Broker urges more study on ‘broadest tax reform in decades’

A federal government proposal to change the income tax system affecting passive income generated within a company is raising some unanswered questions, a member of parliament suggested to brokers this week.

One commercial brokerage president is calling for further study before changes are made.

“As it stands, the broadest tax reform in decades, as tabled, could favour business owners selling the family business to arm’s length parties instead of passing the business on to family members,” Brooke Hunter, president and chief executive officer of commercial brokerage Hunters International Insurance, wrote Wednesday in an e-mail to Canadian Underwriter. “This unto itself suggests further study is needed before we implement change.”

A company’s passive investment income essentially includes investments in entities such as limited partnerships or enterprises in which the business is not actively operating.

In a discussion paper released July 18, federal finance minister Bill Morneau noted that the current income tax system “applies additional refundable taxes on passive income generated within a corporation, but does not include provisions to differentiate between the source of earnings used to fund the passive investment.”

The system could be replaced with one that would “generally remove the refundability of passive investment taxes where earnings used to fund passive investments were taxed at low corporate tax rates,” Morneau said at the time of one of the proposed changes.

Draft legislation on that proposal “hasn’t come out for consultation yet,” noted Francesco Sorbara, Liberal MP for Vaughan-Woodbridge, Ont., during the Insurance Brokers of Toronto Region breakfast Nov. 14.

Sorbara added he is “assuming” that legislation will eventually be passed.

“There are people out there who say these passive investments should be incentivized to be active investments,” Sorbara told those attending the IBTR breakfast, held at Le Parc banquet centre in Markham.

“Changing the yardstick around passive investments penalizes those who have already been re-investing in their business with an eye to the long haul,” says Hunter.

In its discussion paper, the ruling Liberals suggested some Canadians are “taking advantage of the fact that corporate income tax rates are much lower than personal tax rates for higher-income individuals. This is a problem when an individual holds money inside a corporation, not to invest it in growing the business, but simply to shield it from the higher personal tax rate.”

The consultation period on the proposed changes ended Oct. 2

“Veterinarians, insurance brokers, small oil and gas companies, doctors, store owners, and even rural municipalities” were among the people who expressed concern about the measure, Conservative MP Robert Kitchen said last month in the House of Commons.

“There are still a lot of details that need to be sorted out,” Sorbara said Nov. 14 at the IBTR breakfast. “We want to ensure that everyone who has played by the rules to date – that no one is penalized.