While the 2013 federal budget seeks to bolster training and hiring through measures such as a new job grant, it also includes tax measures that will pinch small-business owners.
One of them is reforms to the dividend tax credit, which are expected to add $2.34-billion to Ottawa's revenues over five years.
Profits earned by corporations are subject to corporate income tax and – if distributed to individuals by way of dividends – also to personal income tax. The dividend tax credit in the personal income-tax system tries to adjust for that, and it compensate individuals for corporate taxes that have been paid. But the latest budget says the current system has been overcompensating individuals, such that a person who receives dividend income from a corporation can be better off than if they had earned the income directly, so the government is making changes.
"They are making it more expensive for business owners to access their profits," says Tim Cestnick, president of WaterStreet Group Inc. "If you are a successful business owner, getting out money to live on is going to be more difficult now."
Mr. Cestnick added that many affluent families, often people who have their own companies, will also have to give up some popular tax-planning strategies that make use of life insurance, namely leveraged insurance annuities and so-called "10/8 arrangements." Changes to those two strategies will collectively add $360-million to government coffers over five years.
And Globe and Mail columnist Rob Carrick points out that the $750,000 lifetime capital gains exemption on the sale of small business corporation shares as well as qualified farm and fishing properties will be increased by $50,000 for the 2014 tax year.