Business owners who were feeling anxious ahead of this year’s federal budget were likely reassured after details were unveiled on Tuesday. After months of speculation on just how passive income in small companies might be taxed, the results are in. The news is relatively good when compared to what many may have expected in the months leading up the unveiling.
First and foremost, small business will not see any new tax increases. In fact, it’s clear the government did not deviate from its previously announced plan to bring the small business tax rate down to nine per cent by 2019. And there are no changes to personal tax rates or the capital gains inclusion rate.
After proposing sweeping changes to the taxation of private corporations in 2017, cooler heads seemed to prevail, with the government opting for greater simplicity. Budget 2018 proposed two changes to limit the tax deferral advantages of earning passive income inside private corporations.
Beginning in 2019, the small business tax rate will begin to be phased out when passive income earned in the corporation exceeds $50,000. Once passive income exceeds $150,000, the corporation will no longer be able to access the small business tax rate.
A second measure proposes to generally limit the accessibility to a corporation’s refundable taxes to the extent non-eligible dividends are paid, with certain exceptions for dividends arising from portfolio dividends.
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In short, there were no major changes for small businesses on the tax front. Instead, the government focused on women’s entrepreneurship, new plans to simplify how governments work with growing businesses and encourage entrepreneurship.
Women entrepreneurs: By far, the largest net new impact on Canada’s entrepreneurial class is the $1.65 billion in new financing being made available to women business owners, to be delivered over three years through the Business Development Bank of Canada and Export Development Canada.
The government is also making $105 million available over five years to reduce barriers that have traditionally made it harder for women to launch their own business. Those who do business with the federal government will also notice changes. The budget promises that 15 per cent of small- and medium-sized businesses that provide goods or services to the federal government will be women-owned, quickly growing their potential for additional revenue.
Innovation programs: Another big-ticket item in the 2018 budget is the near $4 billion in investment to be spent over five years to support Canadian science and research, something that has already generated a great deal of positive reaction. This initiative includes items that are sure to be of interest to anyone who has or is considering launching a new business, in particular those outside major urban centres.
— The government is dedicating $700 million over five years (plus an additional ongoing $150 million) to the Industrial Research Assistance Program to support small-business research and development for projects up to $10 million. The threshold is increasing from the previous $1 million.
— In another effort to encourage entrepreneurship outside traditional business hubs in the country, regional development agencies will receive $511 million over five years through support of regional innovation ecosystems, mentorship programs, networking and skill development.
— The Canadian Trade Commissioner Service will help Canadian businesses access new opportunities in foreign markets.
— Another $540 million is also being set aside for the National Research Council to “reinforce its partnerships” with Canada’s scientists and small- and medium-sized enterprises focused on research and commercialization.
Greater IP awareness: Entrepreneurs who struggle to wrap their heads around the ins and outs of intellectual property will no doubt welcome plans in the budget to spend more than $85.3 million on a new Intellectual Property Strategy. It’s designed in part to help “raise the intellectual property literacy” of Canadian entrepreneurs, and incentivize businesses to leverage their IP.
Parental sharing benefit: Sure to be of interest to some business owners is the unveiling of an additional “use it or lose it” five-week parental leave benefit to fathers or non-birth parents, including adoptive and same-sex partners, when they agree to share parental leave. The program is set to launch in June 2019, representing an investment of $1.2 billion over five years and $345 million each year after that.
What was not said: Businesses have long enjoyed the benefits of a tax advantage relative to the U.S., but with recent tax reforms south of the border, that is no longer the case. Entrepreneurs will have to wait and see how the federal government will address this challenge.
Sandy Maag is a tax partner in EY Canada’s Private Client Services practice, and is based in Montreal.