You may remember when small businesses got all fired up about the tax rules that the Canadian federal government proposed in 2017 and 2018, but you may also remember not understanding what these new changes meant for your company.
Whether you’re a start-up or you’ve been in business for a while, there’s a good chance that you haven’t kept up with tax regulations (because other than us accountants and bookkeepers, who does?), but there’s also a good chance that you haven’t yet realized how they impact you.
Now that the small business tax changes proposed in last year’s budget are finally in effect (as of January 1st, 2019) it’s time to refresh your memory. It’s also important to know that this year’s Federal Budget, tabled on March 19th by Finance Minister Bill Morneau, introduced additional changes, and we’ve highlighted those, as well.
Here are the most important Canadian tax considerations for a small business owner:
Small Business Deduction (SBD)
- Corporations can claim the SBD on their corporate income tax returns, which could result in a 9% federal small business tax rate on up to $500,000 of active business income. As of 2019, the $500,000 small business limit is reduced by $5 for every $1 of investment income earned above a $50,000 threshold.
- The small business deduction limit will be reduced to 0 at $150,000 of passive income.
Here is an example to help put this into perspective:
“If you earn $100,000 of passive income, you are over the threshold by $50,000; $50,000 x $5 = $250,000, so $250,000 of business income qualifies for the small business tax rate and any remaining business income will be taxed at the general federal corporate tax rate (15%)”.
Tax on Split Income (TOSI)
- Ottawa put in place new tax rules designed to prevent business owners from splitting income with family members as of 2018.
- Some business owners can reduce their tax payable by transferring some of their taxable income to a family member in a lower tax bracket — i.e. a spouse or child. There are certain instances when this is still possible under the new tax rules, but you will need to speak to your accountant before doing so — ask us!
- Prior to the new rules, TOSI, or “kiddie tax”, applied the highest marginal tax rate on dividends to minor children. Now, certain adult individuals will be affected by TOSI as well.
If you thought that Federal Budget 2019 would provide some relief to last year’s heavy tax changes, you’ll be sorry to hear that there aren’t many tax breaks for small businesses in this years’ proposal. Instead, the government has introduced another factor:
- Federal Budget 2019 introduced higher Canada Pension Plan (CPP) premiums.
- For the next five years, “an employer and employee will each contribute 5.95 per cent of the employee’s income to the CPP, up to the yearly maximum pensionable earnings (YMPE) rate of about $55,000.” The premium is increasing from the current rate of 4.95 per cent.
- You may be forced to cut your employees’ hours, hold back from new hires, and pause on investments. While there are some tax cuts, they don’t cover rising CPP costs.
According to Dan Kelly, president and CEO of the Canadian Federation of Independent Business (CFIB),
“The net effect [of the higher CPP premiums] is still a payroll tax hike for small employers and smaller paycheques for employees.”
Rebate for Electric Vehicles
- It’s not all bad news for small business owners though: the government is offering generous tax write-offs if businesses purchase electric battery or hydrogen fuel cell vehicles. “Businesses will be able to write off capital costs for eligible zero-emission vehicles in the year that the vehicle was purchased, instead of writing off slowly over time.”
- Capital costs for business–operated personal vehicles such as passenger cars and light trucks will be fully deductible up to a limit of $55,000 plus sale tax.
- Prior to the rebate’s introduction in Federal Budget 2019, when business owners ask about writing off vehicle expenses, we rarely ever encouraged company cars. This was due to the potentially heavy stand-by charges and operating cost benefit.
Further proposals in Federal Budget 2019, such as the government’s carbon pricing plan and the Canada Training Benefit, will affect small business owners, too. Now that you’re caught up with what’s taken effect from 2018 and what’s been proposed last month, keep on the lookout for where the new regulations go — we’ll make sure you’re updated.
Passive income, deductions, CPP premiums…that’s a lot of tax talk and if you don’t understand it, keeping up with the changes is even harder. There are ways to minimize the impact of the Federal Budget changes, regardless of the specific solution your business needs. Qmulus, backed by the experienced CPAs and tax specialists at SBLR LLP, can help map out your business’s growth and set you up for success.
Stop worrying about ever changing tax regulations. Schedule an appointment or call us at 647-476-2145 to speak to an experienced tax professional.