TAX DECREASE FOR SMALL BUSINESSES

A welcome measure in the recent federal budget was the drop in corporate income taxes for small Canadian companies. The current federal general corporate
income tax rate is 15%. However, for those companies eligible for the small business deduction, federal tax on their first $500,000 of income is only 11%. Added to the British Columbia provincial tax rate of 2.5%, the total corporate tax rate for eligible income of small companies in British Columbia is 13.5%. Beginning in 2016, this rate will be decreased by ½ percent per year for four years. By 2019, the federal rate will be reduced to 9%, resulting in a total small business corporate tax rate of 11.5%. To offset part of the lost tax revenue from this measure, the federal government will be increasing the rate of tax that shareholders will pay on dividends received from these companies. Currently, the federal tax rate on dividends in the maximum tax bracket is 21.22%. By 2019, this tax rate will increase to 22.97%.
This new measure can provide some interesting tax planning opportunities for shareholders of small companies who do not need to access income earned by their eligible company until a later date.