What are the federal budget tax consequences?

Are you wondering about the federal budget tax consequences? This short article discusses how the 2013 federal budget affects small business owners and individuals like yourself, so if you wish to learn about how the latest Canadian budget increases taxes for small business owners and individuals, this is the place to be. Let’s get started.

Tax on Dividends:

The 2013 budget has increased taxes on dividends paid from small business corporations to their owners. Prior to 2013, small business owners could receive dividends from their corporations, rather than paying themselves a salary, and save a lot in taxes. After the 2013 budget, the income tax paid by small business owners on dividends and salary is almost the same. That tax advantage has now disappeared.

Here are some statistics surrounding this aspect of how the 2013 federal budget affects small business owners. The dividend tax credit has been reduced from 13.3% to 11%. The effective top federal tax rate for non-eligible dividends paid from small business corporations has increased from 19.6% to 21.2%.

Lifetime Capital Gains Exemption:

By way of background, the lifetime capital gains exemption means that owners of businesses can sell their shares for a profit of up to $750,000 and pay no income tax. The 2013 budget has increased the lifetime capital gains exemption from $750,000 to $800,000, effective the 2014 taxation year. After 2014, the lifetime capital gains exemption will be indexed for inflation. This is a very big win for business owners who are planning on selling their businesses in the near future.

Hiring Credit for Small Businesses:

The 2013 Canadian federal budget provides for a $1,000 credit for small business owners to apply against EI premiums paid on behalf of their employees. If you hired new or additional employees in 2013, or your EI premiums increased from the prior year, you could be eligible to receive this lucrative $1,000 credit. What this goes to show is that while this Canadian budget increases taxes for small business owners, it offers some solace as well.

CCA for Manufacturing Equipment:

While this Canadian budget increases taxes for small business owners, respite comes in another manner as well. For instance, this budget allows manufacturing equipment to be written off over two years. So, if you have purchased manufacturing equipment in the year 2013, you can write-off the entire cost of that equipment over 2013 and 2014, thereby reducing your taxable income. The government has provided this incentive specifically for the manufacturing industry, as this industry has been hard hit over the last few years.

Deduction for Safety Deposit Boxes:

Another way how the 2013 federal budget affects small business owners and individuals is that this budget has disallowed the deduction that Canadians used to claim for safety deposit box fees. The logic is that Canadians now use digital forms of media to store their letters and data, and no longer need a safe deposit box to store information.

First-Time Donor’s Super Credit:

This tax credit has been introduced in the 2013 tax budget to encourage Canadians to donate to charitable organizations. If you are a first time donor you’ll receive a credit of 40% on donations made up to $200, and a credit of 54% for donations made in excess of $200 to charitable organizations. You are considered a first time donor if you have not made a donation since the year 2007.

Adoption Expense Tax Credit (AETC):

This credit is 15% of the adoption expenses incurred by potential adoptive parents. The major change with respect to this credit in the 2013 budget is the starting period when adoptive parents can begin claiming adoption expenses.

Prior to 2013 you could only begin claiming adoption expenses for the purpose of this credit once you were matched with a prospective child that was going to be adopted. However, in 2013 and later years you will be able to claim adoption expenses when you submit your application to the appropriate provincial ministry. This will allow for a greater deduction to be claimed.

Reporting Financial Transactions to CRA:

Beginning in 2015, financial institutions are going to be required to disclose electronic fund transfers made in excess of $10,000 to the Canada Revenue Agency (CRA). Why are they doing this? Well, to prevent money laundering, hiding money offshore, tax evasion, and all sorts of other illegal activity.

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

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