There was a lot of vigorous debate this past summer about federal business taxes. The final outcome is that Canada’s small business tax rate is coming down, as promised.
It stood at 11% in 2015. It will drop to 10% on January 1st, 2018, and then to 9% one year later. That will give Canadian small businesses an even more significant tax advantage over competitors in the United States.
The annual savings could be as high as $7,500. The average firm will gain about $1,600 per year from lower federal taxes.
With respect to the practice known as “income sprinkling”, which is a tax reduction technique used in about 3% of Canadian privately-controlled corporations, the rules will be clarified and simplified to avoid red tape, but here’s the bottom-line – where family members actually contribute to the business and are reasonably compensated for what they do, there will be no change in federal taxes.
Similarly, there will be no change in the rules applicable to the lifetime capital gains exemption, or the conversion of income into capital gains. This is especially important for family farms. We will work closely with farmers and small businesses to facilitate transfers of farms and family businesses from one generation to the next.
Over the past few months, one of the most contentious tax issues has been how to treat “passive income” collected by certain privately-controlled corporations. This is not the active income they earn from running their businesses, but the additional profits they accrue from investing retained earnings in activities that are unrelated to their businesses.
This particular form of wealth is concentrated in very few hands. To put things in context, there are 1.8 million privately-controlled corporations in Canada. Just 3% of them collect 88% of all the passive income earned in any given year.
New federal tax rules will not affect the 97% of companies that earn modest amounts of passive income – up to $50,000 in any one year. That represents a rate of return of 5% on a capital base of one million dollars. This annual threshold will enable privately-controlled corporations to accumulate a reasonable cushion to protect against future downturns, prepare for retirement or other contingencies.
I am grateful for all the input we have received on various taxation issues. Clearly, the Government of Canada has listened carefully to farmers and small businesses. Both the Canadian Federation of Agriculture (CFA) and the Canadian Federation of Independent Business (CFIB) have applauded the outcomes described above.
Equally encouraging is the good news about Canada’s economic success over the past two years.
From the outset of our government, we identified Canada’s most immediate economic problem as a lack of sufficient sustained growth. So we have pursued a policy of investment to drive greater economic growth, not austerity.
We have cut middle-class taxes and created a more generous Canada Child Benefit to put significantly more money into the pockets of ordinary Canadians. We have also invested extensively in community infrastructure, housing, retirement security, higher learning and skills, science and innovation, and international trade. Our federal investments in Saskatchewan alone over the past two years have totalled more than a Billion Dollars.
In addition, by linking strong economic policy with credible environmental policy, we have made it possible to approve two major pipelines (TransMountain and Line-3) to move western resources into export markets. These projects represent $11 billion in private sector investment and 22,000 jobs. Significantly, all the big contracts to build the necessary pipe so far have gone to Evraz Steel in Regina.
Our economic plan is working. The deficit is lower than projected. Our federal debt-ratio is the best among G7 countries and it continues to fall on a steady downward track. Middle-class and small business taxes are coming down. Canada’s economic growth rate is more than double the average of the previous 10 years. And more than 500,000 net new jobs have been generated.
There’s much more yet to do, but this is a good start.