Ontario and Quebec haven’t signaled whether they’ll match a tax break for small businesses proposed in the 2022 federal budget. Typically, provinces align their tax regimes to match changes made at the federal level.
In the budget tabled April 7, the federal Liberals proposed increasing the level of taxable capital at which a business can still access the small business rate (a federal rate of 9% on the first $500,000 of taxable income, versus the general federal corporate rate of 15%).
Under current rules, access to the small business rate is proportionally reduced when a business has taxable capital of between $10 million and $15 million. Under the proposal, access to the rate would phase out more gradually between $10 million and $50 million.
The proposed change would allow more medium-sized small businesses to access the small business deduction (SBD) and increase the amount of active business income that would be eligible for the SBD, the federal government indicated in the budget. The proposal would be effective for tax years beginning on or after the federal budget date.
However, Ontario’s 2022 budget, tabled three weeks after the federal budget, contained no mention of the federal proposal or any change to the province’s small business tax regime. Quebec, which released its budget on March 22, has also made no announcement regarding its intention to match the proposed change since the federal government released its budget.
According to KPMG Canada, most provinces refer to the federal business limit for the purposes of calculating small business tax, meaning that provincial rules would automatically align with the federal change.
However, both Ontario and Quebec would need to make legislative amendments to match the proposed federal measure.
In an email sent on May 3 to Investment Executive, a spokesperson for the Ontario Ministry of Finance said that “given the timing of the release of the 2022 federal budget, the province did not have sufficient time to address the proposed federal tax changes in the 2022 Ontario Budget.” The spokesperson said it would “not be appropriate to comment at this time” on whether Ontario would match the proposed federal change. Ontarians vote in a provincial election on June 2.
A spokesperson for Quebec’s Ministry of Finance said in an email sent on May 11 that the federal government’s proposed change was “still under study.” The National Assembly’s last scheduled sitting day is June 10 ahead of a provincial election that must occur by Oct. 3.
If Ontario were to decide not to follow the federal government’s proposed change to small business taxation, it would not be the first time.
In November 2018, the Ontario Progressive Conservative government announced it would not follow the federal government’s changes to the taxation of small business that limited access to the SBD rate. That time, Ontario’s decision provided small businesses in the province with tax relief, said Armando Minicucci, a tax partner with Grant Thornton LLP in Toronto.
However, should Ontario decide not to follow the federal government’s proposed small business tax changes this time, small businesses in the province would be disadvantaged, Minicucci pointed out.