The Conservative government will announce tax cuts for small business in Tuesday's federal budget as part of an effort to shore up a key constituency ahead of the fall election.
And seniors will not be forced to withdraw as much money annually from their Registered Retirement Income Funds, a budget move that is meant to address concerns that existing rules put them at risk of outliving their savings. The new RRIF formula will reduce the required minimum withdrawal by about 30 per cent in the first year and smaller amounts in subsequent years, The Globe and Mail has learned.
With an election scheduled for October, Ottawa is moving ahead with a tax-cut-heavy plan aimed at winning over key segments of the population, including small-business owners, seniors and families raising children.
At the same time, all of the budget measures have been massaged to fit within the central promise of a return to balanced budgets, meaning some announcements will effectively be campaign promises that are contingent on a Conservative election victory. Allocating future surpluses will leave the opposition parties with little room to promise an alternative without undoing Tory tax cuts.
Finance Minister Joe Oliver will deliver the budget Tuesday after initially delaying its release for weeks in order to assess the rapidly changing economic landscape resulting from lower oil prices.
Since forming government in 2006, the Conservatives have already slashed the corporate tax rate from 21 per cent to 15 per cent. But the tax rate for small businesses – measured as a company with less than $500,000 in taxable income – has only had one reduction, from 12 per cent to 11 per cent in 2008.
The Canadian Federation of Independent Business has been lobbying hard for a further two-percentage-point cut to 9 per cent. Dan Kelly, the CFIB president, said Monday that he is optimistic the budget will at least promise to phase in a lower small-business tax rate in order to catch up to the tax breaks that were provided to big businesses.
"We believe that there are good and legitimate reasons to reduce the small-business rate and we're encouraging them to do that," he said. "I think there's a decent chance that the feds would move in that direction."
Such a move was signalled in the 2013 Throne Speech, which promised "further tax relief for job-creating small businesses" once the government returns to balanced budgets.
Cutting the small-business tax rate by a full percentage point would reduce federal revenues by about an estimated $600-million, putting the cost to government of a 2-per-cent cut at about $1.2-billion. That is why the CFIB says it is possible the government will instead phase-in a cut, possibly by reductions of half a percentage point at a time.
Cutting small-business taxes will have significant implications both in terms of politics and public policy. From a political point of view, a reduction will help the Conservatives gain support from the key constituency of small-business owners and will also respond to one of the the New Democratic Party's key economic pledges.
NDP Leader Thomas Mulcair announced his support for a small-business tax cut in January, saying it would encourage job creation among the middle class.
However, the proposal has faced significant criticism from policy experts, including the University of Calgary's Jack Mintz, who is a member of Mr. Oliver's economic advisory council.
Dr. Mintz, who is a leading advocate for lower corporate taxes and for income splitting among couples, says lowering the small-business tax rate is a "horrible idea" that would primarily benefit the rich.
"There's a lot of small businesses that are set up for tax avoidance and this will just increase it," he said. According to his research, about 60 per cent of small-business deductions go to households with more than $150,000 in income.
Dr. Mintz said a further cut will encourage corporations to split into smaller parts in order to fall under the $500,000 definition of a small business.