Finance Minister Bill Morneau has backed away from his controversial plan to change the way passive income held within a private Canadian controlled corporation is taxed.

Passive income is money earned from things like an investment portfolio or rental income and is not actively being invested in a business. Canadians who use privately controlled corporations, called CCPCs, are taxed at a lower rate on their business income than individuals who are not incorporated.

Tax rates in Canada vary from province to province.There are much lower tax rates available on business income earned within a company, including the small business rate of approximately 15 per cent or the general corporate tax rate of about 25 per cent.

As a result, Canadians who earn business income via a corporation can build up a passive investment portfolio more quickly than an individual – a reality the finance minister said last July was unfair.

Under the Liberals’ new plan, unveiled Tuesday in the budget, Finance department has now set a threshold of $50,000 on passive income. This would allow for some savings within company structure without the risk of penalty or new rules being applied. For example, money could be set aside for personal use, including sick leave, maternity or parental leave, or retirement.

Meanwhile, private corporations earning more than $50,000 in passive income up to a maximum of $150,000 will see their ability to claim the small business tax rate of 15 per cent phased out at at rate of $5 for every dollar of investment income over $50,000.

The thresholds were determined based on the fact that under the small business tax rules the low corporate tax rate can be applied on up to $500,000 of business income per tax year.

The changes come after months of public consultations launched in October 2017.

“We found a way that is simpler,” Morneau told reporters in French on Tuesday. “We listened a lot … and we have something that has the same goal, but in a way that ensures people can make investments.”

The Trudeau government first attempt to change the way CCPCs were taxed were unveiled in July 2017. The changes include reforms to areas like the capital gains exemption, family business succession planning and income sprinkling.

The proposal, which was seen by industry as being unworkable and unclear, triggered a firestorm that forced Morneau to backpedal.