Currently, access to the small business tax rate is reduced proportionally when the taxable capital of the company is between $10 million and $15 million. Access to the small business rate stops completely when your taxable capital is $15 million or more.
The budget proposed to eliminate access on a phased basis, with access to be eliminated completely when taxable capital reaches $50 million.
The procedure will apply to tax years beginning on or after Budget Day. The government estimates that companies will save about $660 million in taxes between 2022 and 2027 for reinvestment and job creation.
Keith MacIntyre, partner at Grant Thornton LLP in Halifax, says capital-intensive companies often don’t qualify for the small business rate. Through this proposal, the federal government provides “relief” to such businesses, such as a car dealership or real estate company.
However, for these companies, “What’s really negative here […]is that you will need cash reserves in order to save for future expansion,” adds Keith McIntyre.
Passive income rules prevent this: The small business deduction limit begins to fall when investment income exceeds $50,000 and reaches zero at $150,000.
This threshold prevents the company from building up cash reserves to pay, say, a deposit on a $1 million building it needs for its activities.
“The fact that passive income rules have not been amended at the same time could make [cette nouvelle règle] “Very unimportant for a lot of capital-intensive companies that save conservatively,” says Keith McIntyre.
However, the Canadian Federation of Independent Business (CFIB) welcomed the proposal. “We applaud the government for accepting CFIB’s long-standing recommendation to raise this limit to $50 million, encouraging more small businesses to become mid-sized businesses,” CFIB President Dave Kelly said in a press release.
Another budget item related to passive income is cracking down on the use of foreign companies to avoid paying taxes on passive income.
According to the budget, “Some people are manipulating the Canada Controlled Private Corporation (CCPC) status of their company to avoid paying additional recoverable corporate income tax that they would have otherwise paid on investment income earned in their company.”
For example, to stop qualifying as a CCPC, a company can move to a low-tax foreign jurisdiction, use a foreign shell company, or transfer negative portfolios to a foreign company, depending on the budget.
Keith MacIntyre gives the example of a company registered in the British Virgin Islands or another foreign jurisdiction in order to avoid a CCPC situation and therefore, to tax large capital gains when you sell your shares.
“You can almost halve your taxes on this sale,” he said. (In Nova Scotia, for example, CCPCs are taxed at a combined rate of approximately 53% on investment income, compared to 29% for a public corporation.) It is a judging game. »
Although the federal government has tried to challenge this type of planning in court, it is now considering the legislation, he notes.
The government proposes a change Income Tax Law so that, for tax years ending on or after Budget Day, investment income earned and distributed by private corporations that are, in substance, CCPCs will be subject to the same taxes as investment income earned and distributed by CCPCs.
Keith MacIntyre asserts that “this is careful planning” on the part of the government, because this kind of avoidance is widespread.
The budget said the measure would increase federal revenue by $4.2 billion over five years from 2022 to 23.
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