Canada’s lawyers, doctors and other professionals are on edge as they wait to see whether weeks of furious lobbying paid off ahead of the March 22 federal budget.
The Liberal platform suggested that hundreds of millions in new tax revenue could be raised by tightening small business tax rules so that they are not used by high-income individuals as a way to pay less tax.
But experts say turning that pledge into a concrete policy change could be technically difficult and the promise is creating a high level of uncertainty for potentially affected business owners.
“It’s a hot, hot issue. It’s the No. 1 issue that comes up when we deal with small business owners,” said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management. “We’re even telling people, ‘If you’re a newly minted doctor, lawyer or accountant, you might want to wait a few weeks before setting up your professional corporation.’”
Companies with income under $500,000 can qualify for the federal small business tax rate, which is 10.5 per cent this year and is currently scheduled to decrease to 9 per cent by 2019. Larger companies must pay the corporate tax rate of 15 per cent.
Some of the tax advantages of incorporating as a small business include the ability to defer the payment of salary or to split income with a spouse or adult children to avoid higher personal tax rates.
Previous federal moves known as the “kiddie tax” have blocked small business owners from paying minor children.
A comment made by Finance Minister Bill Morneau during a Feb. 23 appearance before the House of Commons finance committee appeared initially to some as if he was ruling out action in this area, but others point out that upon closer review, what the minister meant was not clear.
Conservative MP Phil McColeman had asked Mr. Morneau whether he would stop professionals from incorporating as a small business under a category called Canadian-controlled private corporation. Mr. Morneau then asked Mr. McColeman to repeat a specific yes or no question that he was being asked.
“Simply stated, is your government, as you’ve signalled, going to move towards eliminating the current status that professionals in these types of occupations – veterinarians, chiropractors, etc. – have under the Canadian-controlled private corporations taxation provisions?” Mr. McColeman asked.
“I can confirm, no,” Mr. Morneau replied.
While that statement was initially viewed as a positive sign by advocates of the existing rules for professionals, some say the minister’s comment still leaves the door open to restricting, rather than eliminating, the access of professionals to the small-business tax rules.
A spokesperson for Mr. Morneau declined further comment, but said the government remains committed to its campaign promise in this area.
The initial Liberal pledge was inspired by research conducted by University of Ottawa Professor Michael Wolfson, who claimed that the use of income splitting by professionals was a “dark corner of the tax system” that costs the federal government about $500-million a year.
The practice involves paying out money from the small business to a spouse either as salary or dividends in an effort to reduce the overall amount of tax paid. A key question is sorting out cases in which the spouse is a legitimate business partner from cases where income is paid simply as a way to avoid higher tax rates.
Prof. Wolfson has said the size of the potential tax loss could be as high as $1.7-billion.
The Chartered Professional Accountants of Canada have told Mr. Morneau in writing that treating professionals differently from other small-business people would be “inappropriate” and that the party’s promise has created uncertainty for many Canadians. The CPA recommends delaying any action to allow for a broad review of Canada’s business tax rules.
Comments by two Liberal MPs on the finance committee have also led to concern by small business advocates that a further change is coming.
“I’ve never seen a homeless practising doctor. I believe that in our society everyone should pay their fair share,” Liberal MP Robert-Falcon Ouellette told the committee.
Liberal MP Raj Grewal, a former Bay Street lawyer, told the committee that he did not believe professionals such as lawyers should receive the same level of tax benefits as a small-business owner who runs an independent pizza shop.
“The intent [of the Liberal platform] was to help small businesses but in the lens that it would be the convenience stores and the mom and pop shops,” said Mr. Grewal in an interview. “The government hasn’t made a final decision on that. It may or may not be included in the budget.”
Canadian Federation of Independent Business president Dan Kelly said Mr. Morneau’s comment appears to leave open the possibility of limiting the access of professionals to the small-business tax deduction.
“It shouldn’t be up to government to decide who gets to own a chunk of a business,” said Mr. Kelly, adding that the benefit should only go to legitimate businesses. “If they’re not running an actual operating business, they’re just parking money somewhere because they’ve set up some shell company that has no active business interests, then we take no issue with any tougher action on the small business corporate tax rate.”Report Typo/Error