Tax policy has been a central feature of the 2015 Federal Election. Beyond the simple rhetoric of who will 'raise taxes' and who will 'lower taxes', detailed pronouncements about how the Parties plan to raise and spend tax dollars to improve the economy and the lives of Canadians have become key differentiators for the three main Party leaders.
To help explain some of the key tax policies of the three main political Parties, Fasken Martineau DuMoulin LLP's Tax and Government Relations and Strategy groups have prepared this summary of the central tax proposals of the Canadian federal election on October 19, 2015, and what they might mean for you, your family and your business.
Business Income Tax Rates
The Conservative Party (the "Conservatives"), the Liberal Party (the "Liberals") and the New Democratic Party (the "New Democrats") have all proposed to change the corporate income tax rate applicable to small businesses.
Canadian corporations are generally subject to a 15% federal corporate tax rate. Corporations that are considered Canadian controlled private corporations are eligible for a small business deduction that effectively lowers this rate to 11% on the first $500,000 of active business income earned in a given year.
The Conservatives and Liberals have proposed to maintain the 15% federal corporate income tax rate and reduce the small business tax rate to 9% by 2019. The Conservatives have indicated its reduction would be in 0.5% increments, beginning in January 2016.
The New Democrats have also proposed to lower the small business tax rate to 9%, however, the reduction would be implemented by 2017. The New Democrats have also committed to increasing the federal corporate tax rate to 17% by January 1, 2016.
The Parties make various claims about the effect on employment in Canada (and, more broadly, overall economic performance) that these rate changes will bring, however, the relationship between employment and corporate tax rates is difficult to verify.
The Parties also appear to be claiming that their corporate tax rate proposals are competitive (especially compared to the US corporate tax rate of 35%). It should be noted that the rates described above are federal tax rates and the combined federal/provincial tax rates would add 11% to 16% for the general rate and 2.5% to 8% for the small business rate.
The difficulty with making comparisons about tax competitiveness between different jurisdictions is that corporations and corporate groups rarely pay the stated rate of corporate income tax. A comparison of the tax competitiveness between different jurisdictions should not simply be about comparing stated rates but requires careful analysis of the corporate income tax base, integration between corporations and shareholders, and the controlled foreign corporation tax regime. All of which is difficult to explain and clearly demonstrate in the context of an election campaign.
It is also worth noting that globally, corporate tax rates are generally declining. According to the Organisation for Economic Co-Operation and Development ("OECD"), in 2003 the average corporate income tax rate was approximately 30%. By 2015, the average rate had declined to 22.8%.
Business Income Tax Credits
Both the Conservatives and New Democrats have proposed tax credits designed to benefit corporations.
Tax credits provide a deduction from taxes owed. Tax credits can be either refundable or non-refundable. Non-refundable tax credits can only be realized where the corporation has a tax balance owing, whereas refundable tax credits can result in refund payments where no corporate tax is owing. This can be contrasted with tax deductions, which reduce the taxable income that is subject to tax.
The Conservatives have promised to maintain the 15% mineral exploration tax credit ("METC") and introduce a 25% mineral exploration tax credit (the "Enhanced METC") for companies involved in remote mining projects in the territories, or those more than 50 kilometers from an all-weather road or service centre. The reasoning behind the Enhanced METC is that companies operating in these remote locations will be subject to high overhead costs. The Enhanced METC is aimed at increasing development and mining activities in areas that present logistical problems for mining companies.
While opponents of the METC and Enhanced METC see these credits, when combined with the use of Flow-Through Shares, as a means of subsidizing high-risk capital investments and as a tax planning tool predominantly used by high-income taxpayers, the mining industry generally supports these measures as they promote development of mining projects in remote and not-remote locations and advocate for the support of the mining industry in Canada during this period of low commodity prices globally. Arguably, such support leads to an increase in new mining projects which in turn increases taxable revenue in Canada and job opportunities for Canadians.
The New Democrats have promised to introduce a $40-million innovation tax credit, available to businesses investing in machinery, equipment and property used in innovative research and development. The innovation tax credit is aimed at stimulating growth in the technology and start-up business sphere by providing a tax credit, in lieu of or in combination with government grants, to assist in the funding of innovative technological advancement. Proponents of the innovation tax credit trumpet the potential jobs that could be created in these areas and the advancements that could be realized. However, opponents of the innovation tax credit are questioning whether the proposed amount is sufficient to make any meaningful impact on these areas and the Canadian economy. The full details of the proposed innovation tax credit remain quite murky and so are its potential ramifications.
Personal Income Tax Rates
The Conservatives and New Democrats have committed to maintaining the status quo with respect to personal income taxation. Conversely, the Liberals have promised a federal tax rate reduction for middle-tax bracket individuals and the creation of a new high-income federal tax bracket.
