OTTAWA — The federal Liberal government says it will lower the small business tax rate to 10 per cent in January and to nine per cent in 2019, the start of a week-long effort to stanch the bleeding from a self-inflicted political wound.
Prime Minister Justin Trudeau also says the government won't be changing the lifetime capital gains rule, which allows business owners to convert regular income of a corporation into capital gains, which are taxed at a lower rate.
is making the announcement as his government faces widespread criticism for a package of controversial tax-reform proposals.
The small business tax rate is currently at 10.5 per cent and applies to the first $500,000 of active corporate income, and the government says lowering the rate will provide entrepreneurs with up to an additional $7,500 per year.
Combined, the government estimates the tax reductions will reduce Ottawa's revenues by about $2.9 billion over five years.
Trudeau campaigned in 2015 on a promise to reduce the small business tax rate to nine per cent from 11 per cent over three years — but he announced in Budget 2016 he would freeze the rate at 10.5 per cent, cancelling in the process a legislated reduction to nine per cent instituted by the previous Conservative government.
Faced with vocal opposition to tax proposals the Liberal government is now reviving the nine per cent promise.
In recent weeks, doctors, lawyers, accountants, shop owners, farmers, premiers and even some Liberal backbenchers denounced the reforms, contending they'd hurt the very middle class Trudeau claims to be trying to help.
The changes are aimed at more clearly targeting the reforms at wealthy individuals who've used incorporation of small businesses to gain what the government maintains is an unfair tax advantage.
They're also meant to address concerns the reforms will disproportionately impact women, inhibit the ability of small business owners to save for a rainy day and make it impossible for farmers, fishers and others to pass their businesses on to their children.
Earlier Monday, the opposition Conservatives attacked Morneau for what they described as the Liberals' flip-flop.
"History of small biz tax cut: Tories passed it. Lib platform promised to keep it. Lib budget cancelled it. Now Libs promise to reinstate it," Conservative MP Pierre Poilievre wrote on Twitter.
Morneau has acknowledged that changes are required to address the concerns his reform proposals have triggered.
He's signalled that he'll ensure angel investors and venture capitalists, whose financing helps start-up companies get off the ground, won't face unintended consequences. He also wants to avoid subjecting companies to additional red tape, complicating the intergenerational transfer of small businesses or hurting the ability of women entrepreneurs to save money for maternity leaves.
The Liberals' popularity has taken a hit in some opinion polls amid the backlash to the proposed reforms, first announced in mid-July.
The damage control effort began Monday with the briefing for Liberal MPs, some of whom have been among the most critical of the proposals. Backbenchers emerged from the meeting saying they feel satisfied that the government has listened to their concerns, although they were not given details of the changes that are to be unveiled in a series of announcements later in the week.
"I feel very, very positive. For the first time in a couple months, I've got a bit of a smile on my face," said New Brunswick MP Wayne Long, who was kicked off two Commons committees for voting against the government earlier this month on a Conservative motion calling for further consultations on the proposed reforms.
"There wasn't a lot of specifics today, but I'm very, very confident — by certainly the tone and messaging of the minister — that a lot of these concerns ... will be addressed."
The rollout of the tax reform proposals has been a communications disaster for the government, in part because backbenchers were not consulted before the original announcement, Long suggested.
"I'm hoping that we can all learn from this and move forward as a team ... When everybody on the team feels they're part of the team, that's what makes a winning team and I think we've turned a corner on that."
Edmonton MP Randy Boissonnault, who had apologized to small business owners for the implied message that they're tax cheats, said he's satisfied there's been a "change in tone already."
"The finance minister has listened. Caucus has been involved and heard very loudly," he said, adding that business owners have also been heard.
Trudeau is to announce the reduction to the small business tax rate later today at a pizza shop in Markham, Ont., accompanied by Morneau and Small Business Minister Bardish Chagger.
