The truth about the 2019 small business tax cut to 9%

In the last few days you will have seen Liberal MP’s across the country patting themselves on the back by posting this self-congratulatory info graphic on every social media outlet there is. They claim that by lowering the small business tax rate to 9%, they are saving small businesses up to up to $7,500 / year. Mathematically speaking, a 1.5% reduction x $500,000 of corporate earnings (after payroll) = $7,500/year. So this “savings” is fairly cut and dry, right? Maybe not…

I love facts, and I know you do too – so let’s review the facts about this “tax cut” to see if our government is being honest with us.

Budget 2015: Stephen Harper’s Finance Minister announced a plan to “lower taxes on job-creating small businesses”. Part of this plan was to reduce the small business tax rate from 11% to 9% by, you guessed it, 2019. The first reduction was in 2015 to 10.5%

October 19, 2015: Just Trudeau’s Liberal’s win a majority government in the federal election.

Budget 2016: Trudeau cancelled further planned reductions in the corporate small business tax rate, freezing it at 10.5%.

February 16, 2016: Bill Morneau announces the CPP ‘enhancement’, which will increase the CPP premiums that companies and employees pay starting in 2019.

July 18, 2017: Bill Morneau and the finance department released drafts of what was to be the broadest tax reform that Canada had seen in over 40 years. This package proposed to close “loopholes” which are used by private companies. The government claimed that the tax system has been rigged for the last 40+ years, favoring entrepreneurs over employees.

The Minster left 75 days for consultations, and what a fabulous ‘consultation’ it was! As a side note, the last time tax reform this big was proposed (over 40 years ago), there were several years of consultations and study.

Bill Morneau started his “listening tour” where he traveled around the country and apparently ‘listened’ to Canadian Small Business owners. He said, repeatedly, that these proposals would only apply to the wealthiest of private companies, for example those owned by doctors. Canada’s tax community quickly discovered that the proposals were actually aimed at all private companies in Canada, big and small, and that the proposals were decidedly bad for business.

Our Summary of the July 18, 2017 tax proposals.

Canadians naturally assumed that the Finance Minister had read, or at minimum had hired someone educated in tax law to read, his proposals before they were released. Canadians perceived that Bill Morneau didn’t make a mistake and had willingly decided to label average everyday Canadian Small Business Owners as “tax cheats”. To make matters worse, it quickly came to light that the uber wealthy Finance Minster and the uber wealthy Primer Minister used tax strategies to reduce their own tax bills, and that these strategies were not affected by the new proposals.

It turns out that Farmers, Fisherman, restaurant and corner store owners do not like being called tax cheats for following tax laws that have been in place for decades. And so, a nationwide uproar ensued.

October 16, 2017: The Trudeau government announced that Stephen Harper’s small business tax cut was back on! This was viewed by many to be damage control to satisfy the angry mob.

December 18, 2017: Canada’s Senate released a report on the July 18, 2017 tax proposals suggesting, among other things, that these proposals be scrapped entirely.

The same day: The government released their final version of the tax increases to small businesses including the revised Tax on Split Income regime and new taxes on a private company’s savings and passive income. These proposals, which were eventually passed into law, are widely considered by Canada’s tax community to be the most poorly drafted and complicated tax laws that we have.

Budget 2018: Passes these measures into law and adjusts personal tax rates on dividends upwards to compensate for the reduction in corporate tax rates such that there is absolutely no tax savings to small business owners who pay earnings out of their companies. In fact, it now costs more to pay pre-2019 earnings out of a private company via dividends than it used to – another tax increase.

January 1, 2019: Federal Carbon tax kicks in increasing the price of food, gasoline, heat, electricity, business supplies and inventory with no clear idea provided about how this tax will save the world.

The same day: CPP rates increase, meaning companies will pay an additional $85/employee/year in CPP in 2019. These rates are expected to increase until 2025 when companies will pay an extra $645/employee/year in CPP.

I am biased, I want my clients to pay less tax. Normally an announcement like this would be very exciting – but to say that lowering the small business rate is “saving small business up to $7,500/year” is very misleading when weighed against all the other taxes that have gone up under this government. From a tax perspective, Canadian private businesses are much worse off than they were four years ago, despite our government’s relentless spamming of self-congratulatory messages on social media. This government is counting on small business owners to have short memories. Please don’t let that happen.

Please spread the word and share this with as many small business owners as you can so that they are not deceived.

I’ve included links to all the relevant events and dates in our blog post for your reference.

If you’d like to discuss how these changes will apply to your business, please contact us today.