Okay, time for a blog post on this. The NDP announced yesterday that they were removing the Small Business Income tax rate effective Dec 1, 2010. It’s currently at 1% and has been decreasing from 8% since 1999.
A few points to be clear on before we proceed:
The NDP, while wanting to take all the credit for bringing the rate to 0% has to realize that this would have been cut no matter who was in power. There isn’t a province west of Quebec that has a rate more than 4.5%. So yes, Kudos for cutting it, but it would have been decreased regardless.
The Small Business Income Tax rate applies to income of $400,000 or less. Remember we are talking income here, not Revenue (the two are different: Revenue less expenses = income). And after $400,000 of income, the business pays the normal rate of 12%.
What I would like to know is how many cupcakes the NDP bought in order for the business owner to say this:
Business owner Derrick Godfrey, who operates a cupcake shop in Osborne Village, said the elimination of the tax will mean about an extra $10,000 a year for his shop.
“Ten grand means it’ll allow us to hire another part-time baker,” said Godfrey.
Really? $10K, huh?
$400,000 @ 1 % = $4,000.
So where does the magic $10K come from? The maximum effect is $4,000. And dude, I seriously doubt you have $400K in income from selling cupcakes. If we assume 50% gross margin and 20% overhead, you’d need $1.3M in sales to some up with $400K in income. Winnipeggers aren’t stuffing their faces with that many cupcakes!
Now that I have warmed you all up, I’m a numbers guy so lets see what the numbers are telling me about this announcement.
There are two major taxes that affect businesses in Manitoba ( I could talk about personal income taxes, but I’ve covered that in an earlier post) – Corporate income tax and Payroll Tax. For the sake of these comparison I’ve only looked at Ontario westward. Manitoba and Ontario are the only provinces that have payroll taxes. I’ve ran the numbers for four scenarios:
Scenario #1. A business makes $400K ( MB small business rate maximum) and has a payroll of $1.0M:
|$400K Income, $1.0M Payroll|
Well, Manitoba’s payroll tax doesn’t kick in until $1.25M, and since Manitoba doesn’t charge income tax under $400K, looks like Manitoba has the best rate and Ontario loses.
Scenario#2 – Business still makes $400K, but now has payroll of $1.5M so MB payroll tax kicks in:
|$400K Income, $1.5M Payroll|
So now the effect of the payroll tax comes into effect here. ON still pays the most, but now BC pays the least.
Scenario#4 – Business makes $750K, but payroll of $1.5M:
|$750K Income, $1.5M Payroll|
Okay, Ontario is still the highest, but look what has happened to Manitoba, it’s now the second highest. Why? Because the small business limit in Manitoba is $400K and in every other province it is $500K. Because of this, Manitoba business owners pay anywhere from $7,500 to $9,500 more tax on that $100K.
Scenario#4 – Business makes $1.5M, but payroll of $2.6M:
|$1.5M Income, $2.6M Payroll|
The big business scenario. Highest corporate tax bracket, highest payroll tax rates. Manitoba jumps over Ontario. Why? Because our payroll tax is higher. Why is Alberta the least now? Because while the low rate for B.C. is lower than Alberta, the high rate for B.C. is higher than AB.
Ontario is highest in 3 out of 4 scenarios
Manitoba is lowest in one scenario
Where Manitoba starts to become uncompetitive with other western provinces is between $400K and $500K of income and when payroll tax comes into play. You can really see the impact of Payroll tax in the last scenario. Goes to show why we have so few big businesses locating their head offices here.
So it’s the payroll tax that’s the killer. It’s easier for business owners to reduce their taxable income, but much harder to affect the amount of payroll tax to be paid ( although both can be done).
So is it fair for Manitoba businesses? Well at the low end yes. But the NDP gov’t should increase the exemption to $500K and start working on getting rid of the payroll tax – that would make us competitive with other western provinces. We don’t need to be the lowest, but there is a $72,900 gap between a business with $1.5M of income in Alberta and Manitoba. That’s huge.
This move while nice is pretty much window dressing and an attempt to make the current gov’t look more business friendly than it actually is.
Perhaps more unsettling is the Finance Minister’s position that they have no plans to reduce the personal income tax rates of which Manitobans pay the highest in the country.
Given the firehose that is the NDP approach to spending, is it even possible for them to even think about any substantial reductions?