Passive income changes would fetch $6B after a decade: report
Federal revenue still gets boost despite higher tax rates hitting fewer firms: PBO
The Finance Department’s recent amendments to its contentious tax proposals will significantly reduce the number of private corporations exposed to higher tax rates on passive income, but it would still fetch $6 billion for the federal government after a decade, according to a new report.
On Thursday, the Parliamentary Budget Officer released a study that found just 2.5 per cent of Canadian Controlled Private Corporations (CCPCs), or roughly 47,000 companies, held passive investment income above the federal government’s $50,000 threshold in 2014. That figure compares to roughly 14 per cent of CCPCs, or 262,000 companies, that would have been affected before the threshold was introduced.
The PBO estimates the passive investment changes will boost government revenues by around $1 billion over the next two years, rising to around $6 billion per year after the next decade.
The report comes after Finance Minister Bill Morneau’s tax changes proposed 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 proposal.
In response, Morneau amended his earlier proposal in mid-October to only apply to CCPCs with investment income higher than $50,000.
Passive income within CCPCs is currently taxed around 50 per cent, including federal and provincial rates. Under the change, retained earnings on passive income above the $50,000 threshold will be exposed to the higher rate proposed by Ottawa — as much as 73 per cent in some cases, according to estimates.
The PBO report drew from a database of CCPC tax returns spanning from 2000 to 2014. It found that in 2014 only 4.3 per cent of CCPCs in the “professionals” category — including doctors, lawyers and dentists and others — have 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 per cent 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 affected by the changes, with 10.4 per cent of corporations above the $50,000 threshold.
Finance and insurance are the second-most impacted (nine per cent), followed by real estate CCPCs (6.6 per cent) and professionals (4.3 per cent).
Even so, the alterations have broadly failed to satisfy the business community. On Wednesday the Coalition for Small Business Tax Fairness, a coalition of nearly 80 business associations, said in an open letter to Morneau that the changes will hamper efforts by medium-sized corporations to expand.
“While the $50,000 annual threshold will be helpful for small businesses that want to remain small, it will be insufficient for those that want to grow and create new business opportunities,” it said.
The coalition also suggested that businesses below the threshold would also 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 the federal government to scrap the passive investment changes before they are brought forward in the 2018 budget.
Meanwhile, some tax professionals and economists have cautioned against levelling higher taxes against the wealthiest members of society, arguing it only stifles investments by key job creators.
“If they start taxing me 75 per cent on my interest income, I’m not investing in anything risky with that money — why would I?” said David Malach, a partner at Aird & Berlis LLP in Toronto. “There’s no way I’m going to invest in a startup if the government is taking three-fourth of my money.”