Feds pledge lower small business tax rate

Prime Minister Justin Trudeau on Oct. 3 in Ottawa. (PM.gc.ca)

UPDATED, Oct. 16 — The federal government says it will cut the small business tax rate to nine per cent from 10.5, a move seen as an attempt to counter a growing backlash against its July tax reform announcement.

Prime Minister Justin Trudeau and Finance Minister Bill Morneau appeared side-by-side in Toronto’s far suburbs to announce the tax cut, highlighting their desire to get past what has become a major stumbling block as the two-year-old Liberal government heads into the second half of its mandate.

“Powerful interests have benefited a lot from the current system, and they will fight hard to maintain the status quo. We knew that going in. But nothing will stop us from building an economy that works for more Canadians,” Trudeau said in a sometimes combative news conference.

Earlier this month Morneau had promised the government would make changes to the July proposals that would address concerns expressed by many affected by the changes — including farmers concerned about the implications while saving for retirement, employing family members or selling their operations to the next generation.

“Our goal is not, and will not be, to change the ability to move a family business, a family farm, a fishing business from one generation to the next,” Morneau told reporters Sept. 28, after appearing before the House of Commons finance committee.

In trying to reset the tax debate, the government said Monday the small business tax will be lowered to 10 per cent effective Jan. 1, 2018, and to nine per cent in 2019.

In one example from a background document on the small business tax reductions, the government cited an example of a farm, summing up the example with the statement that “once the small business tax reductions are fully implemented, the business will save an additional $750 which could be used to help pay for new farm equipment.”

Trudeau on Monday shifted the focus away from those using the loopholes toward the tax code itself. “It’s not the people who are the problem, it’s the system,” he said.

At the same time, one of the most reviled parts of the tax reforms proposed in July — measures to limit access to the lifetime capital gains exemption, a move critics said would hurt the ability of families to pass their business on to their children — was abandoned.

When the owners of an incorporated farm sell their operation to family members they currently face a 25 per cent tax bill on the earnings — but under Ottawa’s proposed reforms it would have jumped to 46 per cent, according to several accountancy firms, including MNP.

The government indicated Monday it would still proceed with a crackdown on income-sprinkling — a tax strategy that sees business income transferred from a business owner to a spouse or child, who would be taxed at a lower rate.

In a statement Monday, however, Morneau and Bardish Chagger, the federal minister for small business, said the government now plans to “simplify” its proposal on income-sprinkling.

The “vast majority” of private corporations won’t be impacted by the proposed income-sprinkling measures, they said, including corporations with family members who “meaningfully contribute to the business.”

In July, Morneau proposed tax reforms meant to close loopholes for those that use private corporations to reduce the amount of tax they pay.

The three-pronged tax reform plan, which affected those who sprinkled income among family members or used passive investment income in order to be taxed at a lower rate, had sparked outrage among doctors, farmers and family businesses.

At its news conference Monday, the government was silent on the topic of passive investment income.

Farm organizations including the Canadian Federation of Agriculture and Canadian Cattlemen’s Association on Monday hailed the government’s announcements as a positive sign that their concerns have been heard.

The CCA said it “look(s) forward to reviewing the technical changes” relating to income-sprinkling, while the CFA said its members “look forward to more clarity” on the matter.

The CFA added its farmer members “remain apprehensive about other proposed tax measures, particularly on passive investments, which are vital for managing year-over-year risks due to weather or market-related volatility.”

The CFA said it has also noted concern with plans that would affect conversion of income into capital gains.

Includes files from Gord Gilmour, Allan Dawson, AGCanada.com Network staff and Reuters.

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