Professionals and other small business owners are bracing for Ottawa's next move to target Canada's top 1 per cent as the federal Liberals signal more is to come.
The government made the first step this week, when the Liberals confirmed plans to impose a tax hike on income above $200,000, which will partly offset a tax break on income earned between $44,701 and $89,401.
But the Jan. 1 tax changes will implement only one part of the Liberal platform's pledge to get high-income Canadians to pay more. The Liberals have said they will also revise small business rules to ensure wealthy Canadians do not use them to avoid higher taxes.
Liberal Leader Justin Trudeau attracted controversy during the federal election campaign for stating that "a large percentage of small businesses are actually just ways for wealthier Canadians to save on their taxes."
As Prime Minister, Mr. Trudeau has turned that sentiment into government policy. His mandate letter to Small Business and Tourism Minister Bardish Chagger instructs her to work with Finance Minister Bill Morneau to ensure that planned reductions in the tax rate for small businesses are not "used to reduce personal income tax obligations for high-income earners."
What that will mean in practice is not clear. Finance Canada said it cannot comment on potential future actions. But some speculate that Ottawa will follow the lead of the Quebec government, which announced in its March budget that it will limit the types of businesses that qualify for the lower small-business tax rate. Under the Quebec plan, businesses with three or fewer employees would no longer qualify and would pay the higher corporate tax rate.
"Professionals in this country – doctors, lawyers, dentists – are very worried that they are going to be singled out," said Dan Kelly, the president of the Canadian Federation of Independent Business, who met with Quebec Finance Minister Carlos Leitao on Monday to express his members' concerns about the provincial plan. "We are worried that [Ottawa] may be drawing inspiration from the Quebec measure."
Quebec's March budget said the move would mean 75,000 companies in the construction and services sector would no longer qualify for the small-business tax rate.
The argument for the change is that the small-business tax rate is meant to free up cash so businesses can invest and create jobs. The Quebec budget stated that companies with "a small and stable number of employees... need little investment to generate revenue."
Quebec expects the change will raise about $200-million a year, which would go entirely toward reducing the tax rate of the small businesses that do qualify.
Ottawa announced on Monday that the government's middle-class income tax cut will cost more in foregone revenue than will be raised by the tax hike on income over $200,000, leaving an annual hole of more than $1.2-billion in the federal treasury. The Liberals had promised that the tax hike would fully pay for the tax cut.
Part of the issue is that individuals affected by the higher taxes can take steps to avoid paying them.
Don Carson, a chartered accountant with the accounting firm MNP who works with high net-worth clients, said this behavioural response is very real. He noted that while salaried employees cannot do much to avoid higher taxes, small-business owners can restructure their compensation to limit how much income they receive at the new rate.
"They'll just leave the money inside the business," he said, noting that small-business owners have taken similar actions in response to new provincial taxes on higher incomes.
Some owners also bring in family members and pay them a salary.
Mr. Carson said he would not be surprised if the Trudeau government's first budget moved in the same direction as Quebec when it comes to limiting access to the small-business tax rate.
Canada's top 1 per cent is made up of just 264,030 individuals who pay 20 per cent of the nation's income tax. Mr. Carson warns there is a limit to how much tax some of them will pay before they leave the country.
"This will be, for a lot of individuals, the straw that broke the camel's back," he said. "It's an issue of fairness. They don't feel they should be paying more than half of what they earn to a government or a collection of governments."