Dean Radomsky is a tax partner in EY Canada's Private Client Services practice in Calgary.
Amid a strong and growing Canadian economy, the Liberal government has delivered its 2018 budget, offering significant commitments to women entrepreneurs, research and innovation, as well as a new intellectual-property strategy and some much-awaited clarity about its proposal to tax passive corporate income.
Here are the key items in the 2018 federal budget to which small businesses should pay close attention, as well as a couple of areas in which the government decided to remain notably silent.
Passive investment income clarity
In July, 2017, the federal government proposed, among other items, to increase tax on passive investment income inside private corporations. Corporate income is taxed at a lower rate than personal income so that businesses can spend that money on job creation and growth. Ottawa took issue with the fact that some business owners and professionals had a deferral advantage whereby the lower tax allowed for greater personal savings purposes within the corporation by deferring the higher personal income taxes.
Last year's initial proposal was met with much outcry from the business and professional community, which was concerned both about a potentially significantly higher tax burden and increased administrative complexity. Budget 2018 offers a toned-down approach: Companies earning more than $50,000 a year in passive income will see less of their business income eligible for the small-business tax rate, which will be 9 per cent as of next year. The straight-line reduction of the small-business deduction limit will be $5 for every $1 of investment income above $50,000. At $150,000 of passive income, the small-business rate is eliminated and all amounts of business income is subject to the full federal tax rate. This revised proposal significantly simplifies the July approach.
In December 2017, draft legislation was introduced to address the ability for private corporations to income sprinkle as a means to utilize the lower marginal tax brackets available to a lower-income spouse or an adult child attending postsecondary education. Those proposals remain in place.
Research, science and innovation
To foster and enable future breakthroughs in research and science, the budget includes a historic $4-billion investment in Canada's overall research system, to give Canadian scientists and researchers access to cutting-edge tools, technology and facilities.
And to support innovation, the budget also allocates $2.6-billion in what the government called "incremental support" over five years. It also promises to reform, streamline and simplify Canada's various innovation programs, with the goal of creating a system where Canadian entrepreneurs have a single pathway to the government where they can get guidance on all the available government programs. These changes are expected to occur over the next one to two years. While total innovation funding is set to go up, the actual number of business innovation programs will shrink by up to two-thirds. However, all applications to existing programs will be honoured.
Women entrepreneurship strategy
The advancement of women entrepreneurs has been a priority of this government, and removing barriers to access to capital that women face is a key part of this effort. The budget makes $1.4-billion in new financing available to women-led businesses over three years through the Business Development Bank of Canada (BDC). This is on top of the government's Venture Capital Catalyst Initiative announced in 2017, which has a goal of funding up to $1.5-billion into Canada's venture-capital market, focusing on gender balance and diversity.
Ottawa is also taking a global view when promoting women-led businesses, and the budget states the goal is to support their growth "into competitive, sustainable world-class companies." It also commits $250-million over three years through Export Development Canada for export financing and insurance to women-owned and women-led companies.
In addition to the financing commitments, Ottawa will seek to increase the amount of business the federal government does with women-owned businesses. Of the small- and medium-sized businesses that take part in federal procurement, 10 per cent are women-owned, and the government plans to raise that to at least 15 per cent. There are also boot camps that BDC will offer to women looking to start a business, as well as $9.5-million over three years to accelerate the gathering and sharing of data, information and best practices for women entrepreneurs.
Many startups, particularly in the technology sector, create unique, valuable and proprietary products and services. The government said that to give these businesses more confidence that their ideas and patents will be protected, it will invest $85.3-million over five years in a new intellectual-property strategy.
The strategy includes funding to give small businesses better access to legal advice about IP, as well as the creation of a patent marketplace for licensing and sale of intellectual property, and the creation of a "patent collective" to pool entrepreneurs' patents.
Notable by its absence …
While the budget covered much ground affecting the future of Canadian small business, it conspicuously did not address the competitiveness gap that has emerged between Canada and the United States following the current U.S. administration's tax-reform plan being signed into law. These changes mean corporate tax rates in the U.S. are more competitive with Canada's tax rates. Furthermore, the additional tax incentives within the U.S. government plan, such as the accelerated deduction of capital expenditures, will hurt Canadian competitiveness for foreign capital investment.
Budget 2018 appears to be more inward-looking, with the government providing the investment for growth and innovation with a hope of exploiting progressive free-trade agreements.
With the private company "tax loophole" proposals settled, for better or worse, the focus of the small-business owner for this budget is researching and identifying available innovation programs they could put to use.