End Canada’s small business tax break? One for the voters.

It’s become an issue in Canada’s national election – even as the parties talk tax breaks for small business – some are also saying the small business tax breaks as they stand now need to end.  

Touchy subject

Liberal party leader Justin Trudeau took heat recently on that issue. He prefaced his September 8th comments to CBC’s Peter Mansbridge by saying: “I think small businesses should be paying less taxes, we just have to make sure that it’s done the right way.”Then he went on to say “We have to know that large percentages of small businesses are actually just ways for wealthier Canadians to save on their taxes, and we want to reward the people who are actually creating jobs and contributing in concrete ways.” His opponents jumped on that right away, expressing outrage for what they painted as criticism of the backbone of Canada’s economy – the small business. Both the NDP and the Conservatives are promising to reduce the small business tax rate from 11% to 9% on the first $500,000 of income. That’s a substantial advantage over the general corporate tax rate of 15%.  

Support from the experts

But several leading experts in Canada support Trudeau’s contention that at least some wealthier Canadians are exploiting loopholes in the small business tax break. In a Canadian Council of Chief Executives report released on September 16th, Jack Mintz, the President’s Fellow at the University of Calgary’s School of Public Policy, “…questions the long-held assumption that favourable tax treatment for small businesses encourages investment, job creation and overall economic growth. In fact, tax advantages enjoyed by small businesses end up discouraging entrepreneurs from pursuing growth.” He also says that “…the favourable tax treatment of small businesses enables many wealthy Canadians to pay little or no personal income tax.”

The role of the CCPC

Michael Wolfson, Mike Veall and Neil Brooks drill down into the ways wealthy Canadians use Canadian Controlled Private Corporations, or CCPCs, to reduce the amount of tax they pay. They conclude that “This kind of structuring of income enables lower effective income tax rates, for example by using the Small Business Deduction, benefitting from substantial tax deferral, and opportunities for income-splitting with close family members.” Theynote that “At least 65%, and in some years as much as 80% of the tax filers in the top 0.01% were CCPC owners during this decade (2001-2011).” Mintz has said that “…60 percent of the small business deduction goes to households with more than $150,000 in income. That’s because you tend to have a relatively high number of high income households who own small businesses.” He also says that the tax breaks for CCPCs become a disincentive for growth. “If they grow (beyond $500,000 of income) they lose some of their benefits and get hit with higher taxes…It tends to keep small businesses smaller.”  

Taking issue

Those ideas are controversial in some quarters – Dan Kelly; president of the Canadian Federation of Independent Business took issue with those on October 5th in the Financial Post. He points out that “For every employer earning more than $250,000 a year, there are five who earn less than $40,000.He says “Small businesses employ nearly 10 million Canadians, often two or three at a time.” And he points out that “The majority of employers (98.2 per cent) in Canada are small businesses.  

Change is in the wind

The Conservatives have already set machinery in motion to reduce the small business tax rate; the NDP is in favor of speeding up the schedule; the Liberals aren’t necessarily arguing with the numbers, but want to tighten the rules.One thing is clear – you won’t stop hearing about this issue between now and the October 19th election, or afterward, either.

 

Canadian taxes can be hard for businesses big and small. Automated expense reports, in the cloud, can make them easier. For some help, download our eBook on GST, HST, and QST, prepared in conjunction with the tax experts at Ryan, or click on over to Concur to learn more.

 

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