OTTAWA – The federal government is moving to pare down its controversial tax proposal on passive income so that it will only affect three per cent of private corporations.
Finance Minister Bill Morneau will be in New Brunswick on Wednesday to unveil changes to his passive investment proposal so that it only targets unfair tax advantages used by the wealthy, a senior government official told The Canadian Press.
The official, speaking on condition of anonymity ahead of the announcement, said Morneau will also share updated estimates showing there’s between $200 billion and $300 billion in assets sitting in the passive investment accounts of just two per cent of all private corporations.
The finance minister will also point out that the dollar figure has been growing by $16 billion per year as wealthy incorporated individuals reap what the official described as unlimited benefits from tax-advantaged savings accounts over and above RRSPs and TFSAs, the official said.
The government wants to prevent all of this cash, which it contends is not being reinvested into the businesses or the economy, from piling up in these savings portfolios over generations, the official added.
The tweak to Morneau’s original proposal comes after an onslaught of complaints that warned cracking down on passive investments could adversely affect middle-class entrepreneurs who use their companies to save for economic downturns, sick leaves and parental leaves.
Morneau will provide more details Wednesday on the mechanics of the tweak and a timeline for the introduction of change to passive-income rules, the official said.
The announcement is part of a week-long Liberal effort to calm the anger surrounding the tax proposals, which have outraged entrepreneurs, doctors, tax professionals, farmers and Liberal backbench MPs.
Prime Minister Justin Trudeau began the week by announcing tax cuts for small businesses and plans to abandon part of one of the proposals to avoid negative impacts on the intergenerational transfer of family businesses, like farms.
Trudeau also said the government intended to move ahead with another controversial proposal from the three-part tax package. That change is aimed at limiting the ability of business owners to lower their personal income taxes by sprinkling their income to family members who do not contribute to their companies.
The government has yet to announce how it will proceed with the remaining proposal, which is designed to limit the ability of business owners to convert regular income of a corporation into capital gains, which are typically taxed at a lower rate.
On passive income, the official said the problem isn’t with individuals, but the system, since it encourages wealthy Canadians to keep their personal money inside their corporations so they can receive tax advantages not available to everyone else.
The changes will not be retroactive, as outlined in the original proposal, and they will not affect existing savings, nor the income from those savings, the official said.
Morneau is expected to provide further details Wednesday on the changes to its passive-investment proposal, including a plan for addressing the concerns of angel investors and venture capitalists.
He’s argued the proposals are designed to create a fairer tax system, especially for those in the so-called middle class.
Morneau has also said he hopes the tax reforms will unlock cash for business investment and help lift the country’s “productive capacity.”
In announcing the proposals over the summer, Morneau recommended limits on the use of private corporations to make passive investments that are unrelated to the company.
However, tax experts have warned the original proposal would threaten entrepreneurship in Canada by preventing some business owners from saving for retirement, maternity leaves and economic slowdowns.
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Note to readers: This is a corrected story. An earlier version suggested the measures would only affect three per cent of small businesses.