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TORONTO, ONTARIO: March 5, 2013 - Dan Kelly, seen here at his Toronto, Ontario offices Tuesday March 5, 2013, is the president and CEO of the Canadian Federation of Independent Business . (Tim Fraser for The Globe and Mail) (For Special Reports - Canada Competes story by n/a) (Tim Fraser For The Globe and Mail)
TORONTO, ONTARIO: March 5, 2013 - Dan Kelly, seen here at his Toronto, Ontario offices Tuesday March 5, 2013, is the president and CEO of the Canadian Federation of Independent Business . (Tim Fraser for The Globe and Mail) (For Special Reports - Canada Competes story by n/a) (Tim Fraser For The Globe and Mail)

Quebec small-business tax hike could have national implications Add to ...

Some of the smallest businesses in Quebec are getting ready to pay more corporate tax next year, a change experts say could also be in store for similar-sized corporations across Canada.

Starting in 2017, incorporated Quebec companies with three or less employees will no longer be eligible for the small-business tax deduction. Instead of paying 8 per cent on the first $500,000 of taxable income, the rate will be 11.9 per cent, similar to larger companies.

The Quebec government says the “refocusing” of the small-business deduction is to “bring the measure back into line with its initial objective: encouraging the growth of SMBs [small and medium-sized businesses] and fostering employment growth,” according to an e-mail response to an interview request from a provincial Finance Department spokesperson.

Manufacturing companies were excluded from the change, and will see their rate drop further. The government said the “refocusing” targets the services and construction sectors.

What could hit these Quebec small businesses even harder, along with those in the rest of Canada, is if the federal government also restricts what type of companies can use the small-business deduction, which Prime Minister Justin Trudeau mused about during his election campaign last fall.

If the federal government were to make a similar move, affected small businesses in Quebec would see their combined federal and provincial tax rate jump to 26.9 per cent from the current rate of 18.5 per cent. If only the provincial rate changes, they will pay 22.4 per cent.

Dan Kelly, chief executive officer of the Canadian Federation of Independent Business, says his organization, founded 45 years ago in part on the issue of taxation for small business, is fighting to have the Quebec reduction reinstated before it kicks in next year. The CFIB is also lobbying to keep the federal government from making a similar change, which Mr. Kelly says that if made, could be announced in the coming federal budget.

“It seems crazy to me that you’d eliminate access to the small-business rate for the smallest of the small businesses,” Mr. Kelly says. “If anything, that should be the group you’re most keen to support.”

The fear is also that other provinces could follow suit, he says.

“If the feds move, I think everyone loses on both the federal and provincial share.”

Mr. Kelly says the potential tax change is geared at professionals, such as doctors or accountants, but will also hurt startups and mom-and-pop shops, including the local convenience store owner.

“This is going to cut a pretty wide swath,” Mr. Kelly says, also noting that he doesn’t think professionals should be a target.

“Doctors and dentists aren’t all rich. People also forget they have massive debts when they start their companies,” he says.

Peter Diekmeyer, a Montreal-based freelancer writer who incorporated his business in part for the legal liability that separates his business and personal assets, says he doesn’t have the resources – like a lawyer or doctor might – to hire extra staff to still qualify for the deduction.

He sees the changes in Quebec as counterproductive, believing the hardest hit will be the entrepreneurial startups.

“Very small businesses, of less than three employees, are a major source of innovation and job creation in our economy,” Mr. Diekmeyer says.

Françoise Bertrand, chief executive officer of the Federation of Quebec Chambers of Commerce, says the difference affected businesses will pay is small, but “is a signal in the wrong direction.”

“We think that, generally speaking, we should aim at less taxes on business and revenues for individuals,” she says.

Small businesses looking at incorporating might want to think twice about whether the costs outweigh the benefits with the higher tax rates, says Martin Lucht, a tax partner at accountants MNP in Montreal.

For those already incorporated, he says not much can be done to avoid the tax increase, except maybe trying to find more deductions to offset some of it.

“The benefit is less than it has been, but there’s still a benefit,” he says.

Aaron Schechter, a tax partner at accountants Crowe Soberman, says the change could prompt some small-business owners to take more money out of their corporation sooner, for personal income, instead of paying higher taxes on it. He notes that part of the advantage of leaving money in the corporation is to defer paying tax on it until it’s needed, and hopefully seeing it grow.

“If the decision was: ‘Do I leave money in the corporation and pull it out in the next year or two, versus pull it out now, people might be more inclined to pull it all out now as opposed to leaving in the corporation because the deferral will be smaller,” Mr. Schechter says. “That said, if you leave it in there, you can still take advantage of the deferral.”

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