Here is the good news in this year’s federal budget: There are no new taxes for investors. The bad news is there is not much new to help entrepreneurs and business owners. In fact, what’s not in this budget might be more eyebrow-raising than what is.
We get the theme: “Building a Strong Middle Class” around innovation, skills and partnerships. And with it, an overriding message: Canadians must prepare with the skills needed for the jobs that will come with a rapidly advancing new economy. But unfortunately there are few specific incentives to address this new economy, especially for small businesses.
There are no tax credits to offset income taxes paid by employers who hire people with “new economy” skills or to encourage investments by new entrepreneurs with great ideas to invest capital in building businesses forward in the economy.
Further, the document predicts tepid growth in the economy going forward to the end of the forecast period ending in 2022. It also continues its focus on increasing the taxable income coming out of small business corporations, and raises EI premiums in the same year that CPP premiums are expected to rise.
The Employment Insurance Act will be broadened to provide eligibility to more workers—including under-represented groups—to access EI-funded skills training and employment supports.
The budget eliminates the Work-in-Progress provision for professional accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors which allowed income to be recognized when the work is billed – a tax deferral now gone for taxation years that begin on or after budget day.
Small business owners should confer with their tax professional about the increased scrutiny tax planning strategies will be under, as the government seeks out loopholes to close. Specifically, the government will soon review income-splitting with family members, the tax rates applied to passive investments in a private corporation and the conversion of salary or dividends into capital gains.
Here’s a roundup of changes likely to affect small business owners and entrepreneurs.
1. Professional work in progress
Accountant, dentists, lawyers, medical doctors, veterinarians and chiropractors will no longer be able to elect to exclude the value of work in progress in computing their income for tax years that begin on or after Budget Day.
2. EI premiums headed up
A deficit is expected in the EI Operating Account in 2017 – to the tune of $2.7 billion – after a surplus of $1.1 billion in 2016, when the premium rate was 1.88. The 2017 rate had been reduced to $1.63, but due to a weaker economy, a deficit occurred. The rate is now poised to increase to 1.69 per $100 of insurable earnings, from the 2016 premium rate of 1.63.
3. Tax benefits for small business go under the microscope
The government is planning to review the tax planning strategies common to small business corporations in the release of a paper over the next several months to review:
- The sprinkling of income amongst family members via dividends and capital gains
- The benefits of holding a passive investment portfolio inside a private corporation
- The converting of salary or dividend income into capital gains
4. Electronic distribution of T4’s
For the 2017 and future tax years, employers will be allowed to distribute T4 slips electronically, without express consent, as long as there are adequate privacy safeguards, to active employees. The safeguards will be specified later by CRA and employers will be required to provide hard copy if employees want this.
5. Flow-through share expenses
Eligible small oil and gas corporations (expenditures of no more than $15 million) will no longer be able to treat the first $1 million of Canadian Development Expenses (CDE – deducted at 30%) as Canadian Exploration Expenses (CEE) after 2018 – deducted at 100%). The corporation can renounce these deductions and flow them through to investors to be deductible on their individual returns. This will lower the after-tax costs of the corporation’s shares. When the amount of the deduction is increased from 30% to 100% it has the effect of increasing the net present value of transferred tax deduction, hence the change in rules.
6. Mineral exploration tax credit for flow-through share investors
Announced in early March, this provision was extended to flow through agreements entered into on or before March 31, 2018. This is a benefit extended to individuals who invest in mining flow-through shares, equal to 15% of specified mineral exploration expenses incurred in Canada.
7. Fees for government services to business
The government plans to implement an automatic inflation escalator on existing business fees.
Evelyn Jacks is President of Knowledge Bureau and author of 52 books on personal tax and wealth planning, including Family Tax Essentials. She tweets @evelynjacks