Many expected that this year’s federal budget — the last before the fall election — would contain some additional tax breaks and incentives for Canadians. So it was no surprise when the budget, which was announced April 21, did feature some welcome news for business owners that could help ease their tax bill over the next several years. Among other important changes, the budget proposes to gradually reduce the small business tax rate by 2 per cent by 2019 and announces consultations to consider expanding the types of income eligible for this lower tax rate. The budget also extends tax relief on manufacturing and processing machinery and proposes new rules to make donations of certain shares of private corporations and real estate exempt from capital gains tax.
If you own a small business, you could see a small tax savings next year as your tax rate on qualified income is reduced to 9 per cent (from 11 per cent) by 2019, at a drop of 0.5 per cent per year. This lower small business income tax rate deduction applies on the first $500,000 of qualified active business income for Canadian-controlled private corporations. But the budget also proposes to bump up the federal effective tax rate on non-eligible dividends. Those who pay taxes in the top bracket will see the current 21.2 per cent rate jump to 21.6 per cent in 2016, with further increases each year until it reaches 23 per cent in 2019.
The government also announced consultations to reconsider whether certain kinds of businesses could be eligible for the lower small business tax rate on income derived from property, such as interest, dividends, rents and royalties. If you own a campground, self-storage facility or other business that primarily earns income from property, you’ll want to follow developments in this area in the upcoming year.
Due to the impending expiry of a CCA class that provided a tax break on purchases of manufacturing and processing machinery and equipment for businesses, the budget also introduces a new accelerated capital cost allowance (CCA) for these assets. Generally, machinery and equipment acquired after 2015 and before 2026 will benefit from this new CCA rate of 50 per cent per year on a declining balance basis. This is almost as beneficial as the expiring rate, which provided 50 per cent per year on a straight line balance basis under the current CCA class.
Something to keep in mind for the future is the budget’s plans to exempt donations of certain shares of private corporations and real estate from capital tax, starting in 2017. Although this may not affect any immediate sale plans, it could be a factor if you’re thinking about selling shares of private corporations and real estate in the near future and giving the cash proceeds to a qualified donee. However, this new rule comes with many conditions that you will have to meet.
Not everything in the budget was good news, however. The budget also expands an important anti-avoidance rule that can treat what would otherwise be considered tax-free inter-corporate dividends as taxable capital gains. It’s worthwhile to keep this new change in mind, since it could apply where dividends are paid on a share to reduce the share’s fair market value below its cost. The change could also be triggered where dividends significantly increase the dividend recipient’s total cost of properties.
It’s worth your while to carefully consider how these measures can affect your business for the coming year and for later years, due to the changes forecasted.