The new federal budget takes the government's ongoing focus on jobs, growth and long-term prosperity to a new level, emphasizing initiatives that promote the broader venture capital system and entrepreneurship culture in Canada. A key element of the budget seems to be a focus on closing numerous loopholes.
It's important for entrepreneurs and private business owners to understand both the corporate and personal tax changes and look at those changes holistically.
On the corporate side, there are a handful of changes that will affect entrepreneurs and private business owners nationwide. One of the things that stays the same, however, are corporate income tax rates, including the $500,000 small-business income limit for a Canadian-controlled private corporation (CCPC).
The government has dropped its review of a more formal corporate group taxation system – a process that first came into play as part of budget 2010. Many private businesses were looking forward to a government recommendation of consolidated tax filing to simplify the process. Unfortunately, businesses will continue to be forced to use alternate planning to offset profits and losses in a corporate group.
Meanwhile, new measures supported by modest new funding to enhance the predictability of the SR&ED tax incentive programs are on the table once again. Anything that streamlines this process and makes it easier for Canadians to access and capitalize on the SR&ED program is critical.
Again this year, we see a further extension of the capital cost allowance (CCA) rate for manufacturing and processing equipment. That means the not-so temporary increase to a 50 per cent CCA rate that was set to expire at the end of 2013 will be extended for eligible assets acquired in 2014 and 2015. The half-year rule applies here – so a full write-off can be claimed over three taxation years.
From a personal tax perspective, a handful of small changes will also have significant implications for business owners.
The budget proposes an increase to the effective tax rate on non-eligible dividends, which are those paid out of corporate earnings subject to a preferential tax rate (such as the small-business rate) or those paid from investment income such as interest or rents. The changes will increase the highest marginal tax rate on these dividends to 38.13 per cent for Ontario residents at the top marginal tax bracket, which will involve a rethinking of annual salary/dividend mix for many businesses.
We're also going to see the lifetime capital gains exemption limit increase from $750,000 to $800,000 for qualified small-business corporation shares, farm property and fishing property after 2013. For taxation years after 2014, the exemption limit will be indexed to inflation. As a result, if two shareholders sell their qualified corporation shares, they could save up to $ 385,000.
In terms of tax benefits, the budget will move to block what it considers unintended tax benefits resulting from the use of two leveraged life insurance products: leveraged insurance annuities and 10/8 arrangements. The 10/8 type policies were used by many businesses to take advantage earning tax free funds inside a life policy and deducting interest by a corporation. These taxpayers will have until the end of 2013 to unwind these policies or lose tax benefits.
The government also plans to review the taxation of testamentary trusts (those created by virtue of a person's will) with a view to eliminating the tax benefits associated with these types of trusts. These trusts are a common succession planning tool, so hopefully the consultations will not result in any changes.
Numerous smaller, administrative changes will also fuel business across the entrepreneurial and private space. Those businesses will want to explore how a proposed $37-million to support research partnerships with industry may open up new doors over the next two years. That's in addition to $121-million over two years to invest in the National Research Council's strategic focus to help the growth of innovative businesses in Canada, as well as money set aside for pilot programs that help SMEs access research at non-profit research institutions, investments in support of new clean technologies, funds to build innovation hubs, new awards programs and more.
Looking at the big picture, Ernst & Young's most recent research shows 88 per cent of global survey respondents across a wide number of industries agreed that innovation was the one genuine differentiator and advantage they have over the competition. Some 74 per cent said that innovation is the reason behind their growth in the last year. With those kinds of numbers in mind, the budget's focus on research and development and entrepreneurs is welcome.
David Steinberg is a partner and co-leader at Ernst & Young's GTA private mid-market practice, and Ron Voyer is a partner and national leader for Ernst & Young's entrepreneurial services and tax