Cut capital gains tax on small businesses: IIAC

With the federal budget announcement a couple of months away, the Investment Industry Association of Canada has released its annual budget recommendations. The organization wants the federal government to focus on small business, especially after giving tax breaks to large companies in its October 30 mini-budget.

“From our perspective, the element that is really missing in terms of the productivity agenda is an incentive program to encourage investing by small companies and encourage growth and start-ups of small companies in Canada,” says Ian Russell, the IIAC’s president and CEO. “It’s important not only to encourage growth of these companies but to also expand and improve competitiveness.”

Russell says the way the government can help small business is by lowering the capital gains tax. He says this can be done cost effectively by “reducing the inclusion rate more for certain companies. You can also do it for common shares both public and private, and limit this to corporations below a certain size threshold.” He adds that the government can do this without extending the capital gains relief to real assets.

This proposal isn’t a new one. Russell says it was even in the Conservative platform a few years ago, but the party hasn’t moved on it yet. With the government promising that tax reductions will be fairly limited in the next budget, the IIAC says it’s imperative to act on the capital gains reduction and not wait any longer.

“There’s huge increasing opportunities for mid-sized companies globally that are specialized in particular areas,” says Russell. “There’s huge demand on an environmental and bio technology front, and there’s a huge demand in financial services globally.”

He says that the government needs to understand that small companies and large business are different. Many smaller corporations don’t pay dividends so a dividend tax credit isn’t useful for them. A capital market incentive would be more beneficial, he explains.

Besides lowering the capital gains exemption, the IIAC has other ideas for the next budget. The organization wants the government to extend the Scientific Research and Experimental Development tax credit program from “small Canadian-controlled private corporations to small companies listed on the TSX Venture exchange.”

It also wants provinces compensated for any net loss due to the elimination of sales tax by harmonizing with the GST.

This point is especially relevant to the manufacturing sector, which pays more in PST than it would if it paid GST. Russell would like to see companies pay only GST, but in order to do that, the federal government would have to compensate the provinces for what they would lose in corporate tax dollars.

Other issues the IIAC wants to address are improved efficiency and competitiveness in the Canadian capital markets.

The recommendations include encouraging provincial regulators to adopt more principles-based regulation, mandating the filing on the CDS Innovation website of all non-client-specific tax information and amending the Income Tax Act to allow investment dealers to transfer RRIF minimum payment information electronically to receiving institutions and avoid the “existing unfair penalties on seniors when errors occur.”

The IIAC’s recommendations don’t include pushing toward free trade in securities, something the organization has been advocating over the past year. Russell says things aren’t moving as quickly as the association had hoped in that department and that it’s up to the American SEC to get the ball rolling.

While recommendations are well and good, will the government listen to the IIAC? Russell thinks so. On Monday he attended a meeting in Vancouver with Finance Minister Jim Flaherty and other business leaders and politicians to discuss budget needs. If anything, Russell hopes to turn the Conservatives’ attention to small business.

“I think the most important thing I’m able to do is draw attention to the idea that you can’t treat corporate Canada in the same way,” he says. “You have to be innovative. The policy agenda for small companies is different than for large ones.”

Read the entire IIAC budget recommendation presentation here.

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com

(01/14/08)

Bryan Borzykowski