What the Liberals may have in store for the small business tax rate

National Post


Looming potential tax changes for incorporated professionals and business owners who run their practice or business through a Canadian-Controlled Private Corporation or CCPC will affect doctors.

If your doctor or lawyer seemed a bit grumpy during your most recent visit, it may have something to do with looming potential tax changes for incorporated professionals and business owners who run their practice or business through a Canadian-Controlled Private Corporation or CCPC.

In their election platform, the Liberals stated that as the small business tax rate for CCPCs will drop to nine per cent from 11 per cent over the next few years, and that the government “will ensure that … CCPC status is not used to reduce personal income tax obligations for high-income earners rather than supporting small businesses.” The platform document quotes University of Ottawa professor Michael Wolfson’s recent research, which estimates that “approximately $500 million per year is lost, particularly as high-income individuals use CCPC status as an income splitting tool.”

While the rules vary by province, practicing members of most professions, such as law, medicine, engineering, architecture and accounting, often choose to incorporate for tax purposes, for reasons including the potential for significant tax savings or deferral, various income-splitting opportunities with a spouse/partner or adult children and perhaps to ultimately take advantage of the lifetime capital gains exemption on the sale of the practice, assuming this is permitted and feasible in the professional’s province.

For example, the use of a corporation has often been heralded as a great tax deferral mechanism, provided the business owner or incorporated professional “does not need all her cash” and can afford to leave some money in her corporation for investment purposes. The reason this works is that the corporation, assuming it qualifies for the small business tax rate, pays tax on its first $500,000 of corporate income at a rate that is substantially lower than the top marginal personal tax rate. As a result, there can be a significant tax deferral advantage by leaving the after-tax corporate income inside the corporation as opposed to paying it out immediately.

What could the government do to make good on their promise to curb abuse of CCPCs? The simplest fix would be to take a page out of the recent Quebec budget and “refocus” access to the small business tax rate to private corporations that employ a minimum number of employees. In Quebec, beginning Jan. 1, 2017, businesses in the service and construction sectors will no longer be eligible for the Quebec small business deduction unless they have more than three full-time employees.

The other possibility is for the government to restrict the ability for professionals to income split with a spouse/partner or adult children by imposing a version of the “kiddie tax” that currently applies to private company dividends payable to minor children, by taxing them at the highest marginal rate and thus removing the incentive to income split.

This past week the Ontario Medical Association sent an email blast to Ontario physicians informing them that the Canadian Medical Association (CMA) is “advocating on behalf of physicians on this matter.”

Prior to the election, the CMA wrote to senior federal government officials outlining the “unique nature of medical practice as a business” and stating that “physicians are highly skilled professionals who provide an important public service and are significant contributors to the knowledge economy.” The CMA also added that as self-employed small business owners, physicians typically do not have access to pensions or health benefits and must, in many cases, provide for their own benefits.

Any changes to the small business tax rules would likely come as part of the Liberals’ first budget, expected in February or March 2016.