Canada's Original Think Tank

Small Business Tax

Small Business Tax

Small Business Tax

Small Business Tax

Published on 3 October 2017
Hansard and Statements by Senator Paul Massicotte

Hon. Paul J. Massicotte:

Thank you, minister, for being with us today. I want to also comment on the tax proposal.

We have all heard many comments. I have received many emails, as you can expect. We all did. A lot of people were upset about the change in policy and position.

My understanding is that all of the amendments you’re proposing deal with — your new words — “unintended consequences.” These were benefits people got, but when the legislation was initially drafted, the tax act was initially structured, these consequences or benefits were not intended, I gather. One of the fundamentals of the tax act, from my understanding from the university courses I took on taxation, is that you have to make sure it’s neutral relative to the form you receive it in: individual, corporate, partnership, trust or whatever.

I gather you found out it’s not equal. Structurally there is a benefit if you use a certain form of entity versus another form of entity, for the same nature of the income. I gather all your efforts are trying to correct that inequity where people have found this “opportunity,” if you wish, to basically save some money from doing so.

Am I correct in saying that, or did you change your mind as to what the intent of the legislation was initially?

Mr. Morneau: Thank you for the question. We have identified that there are advantages in setting up an incorporated structure that allows people to lower their tax in the immediate term and effectively increase their rate of return in the long term versus individuals who don’t have the advantage of incorporating. That was essentially what we identified.

Those advantages have increased over the last half a generation; since the year 2000, they have significantly increased. The arbitrage, if you want to call it that, between the top personal income tax rate and the small business rate has increased significantly, having gone up to 37 per cent. The arbitrage between the corporate rate and the top personal tax rate is more in the order of 26 per cent. So there is a big opportunity for people to save inside their corporation, and that opportunity grows as they have more and more income.

The goal we’re trying to achieve is to make sure that we have not unintentionally created a big opportunity for wealthy Canadians.

The other more immediate-term opportunities are this idea that you can find a way to give income to family members not involved in your business. That just creates a system we don’t think makes sense going forward and that will encourage more and more people to pursue incorporation.

Our goals haven’t changed. We want to communicate that the objective of making sure the system doesn’t create unintended incentives is important. At the same time, those incentives for people to leave that money in their company aren’t incentives to invest in their active business. The secondary observation is that if you have an incentive to put the money in a passive investment and not your active business, that’s not really what we were intending to achieve.

We’re trying to do those two things at the same time. We think it will create a fairer system and, at the same time, encourage people to invest in active business. Those are the goals.