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Impact of New Federal Budget on Business Owners

Last updated: Mar. 2, 2018 

Earlier this week we provided a summary of the 2018 federal budget.

There were a lot of concerns about how this latest budget would affect Canadian small business owners. For starters, there are a large number of key items in the 2018 federal budget which small business owners should pay close attention to.

For example, many business owners expected the government to axe a number of tax breaks in order to increase public revenue. Fortunately, that didn’t happen. Instead, the government opted to help businesses in other ways.

At the same time, what the federal government didn’t do could also have a big impact on Canadian small business owners.

Passive Investment Income

The federal budget tweaks some of the controversial tax proposals that infuriated small business owners and landed Finance Minister Bill Morneau in so much hot water in 2017.

Morneau initially said the tax changes, in particular rules on passive investment income, were designed to stop wealthy business owners from taking advantage of the tax system.

Passive income refers to the practice of holding onto profits inside private corporations and investing the money in mutual funds and real estate, instead of things used for the business itself, like machinery or equipment. Any profits that stay inside the business are taxed at a lower rate, which means a larger amount of the principal is invested.

But critics said the changes would hurt those the Liberal’s said they wanted to help the most—Canada’s middle class.

It was feared that increased taxes on passive investment income would hurt small business owners that use that method to set up retirement plans.

It appears as though Ottawa heard what Canadian small business owners were saying.

The federal government toned down its much-maligned proposed changes to passive investment income. The new rule caps the amount of passive investment income taxed at the small business rate at $50,000 per year.

Canadian businesses that earn more than $50,000 a year in passive income will face gradually higher taxes. Once business owners hit $150,000 of passive income, the small-business rate is eliminated, and all business income is subject to the full federal tax rate.

According to the government, the new passive investment income rules are a boon to the vast majority of Canadian small business owners. That’s because higher taxes will only affect 50,000 small corporations, 90% of which are owned by the wealthiest one percent of Canadians.

Women in the Workforce

The federal government introduced new ways to support women in the workforce.

The budget includes $1.4 billion in new financing available to women-led businesses over three years through the Business Development Bank of Canada (BDC).

This is in addition to the Venture Capital Catalyst Initiative announced in 2017, which looks to fund up to $1.5 billion into Canada’s venture-capital market, focusing on diversity and gender balance.

On page 112 of the budget, the government says this additional capital will help support the growth of these businesses “into competitive, sustainable world-class companies.”

In addition to new financing, Ottawa said it will look to increase the amount of business it does with businesses owned by women. Currently, of the small- and medium-sized businesses that take part in federal procurement, just 10% are owned by women. The federal government wants to raise that to at least 15%.

$90.6 Million to Deal with Tax Evasion

Ottawa has said it is going to take a tougher stand on tax evasion. To that end, the federal government will spend $90.6 million over 5 years to catch tax cheats, both domestically and internationally.

The government is also going after those who promote tax avoidance schemes, and so far, has imposed $44.0 million in penalties.

As the budget points out, the Canada Revenue Agency (CRA) “has a proven track record of meeting expectations from targeted compliance interventions.” The government expects its initiatives to generate $354.0 million in revenue over the next 5 years. This does not include provincial and territorial gains that will come from these initiatives.

What Wasn’t in the Federal Budget

What was left out of the budget will also have a big impact on small Canadian business owners.

The Liberal government said it would not follow the lead of U.S. President Trump and cut corporate taxes. It kept that promise.

Small business owners that were hoping Ottawa would introduce measures to help them compete with U.S. companies were left out in the cold.

Because of Trump’s major tax overhaul, U.S. corporate tax rates are much more competitive than Canada’s tax rates. On top of that, additional tax incentives introduced by Trump, such as accelerated deduction of capital expenditures, means the U.S. will be more attractive to foreign capital investment.

FBC, Helping Business Owners with Financial Reporting & Planning

At 367 pages, the 2018 budget contains a lot of information that impacts small business owners and the way they run their businesses. This, in conjunction with regular changes at the CRA, means it can be difficult for small business owners to keep up. That’s where FBC comes in.

Since 1952, FBC has worked exclusively with small business owners, farm operators, and independent contractors. For over 65 years, we’ve made sure that our members are up-to-date on current tax laws and how changes in the federal and provincial budgets will affect your businesses bottom line. All with the goal of helping you maximize your deductions and reduce your overall tax burden.

For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.

(Source: Government of Canada)