Opinion: Why should small businesses get all the tax breaks?

Allan Lanthier is a retired partner of an international accounting firm and has been an adviser to both the Department of Finance and the Canada Revenue Agency.

Donald Trump has started a global trade war targeting both friends and foes, with a special focus on Canada: Canadian business will have to react.

In addition to finding new markets, Canadian businesses must now compete even more fiercely against U.S. companies for investment and jobs. Clearly, larger businesses will do most of the heavy lifting. Which raises the question of why small firms – not large – are singled out for so many tax breaks in Canada.

The carbon price rebate is only the most recent example. In its 2024 budget, the federal government announced it would send fuel charge rebates of more than $2.5-billion to small and medium-sized businesses but nothing to larger ones. Now, the government has said it would go even further and make the rebates tax-free.

Taxation of the rebates will be sorted out once Parliament returns to work. However, the broader questions are why small businesses receive so many tax breaks, and whether many of these preferences owe their existence more to political expediency than sound tax policy.

The most expensive preference is the small business tax rate, which comes at an annual federal-provincial cost of about $15 billion – a cost borne by other taxpayers, including larger businesses. Our general federal-provincial corporate rate is about 26.5 per cent and the small business rate only 11.6 per cent – a savings of almost 15 percentage points.

The lower rate generally applies on the first $500,000 of annual business income. Politicians don’t seem able to resist the lure of lower rates. In its last budget in 2015, Stephen Harper’s government proposed a two-percentage point reduction in the federal small business rate, and the new Liberal government followed through on that promise. And just last week, Nova Scotia announced that its rate – already a paltry 2.5 per cent – would be further reduced by one percentage point and its annual threshold increased to $700,000 of business income.

There is little if any evidence that these lower rates contribute to job creation or economic growth in any meaningful way. In addition, the preferential rates are available to incorporated professionals, such as doctors, lawyers and accountants.

Small business benefits from many other tax preferences. A 35-per-cent credit applies for research and development. Shareholders can receive tax-free capital gains of about $1-million when they sell their small business shares – a limit that the 2024 budget proposes to increase to $1.25-million, inflation-adjusted going forward. The list goes on.

While politicians love to say that small business is the backbone of our economy, that isn’t actually true. There is no question that small businesses – those with up to 20 employees – are critical to the Canadian economy: however, they account for less than 20 per cent of Canadian jobs. Larger businesses employ many more Canadians, pay higher wages and have greater productivity.

Canadian businesses find themselves in a new battle against U.S. companies. While the U.S. federal corporate rate is 21 per cent, U.S. President Donald Trump campaigned on lowering it to 15 per cent for corporations that make their products in the U.S. This would mean a combined U.S. federal-state tax of about 20 per cent – a rate significantly lower than our own.

In threatening tariffs, Mr. Trump hasn’t just thrown a curve ball: it is a high, inside fastball aimed directly at our collective heads, and our government must respond. In addition to retaliatory tariffs, we should reduce our general corporate tax rate for all businesses and provide accelerated tax write-offs to level the playing field with the United States. And to compensate for the loss of corporate tax revenue, many of the small business preferences that riddle our tax code should be scaled back or repealed.