Personal income tax has been the subject of much discussion so far in the election campaign, but the big questions about corporate income tax have been almost forgotten. Yet the stakes are high, especially on the eve of a recession.
Posted yesterday at 2:00 p.m.
SME tax
In Quebec — and only here because neither the federal government nor any other province applies this condition — incorporated SMEs that do not hire the equivalent of three full-time employees do not have access to tax credits employment and cannot benefit like others from the reduced tax rate of 3.2%. They are therefore taxed at 11.5%, the same rate as large companies.
However, their ability to pay taxes is lower than that of large companies which benefit from economies of scale, better access to financing and at lower cost, and which have more resources to deal with the red tape and regulatory.
This condition is based on an objective of job creation. But what about the problem of unequal treatment of companies with similar characteristics?
This selective taxation alters competition between them. Those targeted are often start-ups and the rate differential with other SMEs constitutes for many a barrier to their expansion.
Added to the federal tax of 9%, the tax rate of the start-up who does not satisfy this condition relating to employment therefore totals 20.5%. However, this is tax at the incorporated company level only. When the income from it is paid to its owner, a second tax applies to the individual. Finally, for every $100 in profit realized by the start-up incorporated, up to $59 must be remitted as tax. Yes: 59% tax!
Only businesses in the primary and manufacturing sectors are exempt from this condition relating to employment, but they represent only one tenth of SMEs.
SMEs are 98.1% of businesses. Many are not having it easy these days with rising interest rates, inflation and labor shortages, so the number of insolvency files filed in July 2022 has increased 48% over the previous year. It is therefore often out of breath and framed by difficult tax rules that SMEs must prepare for the coming recession.
large business tax
Large companies are taxed at the rate of 11.5% in Quebec and, to encourage them to invest here, they can benefit from exemptions from employer contributions to the Health Services Fund and income tax for a maximum period of 15 years old. This rate of 11.5% is stated in the law, but, after deducting tax expenditures and tax credits, the actual rate is often much lower. However, it is impossible to know the tax paid by a large company in Quebec because the financial reports do not reveal this information.
The idea of increasing the contribution of large companies that generate extraordinary profit margins is gaining popularity.
António Guterres, Secretary General of the United Nations, said on August 3: “I call on all governments to tax these excessive profits and use these funds to support the most vulnerable in these difficult times. Such a tax has recently been adopted in several countries. In Italy, for example, it is 25% on superprofits generated by energy companies and anticipated revenues are 10 billion euros. In Canada, the 2022 budget proposes to introduce a 15% “recovery dividend” on the superprofits of banks and life insurers, and the estimated receipts are $4 billion.
Could this recovery dividend apply to energy companies as well, or even to all of the superprofits made by Canadian multinationals? Could the tax have been more greedy? Most likely. If there is a possibility of taxing superprofits more, this may be an opportunity for the provinces to seek additional revenue. There are superprofits in Quebec. For example, National Bank of Canada recorded net profits before tax of $4.1 billion for its fiscal year 2021, compared to $2.8 billion for 2019, reflecting a 46% increase.
Other avenues exist, of course, such as the implementation of a minimum tax for companies that do not pay their fair share of tax or even the taxation of the turnover of large digital companies. A minimum tax already exists in Ontario, the American Inflation Reduction Act calls for it to be implemented in the United States starting in 2023 and, of course, there is the global minimum tax which must come into being. in 2024 at the initiative of the Organization for Economic Co-operation and Development (OECD). As for the tax on digital services (DST), it is planned in Canada for the 1er January 2024, with retroactive effect to 2022. However, since the global minimum tax proposed by the OECD is preferable from all points of view, the DST will not come into force if the global minimum tax is actually implemented in 2024 , as is likely to be the case.
The electoral platforms
Political parties are proposing targeted measures here and there, but the important problem of selective taxation which affects competition between businesses has only been raised by two parties, the Parti Québécois (PQ) and the Liberal Party of Quebec (PLQ) . The idea of a minimum tax for businesses was proposed by Québec solidaire. The PQ has promised the implementation of a tax on superprofits and a tax of 3% of the Quebec turnover of large digital companies. The PLQ and the PQ plan to recover significant sums from tax havens, but their approach lacks precision.
Taxation is the price to pay for living in society. Let’s keep talking about it again and again during this election campaign.