The decade of tax cuts came to an end in British Columbia this week, with the governing Liberals suspending the planned elimination in April of the special corporate tax rate for private Canadian businesses.
That change will deliver $281-million to provincial coffers next year – or, flipped around, it will strip away up to $12,500 apiece that businesses were expecting to have to expand and invest in jobs and equipment.
B.C. Finance Minister Kevin Falcon, tabling his first budget, defended his decision by citing the “uncertain fiscal environment,” and said that the tax is among the lowest in Canada. He is promising that the elimination of the small-business corporate tax could still happen, but only when B.C.’s finances have returned solidly to a surplus.
“We will revisit it only after our fiscal situation has improved,” said Mr. Falcon, who is pinching pennies across the board to balance the books by 2013, eliminating the province’s deficit as required by law.
The rate has fluctuated, wavering among 8.5 per cent, 5.5 per cent and 4.5 per cent in the last years of NDP government in B.C. As of December, 2008, the rate was pegged at 2.5 per cent. The small-business corporate tax rate actually applies to any Canadian-controlled private company, regardless of size. As a result, a firm with millions in earnings would still pay just the 2.5 per cent on its first $500,000 in taxable income; a higher 10-per-cent rate kicks in for income above that mark. Firms that are publicly traded or not Canadian-controlled aren’t eligible for the lower rate.
In an interview, Mr. Falcon said that he is not ruling out a later elimination of the tax “if it is the smart thing to do,” but that he is awaiting the guidance of an expert panel on business competitiveness, on how to provide the best relief for business.
Mr. Falcon pointed out that small business will be among the beneficiaries of the balanced budget that will come, in part, due to revenues garnered from the policy. According to the budget documents, the measure will raise $281-million in 2012-13 and $261-million in 2013-14.
“It is absolutely in the interests of small business across the province to ensure we have a government that maintains its hard-earned reputation of being disciplined on the fiscal side,” he said. “That’s why we enjoy our triple-A credit rating and we are seen around the world as a safe harbour for investment, and the moment we lose that is when the small-business community is going to feel that impact.”
While the B.C. Conservatives, threatening to crack the centre-right coalition that is the B.C. Liberals, attack this approach from the right, there is unusual agreement between the government and opposition NDP on the issue.
Bruce Ralston, the NDP finance critic, said he could see Mr. Falcon’s point.
“It does appear to be a change in direction from what they indicated, but circumstances change,” he said. “The position, in the circumstances, is one I appreciate. The government needs the revenues to try to balance the budget.”
Mr. Ralston, otherwise a scorching critic of Mr. Falcon’s budget, said there are other ways to help small business besides reducing the tax rate to zero.
The Canadian Federation of Independent Business said it is disappointed in the change. Shachi Kurl, the federation’s provincial affairs director for B.C. and the Yukon, said her organization would have welcomed a firmer commitment from the minister to getting to zero on the tax. She is concerned about the ambiguity around the situation.
Ms. Kurl said 2.5 per cent may not sound like a lot, but it is important to businesses. “The issue and the importance and the real benefit around eliminating the small-business tax rate is it helps free up capital and cash for small business and entrepreneurs who may not be able to access that through the banks,” she said.
Businesses, she said, are also grappling with cost-increase pressures ranging from hikes to the minimum wage to the carbon tax and Medical Services Plan premium increases, which means the small-business tax is a new concern. “When you’re making profit on the teeny, tiny margins, a few thousand dollars is not insignificant.”