Tax analysts expect unintended consequences after the province mimics a move from Ottawa
A month after the federal government promised to reduce the small-business tax rate to 9% by 2019, Ontario announced a similar reduction in business taxes to soften the impact of an upcoming wage hike. But that move by the province may lead to unintended consequences.
According to tax experts, the plan to reduce the small-business tax rate from 4.5% to 3.5% next year would increase the personal income tax rate on non-eligible dividends paid out by Canadian-controlled private corporations.
“It effectively means that your total rates will be going up,” David Malach, a tax litigation lawyer at Toronto-based Aird & Berlis, told the Financial Post. He and a colleague previously warned that Ottawa’s planned reductions would result in similar aftershocks.
In its fall economic statement — during which the small-business tax cut was announced — Ontario also declared a reduction of its tax-credit on non-eligible dividends. The upshot: a 1% increase in overall tax rates on those dividends. The Ontario finance department, meanwhile, has said it would be lowering the tax credit, which would “over-refund corporate tax.”
For its part, the federal government announced a tax hike on non-eligible dividends in the footnote of a document released Oct. 16, the same day it announced the plan to roll back small business tax rates.
Allan Lanthier, a former chair of the Canadian Tax Foundation and retired partner at Ernst & Young, offered some projections. He estimated that Ottawa’s changes mean that an Ontarian earning $50,000 will see the tax rates on non-eligible dividends increase from 17.4% to 19.3% by 2019. Meanwhile, those in the highest income-tax bracket will see their tax rates rise from 45.3% to 46.8%.
Jeff McRae, a managing partner at Rosenswig McRae Thorpe LLP in Toronto, said that since smaller businesses earning less than $500,000 annually would be eligible for the lower small-business tax rate, they would be the ones to pay the higher, “non-eligible” rate on dividends. The sting would be worst for business owners about to close up shop; having paid the higher corporate tax rate over their CCPC’s lifetime, they will now be subject to the higher non-eligible dividend rate.
“The downside is all of your old retained earnings, all of the money you’ve built up over the years in your company, will all get taxed at the new, higher personal rate,” McRae said.
Ontario’s changes would add salt to the wound, according to other experts. “[W]e’ve been down this road before,” Jack Mintz, a tax specialist at the University of Calgary’s School of Public Policy, told the Post. “When there has historically been a reduction in the small business rate, it does then require an adjustment in the dividend tax credit.”
Weighing in on the issue, Canadian Federation of Independent Business (CFIB) president and CEO Dan Kelly said the organization believes the small-business tax reduction will benefit most of its members on the whole.
“Of the many concerns we have about tax changes, this one is quite low down the list,” he said.
Related stories:
What small-business owners need to do before the year ends
Ottawa urged to scrap capital gains tax
According to tax experts, the plan to reduce the small-business tax rate from 4.5% to 3.5% next year would increase the personal income tax rate on non-eligible dividends paid out by Canadian-controlled private corporations.
“It effectively means that your total rates will be going up,” David Malach, a tax litigation lawyer at Toronto-based Aird & Berlis, told the Financial Post. He and a colleague previously warned that Ottawa’s planned reductions would result in similar aftershocks.
In its fall economic statement — during which the small-business tax cut was announced — Ontario also declared a reduction of its tax-credit on non-eligible dividends. The upshot: a 1% increase in overall tax rates on those dividends. The Ontario finance department, meanwhile, has said it would be lowering the tax credit, which would “over-refund corporate tax.”
For its part, the federal government announced a tax hike on non-eligible dividends in the footnote of a document released Oct. 16, the same day it announced the plan to roll back small business tax rates.
Allan Lanthier, a former chair of the Canadian Tax Foundation and retired partner at Ernst & Young, offered some projections. He estimated that Ottawa’s changes mean that an Ontarian earning $50,000 will see the tax rates on non-eligible dividends increase from 17.4% to 19.3% by 2019. Meanwhile, those in the highest income-tax bracket will see their tax rates rise from 45.3% to 46.8%.
Jeff McRae, a managing partner at Rosenswig McRae Thorpe LLP in Toronto, said that since smaller businesses earning less than $500,000 annually would be eligible for the lower small-business tax rate, they would be the ones to pay the higher, “non-eligible” rate on dividends. The sting would be worst for business owners about to close up shop; having paid the higher corporate tax rate over their CCPC’s lifetime, they will now be subject to the higher non-eligible dividend rate.
“The downside is all of your old retained earnings, all of the money you’ve built up over the years in your company, will all get taxed at the new, higher personal rate,” McRae said.
Ontario’s changes would add salt to the wound, according to other experts. “[W]e’ve been down this road before,” Jack Mintz, a tax specialist at the University of Calgary’s School of Public Policy, told the Post. “When there has historically been a reduction in the small business rate, it does then require an adjustment in the dividend tax credit.”
Weighing in on the issue, Canadian Federation of Independent Business (CFIB) president and CEO Dan Kelly said the organization believes the small-business tax reduction will benefit most of its members on the whole.
“Of the many concerns we have about tax changes, this one is quite low down the list,” he said.
Related stories:
What small-business owners need to do before the year ends
Ottawa urged to scrap capital gains tax
