Evidence of meeting #145 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was rate.
A video is available from Parliament.
Conservative
The Vice-Chair Conservative Pierre Poilievre
That is presuming there's active income. No, my question was this. Presuming there is passive income and active income—passive and active—what is the total marginal effective tax rate on moving from $50,000 in passive income to $50,001?
Director General, Business Income Tax Division, Tax Policy Branch, Department of Finance
The tax rate that applies on investment income is around 50% right now at the corporation. That is not going to change.
Director General, Business Income Tax Division, Tax Policy Branch, Department of Finance
In terms of additional, there is no change, so it would be around 50%.
Conservative
The Vice-Chair Conservative Pierre Poilievre
Okay, great, we've covered the first part of it.
So then on the other side of active account, you're then reducing the company's eligibility for the small business tax deduction, right?
Director General, Business Income Tax Division, Tax Policy Branch, Department of Finance
Yes.
Conservative
The Vice-Chair Conservative Pierre Poilievre
Then when you reduce by $5 the amount of money the small business can use for the small business tax deduction, how much extra tax will they pay on that $5?
Director General, Business Income Tax Division, Tax Policy Branch, Department of Finance
The tax rate will go from 9% to 15%, so 6% additional on those $5, so 30¢.
Conservative
Conservative
Pierre Poilievre Conservative Carleton, ON
Sorry, you don't have the floor. I didn't interrupt you when you had the floor. If I were you, I wouldn't want this talked about, either, so I can appreciate why you don't want me to go here, but I'm going to go here.
The effect is, if you take a business that has passive and active income for which only one thing has changed, and that is that the business will go from $50,000 to $50,001, that $1 will be taxed at a rate of 50.17%. Then, on top of that, the effect of earning that dollar will reduce the eligibility for the small business tax rate by $5. You multiply five times six, and you've got 30. So the effect is 30 on top of 50.
Director General, Business Income Tax Division, Tax Policy Branch, Department of Finance
Just to make sure that we understand each other, the 50 is the overall tax that applies on investment income. That's not changing.
Director General, Business Income Tax Division, Tax Policy Branch, Department of Finance
On the $5, 50% of the $5 will be taxable, so if you're taxed at the general rate—that's 15%—the overall tax will be, if I'm calculating this correctly, 75¢. But the change is 30¢.
Conservative
The Vice-Chair Conservative Pierre Poilievre
The change is 30¢. So what would the rate have been before?
Director General, Business Income Tax Division, Tax Policy Branch, Department of Finance
It was 9%. So it goes from—
Conservative
Director General, Business Income Tax Division, Tax Policy Branch, Department of Finance
On the $5 of active income, the change is 30¢, and there's no change on the 50, so I don't think you can add the 50 to the 30 directly.
Conservative
The Vice-Chair Conservative Pierre Poilievre
No, but actually, that's the rate that someone would effectively pay on that extra dollar of passive income.
Director General, Business Income Tax Division, Tax Policy Branch, Department of Finance
But to pay those additional taxes, you need $6 of additional income, so I don't think you can just add on $1 the taxes that you would pay on $5 of active income. You would need overall to have earned $6 in order to pay those additional taxes.
Conservative
The Vice-Chair Conservative Pierre Poilievre
Right, okay. I guess what I'm saying that is the change in the taxability of that new dollar of passive income is already 50%—we all agree to that—but with the proposal in the budget, the act of earning that extra dollar of passive income would subject another $5 to a higher tax rate. That's correct.
So you would pay effectively.... By earning that extra dollar, would you not first lose 50¢?
Director General, Business Income Tax Division, Tax Policy Branch, Department of Finance
As is currently the case.
Conservative
The Vice-Chair Conservative Pierre Poilievre
Yes, and that will continue to be the case. Then, if nothing else changes in your situation, you would lose another 30¢.
