proposals that suit small businesses’ structure. These organizations released open letters on behalf of their members warning the government about the new changes announced. They pointed out that the measures concerning passive income could reduce the availability of risk capital in Canada that is relied upon for business investment. The CCI has indicated that they are open to continuing discussions with the government as it builds its Tax Fairness plan. “Access to capital is a critical part of growing a tech firm, and Canada’s high-growth CEOs need a competitive tax environment and an ecosystem that encourages entrepreneurship and scaling up globally”, said Benjamin Bergen, executive director of CCI.

For the time being, Canadians remain unclear about the final measures that will be implemented and the real economic impacts that their business will have to face.

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