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How the new federal tax changes will affect small businesses

The new federal tax changes that took effect January 1 will impact organizations and Canadian citizens as a whole.

In more than one way, a number of new legislations will have Canadian business owners see adjustments to their employees’ paycheques and payroll contributions.

Here’s what you need to know.

The tax rate for small businesses will drop.

The tax rate is going to drop down from 10 to nine per cent, respectively.

CFIB reports this will result in an annual savings of around $7,500 for small businesses.

This will also mean entrepreneurs and self-employed Canadians can retain more of their earnings to reinvest in business growth or re-allocate in other ways.

Passive investment income earned inside private corporations will be taxed more heavily moving forward.

To break it down, small businesses are allowed a favourable tax rate of 13.1 per cent across the country (on average) on the first $500,000 of active business income. For every dollar of investment income above that threshold, the small-business deduction limit will fall by $5.

This proposed change essentially eliminates the favourable small-business tax rate once passive income reaches a certain amount annually — and will now have the regular 15 per cent corporate tax rate placed on all business income, according to the CFIB.

While this new approach effectively protects the tax treatment towards past savings and investments, it reduces the amount of active business to receive any low-business rates for future.

The more passive income a business holds in real estate, stocks and investments for example, the more their small business deduction limit will be reduced to.

EI premiums will decrease as employment stabilizes.

During the Federal Budget announcement, Finance Minister Mill Morneau provided acknowledgement to Canada’s economy and employment numbers. Statistics Canada reported in its December 2018 year-end release:

“In 2018, employment increased by 163,000 or 0.9%.

Over the course of the year, the unemployment rate fell 0.2 percentage points to 5.6%—the lowest rate since comparable data became available in January 1976.”

 “What is more, our debt-to-GDP ratio is very good. It is better than that of any of the other G7 countries.” Morneau concluded.

Due to Canada’s unemployment rate dropping to 40-year lows, this resulted in reduced demand for EI insurance. 

EI rates that employees pay will drop by four cents per $100 of insurable earnings. Quebec will see these rates drop by five cents per $100 of insurable earnings.

This means the amount employers contribute (1.4 times what employees pay) will also be reduced.

Canadian Pension Plan contributions to increase annually

CPP intends to gradually increase contributions over the next seven years.

On January 1, employee contributions on earnings between $3,500 and $57,400 have increased to 5.1 per cent from 4.95 — the first of five gradual increases that will bring the contribution rate up to 5.95 per cent by 2023.

The overall aim of these plan enhancements is to increase Canadian’s savings by one-third of average work earnings rather than one quarter.

The Liberals justified the need for CPP plan enhancement with numbers that indicated Canadians weren’t saving enough for retirement.

While these changes directly impact amounts taken off of Canadian’s pay stubs, small businesses and self-employed Canadians will see increases in the contributions paid on their employees’ behalf.

Carbon tax plan to be implemented for provinces that did not sign on to the pan-Canadian Framework on climate change.

Come April 2019, the implementation of a federally imposed carbon tax on provinces that have failed to come up with their own plan (Saskatchewan, Manitoba, Ontario, New Brunswick, Yukon and Nunavut) will have to pay a tax of $20 per tonne of emissions. This tax will increase by $10 a year until it reaches $50 per tonne by 2020.

While the government has made claims that most of these tax dollars will be returned to residents in the form of rebates, the verdict is still out on the impact to Canadian businesses.

It’s not all bad news as economists have historically pointed to carbon taxes as the most efficient and cost-effective way to reduce greenhouse emissions.

“What a carbon tax does is put an incentive in place for every individual and business to think about their own unique situation, to think about if they have low-cost ways of avoiding an emission and thereby saving on the tax,” said University of Calgary associate professor of economics Trevor Tombe in a CBC article.

As they say, knowledge is power. Work with your accounting firm, payroll service or consult with an employment lawyer if you have questions about federal, provincial, or local law changes. It’s important to prepare your 2019 budget and business operations with these federal tax changes in mind.