The small business deduction and a Canadian tax on unreasonable accumulations


University of British Columbia

Date Issued


Document Type



Master of Laws - LLM




In its treatment of "small" business at the time of Tax Reform, the government of the day chose not to attempt to achieve the ephemeral goal of strict adherence to concepts such as neutrality and horizontal equity. On the contrary, in implementing the "small business deduction" for Canadian-controlled private corporations its stated intention was to provide "direct assistance to small business — but only to incorporated small business. Conventional wisdom justifies such a policy of providing assistance to small business on the theory that in the absence of special tax concessions (or other assistance) for small business imperfections in the capital markets, which are alleged to reduce significantly the funding available to small business, would limit the ability of small business to fulfil what is seen by adherents to this theory to be its traditional entrepreneurial role in the Canadian economy. The thesis proposed herein does not attempt to assess the validity of a policy of providing assistance to small business through fiscal measures (assuming that it does in fact exist) but rather focuses on a potential inefficiency inherent in one aspect of its (apparent) implementation: there is presently no control mechanism to ensure that the funds made available to incorporated small business through the "small business deduction" are used in furtherance of the purported goal of this tax credit, i.e. "direct assistance to small business." It is suggested in this thesis that the restoration of some form of tax on unreasonable accumulations to replace the departed Part V tax would provide appropriate pressure upon the Canadian-controlled private corporation in terms of guiding the tax deferral benefits available through the small business deduction towards their stated object. Such a tax would, of course, have the complementary function of depriving those corporations which failed to reinvest the deferral benefits of same. Chapter one of the thesis introduces the topic and defines its basic parameters. As a means of laying a foundation for exploring the suggestion that a tax on unreasonable accumulations may be desirable, chapter two reviews the relevant statutory context into which such a tax would have to be placed. Chapter three considers aspects of the justification for such a tax. In the interest of learning such lessons as history might offer in this realm, chapters four, five and six examine specific variations on such a tax which have already found expression in legislative form: chapter four dealing with Canadian experiences in this area, chapter five looking at the American example and chapter six reviewing its British manifestation. Chapter seven analysis the possibilities as to the form which a tax on unreasonable accumulations might in fact take were it to be instituted in Canada. Finally, chapter eight contains some conclusions.


Small business - Taxation - Canada

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