Ottawa to cut tax on small business, simplify reforms
But move could have limited impact on Canadian companies, analyst says
The Liberal government announced a cut to small business tax rates Monday, as Ottawa scrambled to appease entrepreneurs who believe recent tax change proposals run counter to the government’s stated claim that it’s fighting for the middle class.
Prime Minister Justin Trudeau, alongside Finance Minister Bill Morneau on Monday, said the government will lower the small business tax rate to 10 per cent in January and to nine per cent in 2019. The move came just weeks after the Finance Department closed the consultation period for its proposed tax changes under private corporations.
Trudeau had promised to cut the small business tax rate to nine per cent during the election campaign, but cancelled the cut in the 2016 budget, instead “freezing ” rates at 10.5 per cent, down from an earlier rate of 11 per cent.
Concerns that the federal government’s proposed changes will increase the tax burden for small corporations has caused a firestorm of criticism in recent weeks, from business associations, farmers, doctors, and other groups, including some Liberal backbenchers.
The government had framed the changes as making high-income earners pay their “fair share” of taxes by removing various shelters.
The changes originally proposed would remove the ability to spread income among family members within corporations, tax some passive investments inside private corporations at a higher rate and limit access to capital gains exemptions. Consultation on the proposal ended Oct. 2, and the federal government is expected to make technical changes after criticism from some business groups.
On Monday, the prime minister said the government would simplify one of its more contentious proposals, which would limit the ability of business owners to lower their personal income taxes by sprinkling their income to family members who do not contribute to their companies. “We’re making changes to a flawed system,” Morneau said Monday.
The small business tax rate applies to corporations with revenues up to $500,000. Canada’s federal corporate tax rate is 15 per cent, while provincial tax rates range between 10 and 14 per cent. Combined, the government estimates the tax reductions will reduce Ottawa’s revenues by about $2.9 billion over five years.
Morneau on Monday also signalled that he’ll ensure angel investors and venture capitalists, whose financing helps startup companies get off the ground, won’t face heftier tax burdens.
He also wants to avoid subjecting companies to additional red tape, complicating the intergenerational transfer of small businesses or hurting the ability for female entrepreneurs to save money for maternity leaves.
Dan Kelly, the president of the Canadian Federation of Independent Business, said the changes were “welcome news,” but added that the cuts should come alongside a more equitable system in other aspects of Canadian tax law.
The small business tax reduction would allow firms to retain hundreds of millions of dollars in revenues, giving companies more space to reinvest capital and hire workers, he said.
“That money in my opinion can be better used by business owners to create jobs, expand their operations, or perhaps just reduce some of the pressure on them than it would if left in the hands of government,” he said.
J.D. Greenberg, of Torontobased Paisley Pike Chartered Accountants, said reducing the small business tax rate would have limited impact on Canadian companies — both those that will be affected by the government’s proposed tax changes and those that will not. “For the small minority of business owners that have the ability to accumulate passive income or other strategies that are targeted, this tax reduction will have only a minor offsetting effect against the bigger issues raised in the consultation document,” Greenberg said.
Canadians for Tax Fairness said that the new rate cut is estimated to cost $1.6 billion, which is less than the estimated revenues from closing the loopholes.
“The large gap between the business tax rates and those for individuals is already the main driver of the tax avoidance the government is trying to address,” Dennis Howlett, executive director of Canadians for Tax Fairness, said in a statement. “There is little evidence that lower business tax rates are linked to job creation at all.”
Tax experts say the Canadian tax system would be better served by undergoing a more widespread overhaul aimed at simplifying the tax code. Tax rules are constantly changed, while new tax credits are regularly introduced and removed, making the system more tough to navigate for small businesses.