A New Approach to Improving Small Business Tax Competitiveness
With the 2020 Covid-induced recession, many small businesses, especially in the travel, retail and hospitality sectors, have faced difficult health restrictions and declining demand. Temporary subsidies have been provided to help cover wage and rent costs and credit facilities have enabled many small businesses to survive.
After economies recover from the pandemic recession, it will be useful to revisit taxation on small business growth and productivity. In most countries, if the corporation grows large enough, the owner pays more corporate and personal taxes. To analyze the impact of taxes on business growth, we construct “tax walls”, reflecting the marginal effective tax rate on capital as the business grows. The rate rises since some corporate tax benefits may be lost, and, the owner will pay more personal income tax.
This study is an update of the 2013 SPP report titled “Small Business Taxation Revamping Incentives to Encourage Growth”. Since 2013, SME taxation has changed significantly, including the 2015 federal provisions limiting income-splitting for family business owners and increasing the tax on passive income (by grinding down the small business deduction). This report aims to evaluate Canada’s taxation in 2020 (ignoring Covid-related temporary support) compared to other G7 countries and Australia (the latter having a similar industrial structure and rule of law). Competitiveness, especially with the United States, is important since small business owners can decide to move to the U.S. or Canadian small businesses can be sold off with their functions moved to foreign jurisdictions.
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