The Numbers behind the small business tax cut

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%.

I found it interesting that the Free Press pretty much buried the story, yet was being tweeted all day yesterday .  CTV did a story on it :

http://winnipeg.ctv.ca/servlet/an/local/CTVNews/20101201/wpg_tax_101201/20101201?hub=Winnipeg

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
Income Payroll Total
BC 10000 0 10000
AB 12000 0 12000
SK 18000 0 18000
MB 0 0 0
ON 18000 11700 29700

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
Income Payroll Total
BC 10000 0 10000
AB 12000 0 12000
SK 18000 0 18000
MB 0 10750 10750
ON 18000 11700 29700

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
Income Payroll Total
BC 38750 0 38750
AB 40000 0 40000
SK 52500 0 52500
MB 42000 10750 52750
ON 52500 21450 73950

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
Income Payroll Total
BC 117500 0 117500
AB 115000 0 115000
SK 142500 0 142500
MB 132000 55900 187900
ON 142500 42900 185400

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.

So recap:

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?

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7 thoughts on “The Numbers behind the small business tax cut

  1. Thanks for breaking this down to more easily understood numbers. I think governments want people’s eyes to glaze over when announcing such things. This helps to bring perspective to matters.

    Well done.

  2. I said the same thing watching the news, but figured the cup cake guy must be a card carrying member of the dippers. $10k in tax savings… I can’t believe the air such drivel. Clearly reporters have no desire to paint an even remotely accurate picture.
    Has TV news become a CJOB call in show? Anyone can have an opinion… even if it is WRONG

  3. I also appreciate the context that you provided for this announcement. As is often the case, it’s less straightforward than it might appear. I just wish you weren’t the only one putting these claims through the wringer.

  4. It would be nice to have all businesses keeping all their money. But how would reducing a payroll tax ultimately help the people employed by a business? Are the employees going to get paid more or is the business owner simply going to keep more for him/herself?

    If they do hire employees, why should we laud businesses for creating more dead-end jobs?

    This rationale seems noble on the surface, but seems to serve no purpose other than to turn Canada into the next China.

    • Payroll tax is a comparative tax. By that I mean that you can compare the rates across Canada and determine where you want to (open) or move your business to. All other things being equal, if payroll tax was the one deciding factor, why would any business locate in Manitoba if they could locate elsewhere and not pay it?

      As for keeping/hiring, payroll tax is based on net income, so what I think would most likely happen is that that net income would be re-invested in capital improvements or distributed to ownership. That distribution would be then spent in the community, generating sales tax revenue.

      Good point – would reduced payroll tax mean increased employment? Depends on the thinking of the business. If target is $X after tax income, then yes it could translate into more jobs. But if the business has a gross margin target or EBITA target, then the money would go to retained earnings.

      As for your comment on dead end jobs – I’m not sure what you mean by that. Payroll tax is applicable to all salary ranges, and I’m missing how you think reduced payroll taxes translate to dead end jobs.

      My point is that business taxes should be similar between all western provinces. There is a huge difference for business taxes for larger businesses between Manitoba and other Western provinces. Is our standard of living that much higher due to government spending to justify it? I would argue no, so why the difference?

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