Quebec cuts access to small business tax rate – Will other provinces follow?

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

Marginal tax rates ascend – Provinces raise the stakes

A well-known Canadian tax commentator once wrote (paraphrasing here) that a good advisor knowledgably counsels where taxes are, whereas a great advisor guides where taxes will be. 

Myself, I can only claim to have been good enough to notice that things appeared to be at a turning point when Nova Scotia tabled its 2010/2011 budget. The province had boldly moved to introduce a provincial tax bracket above the top federal tax bracket – and at an effective combined rate of 50% to boot. For context, no province had a bracket above the top federal bracket at the time, and the last time a combined federal-provincial tax bracket was 50% was in the year 2000.

On the face of it, this was arguably a non-event beyond that provincial border. Still, whether Nova Scotia influenced other provinces or just reflected what was brewing in parallel elsewhere, half a decade later, it’s getting crowded at the top.

Nova Scotia 2010

In 2009, Nova Scotia commissioned two studies on balancing its fiscal state, which it began acting upon in its 2010 budget. At the time, the 29% top federal tax rate applied to income over $127,021. The province introduced a new top personal tax rate of 21% on income over $150,000, making for a combined rate of 50%.

Concurrently, the 10% provincial surtax (that otherwise applied to income above about $83,000) was suspended. Ironically, this meant lower net taxes for those with incomes of up to about $170,000. Both provisions were to remain in place until the provincial budget was balanced, which remains pending.

Ontario 2012 to 2014

In 2012 Ontario imposed an additional 2% rate for income over $500,000, dubbed by some as a “super tax.” As in Nova Scotia, it was temporary until a balanced budget could be reached, which at the time was projected for 2017. This was implemented in two stages – 1% in each of 2012 and 2013. Unlike Nova Scotia, Ontario did not suspend its surtax, meaning the true full addition was 3.12% for a total top tax rate of 49.53%.

Initially defeated on its 2014 budget, the incumbent Liberals returned with a majority, passing its budget that eliminated the $500,000 income tax bracket and replaced it with a 1% addition at each of the $150,000 and $220,000 income thresholds. The net effect is the same 49.53% tax rate, but the “temporary” sticker has been removed.

Quebec 2013

Until 2012, Quebec’s top provincial tax rate was 24%, applicable to income over $80,198. The 2013 budget introduced a new tax rate of 25.75% on income of $100,000 and over. After applying the Quebec abatement for federal taxes, the top combined tax rate is 49.97%.

British Columbia 2014

A top 16.8% tax rate was introduced on income over $150,000, for a combined total tax rate of 45.8%. This income bracket is a two-year temporary measure scheduled to expire at the end of 2015, as confirmed in the 2015 budget.

New Brunswick 2015

Two provincial income tax rates were added – 21% for income over $150,000 and 25.75% for income over $250,000. The top combined tax rate in 2015 is 54.75%.

Newfoundland and Labrador 2015

Two provincial income tax thresholds were added at $125,000 and $175,000. In a phased implementation, the top tax rate will be 14.3% in 2015, rising to 15.3% in 2016. The combined tax rate in 2016 will be 44.3%.

Yukon 2015

The territory added a 15% tax bracket applicable to income over $500,000. The top combined tax rate in 2015 is 44%.

Alberta 2015

The long-time incumbent Conservative party was defeated in a spring election, replaced by a New Democratic Party majority. The ensuing budget added three tax brackets above the top federal tax bracket. At the top, income over $300,000 will be taxed at 11.25% in 2015, for a combined top tax rate of 40.25%. In 2016, that top provincial tax rate rises to 15%, or 44% combined.

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Current top tax brackets and rates

BC $151,050 45.80%

AB $300,000 40.25%

SK $138,587 44.00%

MB $138,587 46.40%

ON $220,000 49.53%

QC $138,587 49.97%

NB $250,000 54.75%

NS $150,000 50.00%

PE $138,587 47.37%

NL $175,000 43.30%

YK $500,000 44.00%

NT $138,587 43.05%

NU $138,587 40.50%

Note: Bold figures indicate those provinces/ territories that have a bracket higher than the top Federal bracket of $138,587 in 2015.

Federal Budget 2015 — Seniors and savers are winners

Finance Minister Joe Oliver delivered his first Federal Budget on Tuesday, April 21, 2015.  Being that it is an election year, it was not surprising that there were plenty of proposals that would appeal to a variety of voters.  Of course, this is in addition to the announcements in the Fall 2014 Economic Statement (See sidebar).

For this summary, we focus on the key items relevant for financial advisors and their clients.

