VII. Appropriateness of Special Provisions for Small Enterprises
16.97. In Canada, a ‘Canadian-controlled private corporation’—very generally, an unlisted company controlled by Canadian resident individuals—is taxed on its ‘active’ business income at a special rate of 25 per cent on the first $100,000 of such income, provided its accumulated income does not exceed $500,000 and the income accumulated is invested in the business in the form of business assets, cash or shortterm securities. The effect of this special treatment, and of the one-third dividend tax credit available to individual shareholders in that country, is that none of the corporation's business income distributed to shareholders need bear any more tax than would have been paid had it been derived directly by the shareholders. It should be noted, moreover, that having regard to the difference between the 25 per cent rate, which may be all the tax payable by the company on business income, and marginal rates higher than this payable by shareholders, the Canadian-controlled private corporation involves substantial tax deferral.
16.98. In the United Kingdom, a ‘small company’ is charged to corporation tax at a lower rate than other companies: while
the general rate is 52 per cent, the concessional rate is only 42 per cent. A small company is defined as one with profits
in the
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year in question of up to £25,000; there are tapering provisions for companies with profits between
£25,000 and £40,000. Exploitation of the small company provisions by fragmenting an enterprise over several companies is
controlled.
16.99. In relation both to public and to private companies, Australia until quite recently imposed a lower rate of company tax on the first $10,000 of company income and a higher rate on subsequent dollars. This may be seen as a very crude way of providing some relief from the burden of over-taxation to shareholders in small enterprises. The lower rate on the first $10,000 was available to all companies however large their income. In the case of private companies, there was a sliding scale of retention allowance which also might be seen as providing some relief for small enterprises. Both the lower initial rate of tax and the sliding scale of retention allowance encouraged fragmentation.
16.100. If special provisions are to be made for small enterprises, the Committee would prefer the Canadian or United Kingdom model rather than a return to what used to be the Australian law. However, the Committee takes the view that one should not lightly introduce a new element of non-neutrality into the company tax system. There can be no question that the Canadian provisions afford very substantial tax deferral; and although this element of non-neutrality is much less conspicuous in the United Kingdom model, it is nonetheless significant.
16.101. It is noteworthy that neither Canada nor the United Kingdom allows an election by shareholders to be taxed as a partnership. In the Committee's view, this election is sufficient to afford protection to shareholders in a small enterprise from any element of over-taxation. If the furthering of economic growth is thought to justify tax concessions or other financial incentives to small enterprises, they should be offered whatever the form of business organisation adopted. This is also the view of the Bolton Committee which argued that, since so many small enterprises in the United Kingdom are unincorporated, assisting such enterprises through corporate income tax would be highly discriminatory and of only limited effectiveness.