In the midst of an economic downturn and staggering volatility, the Liberal government delivered a federal budget that will see a nearly $30-billion deficit in the hopes of stimulating – and growing – the Canadian economy.
Supporting the Liberal election platform, with a focus on economic growth, the 2016 federal budget focused on closing perceived tax loopholes in order to maintain integrity in the tax system and generate tax revenue for the government. Here are the top five things small business owners need to know about how the budget may impact them.
Full budget coverage: Read Laura Stone's breakdown of the highlights
1) Small business deduction
The 2016 budget saw two types of changes made to the small business deduction. Under existing legislation, the small business deduction is available to corporations that earn business income up to $500,000. The tax rate is 15 per cent and the deduction provides tax savings of up to $55,000.
There was a perceived abuse of primarily professionals that used corporations to claim the small business deduction by charging fees to a partnership of which the shareholder was a partner. This perceived loophole has now been blocked, as these fees are no longer eligible for a full small business deduction.
Additionally, previous tax plans had allowed that under certain circumstances, groups of companies could potentially double up on the small business deduction by allowing for the conversion of interest income to active income. The 2016 budget has removed this planning and has closed the perceived tax loophole.
2) Corporate tax rates
The newly released budget has no changes that have been proposed to the general corporate income tax rates. Of particular interest, the budget doesn’t propose to limit access to the general corporate rate of tax earned by a professional corporation or any other corporation, either on business income allocated from a partnership or earned directly. Canada still has one of the lowest corporate tax rates of the G7 countries.
3) Eligible capital property (goodwill)
Under current legislation, when goodwill was purchased, 75 per cent of what you paid for goodwill went into a pool that depreciated at a rate of 7 per cent. When goodwill was sold, only 50 per cent of what you received was taxable at a rate of 26.5 per cent, resulting in an effective tax rate off 13.25 per cent.
Under new budget measures, when you buy goodwill it goes into a capital cost allowance (CCA) pool similar to the rules for the purchase of any other depreciable capital asset. The new depreciation rate will be 5 per cent. When goodwill is sold, any proceeds received in excess of cost of goodwill will be taxed as a capital gain at the rate of 25 per cent.
4) Transferring life insurance
A perceived tax loophole has been eliminated regarding transfers of life insurance policies. Under existing legislation there was a way to extract tax-free corporation money by transferring a life insurance policy into a corporation. The new budget proposes to limit the tax benefits of such transfers, as well as retroactively adjust certain benefits associated with policies transferred before 22 March 2016.
5) No changes to capital gains inclusions and stock options
It was speculated prior to the 2016 budget that the capital gains inclusion rate, currently 50 per cent, was to be increased and that there would be changes to the stock option benefit rules. The newly released budget doesn’t propose any amendments to either the capital gains inclusion rate or the stock option rules.
Tax measures already implemented
The government confirmed its intention to introduce a number of previously announced measures, as modified to take into account consultations and deliberations since their release. Prior to the budget release, we’ve already seen the new government implement tax measures including the 4 per cent increase in the top federal tax rate (from 29 per cent to 33 per cent) for taxable income over $200,000, a reduction of the second tax bracket from 22 per cent to 20.5 per cent, and a reduction of Tax-Free Savings Account (TFSA) contribution limits from $10,000 to $5,500.
With the hope of strengthening the Canadian economy, the Liberal government has detailed measures in an effort to generate tax revenues primarily from perceived loopholes. The total expected revenue from these corporate changes is relatively small compared to the revenues generated from the personal tax changes.
Ultimately, small businesses shouldn’t expect any drastic impact on their business. This budget will help the government achieve its objectives, without significant pressure on – or benefit to – small business.
David Steinberg is a tax partner and national co-leader of the Private Mid-Market practice at EY. Follow EY’s Private Mid-Market practice on Twitter @EY_CAPrivateCo.
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