Mr. Morneau appeared on Wednesday before the Senate’s national finance committee, which has been holding hearings on the topic for weeks and intends to continue its work on a cross-country tour this month.
While many business lobby groups initially said they welcomed Mr. Morneau’s changes to the proposals, the Senators have since heard from business owners and tax experts who say the plan would still hurt the economy.
“A consensus is developing that these should be abandoned and that what we should be doing is reviewing the complete tax system in Canada,” Independent Senator Doug Black told Mr. Morneau on Wednesday, summarizing what the committee has heard to date.
The Finance Minister acknowledged some concerns still need to be addressed. He said the government will provide more detail over the coming months and in next year’s budget.
“We believe we’ve found a balance,” he said.
Mr. Morneau released a package of proposals in July for consultation. He said the changes were to prevent high-income Canadians from using small business corporations as a way to pay less tax. One proposal would limit the ability of a business owner to pay less tax by “sprinkling” income to family members who do not make a “reasonable” contribution to the business. Another would have limited the conversion of dividend income into lower-taxed capital gains. A third proposal was presented as an effort to restrict the use of small business corporations as a vehicle for making passive investments, such as buying and selling shares of other companies that are not related to the business.
The proposals prompted a major outcry from business owners. Mr. Morneau responded in October with a week of announcements. He said the government would abandon the measure related to dividends and capital gains. He said he would move ahead with the provisions on income sprinkling but with a clearer definition of a “reasonable” contribution. Thirdly, he said an exemption would be allowed on the first $50,000 a year in passive investment income, which is equivalent to a 5-per-cent return on savings of $1-million.
He also said the government will cut the small business tax rate to 9 per cent from 10.5 per cent by 2019.
Mr. Morneau said on Wednesday the government intends to release more detail on the income sprinkling proposals over the next two months. He also said the government is planning to release draft legislation in January on the passive-income proposals before the next budget. The budget, which in the past two years has been tabled in March, would include the passive-investment changes. Mr. Morneau suggested critics of the plan should wait until all of the additional details are released.