Other stumbling blocks to the exemption are ownership by the business of un-qualifying assets — such as the cash value of an insurance policy. Further, if the company owns the building it operates out of, but doesn’t occupy the entire space, any part of the structure leased by other businesses constitutes a non-qualifying asset. “The purification process is complex,” says Nicola.
Looking at other aspects of the budget, Kett says the raising of the RRSP maturity age to 71 from 69 will allow business owners who want to remain active to keep earning some income without getting penalized for not converting their plans to RRIFs. She’s seeing more clients opt for staged retirement, whereby they slow down in their mid-50s or early 60s, but keep a hand in their businesses into their 70s.
“A lot of people who used to be senior executives become directors and they have other sources of income, so to have the RRIF withdrawals kick in could lead to their getting taxed at a very high rate. It also benefits high-net-worth individuals because they generally don’t need the extra income,” she says. “They take it out of their RRIFs because they have to, but the longer they can leave it in, tax sheltered, the happier they are.”
She notes the partial pension options outlined in the budget also could benefit businesses because there’s going to be a shortage of experience employees going forward. “The younger generation has great education but no experience, and when people retire it means the experience walks out the door,” she says. “If there’s a way to keep that talent on board that’s a helpful thing.”
Another biggie, both say, are increases in capital cost allowances (CCAs) by which the value of assets are depreciated. Nicola notes it will make ownership of commercial real estate more attractive and could make Real Estate Investment Trusts (REITs) more appealing to investors. For non-residential buildings such as offices, the CCA will increase from 4% to 6%, and for buildings used for manufacturing, the percentage jumps from 4% to 10%. “It will be noticeable for the taxable portion of REIT distributions,” says Nicola.
While Kett points out the manufacturing and processing area “is not huge anymore,” she adds there will be an incentive for those in the sector to increase investment. “They can write things off over two years that would have taken them several,” she says. Another significant CCA change is the increase in depreciation on computer equipment from 45% to 55%. “Years ago it used to be 30%, so this is more indicative of how quickly technology is evolving,” she says. “It’s recognizing that computers are out of date in two or three years.”
Further, Kett says small business owners will benefit from plans to reduce paperwork burdens. In sum, the proposed changes would decrease tax filing requirements by:
replacing monthly instalments of corporate income tax with quarterly instalments for certain small Canadian-controlled private corporations;
increasing the corporate income tax payable threshold at or below which corporations are eligible to remit annually from $1,000 to $3,000;
increasing the net personal income tax threshold at or below which individuals do not have to pay instalments from $2,000 to $3,000;
increasing the average monthly withholdings threshold below which businesses may be eligible to remit source deductions quarterly from $1,000 to $3,000;
increasing the taxable supplies threshold at or below which businesses can file a GST/HST return annually from $500,000 to $1.5 million; and
increasing the net tax threshold, below which annual GST/HST return filers can remit the tax annually from $1,500 to $3,000.
“From a cash flow perspective that might work well,” says Kett. “Most businesses have a cycle and this can help them if there’s a lean period.”
The share was not owned by anyone, other than the individual or a person or partnership related to the individual throughout the 24-month period preceding the disposition;
The share was, throughout the 24-month period ending immediately before the disposition:
a. A share of a corporation that was a Canadian-controlled private corporation, and
b. More than 50% of the fair market value of the corporation’s assets were used principally in an active business carried on primarily (>50%).
“Companies will need to do a lot of tax planning to make sure they qualify,” Kett says. “But now there’s more incentive to make sure you can do it.” The old limit was $500,000.
And if a business owner has a purchase offer in hand, he may want to rethink adding a signature if he’s currently using a holding company strategy to pass through dividends as a way of avoiding income tax on salary, says John Nicola, founding partner of Nicola Wealth Management in Vancouver. “When you sell the operating company, it’s a holding company that owns the assets,” he says. “So by using the tax strategy to get the dividends accrued tax-free, you actually block ability to take advantage of this.”
