Canada’s small business tax rate helps firms grow: CFIB

Toronto – Canada’s small business tax rate is an effective way to promote the growth of small businesses, says a newly published paper by the chief economist for the Canadian Federation of Independent Business.

The paper, entitled “Policy Forum: Mountains and Molehills – Effects of the Small Business Deduction,” was written by CFIB’s Ted Mallett and published in the Canadian Tax Journal. It examines both sides of the debate on the effectiveness of Canada’s small business tax rate, the CFIB said in a news release.

“The small business deduction may not be perfect, but it remains the best approach for retaining growth capital for small firms. Concerns about it being a disincentive to grow past the deduction limit are overblown since only a small minority of businesses get even close to earning that level of income. In addition, the preferential tax rate helps offset Canada’s high tax and compliance costs for new and small businesses,” Mallett said. “Regulatory compliance costs are approximately three to 10 times higher for businesses employing fewer than five people compared to those employing more than 100.”

According to the paper, businesses with 20 employees or fewer bear almost three quarters of the country’s tax compliance costs, which are between $13 billion and $19 billion. Limited financing options for new small businesses also underscore the need for a preferential tax rate.

“The vast majority of entrepreneurs have to rely on their own assets or those of friends and family when starting a new venture. Debt financing availability is limited and venture capital is rarely a viable option. The small business tax rate helps level the playing field for new businesses and allows them to get off the ground and grow,” Mallett said.

The new federal government has publicly committed to reducing the small business tax rate from 11 to nine per cent by 2019. CFIB will continue to monitor discussions at the federal and provincial levels to ensure that all small firms continue to have access to the rate.