(February 28 – 17:40 ET) Service and knowledge-based industries will finally get some corporate tax relief. Within five years, the federal corporate income tax rate will move to 21% from 28% for businesses not currently eligible for special treatment. That makes for a combined federal/provincial rate of about 40% by 2004.
The financial services industry will be a major beneficiary of the federal initiative. Also on the receiving end will be professional and management consulting businesses, retailers and wholesalers and information technology companies. Not included will be those sectors that already benefit from special tax treatment: manufacturing and processing, small business, resources, as well as mutual fund corporations, mortgage investment corporations and investment corporations.
As a first step, on Jan. 1, 2001, the rate for those businesses perceived to be the engines of Canada’s growth will be 27%, down 1 percentage point. For those companies whose fiscal year includes Jan. 1, 2001, the change will be prorated.
While this is a small step for Canadian businesses in the first year, if Ottawa’s promises are implemented, the gap between Canadian and U.S. corporate rates will narrow, says Satya Poddar, tax partner with Ernst & Young in Toronto. Assuming no changes to the U.S. rate, both rates will hover around 40% in 2004, a level currently competitive with G-7 countries.
Small businesses will get an additional tax break this year. The government will speed up the planned seven-percentage-point reduction for small business. On the next $100,000 earned by small businesses after the first $200,000, they will be taxed at the rate of 21%, effective Jan. 1, 2001, vs the current 28%.
Under the proposed regime, a business with income of $375,000 will pay the standard 12% on the first $200,000, 21% on the next $100,000 and the new 27% on the remaining $75,000 – plus the $4,200 surtax – for total federal corporate tax of $69,450, a saving of $7,750.
-IE staff