To fix that, Nicola suggests having shares of the operating company owned by a family trust in which the beneficiaries are the owner and his wife and children. That way, dividends can be flowed through to shareholders, but the actual owners are family members. Then, when the company is sold, each family member can theoretically qualify for the full $750,000 exemption, which means a family of four can garner $3 million in capital gains exemptions. “People need to be talking to clients about re-examining their corporate structure and ownership so that when they sell they can take advantage of this,” he says.
Other stumbling blocks to the exemption are ownership by the business of un-qualifying assets — such as the cash value of an insurance policy. Further, if the company owns the building it operates out of, but doesn’t occupy the entire space, any part of the structure leased by other businesses constitutes a non-qualifying asset. “The purification process is complex,” says Nicola.
Looking at other aspects of the budget, Kett says the raising of the RRSP maturity age to 71 from 69 will allow business owners who want to remain active to keep earning some income without getting penalized for not converting their plans to RRIFs. She’s seeing more clients opt for staged retirement, whereby they slow down in their mid-50s or early 60s, but keep a hand in their businesses into their 70s.
“A lot of people who used to be senior executives become directors and they have other sources of income, so to have the RRIF withdrawals kick in could lead to their getting taxed at a very high rate. It also benefits high-net-worth individuals because they generally don’t need the extra income,” she says. “They take it out of their RRIFs because they have to, but the longer they can leave it in, tax sheltered, the happier they are.”
She notes the partial pension options outlined in the budget also could benefit businesses because there’s going to be a shortage of experience employees going forward. “The younger generation has great education but no experience, and when people retire it means the experience walks out the door,” she says. “If there’s a way to keep that talent on board that’s a helpful thing.”
Another biggie, both say, are increases in capital cost allowances (CCAs) by which the value of assets are depreciated. Nicola notes it will make ownership of commercial real estate more attractive and could make Real Estate Investment Trusts (REITs) more appealing to investors. For non-residential buildings such as offices, the CCA will increase from 4% to 6%, and for buildings used for manufacturing, the percentage jumps from 4% to 10%. “It will be noticeable for the taxable portion of REIT distributions,” says Nicola.
While Kett points out the manufacturing and processing area “is not huge anymore,” she adds there will be an incentive for those in the sector to increase investment. “They can write things off over two years that would have taken them several,” she says. Another significant CCA change is the increase in depreciation on computer equipment from 45% to 55%. “Years ago it used to be 30%, so this is more indicative of how quickly technology is evolving,” she says. “It’s recognizing that computers are out of date in two or three years.”
Further, Kett says small business owners will benefit from plans to reduce paperwork burdens. In sum, the proposed changes would decrease tax filing requirements by:
replacing monthly instalments of corporate income tax with quarterly instalments for certain small Canadian-controlled private corporations;
increasing the corporate income tax payable threshold at or below which corporations are eligible to remit annually from $1,000 to $3,000;
increasing the net personal income tax threshold at or below which individuals do not have to pay instalments from $2,000 to $3,000;
increasing the average monthly withholdings threshold below which businesses may be eligible to remit source deductions quarterly from $1,000 to $3,000;
increasing the taxable supplies threshold at or below which businesses can file a GST/HST return annually from $500,000 to $1.5 million; and
increasing the net tax threshold, below which annual GST/HST return filers can remit the tax annually from $1,500 to $3,000.
“From a cash flow perspective that might work well,” says Kett. “Most businesses have a cycle and this can help them if there’s a lean period.”
Share is the stock of a Small Business Corporation (SBC – all or substantially all >=90% of the fair market value of the assets were used in an active business carried on in Canada and/or were shares or debt of a SBC) at the time of disposition and is owned by an individual, the individual’s spouse or by a partnership related to the individual;
The share was not owned by anyone, other than the individual or a person or partnership related to the individual throughout the 24-month period preceding the disposition;
The share was, throughout the 24-month period ending immediately before the disposition:
a. A share of a corporation that was a Canadian-controlled private corporation, and
b. More than 50% of the fair market value of the corporation’s assets were used principally in an active business carried on primarily (>50%).