Tax-free savings account

As expected, the government has followed-through on the 2011 election campaign promise to double annual TFSA contribution room.  As of Budget Day that figure was $5,500, so this could have meant an increase to as much as $11,000, but the chosen figure was an even $10,000. This applies for 2015 and subsequent calendar years, but there will no longer be any inflation indexing.

TFSA contribution room

                                                  2009-2012         2013-2014         2015-on

Annual dollar limit                      $5,000               $5,500             $10,000

Indexing ($500 increments)          Yes                    Yes                    No


Registered retirement income fund relief

Relief on RRIF minimum withdrawals has long-been requested by seniors’ advocates.  As shown in the table, mandatory minimums have now been adjusted downward for ages 71 to 100, by close to a 30% reduction at the younger end.  Those who may have already made the higher withdrawal this year under existing factors will be allowed to re-contribute the excess by no later than February 29, 2016.

There will be no change for ages 70 and under, which will continue to be determined by the formula 1/(90 – age).

RRIF minimum withdrawal factors (percentages)


RDSP legal representation

In 2012, the federal government introduced a temporary measure to allow a qualifying family member (i.e., a beneficiary’s parent, spouse or common-law partner) to become the plan holder of a Registered Disability Savings Plan for an adult who may lack the capacity to enter into a contract.  As some provinces and territories have yet to put necessary rules in place, the measure is being extended from its original horizon date of 2016 out to 2018.

Small business tax rate

In a surprising (at least among those with whom I spoke during the Budget Lockup) but welcome move, the small business tax deduction is being increased by 0.5% each year from 2016 to 2019.  Put another way, the resulting small business rate on the first $500,000 per year of qualifying active business income of a Canadian-controlled private corporation (CCPC) is going down from 11% to 9%.

In turn at the shareholder level, the gross-up and dividend tax credit for non-eligible dividends will both be adjusted.  As provincial tax calculations use the federally-defined gross-up, expect the provinces to address this by adjusting respective provincial dividend tax credits.

Table: Small Business Tax Rate Reduction and DTC Adjustment for Non-Eligible Dividends 

                                            2015        2016        2017        2018        2019

Small business rate              11%      10.5%        10%        9.5%          9%

Gross-up                              18%         17%        17%         16%        15%

DTC                                     11%      10.5%       10%         9.5%         9%


Increased LCGE for qualified farm or fishing property

The lifetime capital gains exemption for qualified farm or fishing property will increase.  For dispositions that occur on or after Budget Day, April 21, 2015, it will be the greater of $1 million and the annually-indexed LCGE applicable to small business corporation shares (currently $813,600 in 2015).

Donations involving private corporation shares or real estate

The Budget proposes to allow an exemption from capital gains tax where proceeds of disposition of  private corporation shares or real estate are donated to charity within 30 days after disposition.  The purchaser must be at arm’s length from both the donor and donee, among a number of stringent qualification criteria.  This measure will apply to donations made in respect of dispositions occurring after 2016.

Tax compliance and administration

Streamlining reporting for foreign assets

In 2013, the Canada Revenue Agency (CRA) introduced a revised Form T1135 for foreign investments with a cost base of at least $100,000.  Acknowledging that this has resulted in a disproportionate compliance burden for some taxpayers, a streamlined procedure and form is being developed for those with foreign investments of less than $250,000 cost base.  The new procedure and form will be made available for taxation years that begin after 2014.

Intra-CRA tax information sharing

The CRA collects debts owing to the federal and provincial governments under a number of non-tax programs. The CRA will be given authority to internally exchange confidential taxpayer information to manage collections efforts.  Amendments will be made to the Income Tax Act, provisions related to GST/HST, and excise duties on tobacco and alcohol.

International information exchange

Beginning in 2018, Canada will begin exchanging tax information with G-20 countries in respect of financial accounts.  Financial institutions will be expected to have procedures in place by July 1, 2017 to identify accounts held by residents of any country other than Canada and to report the required information to the CRA.

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SIDEBAR: Fall 2014 Economic Statement

These measures (mainly of interest to families with minor age children) were introduced before the release of the 2015 Budget, and are either claimable for 2014 tax filing, or payable retroactive to the beginning of 2015.

Family Tax Cut 

  • Tax credit worth up to $2,000 based on a notional transfer of up to $50,000 income between parents where a child under the age of 18 resides in the household

Universal Child Care Benefit (UCCB)

  • Increase of $60 to $160 monthly for children under six
  • New $60 monthly payment for children six through seventeen

Child Tax Credit (CTC)

  • Repealed, as it is effectively replaced by the UCCB additions

Child Care Expense Deduction dollar limits

  • Increased by $1,000 per child

Children’s Fitness Tax Credit (CFTC)

  • Doubled for 2014, from $500 to $1,000.