Gov’t nixes proposed tax change targeting capital gains, will restrict income sprinkling

bill morneau

The federal government is cutting the small business tax rate from 10.5 percent to nine percent by 2019, and confirmed that it is not moving forward with at least one of its three proposed tax changes affecting entrepreneurs.

The announcement was made at a press conference with Prime Minister Justin Trudeau, Finance Minister Bill Morneau, and Minister of Small Business and Tourism in Stouffville, ON. According to the CBC, the government will not be moving forward with its proposal to limit access to the lifetime capital gains exemption, noting “potential unintended consequences associated with the proposed measures.”

However, the Liberals said they still plan to restrict income sprinkling by January 1, which allows business owners to transfer income to a child or spouse who would be taxed at a lower rate.

In an op-ed on BetaKit, entrepreneur Bruce Croxon said that this will affect partners supporting the business by “holding the home front” while entrepreneurs build the company. Family members that don’t contribute to the business will not be eligible for income sprinkling, though the government has not been specific in how that will be determined.

“It’s not the people who are the problem, it’s the system,” Trudeau said.

The third proposed tax change called for limits on private companies making passive investments unrelated to the company, which would curb the ability of business owners to convert regular income of a corporation into capital gains, which are typically taxed at a lower rate.

Liberal backbenchers who were also among critics of the changes were briefed this morning. Morneau has already said that the proposals could see adjustments.

“I feel very, very positive. For the first time in a couple months, I’ve got a bit of a smile on my face,” said Saint John MP Wayne Long. Long was kicked off two Commons committees for voting against the government earlier this month on a Conservative motion calling for further consultations on the proposed reforms.

Photo via CTV News