“Companies will need to do a lot of tax planning to make sure they qualify,” Kett says. “But now there’s more incentive to make sure you can do it.” The old limit was $500,000.
And if a business owner has a purchase offer in hand, he may want to rethink adding a signature if he’s currently using a holding company strategy to pass through dividends as a way of avoiding income tax on salary, says John Nicola, founding partner of Nicola Wealth Management in Vancouver. “When you sell the operating company, it’s a holding company that owns the assets,” he says. “So by using the tax strategy to get the dividends accrued tax-free, you actually block ability to take advantage of this.”
To fix that, Nicola suggests having shares of the operating company owned by a family trust in which the beneficiaries are the owner and his wife and children. That way, dividends can be flowed through to shareholders, but the actual owners are family members. Then, when the company is sold, each family member can theoretically qualify for the full $750,000 exemption, which means a family of four can garner $3 million in capital gains exemptions. “People need to be talking to clients about re-examining their corporate structure and ownership so that when they sell they can take advantage of this,” he says.
Other stumbling blocks to the exemption are ownership by the business of un-qualifying assets — such as the cash value of an insurance policy. Further, if the company owns the building it operates out of, but doesn’t occupy the entire space, any part of the structure leased by other businesses constitutes a non-qualifying asset. “The purification process is complex,” says Nicola.
Looking at other aspects of the budget, Kett says the raising of the RRSP maturity age to 71 from 69 will allow business owners who want to remain active to keep earning some income without getting penalized for not converting their plans to RRIFs. She’s seeing more clients opt for staged retirement, whereby they slow down in their mid-50s or early 60s, but keep a hand in their businesses into their 70s.
“A lot of people who used to be senior executives become directors and they have other sources of income, so to have the RRIF withdrawals kick in could lead to their getting taxed at a very high rate. It also benefits high-net-worth individuals because they generally don’t need the extra income,” she says. “They take it out of their RRIFs because they have to, but the longer they can leave it in, tax sheltered, the happier they are.”
She notes the partial pension options outlined in the budget also could benefit businesses because there’s going to be a shortage of experience employees going forward. “The younger generation has great education but no experience, and when people retire it means the experience walks out the door,” she says. “If there’s a way to keep that talent on board that’s a helpful thing.”
Another biggie, both say, are increases in capital cost allowances (CCAs) by which the value of assets are depreciated. Nicola notes it will make ownership of commercial real estate more attractive and could make Real Estate Investment Trusts (REITs) more appealing to investors. For non-residential buildings such as offices, the CCA will increase from 4% to 6%, and for buildings used for manufacturing, the percentage jumps from 4% to 10%. “It will be noticeable for the taxable portion of REIT distributions,” says Nicola.
While Kett points out the manufacturing and processing area “is not huge anymore,” she adds there will be an incentive for those in the sector to increase investment. “They can write things off over two years that would have taken them several,” she says. Another significant CCA change is the increase in depreciation on computer equipment from 45% to 55%. “Years ago it used to be 30%, so this is more indicative of how quickly technology is evolving,” she says. “It’s recognizing that computers are out of date in two or three years.”
Further, Kett says small business owners will benefit from plans to reduce paperwork burdens. In sum, the proposed changes would decrease tax filing requirements by:
replacing monthly instalments of corporate income tax with quarterly instalments for certain small Canadian-controlled private corporations;
increasing the corporate income tax payable threshold at or below which corporations are eligible to remit annually from $1,000 to $3,000;
increasing the net personal income tax threshold at or below which individuals do not have to pay instalments from $2,000 to $3,000;
increasing the average monthly withholdings threshold below which businesses may be eligible to remit source deductions quarterly from $1,000 to $3,000;
increasing the taxable supplies threshold at or below which businesses can file a GST/HST return annually from $500,000 to $1.5 million; and
increasing the net tax threshold, below which annual GST/HST return filers can remit the tax annually from $1,500 to $3,000.
