OTTAWA: The Canadian government on Wednesday released revisions to tax measures targeting the country’s small firms, hoping to end a political uproar that has dominated debate in parliament in recent months.
The original tax proposals, first revealed in July, were meant to close loopholes small to midsize firms and the self-employed used to reduce their tax bills. A heated backlash ensued, uniting farmers, doctors and restaurant owners in protest against the Liberal government. The reaction pushed Prime Minister Justin Trudeau and Finance Minister Bill Morneau into a rare policy retreat, culminating in Wednesday’s announcement.
The changes introduced Wednesday loosen original rules that attempted to limit the distribution of dividends by a business owner to family members. The Finance Department said it has clarified earlier proposals to ensure family members who receive income are exempt if they work an average 20 hours a week at the firm or own 10% of the shares. At a briefing, senior officials said the changes were meant to recognize circumstances in which family members make meaningful contributions to a firm.
“For those [businesses] passing income to family members that are not involved in the business, it’s clear that is no longer going to be deemed appropriate,” Mr. Morneau said.
Canada’s main lobby group for small- and mid-sized firms, the Canadian Federation of Independent Business, said it remained concerned the new provisions won’t take into account the formal and informal ways family members participate in an enterprise.
The government has made a series of efforts in recent months to mitigate the negative fallout over its original proposal. The biggest of those came in October, when it proposed a cut in the tax rate on small businesses to 9% beginning in 2019 from the current 10.5% on the first 500,000 Canadian dollars ($389,000) of income. It also narrowed the scope of a measure that changed the tax treatment of profits not paid out in dividends.
Mr. Trudeau told reporters the further changes announced Wednesday were meant to address complaints raised by entrepreneurs.
Polling indicated the governing Liberals took a hit over the issue, with support falling to the mid-30% range in mid-October from 40%-plus six weeks earlier. However, more recent polls from Ottawa-based Nanos Research suggest Mr. Trudeau’s Liberals have largely recovered.
Despite the polling uptick, Darrell Bricker, president of Ipsos Public Affairs, said he believed the damage from the tax-policy fallout could have a lasting impact by undermining a key tenet of the Liberals’ narrative: that they are the champions of the middle class.
Critics of the government’s initial tax-policy push said the measures failed to target the wealthiest Canadians, or the upper range of the 1%. The uproar has also prompted greater scrutiny of Mr. Morneau’s personal wealth and how he handled his assets after entering politics.
