On April 21, 2015, federal Finance Minister Joe Oliver tabled his inaugural federal budget, with Ontario Minister of Finance Charles Sousa following closely with his Ontario budget on April 23, 2015. Small business owners will find that they are the apparent winners based on the new budget.
As 2015 is scheduled to be a federal election year, the 2015 budget focused on four issues – one of which was keeping taxes low. Did the budget deliver on that front? On the surface, yes – but let us now read between the lines.
- Lower Tax Rates for Small Businesses
Currently: The general corporate income tax rate in Ontario is 26.5%. Income eligible for the small business deduction is taxed at 15.5%.
Proposal: To further reduce the small business tax rate over the next four years, by 0.5% per year. The combined federal and Ontario tax rates will be as follows:
|2015||2016 (proposed)||2017 (proposed)||2018 (proposed)||2019 (proposed)|
|Small Business Tax Rate||15.5%||15.0%||14.5%||14.0%||13.5%|
|General Corporate Tax Rate||26.5%||26.5%||26.5%||26.5%||26.5%|
Our observation: Absent cancellation of the proposed decreases (which has happened at least as often as not), the spread between the small business tax rate and the general corporate tax rate will widen from the existing 11% to 13% by 2019. This speaks to a greater need to plan properly so that your company maintains its eligibility for the small business deduction. In particular, you should give special consideration in managing the company’s taxable capital so that it does not increase to the point where you lose that eligibility. Avoiding the annual requirement to share the small business limit with associated corporations will become more important, as is avoiding the “personal service business” rules (which are often relevant in the context of management fees payable to a corporation).
- Adjusted Rates on Non-Eligible Dividends
Currently: When an individual receives non-eligible dividends, the amount included in taxable income is 118% of the actual dividend. The additional 18% represents the federal gross-up factor. The dividend tax credit rate is used for dividends received from CCPCs to the extent that income is taxed at the small business rate.
Proposal: To adjust the federal gross-up factor and dividend tax credit for non-eligible dividends. The top marginal tax rate – which applies when taxable income exceeds $220,000 – on non-eligible dividends will be as follows:
|2015||2016 (proposed)||2017 (proposed)||2018 (proposed)||2019 (proposed)|
Our observation: These adjustments come as a result of proposing to reduce the small business rate (see above). This is because such dividends are paid from corporate income that was taxed at the small business rate. The Ontario budget did not announce any changes to its dividend tax credit rate, but this may yet change in future budgets.
- Decreased Remittance Frequency for New Employers
Currently: New employers must remit monthly source deductions for one year. Afterwards, they may qualify for quarterly remitting if they have an average monthly withholding amount of less than $3,000 and a perfect compliance record over the past 12 months.
Proposal: To allow certain new employers to remit on a quarterly basis commencing in 2016.
Our observation: Not all new employers will qualify – only those with withholdings of less than $1,000 per month will be eligible.
- “Simplified” Foreign Reporting – Again
Currently: You are required to file form T1135 “Foreign Income Verification Statement” if you own specified foreign property with a total cost exceeding $100,000. (Note: This requirement also applies to corporations, trusts and certain partnerships.) “Specified foreign property” includes funds and investments held outside Canada, but excludes property that is for personal use, held in registered plans, or used exclusively in carrying on an active business.
Proposal: To simplify the reporting process where the total cost of specified foreign property is greater than $100,000 but less than $250,000 throughout the year.
Our observation: Nowadays, it appears that each new budget triggers a new T1135 form – but the continuous tweaking of the system indicates that the government is serious about catching those with unreported income earned outside Canada. As always, if you have unreported foreign income, you should consider “coming clean” via a voluntary disclosure – before Canada Revenue Agency finds you first. It remains to be seen how “simplified” the new form will be, but it is promising to see a new $250,000 threshold introduced. The existing reporting requirements will continue to apply where the $250,000 threshold is exceeded.
- Restricted Application of the “Missed-Slip” Penalty
Currently: You are liable to a flat penalty of 10% of unreported income if you fail to report any amount of income in a taxation year, as well as in any of the three preceding taxation years. Canada Revenue Agency has taken taxpayers to court to apply penalties after missing nominal amounts from T5 slips.
Proposals: (i) To apply the penalty only if you fail to report at least $500 of income in the year and any of the three preceding years. (ii) To revise the penalty calculation to better reflect the actual tax liability.
Our observation: The existing “missed-slip” penalty can be difficult to avoid even with the best compliance intentions. Moreover, it can be disproportionate to the actual tax liability – especially for lower-income individuals. On the one hand, the proposed rule will alleviate some of these concerns for lower-income individuals. On the other hand, this potentially signals even more scrutiny to come for moderate and higher-income individuals.
Other Corporate Tax Proposals
- Introduce a new capital cost allowance Class 53 (with a 50% declining-balance rate) for certain manufacturing and processing machinery and equipment acquired after 2015 and before 2026.
- Broaden the application of the anti-avoidance rule directed at capital gain stripping, and to restrict the exception for certain related party transactions to dividends deemed received as a result of the redemption, acquisition or cancellation of shares.
- Reduce Employment Insurance (EI) premium rates by implementing a seven-year break-even rate-setting mechanism in 2017. This will help ensure that EI premiums are no higher than needed to pay for the EI program over time.
- Modify the dividend rental arrangement rules to deny – where there is a “synthetic equity arrangement – a deduction for an inter-corporate dividend on a share.”
- Exempt qualifying non-resident employers from withholding obligations for payments to qualifying non-resident employees.
- Reduce the benefit of the Ontario Apprenticeship Training Tax Credit for both general corporations and small businesses.
- Limit, reduce or eliminate the Ontario refundable media tax credits.
Other Personal Tax Proposals
- Reduce the annual minimum amount required to be withdrawn from a registered retirement income fund (RRIF) for individuals aged 71 to 94.
- Change the way Ontario taxes trusts and estates by paralleling the federal regime that was introduced in 2014.
- Increase the annual tax-free savings account (TFSA) contribution limit from $5,500 to $10,000 for 2015 and subsequent years.
- Introduce the home accessibility tax credit to provide relief to seniors and persons with disabilities on eligible expenditures of up to $10,000 per year. Eligible expenditures must allow the individual to gain access to the home, be more mobile within the home, or reduce the risk of harm of being at home.
Charles Fu is a partner with Sloan Partners with many years experience in all tax and financial matters. Contact Charles for an appointment to discuss tax savings opportunities and financial strategy for your business.