Liberals will offer measure to soften small business tax changes, source says

The Liberal government is set to offer a measure to Canadians affected by its proposed tax changes that would make the controversial reforms more palatable, CBC News has learned.

"We are not just going to take, take, take," a senior government official, speaking on background, told CBC News. "We're going to give something as well."

The offering — the proverbial spoonful of sugar to make the medicine go down — would be part of the final proposals presented after the consultation period ends Oct. 2.

The official would not speculate on what the government will offer as that sweetener.

The Liberal election campaign platform linked the party's intentions to go after Canadians who use private corporations to reduce their personal income taxes with its promise to cut the small business tax rate to nine per cent.

"As we reduce the small business tax rate to nine per cent, from 11 per cent, we will ensure that Canadian Controlled Private Corporation (CCPC) status is not used to reduce personal income tax obligations for high-income earners rather than supporting small businesses," the platform says on page 80.

The Liberals froze the small business tax rate at 10.5 per cent.

Both Prime Minister Justin Trudeau and Finance Minister Bill Morneau have indicated the government is open to tweaks of the proposed tax reforms, particularly to address any unintended consequences.

The government says its aim is to target high-income Canadians who incorporate in order to reduce their taxes through one or more of three currently legal practices: income sprinkling; passive investments; and converting business profits into capital gains instead of paying them out as dividends or salaries.

The Liberals want to stop the use of income sprinkling — when high-income business owners divert some of their income to family members who are taxed at a lower rate — even when those relations aren't involved in the business. The Finance Department estimates about 50,000 families would be affected by the proposal to end that practice.

One of the most contentious proposals is to limit business owners and professionals who incorporate from holding their business income within the corporation, shielding it from a higher personal tax rate, and not reinvesting it in the business.

Finally, the Liberals want to prevent people from converting their private corporation's income to capital gains rather than as a salary, as a way of paying lower personal taxes.

The government argues while all these practices are currently legal, they give wealthy Canadians a tax advantage that is not available to the middle class.

Backlash won't last, MPs told

From the beginning, Morneau said, he expected resistance from those who will be affected by the changes. But there's been outcry from inside caucus as well as irate constituents who have reached out to their Liberal MPs.

According to the government source, some worried MPs have been told to relax and that the backlash won't last forever— not even until the election in 2019.

That hasn't stopped MPs like Edmonton's Randy Boissonnault from posting an open letter on his website in which he supports the proposed changes, but regrets how the government presented the reforms.

"I want to apologize to each and every entrepreneur and small business owner in Edmonton Centre for the tone and the language that has been used in rolling out these proposals," he wrote.

The government source would not say whether the final tax proposals would be in this fall's economic update, the date for which has not yet been made public.

When the reforms were announced in July, the government set out proposed legislation for both the income sprinkling and capital gains issues. But it was vague on what it might do to address passive income.

The senior official said there is nothing preventing the government from moving forward with the two proposals "that are further ahead" before settling on a solution for passive income.

That economic update is likely to be less of a mini-budget than originally thought, according to the official. A number of significant policies were not ready to go into the March 2017 budget, leading some to predict the update would be more substantial in nature.

The source said that might not hold true after all.