“Money is being taken away from us as if we were a multinational, but we are just two employees,” complains an entrepreneur from Quebec, who has to send $8,000 more in taxes each year because her business is considered too small by Revenu Québec, a measure maintained in the last budget despite the demands of SME defense groups.
“If I had just one more employee, I would save several thousand dollars in taxes,” laments Kathleen McMartin, who has a small accounting business in the Saules sector, in Quebec. “This is a blatant injustice!”
This “injustice”, small businesses like M’sme McMartin usually calls it the “5500 hour rule.”
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Below this bar, which is roughly equivalent to three full-time employees, SMEs operating in the service and construction sectors must send a larger portion of their income to the tax authorities, because they are no longer entitled to the tax. the entire small business deduction (DPE) which sets the tax rate for SMEs at 3.2%.
Depending on the number of hours worked, these very small companies therefore see their rate gradually increase to that of the largest companies, i.e. 11.5%, when they are below the threshold of 5,000 hours. This is an increase of 259%.
Kathleen McMartin and Manon Paré Monier have a small accounting business, Blais et McMartin, in Quebec.
Photo Gabriel Côté
This is precisely what Kathleen McMartin and her partner, Manon Paré Monier, are experiencing. “Between us, we work 4,160 hours per year,” explains the latter.
“I would love to get away from it and hire a third person, but I would have to have work to give him,” sighs Mme McMartin. “It can’t be done by snapping your fingers!”
A Quebec particularity
It was the Liberal government of Philippe Couillard which put this tax measure in place in 2017, to prevent self-employed workers from posing as businesses by pretending to hire relatives in order to benefit from tax advantages.
“The problem is that it affects real businesses like us,” says the accountant.
Year after year, the Canadian Federation of Independent Business (CFIB) asks the Quebec government to abolish this rule, to no avail. “This is one of the greatest tax injustices in the country, and the government is turning a deaf ear,” thunders the vice-president of the organization, François Vincent.
“This type of rule does not exist anywhere else in Canada, all other provinces offer small businesses a reduced rate,” he continues.
“Time bomb”
Mr. Vincent also believes that the 5,500-hour rule is a “real time bomb” in the context of the labor shortage.
“For many companies, it’s a sword of Damocles. They know that if they lose an employee, their tax rate risks exploding!” he explains.
However, restoring access to the DPE to all small businesses would have a considerable impact on state finances. In 2022, Finance Minister Eric Girard estimated that this change would deprive the government of $800 million per year, the equivalent of the sums provided in the last budget to “promote the educational success of young people”.
But the game is worth it, believes François Vincent. “Abolishing this rule is the equivalent of creating 10,000 direct and indirect jobs, because companies could give better salaries to their employees and repay their debts. “It would be money that would go directly back into the communities,” he concludes.