Passive investment income tax changes target only richest corporations, Morneau says

After its initial proposals for private corporations tax reform were panned last year as an assault on small businesses, the Liberals have unveiled revamped changes in Tuesday's budget they say will target only the wealthiest three per cent of private corporations.

Finance Minister Bill Morneau's budget proposes two changes to deal with the income generated by investments held within a private corporation.

First, access to the lower small business tax rate will be gradually reduced for corporations that earn more than $50,000 in an annual income from passive investments.

Those earning $150,000 or more will not be eligible for the small business deduction.

Second, the government is proposing that corporations "no longer be able to obtain refunds of taxes paid on investment income while distributing dividends from income taxed at the general corporate rate." According to the budget, "refunds will continue to be available when investment income is paid out."

According to the Liberals, less than three per cent of private corporations will be affected by these tax changes.

The government estimates the changes will generate $705 million per year in new revenue by 2022-2023. A measure announced in December to crack down on so-called "income sprinkling" among family members is expected to bring in another $220 million.

It remains to be seen how much these changes might mollify business groups angered by last year's tax reform package.

"It's less bad … but still bad," said Dan Kelly of the Canadian Federation of Independent Business.

"It's a billion-dollar total takeaway from small and medium-sized firms at a time when our trading partners are getting more competitive."

Alexandre Laurin, director of research at the C.D. Howe Institute, said the federal government "is on the right track by denying the use of preferential small business rate for businesses with very large amounts of recurring passive income, which will accomplish the original goals without all the complexities and costs that the prior proposed rules would have introduced."