On 29 July 2017 the OECD published a report entitled SME and Entrepreneurship Policy in Canada. The report looks at entrepreneurship activity, business structures, federal programmes, productivity and innovation among small and medium enterprises (SMEs). It also considers the business environment, ease of doing business, access to finance and the labor market.
The OECD report notes that Canada’s tax system is generally favorable to business and the ratio of total tax revenues to GDP is 30.5%, below the OECD average. Compared to the OECD average Canada raises more tax revenue from income taxes and a smaller proportion from social security contributions and tax on goods and services. Canada has achieved a high level of harmonization between the federal and provincial taxes and this has made the tax system rather easier for business to deal with. In addition to the generally business-friendly tax system small businesses also enjoy special tax provisions.
Small business deduction
A small business deduction applies to the first CAD 500,000 of active business income of Canadian Controlled Private Corporations (CCPCs). The small business concession is phased out from capital of CAD 10 million and eliminated altogether for businesses with capital of CAD 15 million and above. The provinces also have their own small business tax rates and thresholds.
The small business rate gives incorporated privately owned small businesses additional after-tax income to use for reinvestment and expansion if they choose to do so. However as businesses are not obliged to use the additional income for investment the OECD report suggests that the impact may be smaller than more targeted measures to support specific growth and development activities.
Sometimes this type of measure may cause clustering of businesses just below the income or turnover threshold, thereby effectively discouraging expansion above the threshold for relief. Studies suggest however that this has not occurred in Canada. The small business tax rate could also be used for tax planning by wealthy individuals and families. Measures to counter tax planning strategies were introduced in the 2016 federal budget.
Lifetime capital gains exemption
An individual is given a lifetime tax exemption for capital gains realized on the sale of qualified small business qualification shares. This exemption is intended to boost investment in small business and facilitate transfer of a business between generations. This supports investment and risk-taking by owners and investors of small companies but evidence suggests that it has been used for artificial tax avoidance, for example by large companies providing benefits to specific shareholders through the creation of CCPCs.
Small business capital gains rollover
This measure enables a taxpayer to defer the taxation of capital gains realised on the sale of common shares of an eligible small business corporation where the proceeds are reinvested in common shares of another eligible small business corporation. The CCPC must have under CAD 50 million in assets, of which less than half represent real estate. The OECD report suggests that more flexibility in the time limit for reinvestment would be helpful, perhaps through introducing a capital gains deferral account where capital gains could be deferred without being taxed until the assets are eventually sold for purposes other than general investment.
Income tax deduction for allowable business investment losses
A capital loss on a small business investment can be used to offset income tax. The allowable portion of 50% of a capital loss on shares or debt of a small business corporation may be deducted against any other source of income in the year. This is primarily intended to support start-up businesses.
Small business job credit
This credit introduced in September 2014 applied to a business paying Employment Insurance premiums equal to or less than CAD 15,000 in 2015 or 2016, reducing the amount of payroll taxes. The measure was intended to encourage job creation but the OECD report points out that social security contributions are already low in Canada, so the impact would be limited.
The OECD recommends that the trend of reduction in the small business tax rate could be discontinued and replaced by targeted measures to address market failures for specific groups of SMEs and start-ups. Federal and provincial loan guarantee programmes could be expanded to increase bank lending to SMEs and direct government lending could be increased, especially to groups unlikely to be served by commercial banks. The government could also strengthen the apprenticeship training system for SMEs; consider introducing a system of combining academic studies with on-the-job training; and create new work-integrated learning programmes.
The Free Trade Agreement between Canada and Ukraine will enter into force on 1st August 2017. As per previous discussion, from August 1, 2017, the agreement will cut 98% of the tariffs for Ukrainian exports to Canada and 72% of the tariffs from Canada to Ukraine. This agreement had been signed on July 11, 2016. The law on ratification was signed on April 3, 2017 by the President of Ukraine.
A new federal tax proposal was announced on 18th of July 2017 by the Finance Minister and it could have a chance of uncertain consequences for small businesses and enterprises (SMEs). The Canadian Federation of Independent Business (CFIB) has increased its concerns regarding potential tax changes. The Government thinks that some changes are being used to gain unfair tax facilities like the transforming of a private corporation’s income into capital gains, the passive investments holding in a corporation and an intention of income scattering among family members.
