Morneau to unveil changes to controversial small business tax proposals Monday

Finance Minister Bill Morneau will unveil changes Monday aimed at mollifying the many critics of his controversial small business tax reform proposals, hoping to tamp down a political wildfire that has scorched Justin Trudeau's Liberal government.

The damage control effort will begin with a special briefing early Monday morning for Liberal backbenchers, some of whom have been among the most vocal opponents of the measures.

Sources, speaking on condition of anonymity because they weren't authorized to speak publicly, say Morneau wants to demonstrate to anxious Liberal MPs that he's heard their concerns about his tax reform plan and is addressing them.

The proposed reforms were intended to put an end to measures which the government contends have allowed wealthy individuals to use incorporation as small businesses to unfairly reduce their income tax burden.

They triggered an angry backlash from doctors, lawyers, accountants, shop owners, farmers, premiers and even some Liberal backbenchers, who maintained the reforms would hurt the very middle class Canadians that the Trudeau government claims to be trying to help.

The changes are expected to ensure the reforms are targeted more clearly at the wealthy.

They're also expected to address concerns that the reforms will disproportionately impact women, inhibit the ability of small business owners to save for a rainy day and make it impossible for farmers, fishers and others to pass their businesses on to their children.

May not be done with changes

Morneau has acknowledged changes are required to address some of the concerns raised and to ensure there are no unintended consequences.

One source said that Morneau intends to emphasize to Liberal backbenchers that he will continue listening to any concerns about the proposed reforms, suggesting that Monday's changes won't necessarily be the end of the story.

As originally proposed, the plan would restrict income sprinkling, in which an incorporated business owner can transfer income to a child or spouse who is taxed at a lower rate, regardless of whether they actually do any work for the company.

It would also limit the use of private corporations to make passive investments that are unrelated to the company and curb the ability of business owners to convert regular income of a corporation into capital gains, which are taxed at a lower rate.

The proposals were unveiled in mid-July but it took about a month for the backlash to materialize. Since then, the Liberals' popularity has taken a hit in some public opinion polls and the governing party's backbenchers have become increasingly anxious.

A number of Liberal MPs, including finance committee chair Wayne Easter, have complained about the messaging surrounding the proposals, which they say portrays small business owners as tax cheats.

Morneau accused of hypocrisy

The Conservatives have used the furor to accuse Morneau of hypocrisy, targeting small business owners while doing nothing to deal with legal tax avoidance strategies used by large corporations like Morneau Shepell, a human resources company headed by the minister until his appointment to cabinet in 2015.

That line of attack was bolstered Friday by news that for two years, Morneau failed to disclose to the federal ethics commissioner that he and his wife are partners in a private company that owns a family villa in southern France. CBC News reported that holding property through a private company is useful in avoiding inheritance taxes in France.

Morneau's ownership of the villa was disclosed but the involvement of the private company was not until last month, when CBC began to ask questions about it.

Dan Lauzon, a spokesman for Morneau, called the failure to disclose the company an "administrative error" and said the minister's office is working with federal ethics watchdog Mary Dawson to ensure he's "in full compliance with the spirit and letter of the rules."

Jocelyne Brisebois, a spokeswoman for Dawson, declined to say if the ethics commissioner is looking into the matter.

Under the Conflict of Interest Act, Dawson has limited power to do anything about it in any event, other than impose a fine of up to $500.