Ottawa’s war against small and medium-sized business owners seems to be over—at least for now. The trouble is the government’s peace offering does little to mitigate the greater threats facing entrepreneurs, from over-taxation and burdensome regulation to tax code complexity.
Wednesday’s fall economic update made it clear that the Trudeau Liberals, with an election looming next year, are eager to quell rumblings from the business community that the federal government is unresponsive to their concerns. It’s no surprise, then, that Finance Minister Bill Morneau offered nuggets to business owners and executives struggling to attract investment in a highly competitive global marketplace, a situation made only more precarious by U.S. President Donald Trump’s recent move to slash corporate taxes south of the border.
After introducing new rules to curb income sprinkling and the growth of passive investment income within private corporations, many entrepreneurs rightfully felt that the federal government was determined to punish their success, not celebrate it.
Unfortunately, the mini-budget will do little to assuage their concerns. Among the new measures the federal government announced are targeted tax reforms that will provide little in the way of broad relief, save for those organizations aiming to make immediate capital investments. Even for those companies, the changes will have a relatively miniscule impact. The reality is that despite the government’s determination to appease the business community, their tax reform efforts aren’t nearly bold enough.
Of the tax changes tabled this week, three have gained the most widespread attention and will have at least some significance for SMEs. The Liberals are proposing to:
- “Allow businesses to immediately write off the cost of machinery and equipment used for the manufacturing or processing of goods.” The government says this will “fuel new investments and support adoption of advanced technology and processes by this highly mobile sector of the economy.”
- “Allow businesses to immediately write off the full cost of specified clean energy equipment to spur new investments and the adoption of advanced clean technologies in the Canadian economy.”
- Introduce “the Accelerated Investment Incentive, an accelerated capital cost allowance (i.e., larger deduction for depreciation) for businesses of all sizes, across all sectors of the economy, that are making capital investments.” The governments says the “Accelerated Investment Incentive will help to encourage investment in Canada, providing a timely boost to investor confidence.”
Morneau’s statement indicates that the latter measure will lower the marginal effective tax rate on new business investment to 13.9 per cent from 17 per cent, below the equivalent rate in the U.S. and making it the lowest such rate in the G7. Under this new rule, a company could expense the full cost of new machinery, equipment or software in the year it’s purchased (and up to 82.5 per cent of a computer’s purchase price), deduct up to 15 per cent of the cost of new production facilities in the first year of operations—up from 5 per cent—and carry forward losses relating to investment deductions for 20 years.
The intent, of course, is to not only compete with U.S. tax cuts, but to also spur innovation and capital investments in a Canadian economy that sorely needs it. Other measures to help further that goal include an $800 million, five-year boost to the Strategic Innovation Fund designed to drive investments in areas such as technology, manufacturing and research and development. The government is also promising to work to remove inter-provincial trade barriers by aligning construction regulations, harmonizing food inspections and allowing for a freer flow of alcohol across provincial borders.
The better news, at least for entrepreneurs based in Ontario, arrived the previous week when the province released its own fall economic update. Doug Ford’s Tories pledged not to mirror the federal government’s tax changes limiting access to the small business tax deduction for any corporation that earns more than $50,000 of passive investment income. The move effectively limits the grind on the small business deduction, so the tax rate in Ontario will be 18.5 per cent as opposed to 26.5 per cent for corporations with more than $150,000 of passive income within an associated group.
In addition, Ontario employers will see an increase in the amount of payroll that is exempt from the Employer Health Tax, up to $490,000 in 2019 from the current $450,000. Bill 47 also became law this week, repealing much of Bill 148, the sweeping package of labour and employment standards changes that imposed a particularly difficult burden on employers. As part of that new legislation, Ontario’s minimum wage will remain at $14 per hour.
Still, it’s far from sunny ways for business owners across this country. The complexity of passive income rules for corporations and limitations on income sprinkling places an undue burden on business owners who must determine if they fall into various exemptions, and also comply with onerous tax reporting standards. Worse, the government’s newly-announced tax relief for businesses expires in 2024, making it only a temporary reprieve.
And at some point, we’ll all have to foot the bill for the federal government’s free-spending efforts to appease the business community. The federal deficit is expected to grow slightly thanks to these new measures, which will likely have long-term economic implications for the country—save an unexpected fiscal windfall down the road.
In the end, it’s unlikely that the federal government’s tax incentives will spur business investment and deliver the growth-driving results Morneau is anticipating. The government could have gone further, taking immediate steps to overhaul the tax system—in particular the increasingly complex Income Tax Act, which has become exceedingly difficult for entrepreneurs to understand and navigate—while reducing complexity and red tape, and making it easier for entrepreneurs to remain competitive and achieve success. We remain hopeful for a strategic realignment of fiscal priorities in the years ahead.
Armando Iannuzzi, Tax Partner