Patrick Kerrigan certainly isn't going to complain about Ottawa's plan to cut his corporate taxes, but he says the fight to protect his small family business from other, potentially punitive tax changes is far from over.
The president of Alpha Poly Corp., a manufacturer of flexible packaging based in Brampton, Ont., sees the reduction in the federal small-business tax rate to 9 per cent from 10.5 per cent announced this week as simply the fulfilment of an election campaign promise.
Mr. Kerrigan – who hopes to transfer the business his father started 28 years ago to his kids some day – is still worried about the tax proposals the government announced in July. While Ottawa is promising tweaks to that plan, parts of the proposals are expected to move forward and will result in higher taxes for some small-business owners.
"Yes, it was nice that they went back to their original promise [to cut small-business taxes] made in the election," Mr. Kerrigan said. "But that doesn't fix things. To me, all this did was throw out a bone. … I don't want to give them the sense that we're all happy now."
The government said on Monday it would thaw a frozen campaign promise to reduce the small-business tax rate to 9 per cent by 2019, something the previous, Conservative government's 2015 budget had legislated. The Liberals did drop the rate to 10.5 per cent from 11 when they came to power, but then halted further reductions in their 2016 budget. The tax rate applies to the first $500,000 of active business income, and Ottawa says the changes amount to $7,500 more a year from today's level.
The government also said it would be revising proposals related to income sprinkling – removing the benefit only where family members have not made a "reasonable" contribution to the business – and is not moving forward with proposed measures to limited access to the lifetime capital-gains exemption, although details on the extent of that change remain unclear. Ottawa is also expected to announce revisions this week to a proposal that would raise taxes on passive investments made through private corporations – another hot-button issue for small-business owners.
Experts say the drop in the small-business tax rate benefits small corporations but does not help business owners personally.
"Lowering the tax rate may not do anything for the overall wealth of the business owner. It is only one side of the story," said Debbi-Jo Matias, a Vancouver-based chartered professional accountant.
While the corporation will pay less tax, the tax rate on dividends from private companies is expected to rise. That means the business owner won't receive any personal benefit when they take money out of the company as dividends for personal use, Ms. Matias says.
For owners to benefit from the tax reduction, she says, their only option is to reinvest in the business by buying equipment or hiring new staff. Or they can let the money sit in retained earnings and draw on it during tough times.
"If the business owner does not use the tax savings to invest in the active business, then there is no benefit of this corporate tax rate cut," she said.
Michael Gorniak, a partner at Saskatoon-based accounting firm Thomson Jaspar, says the tax cut doesn't offset the tax changes from the elimination of income splitting.
The lower tax rate will, of course, help the company invest more in the business, he said, "but the reality is that small-business owners still have to take money out of the company to live."
Gabrielle Loren, a chartered professional accountant and partner for business development at the B.C.-based accounting firm Loren Nancke, also says the $7,500 tax saving touted by the government is not realistic for most small businesses when all expenses are factored in, including taxes, wages and operating costs.
"The amount of profit a small business needs to have in order to save $7,500 is $500,000, and that is after paying wages to the owner and to any family members who worked in that business," Ms. Loren said. "Not too many small businesses make that kind of money."
For example, she says, if a company earns $200,000 in income, pays operating expenses of $60,000 and wages to an employee of $40,000, then there is $100,000 left, which can be paid to the owner as wages.
"If that wage to the owner is paid, then that leaves no money inside the company to be taxed at the new, lower tax rate," she said, adding that the owner would pay tax on their own wages, just like any other salaried employee.
A reduced tax rate only helps businesses that are making money, says Amin Mawani, an associate professor of taxation at York University's Schulich School of Business. He says businesses may benefit more from tax relief when they're struggling.
"What would be more beneficial for small business is to allow more general loss offsetting. Then if I lose money I can maybe offset against other employment income or interest income right away," instead of in subsequent years.
"To me, that downside protection is probably more cherished by small businesses than the relief in the upside … The lower tax rate helps them in the highs, but doesn't help them during the lows."