Taxing corporations at the same rate as small businesses would cost Ottawa $11 billion each year, even when adjusting for increased revenue from personal taxes, a new report from the Parliamentary Budget Officer suggests.

The PBO study analyzed the effects of an annual one percentage point cut in the corporate income tax rate over the next six years, which would bring the rate down to nine per cent. The Trudeau government has promised to cut the small business tax rate from 10 per cent to nine in 2019.

According to the PBO, Ottawa would lose $1.9 billion in corporate tax revenue in the first year of the rate cut, $6-billion by Year 3, and $13.2 billion when the rate drops to nine per cent. The hit to federal coffers is expected to be softened by slight increases in revenue collected through personal income taxes, topping out at $2.1 billion annually in the final year of the analysis conducted by the PBO, headed by Yves Giroux.

Based on the proposed rate-reduction schedule, the report determined that the combined federal-provincial corporate income tax rate would drop from 26.8 per cent in 2018 to 20.7 per cent in 2024.

Under the Canadian system, corporate and personal income taxes are integrated to avoid double taxation and to block loopholes. The reasoning is that Canadians shouldn’t incorporate their businesses strictly for tax purposes.

When a taxpayer records income from shares he or she owns in a corporation, the Canada Revenue Agency (CRA) uses a formula to bring the number up to its approximate value prior to corporate income tax reductions. This new amount is taxed at the appropriate personal rate, with a tax credit later applied to recognize the corporate taxes already paid. The idea is to ensure that all income is taxed indiscriminately, regardless of where it originated.

Typically, when the corporate rate is reduced, the government will adjust the dividend “gross-up” and tax credit rates to ensure the two tax systems match up. This will increase the revenue from personal income taxes, as any income derived from dividends will still be taxed at personal rates, with the CRA offering a smaller offsetting tax credit.

However, the increase in personal income revenue is a far cry from the amount Ottawa will forego by slashing the corporate rate, because corporations do not distribute “all their profits as dividends,” and many dividends received by shareholders are not taxable, as is the case for non-resident shareholders or shares held through “tax-sheltered accounts,” according to the PBO.

The report on gradually slashing corporate tax rates was prompted by a request from an unnamed MP. iPolitics reached out to the PBO to ask for the MP’s identity, but was told it could not release that information because the “necessary consent has not been confirmed.”