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Friday, January 13, 2006

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Growing Small Businesses in Canada: Removing the Tax Barrier

This paper examines a barrier to the growth of small businesses in Canada. As businesses grow beyond what is deemed to be “small business” (income in excess of $300,000 to $450,000 depending on location) they face large increases in business income-tax rates. Economic research outlined in this paper indicates that such increases act as a strong disincentive for growth and expansion.

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Published research indicates that such steep increases in business income-tax rates create a powerful barrier, or disincentive, for entrepreneurs to expand their businesses. The large increases in business income-tax rates as firms move from the small business income-tax rate to the general business income-tax rate creates strong incentives for firms to avoid increases in taxation by reorganizing or by paying out additional monies in salaries and bonuses rather than growing and expanding.

The way to remove this barrier is to eliminate the preferential business income-tax rate for small businesses by reducing the general business income-tax rate. Given the overwhelming evidence of the damaging and costly impacts of business taxes on an economy, it makes little sense to equalize general and small business income-tax rates by raising the small business income-tax rate. The optimal solution is to reduce the general business income-tax rate while aggressively increasing the small business income eligibility threshold in order to reduce the steep increases in business income-tax rates at both the federal and provincial levels.
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