OTTAWA—Small business owners were big winners in Budget 2015. Economic Action Plan 2015 is chock full of measures for helping small businesses, which represent 99 percent of all businesses in Canada and employ over half the people in the private sector.
The biggest measure is a proposal to cut the small business tax rate from 11 percent to 9 percent over the next four years.
“We’re really, really pleased. We’ve been calling for that for years,” Canadian Federation of Independent Business (CFIB) president Dan Kelly told Epoch Times.
Kelly is also pleased that the federal government is planning to legislate the tax cut so that it will still go into effect post-election. The CFIB gave the budget a grade of “A.”
The government estimates this tax cut will save small business owners $2.7 billion over the next four years.
Canada leads the G-7 in having the lowest overall tax rate on new business investment. The marginal effective tax rate works out to be 17.5 percent for Canada. For the U.S., it is 34.7 percent. The 17.5 percent has come down significantly from 33.0 percent prior to the 2006 federal budget.
The Lifetime Capital Gains Exemption (LCGE) is also a big help to small business owners who don’t have pension plans. Instead, they rely on the sale of their businesses to fund their retirements. Now when they sell, up to $1 million is spared from capital gains taxes for farmers and fishers. Other small businesses have lower amounts spared from capital gains taxes.
Other measures for small business include less frequent reporting to the Canada Revenue Agency, part of a measure to reduce red tape, and employment insurance premium freezes for three years before even bigger premium cuts in 2017.
Venture Capital
Much of the federal government’s actions on supporting venture capital (VC) took place in 2013 when it announced up to $350 million to establish four private sector-led funds of funds and up to $50 million to establish high-performance VC funds in Canada.
Andrew D'Souza, serial entrepreneur, start-up executive, and angel investor, met with the late former finance minister Jim Flaherty in Silicon Valley when the Venture Capital Action Plan (VCAP) was being conceptualized.
Flaherty and his advisers were very open to feedback, said D'Souza, and some of the thoughts and suggestions of the group he was part of made it into the final decisions.
The budget provided the update that the government has invested just over $200 million thus far in the four funds of funds.
This funding is working its way to the entrepreneurs, and D'Souza said that companies with strong prospects can now be more optimistic of obtaining capital to fund growth. In addition, the government’s funding enables early-stage investors to take more risks and to fund companies with a high upside risk profile.
Prior to the VCAP, Canadian investors faced criticism for their risk aversion, which resulted in a scarcity of follow-on capital for funding start-ups. Things are now changing.
“I know that if I’m executing well, there’s going to be more capital to continue to fund growth,” D'Souza noted, speaking from a start-up perspective.
“If I’m an early-stage investor, I have to make sure the business is at a point where they can get to some kind of break-even or profitability on the capital that I put in in that round,” D'Souza explained. “So what I’m hoping is that, as the funds actually start to flow through, investors can take more of an aggressive stance.”
The government takes a hands-off approach on deciding which companies get VC funding. That decision is made by the managers of the funds, who have years of expertise working with start-ups. It is the right structure, D'Souza said.
“It’s hard to be in business, and to support entrepreneurialism, I think, is a good thing because entrepreneurs take risk, certainly a lot more than employees tend to risk. And therefore they need to be rewarded by that,” said Kim Moody, a spokesperson for the Chartered Professional Accountants of Canada and Director, Canadian Tax Advisory, at Moodys Gartner Tax Law.
Moody did comment that Canada is still a high-tax jurisdiction overall when factoring in personal income taxes. But on the corporate side, “We compare rather favourably to our peers,” Moody said.
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