“From a cash flow perspective that might work well,” says Kett. “Most businesses have a cycle and this can help them if there’s a lean period.”
Share is the stock of a Small Business Corporation (SBC – all or substantially all >=90% of the fair market value of the assets were used in an active business carried on in Canada and/or were shares or debt of a SBC) at the time of disposition and is owned by an individual, the individual’s spouse or by a partnership related to the individual;
The share was not owned by anyone, other than the individual or a person or partnership related to the individual throughout the 24-month period preceding the disposition;
The share was, throughout the 24-month period ending immediately before the disposition:
a. A share of a corporation that was a Canadian-controlled private corporation, and
b. More than 50% of the fair market value of the corporation’s assets were used principally in an active business carried on primarily (>50%).
“Companies will need to do a lot of tax planning to make sure they qualify,” Kett says. “But now there’s more incentive to make sure you can do it.” The old limit was $500,000.
And if a business owner has a purchase offer in hand, he may want to rethink adding a signature if he’s currently using a holding company strategy to pass through dividends as a way of avoiding income tax on salary, says John Nicola, founding partner of Nicola Wealth Management in Vancouver. “When you sell the operating company, it’s a holding company that owns the assets,” he says. “So by using the tax strategy to get the dividends accrued tax-free, you actually block ability to take advantage of this.”
To fix that, Nicola suggests having shares of the operating company owned by a family trust in which the beneficiaries are the owner and his wife and children. That way, dividends can be flowed through to shareholders, but the actual owners are family members. Then, when the company is sold, each family member can theoretically qualify for the full $750,000 exemption, which means a family of four can garner $3 million in capital gains exemptions. “People need to be talking to clients about re-examining their corporate structure and ownership so that when they sell they can take advantage of this,” he says.
Other stumbling blocks to the exemption are ownership by the business of un-qualifying assets — such as the cash value of an insurance policy. Further, if the company owns the building it operates out of, but doesn’t occupy the entire space, any part of the structure leased by other businesses constitutes a non-qualifying asset. “The purification process is complex,” says Nicola.
Looking at other aspects of the budget, Kett says the raising of the RRSP maturity age to 71 from 69 will allow business owners who want to remain active to keep earning some income without getting penalized for not converting their plans to RRIFs. She’s seeing more clients opt for staged retirement, whereby they slow down in their mid-50s or early 60s, but keep a hand in their businesses into their 70s.
“A lot of people who used to be senior executives become directors and they have other sources of income, so to have the RRIF withdrawals kick in could lead to their getting taxed at a very high rate. It also benefits high-net-worth individuals because they generally don’t need the extra income,” she says. “They take it out of their RRIFs because they have to, but the longer they can leave it in, tax sheltered, the happier they are.”
She notes the partial pension options outlined in the budget also could benefit businesses because there’s going to be a shortage of experience employees going forward. “The younger generation has great education but no experience, and when people retire it means the experience walks out the door,” she says. “If there’s a way to keep that talent on board that’s a helpful thing.”
Another biggie, both say, are increases in capital cost allowances (CCAs) by which the value of assets are depreciated. Nicola notes it will make ownership of commercial real estate more attractive and could make Real Estate Investment Trusts (REITs) more appealing to investors. For non-residential buildings such as offices, the CCA will increase from 4% to 6%, and for buildings used for manufacturing, the percentage jumps from 4% to 10%. “It will be noticeable for the taxable portion of REIT distributions,” says Nicola.
While Kett points out the manufacturing and processing area “is not huge anymore,” she adds there will be an incentive for those in the sector to increase investment. “They can write things off over two years that would have taken them several,” she says. Another significant CCA change is the increase in depreciation on computer equipment from 45% to 55%. “Years ago it used to be 30%, so this is more indicative of how quickly technology is evolving,” she says. “It’s recognizing that computers are out of date in two or three years.”
