Currently, access to the small business rate is reduced proportionately when a business has taxable capital between $10 million and $15 million. Access to the small business rate ends completely from taxable capital of $15 million or more.
The budget proposed to phase out access, with access being eliminated entirely when taxable capital reaches $50 million.
The measure would apply to tax years beginning on or after Budget Day, and the government estimated businesses would save about $660 million in taxes between 2022 and 2027 to reinvest and create jobs.
Capital-intensive businesses often don’t qualify for the small business rate, noted Keith MacIntyre, partner at Grant Thornton LLP in Halifax. With this proposal, the federal government is “giving relief” to such businesses, such as a car dealership or a real estate company, he said.
However, for these companies, “what is really negative here […]you should have cash reserves to save for future expansion,” MacIntyre said.
Passive income rules prevent this: the small business deduction limit begins to be reduced at investment income above $50,000 and reaches zero at $150,000.
This threshold prevents a business from building up cash reserves for, say, a down payment on a million dollar building that a business needs for its operations.
“The fact that the passive income rules were not adjusted at the same time could make [this new rule] very inconsequential for many capital-intensive companies who are saving cautiously,” MacIntyre said.
Still, the Canadian Federation of Independent Business (CFIB) welcomed the proposal. “We commend the government for accepting CFIB’s longstanding recommendation to increase this threshold to $50 million, encouraging more small businesses to become midsize businesses,” said CFIB President, Dave Kelly, in a statement.
Another passive income item in the budget is cracking down on the use of foreign corporations to avoid paying passive income tax.
“Some people manipulate the Canadian-controlled private corporation (CCPC) status of their corporations to avoid paying the additional refundable corporate income tax they would otherwise pay on investment income earned in their corporations,” the report says. budget.
For example, to no longer qualify as a CCPC, a company could relocate to a low-tax foreign jurisdiction, use a foreign shell company, or transfer passive portfolios to an offshore company, depending on the budget.
MacIntyre gave the example of incorporating your business in the British Virgin Islands or another foreign jurisdiction to avoid CCPC status and subsequently avoid tax on a large capital gain when you sell your shares.
“You could cut your taxes on that sale by almost half,” he said. (In Nova Scotia, for example, CCPCs are taxed at a combined rate of nearly 53% on investment income compared to 29% for a general corporation.) “It’s an arbitrage game.
While the federal government has tried to challenge this type of planning in court, it is now reviewing the legislation, he said.
The government has proposed to amend the Income Tax Act so that, for taxation years ending on or after Budget Day, investment income earned and distributed by private corporations that are, in substance, CCPCs are subject to the same tax as investment income earned and distributed by CCPCs.
“It’s careful planning” on the government’s part because this kind of avoidance is prevalent, MacIntyre said.
The measure would increase federal revenue by $4.2 billion over five years starting in 2022-23, the budget said.