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Liberal small-biz tax cut offers ‘some medicine’ but not a panacea to tax concerns, expert says

Stacked up against the other proposals a tax rate reduction for small businesses isn’t enough to keep people in Canada, said one expert.
Stacked up against the other proposals a tax rate reduction for small businesses isn’t enough to keep people in Canada, said one expert. Andrew Vaughan/The Canadian Press

Amid the Liberal government’s suite of contentious tax reform proposals, there’s a hint of a silver lining: cutting the small-business tax rate to nine per cent from 10.5 per cent by January 2019.

That change – one initiated under the previous Conservative government before the Liberals put it on hold – could encourage some business owners and entrepreneurs to stay in, or even move to, Canada, given how competitive the rate is with that of the United States, where the lowest rate for small businesses is 15 per cent.

But, considering the effects of the other proposed tax changes, any net positive effect is far from a given, observers say.

READ MORE: Liberals to trim small business tax rate to 9% by 2019

“If you’re a small business in Canada earning less than $500,000, you stand to save $7,500 in federal tax,” Greg Leslie, tax partner at Collins Barrow, said of the Prime Minister Justin Trudeau’s announcement.

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“But if you’re a small business in Canada that’s sprinkling income and that’s taken away, the 1.5 per cent change won’t help much.”

Income sprinkling is one of the “loopholes” Trudeau targeted in his tax reform proposals that have put the government through the ringer since they were announced in July.

WATCH: Trudeau government fulfills campaign promise, lowers small business taxes

Trudeau government ends up keeping campaign promise, will lower small business taxes
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The proposed tax reforms may affect a minority of Canadian taxpayers, but reaction was fierce.

Proponents of the plans, including many Liberals and some prominent economists, have painted the changes as a measure to make taxes fairer by preventing high-earners from using sophisticated accounting techniques to dramatically slash their tax bills.

On the other hand, opponents of the proposed changes, including the Canadian Medical Association and the Canadian Federation of Independent Business, have said the changes risk “destabilizing” health-care delivery and discouraging people from starting businesses.

READ MORE: Bill Morneau meets with anxious Liberal MPs to reveal small business tax tweaks

Enter the small-business tax rate reduction.

“Canadian businesses currently benefit from a combined general corporate tax rate that is 12 percentage points lower than that of Canada’s largest trading partner, the United States,” the government wrote in a release about the change.

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“Further tax reductions will allow businesses to retain more of their earnings to reinvest – supporting economic growth and job creation in communities across Canada.”

WATCH: Small business tax rate cut will not be a shield for wealthy, Trudeau says

Trudeau: small business tax rate cut will not be a shield for wealthy
Trudeau: small business tax rate cut will not be a shield for wealthy

The rate cut will “certainly” give Canada a competitive advantage over the U.S., said Dave Walsh, partner and tax service line leader at BDO.

“I’ve always been a big proponent of our corporate rates being much lower than the U.S.,” he said in a telephone interview with Global News.

“It does attract businesses and jobs. It will attract a lot of U.S. businesses to create subsidiaries in Canada, create jobs here, and generate economic activity here, because [business owners] will actually pay less tax here than they would in the U.S.”

READ MORE: Small business owners angry about proposed Liberal tax changes

But it’s not that straightforward, said Leslie from Collins Barrow.

Stacked up against the other proposals – details of which the Trudeau and Finance Minister Bill Morneau said will come throughout the week – a tax rate reduction for small businesses isn’t enough to keep people in Canada, he said.

“Income sprinkling is a big one for doctors,” he said in a phone interview Tuesday. “A 1.5 per cent tax change won’t be enough to keep doctors from going south of the border.”

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WATCH: Morneau facing heat over business ventures

Morneau facing heat over business ventures ahead of proposed tax change modifications
Morneau facing heat over business ventures ahead of proposed tax change modifications

Given the context of the tax rate announcement, which came as Morneau was firmly planted in the eye of a political firestorm and after the Liberals faced months of attacks from the opposition, Leslie said it’s difficult to see the timing in any other way than a political move.

“They want to offer some medicine to small businesses, but this [tax rate reduction] won’t do much for many of them,” he said.

“We have to withhold judgment until the end of the week, when we have more details … Hopefully, by the end of the week, we’ll have a better grasp of what the tax environment will look like.”