Government’s proposal for income tax reform needs more research

Published: November 16, 2017

Updated: July 24, 2018

Author: Luke Jones



The federal government has proposed a change to the income tax system regarded passive income generated within a company. However, there are some unanswered questions surrounding the proposal, a member of parliament told brokers.

Speaking to Canadian Underwriter, Brooke Hunter, president and CEO of Hunters International Insurance, said more research must be done before passing the proposal:

“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,” Hunter said. “This unto itself suggests further study is needed before we implement change.”

Passive investment income usually accounts for investments in things such as limited partnerships in which a business is not operating. Federal finance minister Bill Morneau said in a discussion paper release July 18 that the 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 current model could be replaced by the proposed changes that “generally remove the refundability of passive investment taxes where earnings used to fund passive investments were taxed at low corporate tax rates,” Morneau said.

Francesco Sorbara, Liberal MP for Vaughan-Woodbridge, Ont., spoke this week during the Insurance Brokers of Toronto Region breakfast iterated the proposal is not yet under consultation, but he thinks it will be passed.

“There are people out there who say these passive investments should be incentivized to be active investments,” Sorbara told those in attendance.

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