Canada now really, really has the lowest small business tax rate in the G7

After weeks of playing defence on corporate tax changes, the Trudeau government is launching its plan to crack down on professionals who shelter income in private corporations.

With it comes a 1.5 point reduction in the small business tax rate.

Here’s what you need to know.

A hefty tax cut

The Liberal plan will see the small business tax rate drop to 9 percent by 2019 (it currently stands at 10.5 percent.)

That’s pretty big.

Statutory central government small business tax rate (OECD tax database)

Canada, as you can see, already has one of the lowest small business tax rates in the OECD. After this change, barring some competition, it will have the lowest. (Suck it, Korea.)

At 9 percent, Canada will easily have the lowest central government small-business tax rate in the G7, but even accounting for provincial rates, the combined rate will sit at just 12.9 (well ahead of the next-lowest rate, in France, of 15 percent.)

Income sprinkling

When Ottawa first announced plans to update the tax code for small businesses (specifically, Canadian-controlled private corporations), it received a lot of blowback from critics for entirely stupid reasons.

To re-cap: Income sprinkling is a practise whereby the owner of a private corporation pays family members dividends from their business account. Corporate income, generally, faces just a 15 percent tax rate. Personal income taxes, at the highest rate, sit around 50 percent. If the owner of a private corporation can spread that income around to family members, and avoid that top tax rate, the savings could be substantial.

Finance Canada expects that just 50,000 individuals in Canada use this practise.

Let’s be clear: It is paying family members for work they’re not doing. If the family members are doing work, they can legally be paid through the corporation.

The changes unveiled Monday really aren’t a significant departure from the outlines provided last month. It does offer some detail on the test whether or not those family members contributed to the business: If your family member provides labour, capital contributions, or has taken financial risks to advance the business, then they are eligible to receive dividends.

If not? Then you don’t get free money.

What about the other stuff?

Fighting income sprinkling and cutting the small business rate were the two easiest parts of this announcement. Happy Monday.

The Liberals have said there’s more to come this week, and backgrounders prepared by the Department of Finance indicate that Ottawa isn’t backing down when it comes to their other changes.

As a refresher: Ottawa has also indicated that it wants to crack down on those who use private corporations to shelter private investments (stocks or bonds yielding revenue that will not be reinvested into the company) and those who try and convert revenue into capital gains, in a process that one bureaucrat described to me as “magic,” in order to half their tax burden.

The government news release indicated that the government is forging ahead with these changes but is working to avoid “unintended consequences.”

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