Further, Kett says small business owners will benefit from plans to reduce paperwork burdens. In sum, the proposed changes would decrease tax filing requirements by:
replacing monthly instalments of corporate income tax with quarterly instalments for certain small Canadian-controlled private corporations;
increasing the corporate income tax payable threshold at or below which corporations are eligible to remit annually from $1,000 to $3,000;
increasing the net personal income tax threshold at or below which individuals do not have to pay instalments from $2,000 to $3,000;
increasing the average monthly withholdings threshold below which businesses may be eligible to remit source deductions quarterly from $1,000 to $3,000;
increasing the taxable supplies threshold at or below which businesses can file a GST/HST return annually from $500,000 to $1.5 million; and
increasing the net tax threshold, below which annual GST/HST return filers can remit the tax annually from $1,500 to $3,000.
“From a cash flow perspective that might work well,” says Kett. “Most businesses have a cycle and this can help them if there’s a lean period.”
Share is the stock of a Small Business Corporation (SBC – all or substantially all >=90% of the fair market value of the assets were used in an active business carried on in Canada and/or were shares or debt of a SBC) at the time of disposition and is owned by an individual, the individual’s spouse or by a partnership related to the individual;
The share was not owned by anyone, other than the individual or a person or partnership related to the individual throughout the 24-month period preceding the disposition;
The share was, throughout the 24-month period ending immediately before the disposition:
a. A share of a corporation that was a Canadian-controlled private corporation, and
b. More than 50% of the fair market value of the corporation’s assets were used principally in an active business carried on primarily (>50%).
“Companies will need to do a lot of tax planning to make sure they qualify,” Kett says. “But now there’s more incentive to make sure you can do it.” The old limit was $500,000.
And if a business owner has a purchase offer in hand, he may want to rethink adding a signature if he’s currently using a holding company strategy to pass through dividends as a way of avoiding income tax on salary, says John Nicola, founding partner of Nicola Wealth Management in Vancouver. “When you sell the operating company, it’s a holding company that owns the assets,” he says. “So by using the tax strategy to get the dividends accrued tax-free, you actually block ability to take advantage of this.”
To fix that, Nicola suggests having shares of the operating company owned by a family trust in which the beneficiaries are the owner and his wife and children. That way, dividends can be flowed through to shareholders, but the actual owners are family members. Then, when the company is sold, each family member can theoretically qualify for the full $750,000 exemption, which means a family of four can garner $3 million in capital gains exemptions. “People need to be talking to clients about re-examining their corporate structure and ownership so that when they sell they can take advantage of this,” he says.
Other stumbling blocks to the exemption are ownership by the business of un-qualifying assets — such as the cash value of an insurance policy. Further, if the company owns the building it operates out of, but doesn’t occupy the entire space, any part of the structure leased by other businesses constitutes a non-qualifying asset. “The purification process is complex,” says Nicola.
Looking at other aspects of the budget, Kett says the raising of the RRSP maturity age to 71 from 69 will allow business owners who want to remain active to keep earning some income without getting penalized for not converting their plans to RRIFs. She’s seeing more clients opt for staged retirement, whereby they slow down in their mid-50s or early 60s, but keep a hand in their businesses into their 70s.
“A lot of people who used to be senior executives become directors and they have other sources of income, so to have the RRIF withdrawals kick in could lead to their getting taxed at a very high rate. It also benefits high-net-worth individuals because they generally don’t need the extra income,” she says. “They take it out of their RRIFs because they have to, but the longer they can leave it in, tax sheltered, the happier they are.”
She notes the partial pension options outlined in the budget also could benefit businesses because there’s going to be a shortage of experience employees going forward. “The younger generation has great education but no experience, and when people retire it means the experience walks out the door,” she says. “If there’s a way to keep that talent on board that’s a helpful thing.”
Another biggie, both say, are increases in capital cost allowances (CCAs) by which the value of assets are depreciated. Nicola notes it will make ownership of commercial real estate more attractive and could make Real Estate Investment Trusts (REITs) more appealing to investors. For non-residential buildings such as offices, the CCA will increase from 4% to 6%, and for buildings used for manufacturing, the percentage jumps from 4% to 10%. “It will be noticeable for the taxable portion of REIT distributions,” says Nicola.
