Firms will also benefit from another reduction in EI premium

OTTAWA -- The corporate sector -- smaller businesses in particular -- emerged as a winner in yesterday's federal budget, with tax cuts and other measures designed to boost profits.

Small companies will benefit from another reduction in the premiums paid for employment insurance, a jump in the small-business deduction limit, and an increase to the registered retirement savings plan (RRSP) limit. But the key measure for them is a jump in the small-business deduction limit, which will mean a lower tax rate being applied to much more income.

For larger companies, the budget finally laid out a death schedule for the much-despised capital tax on corporate assets, introduced in 1989 to fight the deficit. Capital taxes particularly affected large industries such as the auto and financial-services sectors.

"It's something you carry on your back always," said Ray Finnie, chief executive officer of Brantford, Ont.-based Wescast Industries Inc., the world's largest maker of exhaust manifolds. Mr. Finnie said the capital tax has hurt Canada's ability to lure car makers. "I don't think it makes sense in terms of stimulating the economy and creating jobs."

The resource sector, which includes both small and large-sized businesses, will also benefit substantially from an income tax cut. The rate will fall to 21 per cent over the next five years, to place it in line with other industries.

"Small, medium and large businesses will all find something to their liking," said Don Drummond, chief economist at Toronto-Dominion Bank. Another economist, however, said the business sector -- and the economy -- would have been better off with broad tax cuts instead of a massive spending increase.

"The defining characteristic of this budget is across-the-board program spending," said Jeff Rubin, chief economist at CIBC Wood Gundy Inc. "It's become a ritual -- they spend a whole bunch of money that could have been spent by households."

The key tax changes for business are:

The ceiling on the small-business income tax rate was also raised, after two decades of not moving. The 12-per-cent rate will kick in at $300,000, instead of $200,000, within four years.

Employment insurance premiums, which have been reduced for five consecutive years, will fall in 2004 by 12 cents to $1.98 for every $100 of an employee's first $39,000 of annual income. Employers' contributions are calculated by multiplying the employee rate by 1.4, so the employer rate will fall in 2004 by about 15 cents -- to $2.79 for each $100 of insurable earnings for each employee.

Finance Minister John Manley said the government will also consider restructuring the way it runs its EI program beginning in 2005. A recent report found that employers and employees have paid $25.7-billion over the past four years beyond the $15-billion cushion that actuaries believe the EI fund needs to cover a rapid jump in unemployment. The EI fund collected $18.3-billion in the most recent fiscal year.

The capital tax, which is charged on corporate assets regardless of profitability, will be phased out over the next five years. Medium-sized companies will benefit first.

Income taxes on resource companies will fall to 21 per cent over the next five years from 28 per cent. There will also be a deduction for provincial and other government royalties and mining taxes, and the elimination of the existing 25-per-cent resource allowance. The mining industry will also benefit from a new tax credit for qualifying mineral exploration expenditures.

The government also said it will improve the film or video production services tax credit.

An extra $190-million will also go to the Business Development Bank of Canada to expand venture capital investment in domestic businesses.

The small-business capital gains rollover, designed to provide startups with greater access to capital, has been improved. The $2-million limit, first introduced in 2000, has been eliminated so that there's now no limit on an initial investment or the amount that can be reinvested in shares of eligible small businesses. The changes also allow a reinvestment to be made at any time in the year.