A tax expert argues that policy makers should consider blunting the incentive for professionals to incorporate
In recent years, there’s been much debate about the use of Canadian-controlled private corporations (CCPCs) and whether the wealthy are paying their fair share in taxes. One tax expert is arguing that there is another unaddressed aspect of unfairness — one that can be made right.
“The gap between top personal income tax rates and small-business income tax rates has widened over the past 20 years,” said Geoffrey Turner, tax lawyer in Toronto and adjunct professor at Osgoode Hall Law School, in a piece written for the Financial Post. “At the same time, Canada’s general corporate tax rate for non-CCPCs (including public corporations) is now higher than recently reduced rates in other key countries.”
Turner noted that top marginal tax rates for professionals have already exceeded the psychological barrier of 50%. With provincial taxes factored in, individuals now face a top marginal rate of 53.5% in Ontario, with similar rates in other provinces.
“Statistics Canada reports that in 2017 about 1.3 per cent of individual filers — 364,140 people — paid tax at this highest rate,” Turner said, noting that they contributed a collective 25.5% of Ottawa’s revenue from the personal income tax.
Because of the high top marginal tax rate, he argued, ambitious people with incomes that approach or exceed the relatively low tax threshold are effectively discouraged from working harder, longer, and more productively. Having a tax rate above 50%, he added, pushes talented individuals to leave Canada and migrate to countries with “less confiscatory taxation.”
The high tax rate, he added, creates a strong incentive for professionals to incorporate. “Canada’s general corporate tax rate (combined federal and provincial) is now 26.5 per cent in Ontario, with comparable rates in other provinces,” he said. And under the small business deduction, the first $500,000 of Canadian-source active business income earned by CCPCs every year is subject to a much lower rate — 12.5% in Ontario.
Turner noted that the SBD was originally meant to promote employment in small Canadian businesses and offset their difficulties in obtaining cost-effective financing. But he argued that Canada’s more mature capital markets have made accessing domestic and foreign venture capital relatively easier. He also said that the ability of small private businesses to generate more good jobs and positive externalities than non-CCPC entities isn’t clear.
Citing other preferential treatment enjoyed by CCPC owners, he called for a reduction in the general corporate tax rate and a phase-out of the SBD. Aside from establishing “fiscal neutrality” for businesses, he said such a move would allow the Income Tax Act to be simplified since complex rules governing the SBD could then be repealed.
He also called for the top personal tax rate for residents of all provinces to be brought below 50%, with small business and general corporate tax rates harmonized into a single rate closer to the US rate of 21%. Narrowing the gap between the personal tax rate and corporate rates, he argued, would blunt the incentive for professionals to incorporate.
“[R]educing the currently wide gap between very high personal and very low small-business tax rates … would make our tax system both fairer and more competitive, a rare policy double,” he said.