Canadian Federal Budget 2013 - Some Good and Bad for Business Owners

Finance Minister Jim Flaherty introduced Canada's 2013 budget on March 21, 2013. In the big picture, the budget's public focus was on a revised program for skills and job training -- a topic certainly relevant for businesses of all sizes. And the general-level impression of that program is that businesses will be expected to kick in one-third of the training cost, up to $5,000, for each worker taking advantage of that program.

The budget also contained more technical changes, mostly having to do with taxation of businesses, and it's those that I'll highlight here. (Source)

Good News First - Lifetime Capital Gains Exemption Increased by $50,000

One of the best "quick rich slow" opportunities in Canada is to create and sell one of the tax-advantaged forms of business: shares in a qualified small business corporation; qualified farm property; or qualified fishing property.

The existing level and applicable for 2013 is $750,000 lifetime capital gains. The budget now increases that amount to $800,000, effective for 2014 and beyond.

In addition, a person who has already maxed out their LCGE can go back for a second dip, up to the new maximum.

If you're a business owner contemplating a sale, and the sale price might be higher than $750,000, you may want to postpone the sale until the higher limit kicks in.

And we'll remind you of a planning matter: the LCGE is a per person benefit. If you've created a valuable small business corporation, talk to us about structures through which the LCGE can be multiplied to extend to other family members (recognizing, of course, that there are competing elements in all such decisions, such as the wisdom of giving younger children significant value).

And Some Bad News - Tax Increase on Dividends from Private Corporations

Ever since 2006, when Canada cracked down on the use of publicly traded trusts as a tax-advantaged vehicle, for tax purposes, the Canadian system has recognized two kinds of dividends: "eligible" dividends and "non-eligible" dividends.

Eligible dividends are dividends arising from income earned by a corporation on which the general (higher) level of corporate income tax has been paid. This would be income earned from an active business by publicly traded corporations, but also income earned by private corporations above the level available for the "small business deduction", which is currently $500,000 federally (there's a provincial component; some provinces draw the line at $400,000). (Investment income is taxed differently.)

Eligible dividends are a great kind of income to receive. For example, here in British Columbia, a taxpayer with no other income can receive roughly $49,000 of eligible dividends and pay almost no federal income tax.

Non-eligible dividends are dividends arising from active business income carried on by a Canadian-controlled private corporation that has qualified for the "small business deduction" -- that is, income up to the first $500,000.

Non-eligible dividends are still pretty great to receive, compared to other sources of income. In BC, for 2012, roughly $43,000 of non-eligible dividends may be received without generating any liability for federal income tax (at the personal level; the corporation will of course paid corporate income tax).

The 2013 budget tweaks the income tax system for non-eligible dividends, with the reasoning that the current rates favour this kind of income a little too much. The overall increase, according to one website I read, works out to about 1 percent. The change applies to dividends paid after 2013.

The federal dividend gross-up will be changed from 25 per cent (of the actual amount dividends received) to 18 per cent, and the federal dividend tax credit (DTC) will be increased from 2/3 (12/18) of the grossed-up portion to 13/18.

By my calculation, the new rates drop the (federal) tax free amount of non-eligible dividends to just under $36,000 (down from the current level of roughly $43,000).

For planning purposes, this means that, all else equal, incorporated small business owners will want to boost their non-eligible dividends during 2013.