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.

Passive Income Tax Changes Relaxed

In the summer of 2017, the federal government proposed changes to the taxation of passive investment income of private corporations in Canada. Following angry feedback to the original proposals, the government introduced adjustments in their spring budget. The new measures they introduced will be applicable to company’s tax years beginning after 2018. In both sets of proposals, if a company earned over $50,000 of passive investment income, they would have been subject to new taxation rules. The first proposal would have resulted in an increase to the tax rate on investment income. In their revised proposal, rather than increasing the tax on investment income, the budget proposed to reduce the amount of small business deduction that would be available to a company that earned over $50,000 of passive investment income.

The small business deduction allows a private company to earn up to $500,000 at the lowest federal corporate tax rate. If a business earns passive investment income over the $50,000 threshold, their available small business deduction limit will be reduced. If this
income is greater than $150,000, the small business deduction will be eliminated.

One of the main concerns with the original proposal was that one time capital gains could push a company’s passive income over the threshold.

In response, the government has excluded capital gains on assets used in an active business by a company or a connected company; however, no adjustment has been made for gains on sales of passive investments.

Furthermore, capital losses from prior years are excluded, so taxpayers are unable to offset current gains with previous losses to reduce their income below this threshold.

Small Businesses Untouched

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In the recent provincial budget, the provincial corporate tax rate increased from 10% to 11%. This rate applies to all companies which earn over $500,000.

For small companies who earn less than $500,000, their provincial corporate tax rate has not changed from 2.5%. Combined with the federal corporate taxes, small companies pay a total income tax rate of 13.5%.

Dividend Taxes to Increase

Although there was no change to general personal tax rates in the federal budget this spring, there was one increase which may affect the owners of small businesses across the country.

Company earnings can be paid out to shareholders of a company, either as wages or as a dividend.

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There have been no changes to the tax rates on wages paid out from a company, as these are taxed the same as a regular employee’s wages. On the other hand, there has been an increase in the tax rate on dividends paid.

The calculation of tax on dividends has always been complicated. Because a company has already paid tax on corporate income, the government has taxed dividends at a lower rate than wages.

When the taxes paid on dividends are added to the taxes which have already been paid by a company, the total tax paid will approximately equal the tax that would have been paid by a shareholder if they had received a company’s earnings as wages.

Efforts to make this total tax similar in both situations have led to the complexity in the calculation of this dividend tax rate.

As a result of these recent dividend changes, the tax rate on dividends from small corporations will be increasing from 33.71% to 35.37% for shareholders who are in the highest tax bracket in British Columbia. This increase will be in effect for dividends paid in 2014. Since BC is introducing a temporary tax increase for the highest tax brackets during 2014 and 2015, this high rate will actually be increased to 37.99% for these two years, falling to 35.37% in 2016. This may make small businesses reconsider whether they will pay out their earnings as wages or dividends for the near future.

Hiring Credit for Small Business

Are you a small business that paid less than $10,000.00 in employer’s EI premiums in 2010? You may be elibible for the Hiring Credit for Small Business (HCSB). This is a one-time credit of up to $1,000.00. The credit is calculated based on the difference between the 2010 and 2011 EI premiums paid by your business. Canada Revenue Agency will automatically calculate this credit when the 2011 T4 information return is filed.

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