Federal government reduces small business tax rate

Justin Trudeau
Photo by Sukhwant Singh Dhillon

FACING increasing criticism about its proposed changes to small business tax rules that it released in July, Prime Minister Justin Trudeau, Finance Minister Bill Morneau and Small Business and Tourism Minister Bardish Chagger on Monday announced that the government intends to lower the small business tax rate to 10 per cent, effective January 1, 2018, and to 9 per cent, effective January 1, 2019.

Media reports said that Liberal MPs received a briefing on the government’s plans at a closed-door caucus meeting early Monday morning from Trudeau and Morneau. The MPs appeared to be satisfied at the government’s response to the criticism the party was facing.

To support this change in the small business tax rate, the government said it will take steps to 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.

Based on what it heard from Canadians in a series of country-wide consultations on tax planning using private corporations, the government will this week set out its approach to better target strategies used by the relatively small number of high-income individuals who get the biggest advantage from existing tax rules, the government said.

Chagger and Morneau announced the government’s intention to simplify the proposal to limit the ability of owners of private corporations to lower their personal income taxes by sprinkling their income to family members who do not contribute to the business. The vast majority of private corporations will not be impacted by the proposed income sprinkling measures. Corporations with family members who meaningfully contribute to the business will not be impacted by the proposed measures on income sprinkling. In addition, the government announced it will not be moving forward with proposed measures to limit access to the Lifetime Capital Gains Exemption.

The government noted that since the launch of public consultations on July 18, Canadians 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. In the coming days, the government said it will announce further steps towards fairness for the middle class that will take into account this feedback.