'It could be catastrophic': Morneau draws criticism from business, concerns from N.S. premier

Finance Minister Bill Morneau is in Halifax today for his "listening tour" about Ottawa's controversial tax proposals, drawing criticism from some small business owners and concerns from Nova Scotia's Liberal premier.

Morneau met with local small business owners at a library in downtown Halifax, and said afterwards he heard concerns about the changes, but also an understanding that a system is needed that is fair for all Canadians.

He met later with Premier Stephen McNeil, who told reporters Friday that he was concerned about the impact the tax changes could have on health-care recruitment in a province already dealing with a family doctor shortage.

"I've raised the issues that I've heard from Nova Scotians and I've raised my concerns that I have with them as well around the impact I believe it will have on our province," McNeil said at the Nova Scotia Legislature.

"The opposition is clearly wrong in looking at this solely as a financial one for the province. There's a much greater risk in my view — looking at what will this do around health-care recruitment, doctors and health-care providers."

Level playing field

Morneau's proposal has drawn complaints from doctors, lawyers, tax planners and other small business owners who have used incorporation to reduce their income tax burden.

But Morneau said the changes are meant to end tax advantages that some wealthy business owners have unfairly exploited and to ensure all Canadians have a level playing field.

McNeil said the status quo allows doctors to plan for their retirement and is also an important tool for small business owners that allows them to reinvest in their businesses or to weather a change in the economy.

"It's an important tool that entrepreneurs need to have to be able to do that, otherwise there's only one other avenue for them: to go try to find leverage somewhere else from a lending institution and we believe the mechanism in place has worked well for the province," said McNeil.

'Could be catastrophic'

Doctors Nova Scotia, the association that represents all physicians in the province, said the organization is "absolutely concerned" about the changes and a meeting is being held in Halifax on Saturday with about 300 doctors to discuss the issue.

Kevin Chapman, the association's director of partnerships and finance, said the province gave doctors the right to incorporate in the mid-1990s as a way of retaining and recruiting physicians "at a time they were leaving the province in fairly significant numbers."

"The irony is not lost on us that what incorporation was intended to do back in 1995, it will have the opposite effect if these changes go through. It could be catastrophic," said Chapman, adding that 75 per cent of the province's doctors are incorporated.

"Physicians can't raise the rates. They are bound by contract in terms of what they can charge.… So they have no way to offset the reductions they might feel from these tax changes. We're running the risk that physicians will naturally migrate to other jurisdictions where they can make up that lost earning — or they'll retire."

Restrictions on income sprinkling

Morneau first released the three-part tax plan in mid-July.

The tax proposals include restrictions on the ability of business owners to reduce their tax rate by sprinkling their income to family members in lower tax brackets, even if those family members do not contribute to the company.

Morneau also proposed limits on the use of private corporations to make passive investments that are unrelated to the company. Another change would limit business owners' ability to convert regular income of a corporation into capital gains, which are typically taxed at a lower rate.

Morneau has said there is a lot of misinformation circulating about the impacts of the proposals and Ottawa has been trying to bring clarity to the debate.

The government launched a 75-day public consultation period in July, which ends Oct. 2. Morneau has said he's listening to feedback about the proposals and he's open to making changes, if necessary.

Is it a done deal?

Matthew MacKenzie was one of a handful of small business owners invited to Friday's closed-door meeting in Halifax. He and his wife own two companies: MacKenzie Atlantic Tool & Die and MacKenzie Healthcare Technologies.

He said that while he agrees that it is unfair for business owners to sprinkle income among their kids and parents, he does not agree that it is unfair to split it with a spouse, given the added risk that comes along with business ownership.

"The minister was quite clear that this is still a proposed legislation, nothing is in stone and they are consulting. I don't know if it truly felt like that today to me or to anybody else in that room," said MacKenzie.

"I feel pretty strongly by the tone in the room and the tone by Mr. Morneau that there are a lot of decisions that they've made that they're going to stick to regardless of what concerns are made by the general public or by business owners. Specifically, in relation to income splitting."

Morneau takes his consultation tour to Fredericton on Saturday to the Canadian Chamber of Commerce's annual general meeting.