Tax Changes On ‘Passive Investments’ Will Net Ottawa $6 Billion Annually: Report

Ottawa’s amendments to corporate taxation could generate $6 billion in new revenue for the federal government within the coming decade, according to a new report by the Parliamentary Budget Officer (PBO).

The PBO released a study Thursday that estimates changes to the way passive investments are taxed in Canada will boost government revenues by $1 billion over the next two years, rising to $6 billion per year after the next decade.

The PBO report comes after federal Finance Minister Bill Morneau’s tax changes proposed early this fall spurred an upheaval from small business owners and professionals, who said the tweaks would needlessly restrict company cash flows. Doctors, lawyers and farmers were among the loudest opponents of the proposed changes.

In response, Minister Morneau amended his earlier proposal in mid-October so that the changes only apply to Canadian Controlled Private Corporations (CCPCs) with investment income higher than $50,000. Passive income within CCPCs is currently taxed around 50%, including federal and provincial rates. Under the change, passive income above the $50,000 threshold earned on active retained earnings will be exposed to the higher rate proposed by Ottawa—as much as 73% in some cases, according to estimates.

The PBO report drew from a database of CCPC tax returns spanning 2000-2014. It found that in 2014, only 4.3% of CCPCs in the “professionals” category— including doctors, lawyers and dentists and others—had passive investment income levels above the $50,000 threshold, or a total of roughly 3,700 corporations. Before the threshold, about 28,000 professional CCPCs, or 32.9% of the total, would have paid higher rates on passive income, according to 2014 data.

CCPC’s in the “management of companies” category will be the most impacted by the changes, with 10.4% of corporations above the $50,000 threshold. Finance and insurance are the second-most impacted (9%), followed by real estate CCPCs (6.6%) and professionals (4.3%).

Still, the alterations have broadly failed to satisfy the business community. Earlier this week, the Coalition for Small Business Tax Fairness, a coalition of nearly 80 business associations, said in an open letter to Minister Morneau that the changes will hamper efforts by medium-sized corporations to expand. The coalition also suggested that businesses below the threshold would be impacted by the changes, as corporations “will be saddled with additional complexity and compliance costs despite the $50,000 allowance for passive investment income.”

The group is calling on Ottawa to scrap the passive investment changes before they are brought forward in the 2018 budget. At the same time, some tax professionals and economists have cautioned against levying higher taxes against the wealthiest members of society, arguing it will stifle investments by job creators.