Targeted Tax Fairness Measures Will Protect Canada's Next Generation of Innovators and Entrepreneurs

October 20, 2017 – Waterloo, Ontario – Department of Finance Canada

When you have an economy that works for the middle class, you have a country that works for everyone. As the Government of Canada lowers the federal small business tax rate to nine per cent, it is committed to ensuring that Canada's competitive corporate income tax rates are not being used by high-income individuals to gain a personal tax advantage.

Finance Minister Bill Morneau and Minister of Small Business and Tourism Bardish Chagger today announced the next steps in the Government's plan to move forward on changes to the tax system that will ensure that Canadian-controlled private corporation (CCPC) status is not used to reduce personal income tax obligations for high-income earners rather than supporting small businesses.

Minister Morneau announced that as the Government moves forward with corporate tax changes, including targeted measures on passive investments, it will ensure incentives are maintained so venture capital and angel investors can continue to invest in the next generation of Canadian innovation.

The Government will work with the venture capital and angel investment sectors to identify how this can be best achieved. With this proposal, and the Innovation and Skills Plan announced in Budget 2017, the Government's objective is to support and enhance Canada's growing innovation and technology sector.

Based on its consultations on tax planning using private corporations, the Government announced this week its intention to lower the small business tax rate to 10 per cent, effective January 1, 2018, and to nine per cent, effective January 1, 2019. To support this change, the Government also announced its intention to make changes to the tax system that will ensure that private corporation status is not used to reduce personal income tax obligations for high-income earners rather than to support small businesses to invest and grow.

This week, the Government is announcing further steps towards fairness for the middle class that will take into account feedback received from Canadians during the consultation period. The Government's approach will ensure the measures are focused on a small number of high-income individuals who get the biggest advantage from existing rules.

Since the launch of consultations on July 18, Canadians have engaged in an important discussion on proposed measures to address tax planning using private corporations. Through town halls and roundtables held from Vancouver to St. John's, Ministers and Members of Parliament heard and carefully considered the views and perspectives of small business owners, farmers, fishers, professionals and experts.

Quotes

"Our government wants to encourage young firms to grow. We will ensure that people who wish to invest in innovative start-ups are encouraged do to so, and we will work with the venture capital and angel investment sectors to ensure the appropriate incentives are in place. Financing helps young firms create well-paying jobs in Canada, thus further strengthening the middle class."

- Bill Morneau, Minister of Finance

"Small businesses, especially innovative start-ups here in Waterloo and across the country, are the drivers of growth and job creation in the Canadian economy and strengthen our communities, from coast to coast to coast. It's a pleasure to join Minister Morneau today to meet with stakeholders representing angel and venture capital investors to update them on our proposals, and to commit to working with them going forward. We listened to their feedback, and will only take actions that will ensure our tax system is both competitive and fair, without unintended consequences on Canada's innovation economy. I am proud of the actions our government has taken to support small business owners, especially the reduction of the small business tax rate, which will save small businesses up to $7,500 per year."

- Bardish Chagger, Leader of the Government in the House of Commons and Minister of Small Business and Tourism

Quick Facts

  • According to the Canadian Venture Capital and Private Equity Association, $3.2 billion in venture capital was invested in 530 innovative companies in 2016.
  • Venture capital is being invested across sectors, including information communications technology, health and life sciences, clean tech and agricultural technologies.
  • The Government is also advancing initiatives to provide direct support for venture capital. Budget 2017 announced that $400 million in new financing would be made available through the new Venture Capital Catalyst Initiative.
  • The Government intends to move forward with measures to limit the tax deferral opportunities related to passive investments, while providing business owners with more flexibility to build a cushion of savings for business purposes – for example to deal with a possible downturn or finance a future expansion – as well as to deal with personal circumstances, such as for parental leave, sick days or retirement.   
  • The Government intends to simplify the proposal to limit the ability of owners of private corporations to lower their personal income taxes by sprinkling their income to family members. The vast majority of private corporations, including corporations with family members who meaningfully contribute to the business, will not be impacted by the proposed income sprinkling measures.
  • The Government will not be moving forward with measures relating to the conversion of income into capital gains.
  • With a reduction of the federal small business tax rate to 9 per cent, the combined federal-provincial-territorial average tax rate for small business would be lowered to 12.9 per cent from 14.4 per cent, by far the lowest in the G7 and fourth lowest among Organisation for Economic Co-operation and Development countries. Small businesses can retain more of their earnings to reinvest, supporting the growth of their business and job creation.
  • In the course of the consultations, over 21,000 written submissions were received by the Department of Finance Canada.

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Media may contact:

Chloé Luciani-Girouard
Press Secretary
Office of the Minister of Finance
chloe.luciani-girouard@canada.ca
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