Liberals drop capital gains plans in latest damage control attempt

With a tractor and bales as a backdrop, Finance Minister Bill Morneau made the latest in a series of political damage control announcements regarding the Liberals’ proposed tax changes on Thursday morning.

Facing serious conflict-of-interest and ethics questions about his own finances, Morneau left Ottawa to make the announcement with Agriculture Minister Lawrence MacAulay at the Maclaughlin farm near Erinsville, Ontario.

The minister said the government has decided to not move ahead with new measures related to the conversion of income into capital gains — one of the three main issues in the original tax proposal unveiled in July.

Morneau acknowledged his department heard about unintended consequences of the proposed change during the consultation period that wrapped up on October 2nd, with Finance Canada citing farmers’ concerns about taxation upon death and challenges with intergenerational transfers of businesses.

He also repeated that the government will simplify its proposed measures regarding income splitting (or sprinkling) to provide greater certainty that family members who contribute to a farm business will not be impacted.

Earlier in the week, Morneau said they would also not be moving ahead with plans to restrict access to the Lifetime Capital Gains Exemption within an incorporated business. A farmer can claim an LCGE of up to $1,000,000 on the disposition of eligible property, including on the transfer of such property to a child. The LCGE is applied on an individual basis, so multiple shareholders in a farm (eg. a farmer and spouse) can still qualify for the exemption.

While details have yet to be determined and analyzed, here’s what Bill Morneau has announced this week:

  • small business tax rate will be cut from 10.5 to 9 percent by January 1, 2019 (on income up to $500,000)
  • plans to restrict access to Lifetime Capital Gains Exemptions have been dropped
  • plans to restrict the conversion of income into capital gains have also been cancelled
  • measures to restrict income splitting/sprinkling will go ahead, but will be “simplified” to supposedly provide more certainty that family members who contribute to a business will not be impacted
  • the government will allow passive investment income of up to $50,000 inside an incorporated business before much higher tax rates kick in.

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