26th March 2018

The Budget 2018 is here. And with it, the Liberal Minister of Finance, Bill Morneau, proposed changes to the private corporation tax reform, which was initially introduced last year. The changes are believed to benefit small businesses and will deal with investment income of private corporations.

The first component of the changes allows only businesses that earned less than $50,000 from passive investment annually to access the small business tax rate, which can be lowered to 9%. And those with passive income above the particular amount will be entitled to pay at the general corporate rate at 15%. Moreover, businesses with earnings of $150,000 or more will not be eligible for the small business deduction.

“The new approach will be much simpler to comply with, will not require the tracking of new and legacy pools of passive investments, and will target only private corporations with more than $50,000 in passive investment income per year,” according to the government’s 2018 budget document.

Another aspect of the change includes a proposition that businesses can no longer get “refunds of taxes paid on investment income while distributing dividends from income taxed at the general corporate rate.” However, refunds will be available when investment income is paid out.

“I think it’s a big improvement,” said Bruce Ball, vice president for taxation with the Chartered Professional Accountants of Canada. “It’s better directed at the root issues.”

Following its initial introduction last year, the previous reform was received with attacks from many small business owners, who said it would create more tax burden and complexity for them. But with these new changes, many say that they now feel relieved.


A new approach to ease small business complaints

Even though this newly introduced approach in the Budget 2018 will decrease central government revenues, the feedback from the business sector sounds welcoming. Earlier, the government estimated revenues from the original proposal to be as high as $1 billion at first, and up to $6 billion annually within 10 years. With this new measurement, however, it is estimated that the federal government would raise money up to $305 million in 2019/20 and $705 million in 2022/23.

While overall the new changes appear to be relieving from a small businesses perspective, there are still some concerns about passive income from previous investments.

“The new rules appear to be simpler and may improve things for some business owners from the earlier proposals, but others will lose the benefit of the lower small business rate due to past investments,” said Dan Kelly from the Canadian Federation of Independent Business.

According to the federal government, the changes could affect as many as 50,000 private corporations, or less than three per cent of all small businesses.

In addition, the plan seems to have received positive feedback from tax professionals. Don Carson, a tax partner with MNP, suggested that the new approach is both easier to understand and helps ensure fair tax integration.

“Most of the negative consequences have been removed,” he said. “The concept of integration generally is being maintained through these modified proposals, whereas the earlier proposals would have represented a departure away from a system that had been in place for 45 years,” Don added.