Are lower taxes for small businesses a good idea or bad idea?

Why small businesses and economists differ in opinion

small business, entrepreneurs, taxes, tax breaks, budget 2015, federal budget, Tories, CanadaAlthough the federal budget was largely praised by the Canadian Federation of Independent Business (CFIB) and by small businesses themselves, not everyone is on board with what the Tories are proposing. Lowering the small business tax rate is great for owners and entrepreneurs, but remains a sticky point amongst economists.

So, why the difference in opinion?

The reduction of the tax rate is something the CFIB and independent businesses have been lobbying for for several years. The reasoning behind the government’s decision is to help small business owners retain more earnings that can in turn be used to reinvest and create jobs. Over the four-year period, owners are expected to save about $2.7 billion in taxes. Almost 700,000 small businesses will benefit.

However, economists looking at the bigger picture and the greater Canadian economy have a problem with this reasoning. According to UBC economics professor Kevin Milligan, many people set up small businesses to avoid taxation on a personal level, meaning not many jobs will actually be created.

The new tax rate also increases the tax gap between large and small companies, providing an incentive for businesses to stay under the $500,000 profit threshold, which is bad for the overall economy, says Jock Finlayson, chief economist with the Business Council of British Columbia.

Regardless, small businesses still need support, but Milligan would rather see a simplification of their administrative burden, and imports and exports, or a reduction of tariffs.

The next post in the series looks at how the budget affects female entrepreneurs.



How the federal budget affects you

federal budget, balanced budget, Canada, Joe Oliver, small business, entrepreneursIt’s been a month since the Tories released their federal budget. The Economic Action Plan 2015 includes many funding and tax changes, particularly for small businesses.

In fact, many pointed to small business owners as the big winners of the federal budget — mostly due to the planned tax cut, from 11 to nine per cent over the next four years.

But besides the tax cut, how else does this budget affect small businesses? Here’s a breakdown of what to consider over the next few years:

  • Personal taxes: Once fully implemented, the tax cut will result in savings of $10,000 per year. However, these savings will likely be offset by higher personal tax on dividends paid out of small business earnings. When looking at this tax cut, it’s important to account for both corporate and personal taxes. (We’ll be discussing TFSA changes, the family tax, and other personal tax changes next week.)
  • Eligibility: The small business eligibility criteria is changing, meaning you can stay a small business for longer. A small business will soon include a business with gross annual revenues of up to $10 million, rather than capping at the current $5 million.
  • RRIFs: As a business owner, succession planning and retirement should always be on your mind. And it’s important to start early. The Tories will be reducing the amount that seniors are required to withdraw at the age of 71 and at the age of 80. It will then increase at 94 years old.
  • Young entrepreneurs: The budget also earmarks $14 million over two years for Futurpreneur Canada. It comes at a time when Futurpreneur is seeing more young people turn to entrepreneurship than ever. However, this money is conditional on Futurpreneur raising matching funds from non-federal sources.

Stay tuned next week when we discuss personal tax changes, including changes to the TFSA contribution limit and the family tax credit.