Small Business Catches a Tax Break!

Small businesses employ half of all Canadian workers in the private sector; making sure these employers can continue to provide jobs is critical. 

That’s the impetus behind the first corporate tax rate decrease for small business since 2009, which begins in 2016.  Advisors specializing in managerial accounting should help their clients take this tax gift into account in longer term business forecasting now while reviewing the tax rules for qualifying small businesses.

The cut in the Small Business Tax Rate for qualifying businesses, will phase in over a four-year period on the first $500,000 of net income, starting in 2016.  The current 11% rate will start to be reduced that year by ½%; eventually reaching 9% on January 1, 2019, as illustrated below.

Corporate fiscal periods that straddle the calendar year will be pro-rated into a blended rate.  Qualifying small businesses are those that qualify for the $500,000 small business deduction; that is, Canadian controlled private businesses earning active business income. 

The recent federal budget also noted that the government will review the rules behind active and passive business income for these purposes to enhance fairness for businesses that don’t meet this requirement. Active business income does not include income from a specified investment business or a personal services business, both of which generally require the hiring of more than five full time employees, amongst other criteria,  to fall in line with the definition of a qualifying business for the Small Business Deduction.   No date has been announced for the timing of the review.

With the decrease in income tax rates comes a corresponding adjustment to the Dividend Tax Credit (DTC).  Stay tuned for details next time in KBR.