Jack M. Mintz: How small businesses get taxed more under Trudeau II

When I had been an undergraduate studying tax policy, I remember John Bulloch’s vicious attack on Pierre Elliott Trudeau’s tax reform package, that was particularly threatening to small businesses and investors. Bulloch, head from the Canadian Federation of Independent Business, was successful in paring back proposals that will have squeezed many Canadian entrepreneurs hard. As a result, the CFIB developed a very large membership and became one of the most powerful advocacy groups in Ottawa. 

Dan Kelly, the current head of the CFIB, has a difficult challenge on his hand with Trudeau II, whose upcoming budget offers to curtail tax “loopholes” that encourage professionals and businesspeople to avoid personal income taxes by creating small corporations. With proposed CPP expansion, the development of Ontario’s pension plan and municipal business-property-tax increases, Kelly and his membership face a storm of cost increases brought on by tax-happy governments.

Actually, there is another whammy which has already hit small-business owners without sufficient comment: the Trudeau four-point hike in the top personal income tax rates. While Trudeau promises to deliver Harper’s proposed small-business corporate rate cut from 11 to nine percent on as much as $500,000 in profits, he has already raised 2016 personal taxes on profits more than $200,000 derived by owners using their corporations.

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These personal tax hikes more than swamp the advantages of the corporate tax cuts on new investments. As shown within the nearby table based on my recent work with V. B. Venkatachalam, the effective tax rate on new investment rises one percentage point for Canada as a whole, using the largest rise in Alberta because of the Notley NDP’s simultaneous personal tax hikes. Small businesses are generally taxed more highly on their investments in most provinces in 2016 except British Columbia and New Brunswick, which reduced their own top personal tax rates (New Brunswick was reversing its ill-advised personal tax rise in the previous year).

Kelly should be concerned as his membership is now taxed more heavily in 2016 than in 2015.  

None of this is good news for economic growth. Start-ups generate many jobs and potential innovations that can have lasting effects on the economy. The recent mess-up in tax policy that sees higher federal marginal tax rates could be compounded by poorly thought-through policies like a proposed full taxation of investment (which a minimum of the Liberals now are reportedly wisely reconsidering).



In yesteryear I have been critical of some incentives that impede small-business growth, specially the excessively low small-business tax rate, especially at the provincial level. Whenever a small company grows to become a large firm, it might be more heavily taxed. To avoid development in high-taxed profits beyond $500,000, many smaller businesses pass out income as highly taxed wages and salaries, interest or royalties to owners. Whatever technique is used, growing smaller businesses are zapped by higher taxes when they succeed.

A smart government would have not increased the top personal tax rates, which stultify the incentive to invest, work and undertake risks. Instead, it might have cleaned up the tax system to reduce tax rates, complexity and distortions. A single corporate income tax rate on large and small business could be hugely successful in increasing the tax system, allowing Canada to simplify its now highly complex dividend-tax-credit regime. This could tilt back the tax wall impeding small-business growth.
Now, this proposal would draw Dan Kelly’s ire, since it sounds like another hit on small company. However, what can make more sense for small businesses are incentives that encourage their growth by flattening tax walls rather than which makes them more steep. Various studies have shown that Canada’s economic growth continues to be hurt by policies that inhibit growth as firms have less incentive to grow.

The U.K. features 100 per cent tax depreciation for capital up to roughly $1 million in expenditure when it pushed its top corporate rate down to the little business rate. Expending capital benefits smaller businesses without hurting growth because the incentive is supplied even if the little fish becomes a whale.

The U.S. provides a capital-gains tax cut to those who own small-business shares going public the very first time. This type of incentive clearly encourages growth rather than curtails it.

Some smarter ideas may be considered. One possibility is moving to a low, flat tax on dividends, capital gains and corporate income, as present in Scandinavia plus some other Countries in europe.

The point is the fact that Canada needs to revamp its treatment of smaller businesses to create incentives to grow rather than stay small. Right now, the us government is on the wrong track; it must focus on what makes economies tick. 

Jack M. Mintz may be the President’s Fellow in the University of Calgary’s School of Public Policy, and scholar-in-residence at Columbia School.