If elected, the Liberals' platform would reduce the middle-tax bracket federal rate from 22% to 20.5%, affecting the federal taxation bracket of personal incomes ranging from $44,701 to $89,401. Additionally, the Liberals would tax incomes of $138,586 to $200,000 at a federal rate of 29%, and the new high-income tax bracket would tax incomes of $200,000 or higher at a federal rate of 33%.
With provincial taxes, this would increase the personal income tax rate to more than 50% in Manitoba, Ontario, Quebec, and PEI for taxpayers in the high-income tax bracket and would cause the majority of the provinces in Canada to have a rate higher than 50%. In particular, New Brunswick would realize the highest rate at 58.75% with Nova Scotia coming in second at 54%.
Several economists have warned that a rate at or over 50% will encourage tax avoidance through tax planning and could lead to high income earners leaving Canada to avoid such a rate. A personal tax rate over 50% was recently repealed in the United Kingdom (the "U.K.") and according to HM Revenue and Customs lead to an increase of nearly 9 billion pounds in tax revenue. This increase was reported to be a direct result of the highest personal tax rate being cut from 50% to 45%. One of the reasons that the high rate in the U.K. was repealed was that while the personal tax rate was at 50%, the U.K. believed it had lost high income earners overseas and saw the high income earners who remained in the U.K. use tax planning strategies to declare less income than when the rate was low. If the Liberals enact their personal tax rate increases, it remains to be seen if similar losses to Federal tax revenue in Canada will result.
Family Income Tax Splitting
The Conservatives, in the 2015 Federal Budget, introduced a family income splitting policy called the Family Tax Cut which applies for 2014 and subsequent years. The Conservatives have pledged to continue with the Family Tax Cut if re-elected. Both the Liberals and New Democrats have promised to cancel the income-splitting measure if elected.
The Family Tax Cut allows for couples with children under the age of 18 to transfer up to $50,000 of income between each other for tax purposes, providing a maximum benefit of up to $2,000.
Under Canada's tax system, federal personal income tax rates increase with the level of taxable income of the individual. As a result, a couple in which one individual has a higher taxable income than the other often pays more federal income tax than a couple where both individuals have equal taxable income. The Family Tax Cut, a non-refundable tax credit of up to $2,000, seeks to address this issue by permitting the higher income earning spouse to transfer $50,000 of income to an eligible spouse to take advantage of that spouse's lower income tax bracket.
The Conservatives' position is that the Family Tax Cut addresses an existing inequality in the tax system where some families, prior to the Family Tax Cut, were taxed more than others even though they earned the same combined household income. The Conservative government structured the Family Tax Cut as a non-refundable tax credit to avoid any significant negative impact on provincial revenues related to the calculation of the provincial tax base and capped the maximum benefit to $2,000 to avoid potential larger tax breaks for Canadians with high incomes.
Both the Liberals and New Democrats have taken the position that the benefits of the Family Tax Cut primarily go to medium to high-income households and that lower income households receive near zero benefit. Furthermore, both the Liberals and New Democrats claim that only 15% of Canadian households benefit from the Family Tax Cut as it only applies to families in which one spouse is in a higher income tax bracket than the other and because there is no benefit for single-parent households.
Stock Option Taxation
At the present time, legislation treats the sale or disposition of employee stock options as a disposition of securities, that in certain circumstances is subject to taxation on only one-half of any gain. The Liberals and New Democrats have promised to tax gains from stock options at their full amount, as opposed to the preferential rate enjoyed by employees upon the exercise of their stock options.
The Liberals have indicated their plan would not affect employees with up to $100,000 in annual stock option gains. On September 25, 2015, New Democrat leader Thomas Mulcair indicated in a private letter that "early stage companies" would not be affected by the New Democrats' new tax treatment of stock options. As of the release date of this Commentary, no additional information regarding such an exemption has been made available.
The Liberals and New Democrats argue the current tax treatment of stock options permits senior executive employees and the wealthiest of Canadians to benefit disproportionately from capital gains treatment on stock option dispositions. Furthermore, both parties have suggested their plans would raise $500 million or more in government revenue.
Opponents of the proposed changes contend that not only is the current tax treatment of stock options vital to the Canadian start-up sector, but that fully taxable stock options could result in a loss in government revenue.
With regard to the start-up sector, the opponents argue that start-up companies depend on the current stock option regime to attract talented employees because their budgetary constraints prevent employers from offering competitive salaries. In the start-up sector, employees are generally willing to assume financial insecurity and lower pay in exchange for stock option incentives, which they hope to redeem in the future at a significant gain. As a result, opponents believe the proposed changes, put forth by the Liberals and New Democrats, to the taxation of stock options would have a large, negative impact on the growth of the Canadian start-up sector.
With regards to the impact on government revenue, opponents argue a fully taxable stock option regime would result in double taxation of stock option benefits, requiring the government to respond by introducing a corporate tax deduction for companies issuing such options. After subtracting the cost of the corporate deductions from the anticipated revenue generated from fully taxed stock options, some economists have estimated a $12 million net loss to government revenue.