While Kett points out the manufacturing and processing area “is not huge anymore,” she adds there will be an incentive for those in the sector to increase investment. “They can write things off over two years that would have taken them several,” she says. Another significant CCA change is the increase in depreciation on computer equipment from 45% to 55%. “Years ago it used to be 30%, so this is more indicative of how quickly technology is evolving,” she says. “It’s recognizing that computers are out of date in two or three years.”
Further, Kett says small business owners will benefit from plans to reduce paperwork burdens. In sum, the proposed changes would decrease tax filing requirements by:
replacing monthly instalments of corporate income tax with quarterly instalments for certain small Canadian-controlled private corporations;
increasing the corporate income tax payable threshold at or below which corporations are eligible to remit annually from $1,000 to $3,000;
increasing the net personal income tax threshold at or below which individuals do not have to pay instalments from $2,000 to $3,000;
increasing the average monthly withholdings threshold below which businesses may be eligible to remit source deductions quarterly from $1,000 to $3,000;
increasing the taxable supplies threshold at or below which businesses can file a GST/HST return annually from $500,000 to $1.5 million; and
increasing the net tax threshold, below which annual GST/HST return filers can remit the tax annually from $1,500 to $3,000.
“From a cash flow perspective that might work well,” says Kett. “Most businesses have a cycle and this can help them if there’s a lean period.”
An increase to $750,000 in the lifetime capital gains exemption for farmers, fishermen and small business owners looks great on paper — until you realize a large percentage of Canadian business owners won’t be eligible without some careful preparation.
“Not all small businesses can take advantages of it. There are restrictions — it’s a complicated three-part test,” says Cynthia Kett, a principal at Stewart & Kett Financial Advisors in Toronto. A qualified small business corporation (SBC) share is defined in the Income Tax Act, but generally speaking, the three-part test is as follows:
Share is the stock of a Small Business Corporation (SBC – all or substantially all >=90% of the fair market value of the assets were used in an active business carried on in Canada and/or were shares or debt of a SBC) at the time of disposition and is owned by an individual, the individual’s spouse or by a partnership related to the individual;
The share was not owned by anyone, other than the individual or a person or partnership related to the individual throughout the 24-month period preceding the disposition;
The share was, throughout the 24-month period ending immediately before the disposition:
a. A share of a corporation that was a Canadian-controlled private corporation, and
b. More than 50% of the fair market value of the corporation’s assets were used principally in an active business carried on primarily (>50%).
“Companies will need to do a lot of tax planning to make sure they qualify,” Kett says. “But now there’s more incentive to make sure you can do it.” The old limit was $500,000.
And if a business owner has a purchase offer in hand, he may want to rethink adding a signature if he’s currently using a holding company strategy to pass through dividends as a way of avoiding income tax on salary, says John Nicola, founding partner of Nicola Wealth Management in Vancouver. “When you sell the operating company, it’s a holding company that owns the assets,” he says. “So by using the tax strategy to get the dividends accrued tax-free, you actually block ability to take advantage of this.”
To fix that, Nicola suggests having shares of the operating company owned by a family trust in which the beneficiaries are the owner and his wife and children. That way, dividends can be flowed through to shareholders, but the actual owners are family members. Then, when the company is sold, each family member can theoretically qualify for the full $750,000 exemption, which means a family of four can garner $3 million in capital gains exemptions. “People need to be talking to clients about re-examining their corporate structure and ownership so that when they sell they can take advantage of this,” he says.
Other stumbling blocks to the exemption are ownership by the business of un-qualifying assets — such as the cash value of an insurance policy. Further, if the company owns the building it operates out of, but doesn’t occupy the entire space, any part of the structure leased by other businesses constitutes a non-qualifying asset. “The purification process is complex,” says Nicola.
