Blog: News Flash – Federal Budget Predictions

March 2nd, 2016 Budget Predictions

On March 22nd, 2016 the new federal Liberal government will table its first budget and members of the tax community are expecting a number of tax changes that could significantly impact owner–managers of Canadian businesses. The Liberal Party’s platform mentioned several tax changes with many having already been introduced by legislation or announcement, such as the changes to personal tax rates for 2016 that were announced on December 7th, 2015. Those changes included a reduction in the tax rate for all individuals with income subject to tax in the second lowest tax bracket ($45,282 to $90,563 of taxable income) and the introduction of a new top federal tax rate of 33% for individuals with taxable income in excess of $200,000. Tax rates relating to the investment income tax regime for Canadian-controlled private corporations were also revised.

These are our predictions on certain tax changes that may be announced in the upcoming federal budget which may impact owner-manager tax planning. Crowe MacKay’s experienced tax team can assist in navigating any such changes for both you and your business.

The Small Business Tax Rate

The Liberal Party’s platform stated their intention to ensure that the low rate of corporate tax on active business income of Canadian-controlled private corporations is not available to high-income earning Canadians for income deferral or income-splitting. The complexity of rules in this area could well impact many small businesses or start up operations if the Department of Finance follows the approach taken in Quebec, which imposed restrictions on access to the low corporate tax rate depending upon the number of active employees employed by a corporation. Alternatively, if the Department of Finance follows the Personal Service Business rules, this may result in combined corporate and personal income taxes approaching 60% of the income earned.

The Chartered Professional Accountants of Canada and other organizations have asked the Department of Finance to consult the tax community and review the approach to be taken to avoid unintended consequences and unnecessary complexity in the rules. Contrary to certain articles in the media, the tax community has not lobbied the government on preservation of the current system but rather has pointed out its challenges which should be addressed with any major revision of corporate and personal taxation, as it deserves broader discussion.

Any proposed rule changes could impact only incorporated professionals, or they could be broad enough to affect small businesses in other industries.

Sale of business assets and capital gains

There is speculation that the federal budget may also contain measures that will affect the sale of business assets including the following:

1. The conversion of goodwill or quota sales to capital gains and/or recapture rather than the current eligible capital property approach. These tax changes were proposed more than two years ago and could increase taxation of these sales. Currently these sales are eligible for either the low rate of corporate tax or the general rate, both of which provide an opportunity for tax deferral. If introduced, the new rules could treat these sales as capital gains and/or recapture on depreciable property.

2. The increase of the capital gain inclusion rate. In the 1990s the capital gain inclusion rate was 75% and recently the increase in tax rates on dividends has distorted the tax neutrality of dividends rather than capital gains to the point of creating tax conversion activity. Today it is often much more favourable to receive capital gains than dividends.

Our full commentary on the federal budget proposals will be made available shortly after they are announced on March 22nd. The Crowe MacKay team is here to help you address any changes that affect you.

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