"Entrepreneurship and Small Business" series, #9 (#8 Last minute tax saving for corporations; #7 Business budget made easy; #6 The advantage of a business account; #5 How to pay yourself effectively; #4 How to manage your business; #3 Things to consider when you start your business; #2 What you should do before you quit your full time; #1 What needs to be prepared before you start your business)
The Liberal government tabled their first federal budget on Tuesday by Liberal Finance Minister Bill Morneau. What I think - as a financial advisor for lots of small businesses and working class - it is a disaster :(
First of all, a promised cut to 10.5% small business tax rate has been deferred indefinitely.
The following are not helping businesses and working class in any shape or form:
- Increasing spending and changes to employment insurance will likely going to add costs to employers.
- Restoring the eligibility ages for Old Age Security and Guaranteed Income Supplement benefits to 65 (from 67), and Allowance benefits to 60 (from 62) - good news to our seniors - will only re-introduce the unsustainability into the Canada Pension Plan (CPP) system. That will probably also result in higher CPP contributions down the road?
- Eliminating a provision in Budget 2015 to exempt from tax capital gains realized on sales of private corporation shares and real estate when the cash proceeds are donated to a charity within 30 days.
- Closing the loophole to prevent personally held life insurance policies from being transferred to corporations or partnerships in distributing amounts tax‐free that would otherwise be taxable.
- Capital dividend account (CDA) created following receiving of death benefit in a corporation will now properly reflect the ACB of the policy, regardless of the ownership structure that may have been in place could have allowed the corporation to receive a full credit of the death benefit without reducing that amount by the adjusted cost basis (ACB) of the policy.
- Fund switches within corporate class in a mutual fund corporation will no longer allow investors to maintain the original cost base, starting from September these switches would be considered as a normal disposition at fair market value in order to ensure the realization of capital gains.
- The 33% top marginal tax rate on taxable income in excess of $200,000 income will apply to excess employee profit sharing plan contributions as well.
- Increase the tax rate from 28% to 33% on personal service business income earned by corporations effective January 1, 2016.
- In order to have any principal income earned from a property qualify as active business income, the business now must have more than five full time employees to claim the small business deduction.
- Business owners no longer allow to have multiplying access to the $500,000 small business deduction by owning multiple partnerships and corporations. This probably won’t affect small business owners but entrepreneurs.
Only a couple of things were good to majority of us:
- Bringing back the Labour‐Sponsored Venture Capital Corporations (LSVCC) tax credit at 15% for share purchases of provincially registered LSVCCs.
- Tax on capital gains rate was kept at 50%.
- New capital cost allowance (CCA) class of depreciable property will allow eligible capital properties to be deducted quicker, (allowing up to $3,000 in incorporation costs to be deducted as a current expense). Approximately 80% of newly incorporated businesses will be able to deduct the full amount of the incorporation expenses in their initial year. However, this also effectively resulting in increase in tax upon the sale of goodwill, certain licenses, franchises and quotas as these then will fall under investment income instead of business income, starting from January 1, 2017.
*Information from yesterday's budget, information from Sun Life, Manulife Investments, Fidelity Investments and various news sources. Personal opinion only.
