A Penticton business advocate says he is taking a small business tax rate reduction with a grain of salt, as other changes to the tax scheme remain vague and hard to decipher.
Penticton and Wine Country Chamber of Commerce president Neil Wyper said he’s wary of a drop to the small business tax from 10.5 to nine per cent, announced early this week from the federal government.
“The reduction sounds great, but seems opportunistic or something, like a diversion, almost,” Wyper said.
“The chamber really wants to know more about what the whole plan is. Months ago, when it started, we were asking if the proposed changes were part of a bigger plan that would make sense, and it doesn’t seem like these tax reductions fit a plan back then, more of a response now to all of the negativity they’ve got.”
The Liberal Party rode to power in 2015 on a promise to, among other things, lower the small business tax rate to nine per cent, but instead froze the rate at 10.5 in their first budget in 2016, frustrating small business owners across the country.
“It was strange that they would put that on hold, and then not even mention it this summer, when they brought in the new proposed changes and now bring it up after all of the hostility that they’ve received,” Wyper said.
“I just really want to understand what they’re going for, what the whole picture is if they have one.”
That said, a cut to nine per cent would drop Canada from the number two spot (above Korea at a national 10-per-cent tax) to the single lowest small business tax rate among Organization for Economic Co-operation and Development (OECD) countries. Even with provincial taxes added in, it would top South Korea’s combined rate (11 per cent), but fall below the third-lowest (France, Latvia, Poland) at 15 per cent.
“The reduction of tax rate is definitely welcome. It helps basically all businesses, but there still is underlying question of how are the new changes going to take away from it,” he said.
In the summer, the Finance Minister Bill Morneau announced changes that would go after a few areas of what it calls unfair tax advantages for small business owners.
That included income sprinkling, in which business owners were able to pay out dividends to family members even if they haven’t contributed to the business and passive investments, in which business owners would park excess profits from the business in things like mutual funds, allowing interest to accumulate more money with less tax on those gains.
In its update on Monday, the federal government also tweaked its policy on income sprinkling to more clearly target wealthy business owners whose family members aren’t contributing capital or labour to the business.
“I heard Minister Morneau speak … a few weeks ago, and I had trouble with the way he was talking about that, because I know a number of entrepreneurs where one spouse works full-time to pay the family’s bills so that the other family spouse can start a business,” Wyper said.
“The way that he’s talking about this, it doesn’t recognize that contribution of the working spouse that’s not a capital investment in a business, and it’s not labour in the business, but still being in the future the business is successful having that entrepreneur sprinkle some income back to that working spouse that helped them get started.”
Wyper said he found it inconsistent that a neighbour who contributes “a couple dollars over the fence” to the business can get dividends, whereas the owner’s spouse who helps support the family during the business’s early years gets no dividends.
The federal government, on the other hand, considers that kind of income sprinkling to be an advantage not afforded those who don’t have incorporated businesses — people can’t pass off a portion of their personal income to pay taxes at a lower income bracket.
“In a family where either or both partners are starting a business, if that business is successful, it’s a great outcome for our community at large, not simply just for the individual part of the business. They’re taking on a risk with putting their finances on the line,” Wyper said.
“I think there’s an argument there as well to look at how families should be taxed instead of how individuals should be taxed.”