Business Competitiveness: Understanding the Tax in Post- Pandemic

Knowledge Bureau Report asked Marco Iampieri, Of Iampieri Law Professional Corporation, to review a new paper on small business tax competitiveness by Dr. Jack Mintz, who spoke recently at the Distinguished Advisor Conference (DAC), Patrick Smith and V. Balaji Venkatachalam. It’s an important paper for its time, as the small business in Canada attempts to leave the pandemic behind in 2021.

In 'A New Approach to Improving Small-Business Tax Competitiveness' the authors propose four specific provisions in an effort to improve small business tax competitiveness:

• a flat tax on corporate profits for all businesses, regardless of size, but with an annual 100-per-cent write-off on capital expenditures.
• an income averaging provision for small businesses which would put owners, who will have lean earning years and fat earning years, on a more equal footing with salaried taxpayers.
• targeted small-business dividend taxes for owners with a large interest in an active business.
• a capital-gains exemption for purchasers of initial public offerings in qualifying small corporations.

In an abstract to the paper, Dr. Mintz explains that in this update of a 2013 report, “Small Business Taxation Revamping Incentives to Encourage Growth” it is important to reflect on how things have hanged as economies recover from the pandemic recession and how taxation will have an affect on small business growth and productivity.

In most countries, he explains, if the corporation grows large enough, the owner pays more corporate and personal taxes. To analyze the impact of taxes on business growth, the authors have constructed “tax walls”, to reflect on the marginal effective tax rate on capital.  Since some corporate tax benefits may be lost, as those rates rise with growth, the owner will pay more personal income tax.

He also points out that since 2013, SME taxation has changed significantly, including the 2015 federal provisions limiting income-splitting for family business owners and increasing the tax on passive income (by grinding down the small business deduction). 

The new report, released October 8, 2021, aims to evaluate Canada’s taxation in 2020  while ignoring Covid-related temporary support and compares our taxation system to other G7 countries and Australia.  (Australia has a similar industrial structure and rule of law).

Competitiveness, he warns, especially with the United States, is important here, since small business owners can decide to move to the U.S. or Canadian small businesses can be sold off with their functions moved to foreign jurisdictions.

 Will suggest reforms raise Canadian governmental tax revenue at the expense of small businesses in Canada or help businesses of all sizes thrive?   To form an educated opinion, let’s first take a look at the SBD:

Current State:  An Overview of The Small Business Deduction

The federal small business deduction (the "SBD") provides small Canadian corporations with a deduction against tax otherwise payable on annual active business income up to CAD $500,000, with reductions based on taxable capital. The small business deduction operates as a credit and applies to reduce the federal income tax rate for small businesses from the federal corporate income tax rate of 28% to 9%.

Under subsection 125(5.1) of the Income Tax Act a Canadian Controlled Private Corporation's small business deduction will be clawed back when a Canadian Controlled Private Corporation (and any associated corporations) have taxable capital of over $9,999,999 in Canada.

The Small Business Deduction is reduced by 20% for each increase of $1,000,000 of taxable capital above $10,000,000. A Canadian Controlled Private Corporation that has a taxable capital of $15,000,000 or more will not have any small business deduction available to reduce their taxable active business income. Taxable capital is defined under subsection 181.2(1), 181.3(1) or 181.4, of the Income Tax Act depending on the corporation's market industry.

The rules for the calculation of the small business deduction that a Canadian Controlled Private Corporation may claim if it is carrying on a business in Canada throughout the year are located under the Income Tax Act Part I – Income Tax, Division E – Computation of Tax, Subdivision B – Rules Applicable to Corporations, Corporate Tax Reductions, subsection 125(1) Small business deduction.

Additional educational resources: Join us at the November 10 CE Summit where we will discuss year-end tax planning for individuals, business and investors. Today is the last day to take advantage of early-bird tuition prices!