Doctors and lawyers who run their own practices are anxiously waiting for more details on Prime Minister Justin Trudeau's plan to change tax rules for small businesses. At the moment, few details on the forthcoming changes are available, leaving these professionals wondering just how they will be affected.
The issue of tax avoidance arose during the fall federal election when the Liberals, Conservatives and NDP endorsed the proposal in the 2015 federal budget (passed into law in June) to reduce the small-business tax rate to 9 per cent from 11 per cent. The three parties said it was important to support small businesses because they are a major driver of jobs and economic growth.
However, the Liberals were concerned about handing out tax cuts to small businesses that are set up mainly to avoid taxes. As Mr. Trudeau said in a CBC broadcast on Sept. 8: "We have to know that a large percentage of small businesses are actually just ways for wealthier Canadians to save on their taxes and we want to reward the people who are actually creating jobs."
The Conservatives and NDP disagreed during the election with the suggestion that the percentage of tax dodgers was large. Nonetheless, the Liberals pushed ahead, saying in their election campaign document that they wanted to ensure "Canadian-Controlled Private Corporation (CCPC) status is not used to reduce personal income tax obligations for high-income earners."
Financial adviser Ross McShane of McLarty & Co. has an idea of what could be in store. He thinks the Liberals could reduce or eliminate the small-business tax deduction for these businesses and could also eliminate the ability to split income through dividend-paying shares issued to spouses and adult offspring.
For CCPCs that currently use these tax breaks, the changes could be significant. Gavin Miranda, a partner at accounting, tax and business consulting firm MNP LLP, has crunched the numbers for Ontario businesses and finds that if the small-business tax deduction is not available, "every $50,000 of taxable income would give rise to an additional $5,750 of corporate tax in 2016." Also, if shares can no longer be issued to family members, small-business owners (in the highest tax bracket) now paying $40,000 in taxable dividends to a family shareholder could face as much as $17,000 more in taxes.
Not all CCPCs have access to these tax breaks, so the impact of the amendments won't be as significant in some cases. For example, depending on the province, members of many professional groups are only permitted to issue shares in CCPCs to persons in their profession. And in Quebec, the eligibility for the small-business deduction was amended to exclude corporations employing less than four full-time persons year-round; companies that don't qualify are subject to the 15-per-cent federal corporate rate.
Dr. Barry Dworkin belongs to one of the groups that could be among the hardest hit: Ontario physicians. He believes that the gross income figures often reported in the media may have created a misconception about how much physicians really earn. Like most self-employed persons, Dr. Dworkin says physicians bear a lot of expenses that salaried individual don't have to deal with. As Mr. McShane says: "People have to understand that many doctors are not 'swimming in money.' "
A 2012 study by Ontario Medical Association economist Boris Kralj provided estimates of take-home pay for Ontario doctors using data from PricewaterhouseCoopers. In fiscal 2009-10, they received an average $318,278 in gross payments but after deducting average overhead costs of $141,517 and 20 per cent for pension and benefits, their average disposable income netted out to about $145,000.
"I don't make oodles and oodles of money or spend frivolously – in fact, my car is a five-year-old Hyundai Elantra," Dr. Dworkin says. "And with the Ontario government asking doctors to do more while cutting back on fees, it's getting to be discouraging. I'm beginning to ask, why bother? Maybe it's time to slow down and retire."
Larry MacDonald is an economist, author and financial writer. His website is at larrymacdonald.serveblog.net/home.