As confirmed in the Fall Economic Update (FEU), the Government of Canada has now retreated from some of the private corporation tax proposals set out in the July consultation paper. In what may be described as a partial retreat, the proposal to increase tax on passive investment income will be modified to exclude the first $50,000. Commentators have suggested that this proposal could result in tax rates exceeding 70 per cent of investment income.
Given the public backlash against the July proposals, and to the Government’s credit, the FEU provides expanded statistical data in support of the need for tax changes. In a table contained in the economic update, the Government set out data showing that the number of Canadian-controlled private corporations (CCPCs) has grown – on average – by 8.4 per cent per year between 2010 and 2015, and by 8.7 per cent per year between 2001 and 2015. The table also shows data for selected industry sectors, including professionals (defined to include lawyers, notaries, accountants, physicians, dentists and chiropractors). For ‘professionals’ the corresponding increases were 13.6 per cent and 14.9 per cent. ‘Professionals’ were singled-out for special mention in the July consultation paper, which included the statement that the number of corporations in professional services had tripled over the last 15 years.
Given my previous article on this subject, (September 15th issue of the Financial Post, Ottawa says there’s a ‘need for action’ on private corporations. Maybe there isn’t), I am supportive of the need for greater analysis before embarking on significant changes to the income tax regime. However, the analysis needs to be reliable, and unfortunately, this latest analysis is not.
Helpfully, the FEU states that the data presented were obtained from corporation datasets based on data submitted to Canada Revenue Agency, and I have been able to review limited datasets that are based on the same data. The data are published within the “Open Canada” database, and the latest data available are for 2014. Data are also available for earlier years, and meaningful comparison can be performed. While there are no data specifically available for CCPCs, most corporations appear to be CCPCs, so I have simply considered the population data for all corporations (that submitted Canadian income tax returns). There is a note that 2014 data may be only 96 per cent complete, which would have a minor impact (I ignored this below).
In 2002, there were approximately 1.4 million tax-filing corporations, and 2.1 million in 2014. (This seems reasonably consistent with the Government’s July statement that the number of CCPCs increased from 1.2 million in 2001 to 1.8 million in 2014.) I am encouraged to proceed on the basis that there was indeed a 50 per cent increase overall from approximately 2001 to 2014.
However, when I calculate an 8.7 per cent increase (as stated in the FEU Table) compounded for 13 years, the result is an almost 200 per cent increase. So is the increase 50 or 200 per cent? It looks like 50 is the correct percentage, but I only have limited data.
It does seem possible that the FEU table quotes percentages which are based on numbers of new CCPCs without taking into account those which have been dissolved (note: for more recent years, there are separate Open Canada data showing numbers of newly-formed corporations). However, this explanation would simply confirm that the FEU picture is distorted.
A similar inconsistency arises when one considers “professionals.” The FEU stated increase of 14.9 per cent per year would result in a seven-fold change compounded across 15 years (with 14 changes). The July consultation paper stated the number had “tripled.” I don’t believe the FEU table has the correct number here either, but again I only have limited data.
The Open Canada database also provides detailed financial performance information by industry for Canadian small businesses. Much of the data published are for businesses with annual revenues between $30,000 and $5 million (with distinction between incorporated and unincorporated businesses); however, there are additional, albeit limited, data available for incorporated businesses with annual revenues between $5 million and $20 million. For the incorporated entities, let me refer to these as small corporations and medium corporations.
Without presenting detailed analysis, I have calculated that – in 2015 – the average revenues of medium corporations were approximately 17 times the average revenues of small corporations. However, there were just under 50,000 medium corporations, compared to almost 1.2 million small corporations.
The data confirm that a modest number of medium corporations are – by a significant order of magnitude – involved in much larger businesses than small corporations. This is a reality of our economy, and our Government’s desire to increase taxes for larger CCPCs should be viewed with concern. At the very least, it should be supported by reliable and consistent economic analysis. If I owned such a corporation and was potentially facing a punitive tax in the neighborhood of 70 per cent on investment income (on new asset accumulation), this would definitely influence my behavior.
Full disclosure – I am an immigrant to Canada who now practices through a professional corporation. At the time my wife and I arrived, a Trudeau was prime minister, but I don’t recall any tax rates of 70 per cent. Had there been rates extending to 70 per cent, I wonder if I would be a Canadian today.
Specific professional advice should be obtained prior to the implementation of any suggestion contained in this publication.
Ottawa says there’s a ‘need for action’ on private corporations.
Navigating the Road to Tax Planning
Proposed Changes to Tax Planning Using Private Corporations