Small businesses are the backbone of the Canadian economy. To support them, the federal government provides the Small Business Deduction (SBD), a lower tax rate that allows entrepreneurs to keep more of their earnings to reinvest in growth. However, for those choosing the co-operative model, this essential tool is currently broken.
The “Co-operative Tax Penalty”
In 2016, Bill C-29 introduced rules to stop large firms from “multiplying” SBD access. While the goal was fairness, the broad language inadvertently penalized independent small businesses simply because they are members of a co-operative.
An Incomplete Fix
The government acknowledged this distortion in 2017 and 2019 by amending the Income Tax Act to exempt farmers and fishers. While welcome, this was an incomplete fix based on initial examples. Today, entrepreneurs in retail, manufacturing, services, and health care are still waiting for that same equity. We aren’t seeking a new tax break; we are asking the government to complete the correction it already started.
Why This Matters
Fixing the SBD powers the entire economy:
- Local Reinvestment: Correcting this penalty keeps more money in your community for jobs and technology.
- Level Playing Field: It ensures that choosing a democratic business model isn’t a competitive disadvantage.
- Expert Backing: This “cleanup” of Section 125 of the Income Tax is supported by the Joint Committee on Taxation of the Canadian Bar Association (CBA) and of the Chartered Professional Accountants of A Canada (CPA).
Learn more about this by reading our Small Business Deduction policy brief.