Looking at other aspects of the budget, Kett says the raising of the RRSP maturity age to 71 from 69 will allow business owners who want to remain active to keep earning some income without getting penalized for not converting their plans to RRIFs. She’s seeing more clients opt for staged retirement, whereby they slow down in their mid-50s or early 60s, but keep a hand in their businesses into their 70s.
“A lot of people who used to be senior executives become directors and they have other sources of income, so to have the RRIF withdrawals kick in could lead to their getting taxed at a very high rate. It also benefits high-net-worth individuals because they generally don’t need the extra income,” she says. “They take it out of their RRIFs because they have to, but the longer they can leave it in, tax sheltered, the happier they are.”
She notes the partial pension options outlined in the budget also could benefit businesses because there’s going to be a shortage of experience employees going forward. “The younger generation has great education but no experience, and when people retire it means the experience walks out the door,” she says. “If there’s a way to keep that talent on board that’s a helpful thing.”
Another biggie, both say, are increases in capital cost allowances (CCAs) by which the value of assets are depreciated. Nicola notes it will make ownership of commercial real estate more attractive and could make Real Estate Investment Trusts (REITs) more appealing to investors. For non-residential buildings such as offices, the CCA will increase from 4% to 6%, and for buildings used for manufacturing, the percentage jumps from 4% to 10%. “It will be noticeable for the taxable portion of REIT distributions,” says Nicola.
While Kett points out the manufacturing and processing area “is not huge anymore,” she adds there will be an incentive for those in the sector to increase investment. “They can write things off over two years that would have taken them several,” she says. Another significant CCA change is the increase in depreciation on computer equipment from 45% to 55%. “Years ago it used to be 30%, so this is more indicative of how quickly technology is evolving,” she says. “It’s recognizing that computers are out of date in two or three years.”
Further, Kett says small business owners will benefit from plans to reduce paperwork burdens. In sum, the proposed changes would decrease tax filing requirements by:
replacing monthly instalments of corporate income tax with quarterly instalments for certain small Canadian-controlled private corporations;
increasing the corporate income tax payable threshold at or below which corporations are eligible to remit annually from $1,000 to $3,000;
increasing the net personal income tax threshold at or below which individuals do not have to pay instalments from $2,000 to $3,000;
increasing the average monthly withholdings threshold below which businesses may be eligible to remit source deductions quarterly from $1,000 to $3,000;
increasing the taxable supplies threshold at or below which businesses can file a GST/HST return annually from $500,000 to $1.5 million; and
increasing the net tax threshold, below which annual GST/HST return filers can remit the tax annually from $1,500 to $3,000.
“From a cash flow perspective that might work well,” says Kett. “Most businesses have a cycle and this can help them if there’s a lean period.”
An increase to $750,000 in the lifetime capital gains exemption for farmers, fishermen and small business owners looks great on paper — until you realize a large percentage of Canadian business owners won’t be eligible without some careful preparation.
“Not all small businesses can take advantages of it. There are restrictions — it’s a complicated three-part test,” says Cynthia Kett, a principal at Stewart & Kett Financial Advisors in Toronto. A qualified small business corporation (SBC) share is defined in the Income Tax Act, but generally speaking, the three-part test is as follows:
Share is the stock of a Small Business Corporation (SBC – all or substantially all >=90% of the fair market value of the assets were used in an active business carried on in Canada and/or were shares or debt of a SBC) at the time of disposition and is owned by an individual, the individual’s spouse or by a partnership related to the individual;
The share was not owned by anyone, other than the individual or a person or partnership related to the individual throughout the 24-month period preceding the disposition;
The share was, throughout the 24-month period ending immediately before the disposition:
a. A share of a corporation that was a Canadian-controlled private corporation, and
b. More than 50% of the fair market value of the corporation’s assets were used principally in an active business carried on primarily (>50%).
“Companies will need to do a lot of tax planning to make sure they qualify,” Kett says. “But now there’s more incentive to make sure you can do it.” The old limit was $500,000.
