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CORPORATE TAX RATE DROPPING IN 2019

Corporate tax rates will continue to decrease in 2019 for small businesses.

The small business tax rate applies on the first $500,000 of active income that is earned by a qualifying small business corporation. The tax rate on this income in British Columbia will be reduced to 11%. This drop will represent the final annual decrease in the plan that was introduced by the federal government in 2016. For active business income over $500,000, the tax rate will remain unchanged at 27%.

To offset the decrease in corporate tax rates, the CRA has increased the personal tax rate on dividends paid to shareholders on the qualifying earnings of these corporations. As a result, the net after tax cash of a shareholder has dropped across all income levels on the receipt of dividends. Shareholders in many cases will now pay less cumulative taxes on wages as compared to dividends.

There have been discussions concerning the Canadian response to the drop in corporate income tax rates in the United States. Their federal corporate tax rate dropped from 35% to 21%. When combined with corporate tax rates charged by individual states, the average tax rate for companies in the United States is just under 26%.

Additional drops in corporate tax appear unlikely in Canada. However, the federal government may increase the rates with which capital purchases can be written off, which formed part of the tax cuts in the United States.

ELIGIBLE CHARITABLE EXPENSES EXPANDED

The recent federal budget changed regulations related to the taxability of capital gains on property that is donated to eligible charities. Several years ago, the federal government amended the tax act to encourage people to donate shares in public companies to their favourite charities. A taxpayer receives a charitable
donation receipt for the market value of the shares donated to the charity, but does not have to pay tax on any gains on the shares if they have increased in value  since they were originally purchased. The federal government is now expanding this regulation to eliminate tax on capital gains that arise on the donation of real estate or private company shares.
In order for the disposition to be tax free, the following guidelines must be met:
• The seller must donate the proceeds received from the sale of the property, rather than donating the property itself.
• The seller must make the donation within 30 days of the sale.
• The purchaser must be at arm’s length (not related) to both the donor and the qualified donee.
• The disposition has to occur after 2016.
• The seller cannot buy back the land or shares within 5 years of the disposition. Note that in many instances, the sale of real estate or private company shares may have already held special taxation status if the property had qualified for the capital gains exemption on its disposition.

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.

Instalments Required on Taxes

If you owed over $3,000 when you filed your 2013 tax return, and you owed over $3,000 in either 2011 or 2012, you will be required to make instalment payments.

You will receive a letter in late July if you are required to make these payments.

In the first year, you will be required to make payments equal to one half of the tax owing in September and December, and then one quarter in March and June of next year.

You will be charged interest if you miss your instalment payment, or do not pay the entire amount, at the CRA’s current rate of interest. The interest will be charged from the date the instalment was supposed to have been made.

There are no direct penalties for missing an instalment payment. However, if the interest owing on your instalment payments is over $1,000 for the year, the government will charge you a penalty based on the amount of interest you ended up owing.

If you have underpaid one instalment, you can reduce your instalment interest by paying a future instalment early.

Did You Know…Collecting GST

You can start collecting the Goods and Services Tax Credit (GST) starting with the first quarterly payment that is issued after you have turned 19. For instance, if your 19th birthday falls in August, your first payment will be issued in October. You must file a tax return for the previous year in order to receive the credit. A student earning less than $8,965 in the previous year will receive a total quarterly credit of $95.87, included the British Columbia Low Income Climate Action Tax credit (BCLICATC).