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Finance Minister Bill Morneau is adjusting his tax proposals on passive income so only about 3% of the “most wealthy” privately owned corporations will have to pay higher taxes.

Read: Liberals to cut small business tax rate to 9% over 2 years

Morneau confirmed the changes today at a cafe in Hampton, N.B., a small community east of Saint John in an area where the Liberals’ tax reforms have not been well-received.

Read: Problems with Finance’s passive investing proposals

The minister says the system will now allow a threshold of $50,000 of passive income investment annually, which he says will help small business owners put money away for retirement and parental leave.

Canadian-controlled private corporations (CCPCs) with taxable passive income above the $50,000 threshold in 2015 represented 3% of the CCPC population, but earned more than 88% of total taxable income, says the Finance Department in a release.

Morneau says he hopes the measure helps businesspeople save money for future needs, but will end the practice of stowing money in privately held firms purely as a tax planning strategy.

The government has recognized that passive investments are not purely “a deferral play” by CCPCs, says Michelle Connolly, vice-president, tax, retirement and estate planning at CI Investments. “There is a genuine need for Canadian-controlled private corporations to save for a rainy day,” she says — for things like sick leave or growing the business.

Morneau says there’s between $200 billion and $300 billion in assets sitting in the passive investment accounts of just 2% of all private corporations — or about 29,000 companies out of 1.8 million private corporations.

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.

The details of the proposed measures will be released in Budget 2018, including a technical description of how the passive investment income threshold will be applied.

Lack of clarity

Connolly notes that no specifics on implementation were given today about the nature of the $50,000 in passive income that can be invested by corporations. She wonders if the nature of the returns matters, adding that there’s a distinction between capital gains and taxable capital gains.

Some good news: “Existing passive assets will be grandfathered,” says Connolly. “Any proposed tax measures will only be on a go-forth basis.”

She suggest CCPCs assess their passive assets to ascertain whether those assets should be separated out going forward.

The Canadian Federation for Independent Business also points to a lack of clarity, saying in a release that it wonders whether the threshold will be indexed to inflation.

“These are incredibly complicated tax changes with many potential unintended consequences,” adds CFIB president Dan Kelly.

Overall, the organization cheered the revisions, but noted that the $50,000 threshold may discourage growth. “While the $50,000 annual threshold will help small firms that remain small, it may be too low for small firms saving to grow and create more opportunities,” says Kelly in the release.

Also read:

How active versus passive business income is taxed

Originally published on Advisor.ca
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Edward Collis

I fail to understand how Minister Morneau, who is worth in excess of $100 million, can possibly understand small business. He seems determined to keep small business small. Maybe we should all just sell out to large corporations, or sell the assets, lay off the employees, and get government jobs. The Liberals clearly hate small business. “Let them eat cake”.

Friday, Oct 20, 2017 at 1:00 pm Reply

Joseph Storozuk

I question if consideration has been given to encourage small business owners to invest more into their R.R.S.P. – which would enable them to have a decent retirement.

To do this effectively- the government can increase the maximum allowable to invest into this fund for small business owners and also doctors who do not have a government pension.

This would be extremely beneficial.

Thank you

Joseph Storozuk

Friday, Oct 20, 2017 at 10:54 am Reply