And if a business owner has a purchase offer in hand, he may want to rethink adding a signature if he’s currently using a holding company strategy to pass through dividends as a way of avoiding income tax on salary, says John Nicola, founding partner of Nicola Wealth Management in Vancouver. “When you sell the operating company, it’s a holding company that owns the assets,” he says. “So by using the tax strategy to get the dividends accrued tax-free, you actually block ability to take advantage of this.”
To fix that, Nicola suggests having shares of the operating company owned by a family trust in which the beneficiaries are the owner and his wife and children. That way, dividends can be flowed through to shareholders, but the actual owners are family members. Then, when the company is sold, each family member can theoretically qualify for the full $750,000 exemption, which means a family of four can garner $3 million in capital gains exemptions. “People need to be talking to clients about re-examining their corporate structure and ownership so that when they sell they can take advantage of this,” he says.
Other stumbling blocks to the exemption are ownership by the business of un-qualifying assets — such as the cash value of an insurance policy. Further, if the company owns the building it operates out of, but doesn’t occupy the entire space, any part of the structure leased by other businesses constitutes a non-qualifying asset. “The purification process is complex,” says Nicola.
Looking at other aspects of the budget, Kett says the raising of the RRSP maturity age to 71 from 69 will allow business owners who want to remain active to keep earning some income without getting penalized for not converting their plans to RRIFs. She’s seeing more clients opt for staged retirement, whereby they slow down in their mid-50s or early 60s, but keep a hand in their businesses into their 70s.
“A lot of people who used to be senior executives become directors and they have other sources of income, so to have the RRIF withdrawals kick in could lead to their getting taxed at a very high rate. It also benefits high-net-worth individuals because they generally don’t need the extra income,” she says. “They take it out of their RRIFs because they have to, but the longer they can leave it in, tax sheltered, the happier they are.”
She notes the partial pension options outlined in the budget also could benefit businesses because there’s going to be a shortage of experience employees going forward. “The younger generation has great education but no experience, and when people retire it means the experience walks out the door,” she says. “If there’s a way to keep that talent on board that’s a helpful thing.”
Another biggie, both say, are increases in capital cost allowances (CCAs) by which the value of assets are depreciated. Nicola notes it will make ownership of commercial real estate more attractive and could make Real Estate Investment Trusts (REITs) more appealing to investors. For non-residential buildings such as offices, the CCA will increase from 4% to 6%, and for buildings used for manufacturing, the percentage jumps from 4% to 10%. “It will be noticeable for the taxable portion of REIT distributions,” says Nicola.
While Kett points out the manufacturing and processing area “is not huge anymore,” she adds there will be an incentive for those in the sector to increase investment. “They can write things off over two years that would have taken them several,” she says. Another significant CCA change is the increase in depreciation on computer equipment from 45% to 55%. “Years ago it used to be 30%, so this is more indicative of how quickly technology is evolving,” she says. “It’s recognizing that computers are out of date in two or three years.”
Further, Kett says small business owners will benefit from plans to reduce paperwork burdens. In sum, the proposed changes would decrease tax filing requirements by:
replacing monthly instalments of corporate income tax with quarterly instalments for certain small Canadian-controlled private corporations;
increasing the corporate income tax payable threshold at or below which corporations are eligible to remit annually from $1,000 to $3,000;
increasing the net personal income tax threshold at or below which individuals do not have to pay instalments from $2,000 to $3,000;
increasing the average monthly withholdings threshold below which businesses may be eligible to remit source deductions quarterly from $1,000 to $3,000;
increasing the taxable supplies threshold at or below which businesses can file a GST/HST return annually from $500,000 to $1.5 million; and
increasing the net tax threshold, below which annual GST/HST return filers can remit the tax annually from $1,500 to $3,000.
“From a cash flow perspective that might work well,” says Kett. “Most businesses have a cycle and this can help them if there’s a lean period.”
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An increase to $750,000 in the lifetime capital gains exemption for farmers, fishermen and small business owners looks great on paper — until you realize a large percentage of Canadian business owners won’t be eligible without some careful preparation.