The Canadian Prime Minister, Justin Trudeau met with Wisconsin Gov., Scott Walker at the National Governors Association meeting on 14 July 2017. They discussed a number of issues affecting Canada and Wisconsin including the North American Free Trade Agreement (NAFTA). The Prime Minister stated that his country is ready to work with the US and Mexico to modernize NAFTA while highlighting how much the United States stands to lose if trade with Canada is hindered as President Donald Trump seeks to renegotiate the deal.
Much of Trudeau’s speech appeared to reject the US administration’s stated views. Trudeau highlighted the growing global economy and the impact of NAFTA. However Trudeau acknowledged that the NAFTA agreement is not perfect and is in need of updating. He therefore thanked the Trump administration for renegotiating the deal.
Recently the Prime Minister of Canada and the European Commission announced that they were agreed that the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) would enter into force on September 21, 2017. The CETA will create jobs, strengthen economic relations and boost Canada’s trade with the world’s second-largest market. The CETA is a progressive free trade agreement which covers virtually all sectors and aspects of Canada-EU trade in order to eliminate or reduce trade barriers. The agreement was signed on October 30, 2016, in Brussels.
Currently, only 25% of EU tariff lines on Canadian goods are duty-free. On CETA’s entry into force, the EU will remove tariffs on 98% of its tariff lines. Once CETA is fully implemented, the EU will have eliminated tariffs on 99% of its tariff lines. Once CETA is ratified, Canada will be the only G-7 country to have a free-trade agreement with the world’s two largest markets: the EU and the United States.
The top benefits include duty-free access for forestry and wood products, new markets for agricultural and agri-foods products, new markets for fish and seafood, and improved access for professional services. Current European Union tariffs on Canadian fish and seafood average 11%, with peaks of 25%, which will be reduced or eliminated under the agreement. Salmon, accounting for the majority of British Columbia’s fish and seafood exports to Europe, has faced an average tariff of 5.5%, which would be eliminated under the Canada-EU trade agreement.
The Prime Minister, Justin Trudeau, announces that Canada agreed to commence operation of the Free Trade Agreement with the European Union (EU) on September 21, 2017. The commencement of the Comprehensive Economic and Trade Agreement (CETA) had been delayed by disputes on some issues including pharmaceuticals. The EU also had some concerns about the opening up of the Canadian market to imports of European cheese.
Both sides have now agreed to begin the interim application of the agreement, thus allowing for all the necessary implementing measures to be taken before September 21, 2017. The agreement will enter into force after all 28 EU member states and parliaments have ratified it.
Although most Canadians pay their tax and expect a responsive and fair tax system, some net high wealth individuals are continuing to find ways to avoid paying the tax they owe, placing an unfair burden on the country.
The Canadian Government and the Canada Revenue Agency (CRA) have taken action by devoting resources to the highest risk areas, both domestically and internationally. The Minister of National Revenue, Diane Lebouthillier, on 9th of June 2017, announced an online consultation to enable Canadians to comment on the CRA’s proposed changes to its Voluntary Disclosures Program (VDP).
The proposed changes to the VDP follow an extensive review of the program in recent months in response to recommendations by the Standing Finance Committee. The proposed changes to the Voluntary Disclosures Program would involve:
- narrowing the criteria of who is eligible;
- confirming that severe cases of non-compliance do not benefit from the same level of penalty and interest relief;
- ensuring that requests that reveal proceeds of crime are excluded from relief; and
- requiring payment of the estimated taxes owed as a condition to qualify for the program.
The VDP applies to disclosures relating to income tax, excise tax, excise duties under the Excise Act, 2001, source deductions, GST/HST and charges under the Air Travelers Security Charge Act and the Softwood Lumber Products Export Charge Act, 2006.
The CRA is inviting public comments on its proposed changes on or before 8th August 2017. The official announcement of the amendments to the voluntary disclosures program would be announced in the fall of 2017 and effective from 2018.