Those who hoped Tuesday’s federal budget would introduce measures to help Canada compete with a southern neighbour now enjoying lower personal and corporate tax rates will likely be disappointed.
“We used to have a very competitive corporate tax regime, now all we have is skilled labour pool,” said Don Carson, national leader of the Transaction Tax Services group at financial services company MNP.
Even that skilled pool of labour may start to see more leaking, as educated professionals like doctors, scientists and tech entrepreneurs weigh the benefits of the smaller tax bill they would incur by working in the United States, Carson told Global News.
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And Ottawa’s small business tax changes “remain a billion-dollar take-away from entrepreneurs at a time when entrepreneurs in the U.S. are seeing their tax bills drop considerably,” said Dan Kelly of the Canadian Federation of Independent Business.
On the flip side, Canadian taxpayers will find few nasty surprises in this year’s fiscal blueprint.
Tax experts had largely expected the government to axe a variety of tax breaks in an effort to raise public revenue and simplify the tax code – but that didn’t happen either.
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More money for working low-income Canadians
Indeed, at least in one respect, Ottawa is doing the opposite, by enhancing a refundable tax credit for working low-income Canadians. The Working Income Tax Benefit is being renamed the Canada Workers Benefit (CWB) and getting a makeover.
As promised in the fall, the Liberals are allocating $500 million more per year to finance the credit. The money will serve to boost the maximum receivable tax credit by up to $170 and raise the income level at which the benefit is phased out completely, according to the budget.
The government is also proposing boosting an existing supplement for Canadians with disabilities by up to $160.
Several economists who spoke with Global News praised the move, saying the tax credit aims to help Canadians make the transition from welfare to work.
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“Programs like this help reduce the effective marginal income-tax rate increase that people on welfare face when they start earning income,” said Derek Burleton, deputy chief economist at TD Canada Trust.
Also, the government is proposing that the Canada Revenue Agency automatically determine which taxpayers are eligible for the benefit, instead of Canadians having to claim it. This should ensure an additional 300,000 low-income workers receive the money.
All in all, Ottawa expects to spend nearly $1 billion of new funding on the benefit in 2019 compared to 2018. The changes will take effect in 2019.
Small business tax changes
The budget also contained much-anticipated tweaks to the controversial small-business tax changes that landed Finance Minister Bill Morneau in hot water last year.
The government had already backtracked on, or modified, many of the measures, which it initially announced in July. But one the last pieces of the puzzle was about rules on so-called passive income earned inside private corporations.
Passive income refers to the practice of retaining surplus profits inside the corporation and investing the money in things like mutual funds and real estate rather than, say, machinery and equipment for the business itself.
As long as the extra cash stays inside the company, it enjoys the low corporate tax rate, which means there’s a larger principal to be invested.
The government argued this had created an incentive for wealthy professionals such as doctors and lawyers to operate as a small corporation and use the company to grow their personal savings at a tax-advantaged rate.
But Ottawa’s initial fix to this encountered fierce criticism from small-business owners and tax accountants, who said the new rules would be impossibly complicated and severely hamper entrepreneurs’ ability to save things for things like retirement, maternity leave or a company rainy-day fund.
Morneau’s new fix sees the tax applicable to investment income unchanged. Instead, small businesses earning investment returns of more than $50,000 a year as passive income will face gradually higher taxes, up to the general tax rate faced by larger corporations.
The impact of the changes will vary based on individual circumstances but will enable entrepreneurs and incorporated professionals to make “a fairly straightforward business decision” about how to handle their passive income, said Doug Carroll, a tax expert at Meridian credit union.