Tax changes proposed by the federal government will hurt small business owners who are middle-income earners, says the Canadian Federation of Independent Business, but a Canadian Centre for Policy Alternatives economist says the changes are on target.

Erin McGrath-Gaudet of CFIB and Dalhousie economics professor Lars Osberg debated the proposed changes on CBC's Island Morning Wednesday.

Finance Minister Bill Morneau has said the tax system currently allows some wealthy Canadians an unfair advantage.

The proposed changes include:

  • Eliminating income sprinkling, which allows incorporated small businesses to shift income to family members who don't necessarily work for them.
  • Eliminate the ability to convert a corporation's earnings into capital gains, which are taxed at a lower rate.
  • Reducing the use of private corporations to make passive investments in stocks and real estate.

McGrath-Gaudet said her members were concerned about the characterization of small business owners as wealthy. She said Statistics Canada figures show half of small business owners are earning less than $33,000 a year.

Erin McGrath-Gaudet

Changes to passive investment are a major concern, says Erin McGrath-Gaudet. (CBC)

"This has been both an insult and an injury," she said.

"A lot of these people who are in these very modest, middle-income categories will be caught up in it as well."

Osberg acknowledged many small businesses earn only moderate incomes for their owners, but said the proposed measures would not have a serious impact on them.

"What these measures are designed to do and do do, is tax very aggressive tax avoidance at the top of the income distribution. To say this is going to hit the Ma and Pa small business is just not true," he said.

Lars Osberg, Dalhousie economist

The changes will not have a serious impact on middle-income earners, says Lars Osberg. (CBC)

"The people who will benefit from this campaign of fear and disinformation are the people at the top."

Osberg said few middle-income earners have the resources to invest in these tax avoidance schemes,  instead focusing their resources on RRSPs and tax-free savings accounts.

McGrath-Gaudet said her members are particularly concerned about changes to passive investment taxes, which many small business owners use to save for downtimes or for upgrading business infrastructure without being heavily taxed. RRSPs, she said, are not appropriate for this.

Osberg noted Morneau has expressed a willingness to be flexible in how changes to passive investment are implemented.

With files from Island Morning