In last month’s article, I commented on the prudence of being aware of tax initiatives in other provinces, as one’s own province could choose to adopt or adapt what is going on elsewhere. That was illustrated at the personal income tax level in the move over the last five years toward higher provincial brackets and 50% combined marginal rates.
Consider now the future of corporate tax – or more to the point, the small business corporate tax rate.
While setting forth a plan to reduce general corporate tax rates over the next few years, the 2015 Quebec Budget imposes tighter qualification criteria for its small business deduction. Could this development, as detailed following, be predicting the direction of tax policy in the coming years?
Corporate tax rates in Quebec
The current provincial general corporate rate is 11.9%, with a 3.9% small business deduction (SBD) that takes that down to 8%. In an effort to stimulate economic development, beginning in 2017 the general corporate tax rate will be reduced by 0.1% annually, arriving at 11.5% in 2020. The small business deduction will move in lockstep, so that it will be 3.5% in 2020, maintaining the small business rate throughout at 8%.
That’s the good news.
However, from 2017 there will be a “refocusing of the small business deduction … on corporations in primary and manufacturing sectors”. To be entitled to the Quebec SBD, a corporation must be in those mentioned sectors, or employ more than three full-time employees. Corporations operating at least 25% in primary, manufacturing and processing activities will be entitled to a sliding scale of the SBD, with full entitlement once a 50% proportion is met.
With respect to professional corporations, it is difficult to envision how they could meet those sector definitions. Accordingly, their entitlement to the SBD would appear to rest on meeting the employment requirement, which may be impractical or impossible in many cases.
Thus, beginning in 2017 some Quebec corporations will face a general rate provincially and a small business rate federally. Per the 2015 Federal Budget, the federal SBD is rising by 0.5% each year from 2016 to 2019, bringing its small business rate down from 11% to 9%. Interestingly, once the dust settles five years out, a corporation losing Quebec SBD eligibility will only see a 1.5% rise. Assuming no further changes, the potential combined rates are summarized in the table here.
Federal-Quebec corporate tax rates (%)
2015 2016 2017 2018 2019 2020
General rate,
federal and QC 26.9 26.9 26.8 26.7 26.6 26.5
Federal small rate,
QC general n/a n/a 21.8 21.2 20.6 20.5
Small rate,
federal and QC 19.0 18.5 18.0 17.5 17.0 17.0
Other provinces?
At 3.9% presently, the disparity from the general to the small business corporate rates is narrow in Quebec compared to all the other provinces. The other provinces range from a low of 7% in Ontario and Alberta to a high of 13% in Nova Scotia. If other provinces introduce similar rules in future, the impact in Quebec could look relatively benign in comparison.
Provincial corporate tax rates, 2015 (%)
BC AB SK MB ON QC NB NS PE NL
General 11.0 10.0 12.0 12.0 11.5 11.9 12.0 16.0 16.0 14.0
SBD 2.5 3.0 2.0 0.0 4.5 8.0 4.0 3.0 4.5 3.0
Diff’ce 8.5 7.0 10.0 12.0 7.0 2.9 8.0 13.0 11.5 11.0