On October 16, the federal government decided to back away from a number of measures included in its proposed tax reforms affecting small and medium-sized enterprises. The negative views expressed by many observers (including the RCCAQ) clearly had an impact on this change of course. We are pleased that our efforts convinced the government to clarify some of the more problematic proposals it had put forward.

Back on July 18, federal finance minister Bill Morneau issued a consultation document on tax planning using private corporations. These reforms were primarily aimed at tax strategies used by companies to minimize their tax payable. In the face of widespread discontent, the government announced its change of course on October 16.

New announcement

The cornerstone of the October 16 announcement is a plan aimed at reducing the small business tax rate from 10.5% to 9%, with an initial reduction to 10% effective January 1, 2018 (dropping to 9% on January 1, 2019).
Although the government remains determined to limit income splitting, it has introduced a new definition stating that a reasonable contribution to a business must include the following:

• Labour contributions.
• Capital contributions.
• Exposure to financial risks (e.g. co-signing a loan).
• Past contributions (labour, capital, risk).

In addition, the government announced that it would not be moving forward with its original proposal to modify the exemption rules for capital gains. This is good news for business transfers involving members of the same family.

Unfairness

The changes set out in the original tax reform plans focused on three measures that the federal government saw as fostering unfairness among Canadian taxpayers:

• Income splitting between family members using private corporations.
• Converting regular or dividend income from a private corporation into capital gains.
• Holding passive investment portfolios in a private corporation.

Effective mobilization to benefit brokerage firms

Mindful of the negative impact that these changes would have on a number of brokerage firms, the Insurance Brokers Association of Canada (IBAC), the RCCAQ and the other provincial associations joined forces in opposition. The RCCAQ also rallied its members around its initiative entitled "Tax reform: let's get down to action!"

Working together, we showed the federal government that its initial proposals would have had an adverse impact on brokerage firms. Needless to say, we will remain vigilant as we monitor this issue in the coming weeks and months.