Trudeau is right about the tax advantages of small corporations …. sort of.

Recently Justin Trudeau came under fire for comments suggesting that the wealthiest of Canadians can use incorporation as a way of reducing their taxes. This has resulted in attacks from his opponents and criticism from the Canadian Federation of Independent Business. (See the Globe and Mail article for the full story).  Trudeau is right in being cautious about promises to implement policies that benefit “small businesses” without taking into consideration potential abuse of the tax laws. Susan Ward has written an excellent article on the dangers of being declared a “personal services corporation” by Canada Revenue Agency. If you are a solopreneur and the only shareholder and employee of your corporation, this article is worth reading – especially if you only have one client.

If you run a business with multiple clients and projects, incorporation is a great strategy for entrepreneurs to reduce their taxes and increase funds available to run their business. By incorporating as a single shareholder business all expenses related to the entrepreneurial endeavour can reduce the bottom line on which taxes must be paid. When those taxes are paid, the tax rate is much lower than the personal tax rate. Mr. Trudeau, along with the other party leaders, has announced the intention to further reduce the corporate tax rate for small corporations. Trudeau, by flagging the potential for wealthy individuals to incorporate and reduce taxes on what should be considered personal income, is simply adding a caution to his otherwise good news. He wants to minimize at the policy level the likelihood that small business tax strategies will be abused.  Hopefully, careful planning in the implementation of tax policy will reduce the potential for small corporations to become a focal point for Canada Revenue Agency audits … which detracts from what solopreneurs do best: run their businesses and earn a modest living.

So let’s not be too hard on Mr. Trudeau. After all, he is supporting policy that would further reduce the tax burden on small entrepreneurial corporations and boost small business growth. And he is right to care that the tax laws are carefully constructed so they benefit the individuals that the laws are intended to benefit. His only real mistake was to wander into the strategic and technical concerns of law-making and open himself to misunderstanding. One thing is clear: he, like the other federal party leaders, have promised to further reduce the corporate tax from 11% to 9%, which is good news for us solopreneurs.