Canadian business owners, be prepared: New changes to small business taxation will impact you.

Effective January 1, 2018, the small business corporate tax rate will lower to 10% from 10.5%. This decrease is the first step towards lowering the rate to 9% in 2019.

According to the Department of Finance Canada, the reduction “will provide small businesses with up to $7,500 in federal tax savings per year.” Thanks to the small business tax cut, entrepreneurs can retain more of their earnings and use those extra funds to focus on business growth.

During the Federal Budget release, Finance Minister Bill Morneau mentioned how Canada’s economy had created nearly 60,000 jobs over the last two years. He further expressed how keen the government is to stay competitive, stressing how competitive the country’s tax rates currently are. Morneau says, “In 2018, we are doubling down on that plan, by cutting taxes for small businesses and keeping them low for middle-class families.”

Additionally, the government is set to increase the tax on dividends paid to shareholders of a small business corporation who are family members. This change is effective January 1, 2018. With the new rules in place, the government will stop the practice of multiplying the lifetime capital gains exemption with multiple family members through the use of a family trust.

Under the old tax rules, beneficiaries of a trust who own shares of a small business corporation can each claim the lifetime capital gains exemption.

The government is also proposing to increase the tax paid by small businesses on the investment income that it earns; this includes rents, royalties, interest, and dividends.

In the budget, Finance Minister Bill Morneau proposes changes that deal with the income generated by investments held within a private corporation. For corporations that earn more than $50,000 in annual income from passive investments, access to the lower small business tax rate will be gradually reduced. And those earning $150,000 or more will not be eligible for the small business deduction.

According to the Budget, the government is also proposing that corporations “no longer be able to obtain refunds of taxes paid on investment income while distributing dividends from income taxed at the general corporate rate.” The budget states that “refunds will continue to be available when investment income is paid out.”

Ottawa is eliminating the amount eligible for the preferential small business rate as the amount of passive income rises above $50,000 with the small business deduction limit reduced to zero at $150,000. In addition, it will limit the advantages that some companies obtain when they pay certain dividends.

According to the National Post, an estimated $925 million annually will be brought in due to the tax changes on private corporations by 2022-23.

Until the next time,