Targeted Tax Fairness Measures Will Protect Middle Class Small Business Owners
October 18, 2017 – Hampton, NB – Department of Finance Canada
When you have an economy that works for the middle class, you have a country that works for everyone. As the Government of Canada lowers the federal small business tax rate to 9 per cent, it is committed to ensuring that Canada’s competitive corporate income tax rates are not being used by high-income individuals to gain a personal tax advantage.
Finance Minister Bill Morneau, Minister of Status of Women Maryam Monsef, and member of Parliament for Fundy Royal Alaina Lockhart today announced the next steps in the Government's plan to move forward on changes to the tax system that will ensure that Canadian-controlled private corporation (CCPC) status is not used to reduce personal income tax obligations for high-income earners rather than supporting small businesses.
Minister Morneau outlined today the Government’s intention to move forward with measures to limit the tax deferral opportunities related to passive investments, while providing business owners with more flexibility to build a cushion of savings for business purposes – for example to deal with a possible downturn or finance a future expansion – as well as to deal with personal circumstances, such as for parental leave, sick days or retirement. The intent of the new rules will be to target high-income individuals who can benefit under current rules from an unlimited, personal, tax-preferred savings account via their corporation, far beyond the pension, RRSP and TFSA limits available to other Canadians. This is inherently unfair, and the Government is committed to fixing it, while it reflects on the feedback received from Canadians during the consultation period.
In further developing these measures, the Government will ensure that:
- All past investments and the income earned from those investments will be protected;
- Businesses can continue to save for contingencies or future investments in growth;
- A $50,000 threshold on passive income in a year (equivalent to $1 million in savings, based on a nominal 5-per-cent rate of return) – an amount that is exceeded by only about 3 per cent of corporations – is available to provide more flexibility for business owners to hold savings for multiple purposes, including savings that can later be used for personal benefits such as sick-leave, maternity or parental leave, or retirement; and
- Incentives are in place so that Canada’s venture capital and angel investors can continue to invest in the next generation of Canadian innovation.
From the launch of consultations on July 18, Canadians have engaged in an important discussion on proposed measures to address tax planning using private corporations. Through town halls and roundtables held from Vancouver to St. John’s, Ministers and Members of Parliament heard and carefully considered the views and perspectives of small business owners, farmers, fishers, professionals and experts. This week, the Government is announcing further steps towards fairness for the middle class that will take into account feedback received from Canadians during the consultation period. The Government’s approach will ensure the measures are focused on a small number of high-income individuals who get the biggest advantage from existing rules.
“Every small business owner knows that success often means taking risk. I’ve met with and listened to small business owners all across Canada and I know that their success also depends on flexibility in how they save for things like maternity leave, sick leave and their retirement. The changes we will make, including lowering taxes on small business to nine per cent, are helping us take one more step towards an economy that works for the middle class.”
- Bill Morneau, Minister of Finance
CCPCs with taxable passive income above the $50,000 threshold in 2015 represented 3 per cent of the CCPC population, but earned more than 88 per cent of total taxable income. The vast majority of businesses will not be affected by the tax changes.
80 per cent of the passive investment income in Canada is earned by 2 per cent of all CCPCs.
More than 80 per cent of passive investment income is earned by CCPC owners making more than $250,000 per year.
An increasing number of Canadians—often high-income individuals—are using private corporations in ways that allow them to reduce their personal taxes. In some cases, someone earning $300,000 with a spouse and two adult children can use a private corporation to get tax savings that amount to roughly what the average Canadian earns in a year.
Only an estimated 50,000 family-owned private businesses are sprinkling income. This represents only a small fraction – around 3 per cent – of CCPCs.
All corporations, including CCPCs, benefit from a combined general corporate tax rate that is 12 percentage points lower than Canada’s largest trading partner, the United States.
The Government intends to provide further support to small businesses in Canada through a further reduction of the federal small business tax rate to 9 per cent.
As a result, the combined federal-provincial-territorial average tax rate for small business would be lowered to 12.9 per cent from 14.4 per cent, by far the lowest in the G7 and fourth lowest among Organisation for Economic Co-operation and Development countries. Small businesses can retain more of their earnings to reinvest, supporting the growth of their business and job creation.
In the course of the consultations, over 21,000 written submissions were received by the Department of Finance Canada.
The Government will base its next steps on the following key principles. We will:
- Support small businesses and their contributions to our communities and our economy.
- Keep taxes low for small businesses, and support owners to actively invest in their growth, create jobs, strengthen entrepreneurship and grow our economy.
- Avoid creating unnecessary red tape for hard-working small businesses.
- Recognize the importance of maintaining family farms, and work with Canadians to ensure we don't affect the transfer of a family business to the next generation.
- Conduct a gender-based analysis on finalized proposals, to ensure any changes to the tax system promote gender equity.
- Government Moves to Reduce Small Business Tax Rate and Support Fairness for the Middle Class
- Minister Morneau Holds Town Hall and Facebook Live Event in Oakville
- Parliamentary Secretary to the Minister of Finance Brings Listening Tour to Regina
- Minister Morneau Discusses Tax Fairness With Standing Committee on Finance
- Minister Morneau Brings Listening Tour to Toronto
- Minister Morneau Brings Listening Tour to Fredericton
- Minister Morneau Brings Listening Tour to Halifax
- Minister Morneau Brings Listening Tour to Gatineau
- Ministers Morneau and Chagger Kick Off National Listening Tour With Small Business Owners
- Minister Morneau Announces Next Steps in Improving Fairness in the Tax System
- Minister Morneau Brings Message of Tax Fairness to Toronto Region Board of Trade
Media may contact:
Office of the Minister of Finance
613-369-5699 / 613-462-5469
Department of Finance Canada
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