On Friday, Morneau acknowledged that the government has to do a better job of reassuring middle-class Canadians that they won't be hurt by the proposals.
"The fact that farmers won't be impacted, we need to make that clear," he said.
"The fact that, you know, small businesses will be able to continue to invest in their business, which is what we want, and won't be worried about passing their business to the next generation, we're going to communicate that clearly."
As originally proposed, the plan would restrict income sprinkling, in which an incorporated business owner can transfer income to a child or spouse who is taxed at a lower rate, regardless of whether they actually do any work for the company.
It would also limit the use of private corporations to make passive investments that are unrelated to the company and curb the ability of business owners to convert regular income of a corporation into capital gains, which are taxed at a lower rate.
Critics have complained that the reforms would hurt entrepreneurs who take personal financial risks when they open a business, impeding their ability to save for retirement or maternity leave and to sock away funds for economic downturns.
Today, we announce tax measures designed to make Canada’s tax system more fair, while helping small businesses succeed & grow. #promisekept
— Justin Trudeau (@JustinTrudeau) October 16, 2017
Small businesses drive the Canadian economy – they create jobs, support our communities & make them even better places to call home.
— Justin Trudeau (@JustinTrudeau) October 16, 2017
This tax cut will help small businesses keep more of their hard-earned money, so they can invest in their businesses & their employees.
— Justin Trudeau (@JustinTrudeau) October 16, 2017
When small businesses prosper, so does Canada. https://t.co/koHckFbYQv #SmallBusinessWeek #SBW2017
— CanadianPM (@CanadianPM) October 16, 2017
Beginning January 1, we will end the practice of income sprinkling to family members who don’t make contributions to the business.
— Justin Trudeau (@JustinTrudeau) October 16, 2017
No one should choose between retirement & keeping their business in the family. We will not change lifetime capital gains exemption rules.
— Justin Trudeau (@JustinTrudeau) October 16, 2017
Canadians elected us to build an economy that works for everyone, not just the wealthy - tax measures announced today will help us do that.
— Justin Trudeau (@JustinTrudeau) October 16, 2017
We could only make this change after looking at the tax system. That’s what our consultations of the past several months were all about.
— Justin Trudeau (@JustinTrudeau) October 16, 2017
Statement by the Prime Minister on Small Business Week Ottawa
The Prime Minister, Justin Trudeau, today issued the following statement marking Small Business Week, which runs from October 15 to 21, 2017:
“This week is Small Business Week, a time to celebrate and thank Canada’s small and medium sized businesses for their immense contributions to our country’s prosperity. It is also an opportunity for current and aspiring entrepreneurs to connect, share experiences, and learn new ways to make their businesses even more successful.
“Small business owners move Canada forward. They invest in our communities, transform new ideas into market-ready products and services, and unlock economic opportunities that create jobs and grow the middle class.
“Small businesses are the backbone of our economy. They make up 98 per cent of all business operations in Canada, employ over 70 per cent of the total labour force in the private sector, and contribute more than 30 per cent to our gross domestic product.
“We know that when small businesses prosper, so does Canada. That is why Budget 2017 introduced the Innovation and Skills Plan to remove barriers and help small and medium sized businesses reach new markets, and to ensure that they have the technology, talent, and tools they need to thrive, grow, and prosper. That is also why we have been meeting with small businesses and listening to their feedback as we work toward making Canada’s tax system more fair and competitive.
“Today, I joined Ministers Morneau and Chagger to announce that the Government intends to lower the small business tax rate to ten per cent in 2018 and to nine per cent in 2019. These tax cuts will fulfill a promise we made to Canada’s small business owners and, more importantly, make sure that they can keep more of their hard-earned money to invest back into their businesses, their employees, and their communities.
“On behalf of the Government of Canada, I invite all Canadians to participate in events across the country to celebrate Small Business Week. I thank the Business Development Bank of Canada for their annual organization of this special week and wish them every success with this year’s activities.”
