The Center Block and the Peace Tower in Parliament Hill

The Investment Industry Association of Canada is urging the federal government to make significant alterations to its proposed changes to the taxation of private corporations, including altogether abandoning the changes to the taxation of passive investment income.

“The new rules were introduced too quickly and with insufficient analysis,” said Ian Russell, president of the IIAC, on Tuesday during his testimony to the House of Commons Standing Committee on Finance on the implementation of the 2018 federal budget.

The government’s current proposed rules could result in a flight of capital out of the country, the group suggests.

“If the government proceeds with its modified new tax rules, we recommend it closely monitor the impact on expansion of existing, growing private corporations, and migration of these businesses to the United States. Canada can ill-afford the loss of available capital for small and mid-sized businesses.”

The government first introduced proposed changes to the taxation of private corporations last July, concerned that the existing rules provided unfair tax advantages to high-income earners. In the months afterwards, and then again in the federal budget, the government narrowed the scope of those initial proposals, responding to widespread criticism that the original proposals were too broad, too complex, and resulted in too many negative unintended consequences.

While the IIAC praised the government’s recent amendments to its original proposals as an “improvement”, the group said that the government’s proposed changes to the taxation of passive investment income, outlined in the budget, penalize small businesses wishing to hold passive investment as a contingency again unforeseen circumstances, or to use for future investment in the business. The IIAC asked the government to abandon the passive investment income tax proposals entirely.

“We have little idea how important these companies [affected by the proposals] are to the Canadian economy. They may be among the largest and most dynamic in the country,” Russell said.

If the government is determined to proceed with the passive investment income changes, it should: consider providing small business owners the ability to “grandfather” past investments, and the income earned from these investments; index the $50,000 and $150,000 exemption limits to inflation, between which the access to the small business rate is ground down; and monitor the impact of the new rules on business behaviour.

The IIAC also asked the government to provide small business owners greater clarity and certainty to the proposed rules affecting the taxation of split income from a private corporation, and to delay implementation to provide business owners with more time to prepare and comply with the new rules.