Following changes to the taxation guidelines implemented by the Federal Government, the 2018 budget now reflects provisions designed to fund the implementation of the tax reform initiative. Perhaps most popularly, business owners are to carry a huge chunk of the burden as corporate taxes soar.
But are the changing taxation guidelines merely a boon and unnecessary hurdle to the small- and medium-sized business sector?
For a detailed discussion of the 2018 Federal Budget, click here.
See how tax planning services offered by Chartered Professional Accountants can help you stay ahead of the new tax regulations, and keep your business afloat in the current economy:
2018 Income Tax and Federal Budget Updates
Retroactive Limiting Access to Refundable Tax
Currently, a Canadian Controlled Private Corporation’s (CCPC) existing Refundable Dividend Tax on Hand (RDTOH) balance is only available upon payment of taxable, but ineligible dividends.
If your company has RDTOH, you will be able to earn this back, retroactively, when you pay eligible dividends. This process may take several years, and claiming this requires proper fiscal planning.
With the help of accountants providing tax planning services, business owners can track new accounts in their finances that may be eligible for RDTOH. This eligible RDTOH can help track refundable Part IV taxes paid on eligible portfolio dividends. As a result, the current RDTOH will be deemed as the non-eligible RDTOH, which is used to track refundable taxes on in investment income and Part IV tax on non-eligible dividends. A caveat that business owners must watch out for is, non-eligible dividends must recover non-eligible RDTOH balances before recovering eligible ones.
Passive Investment Income in a Private Corporation
One of the most widely-discussed tax reform proposals, this effort was deemed fair by financial professionals and business owners. If a corporation, along with its associated corporations earns in excess of $50,000 of passive income in a fiscal year, then their small business deduction will be reduced. The business deduction limit will be reduced by $5 for every $1 of investment income over the threshold of $50,000, becoming zero at $150,000 of investment income.
Regardless, this area of the taxation revamp is now moot; the Department of Finance has since dropped its proposals to change the change the taxation of passive investment income in CCPC’s.
Prepare for CRA Audits
In light of many proposed changes to Canada’s taxation guidelines, it’s natural that the CRA aims to extensively audit business owners and ensure their compliance with the new laws. Finance Minister Morneau announced the allocation of a few hundred million to CRA audit departments to support this. For this, accountants provide tax planning services to individuals and corporations, helping them to ensure their compliance to new tax regulations.
What The U.S. Tax Reform Means for Canada’s Economy
Proposed changes to Canada’s corporate taxation guidelines have generated quite a discussion over the past year. South of the border, the U.S. is following suit with their own tax reform initiative — but so far, the Federal Government is yet to address what Canada will be doing to maintain a healthy economy and a steady flow of investments despite the renewed competition.
Due to traditionally strong economic ties with the U.S., many Canadian businesses earn a huge chunk of their revenue across the border. With the huge reduction in the corporate tax rate (now down to a 20% flat rate in comparison to Canada’s combined federal and provincial rates at 27%), the prospect of increased savings is imminent and eagerly anticipated.
As corporate taxation rates in the U.S. relax, acquisition activity is likely to accelerate as business owners see a window for growth. U.S. investments are then expected to trump their Canadian counterparts as, despite having similar tax rates and burdens, U.S. regulations are relatively relaxing and cutting back on restrictions, making it more lucrative and accessible for foreign investors to invest in the U.S.
With Canada’s edge in lower corporate tax rates now matched south of the border, pulling investments back north could require far more creative solutions to remain competitive in the global economy. Canadian economists note that this doesn’t necessarily mean slashing tax rates; but simplifying regulations and reviewing taxable and non-taxable items, for instance.
For a detailed discussion of the 2018 Federal Budget, click here.
