How the 2016 Budget Could Affect CCPCs in Canada

Canadian-Controlled Private Companies (CCPCs) currently enjoy a low business federal tax rate of 10.5% for profits below $500,000. Profits that exceed $500,000 are taxed at a higher federal rate of 15%. Provincial tax rates are extra. Previously, the Conservative Government planned to reduce the low federal tax rate (10.5%) to 9% over four years. However, the newly elected Liberal Government will not be lowering the rate to 9%. Instead it will be kept at 10.5%.

How This Will Affect Small Businesses in Canada?

Billy Barber Inc. is a CCPC that makes $10,000 per month. If the Federal Government had agreed to lower the business tax rate, Billy Barber Inc. would be taxed 9% or $900 for every $10,000 of taxable profit. Instead of lowering the business tax rate to 9%, the Federal Government decided to keep it at 10.5%. This means that Billy Barber Inc. has to pay $1,050, for every $10,000 of profit.

Recent rumors are that the Federal Government will change the criteria for allowing CCPCs to claim the low business tax rate of 10.5%. The main concern is that the Federal Government will follow Quebec’s regulations, which only allows CCPC’s with three or more employees to claim the low business tax rate of 10.5%. If the Federal Government were to follow Quebec’s decision, CCPCs with less than three employees would have to pay the higher federal tax rate of 15%.

Let’s Use An Example:

Frank is an IT consultant from Toronto who owns his own incorporated CCPC and is the only employee. His company earns annual profits of $100,000. How would the changes to the low business tax rate affect Frank?

Under the existing rules, Frank’s company pays $10,500 (10.5%) on its $100,000 of annual business profits.

If the Federal Government changes its current policy and adopts Quebec’s policy, Frank’s company would have to pay $15,000 (15%) of federal corporate tax on its business profits, or $4,500 more. This tax increase will affect thousands of Canadian businesses like Frank’s. Remember, this is just a concern, and has not yet been put into law.

Incorporation Costs

Changes have also been made to the way incorporation costs work for tax purposes. Under the old rules, incorporation costs were treated as eligible capital expenditures, meaning that only 75% of the incorporation costs could be depreciated at a rate of 7% per year.

Example #2

Jason hires a lawyer, Zoe, and pays her $2,000 to incorporate his company.

As mentioned above, prior to the rule changes, only 75% of the $2,000 incorporation fee could be depreciated at 75% per year. 75% of $2,000 is $1,500, and 7% of that equates to a write-off of only $150 for the year, which is not a lot.

With the new rules, 100% of incorporation costs can now be expensed in the year incurred. Jason can now claim a tax deduction of $2,000 instead of only $105 under the old rules.

Intangible Assets

Intangible assets are any assets that are not physical in nature. These include goodwill, intellectual property (such as trademarks, logos, and copyrights) and more. How do the new rules compare to the old rules?

Previously, these expenditures were classified as eligible capital property, so that only 75% of the costs could be depreciated at a rate of 7% per year (similar to incorporation costs).

Under the new rules, any intangible asset purchased has its own Capital Cost Allowance class and is now depreciated at 5% per year.

Example #3

Dennis and Laura own a very successful lemonade company. Roger, a local business man decides to buy the company for $300,000, including $100,000 for goodwill. How will the new rules for intangible assets affect Roger?

The previous rules stated that 75% of the costs could be depreciated by a rate of 7.5% per year. Of the $300,000 that Roger paid for the company, $100,000 was for goodwill. Of this $100,000, only 75% or $75,000 can be depreciated each year at a rate of 7%. Roger would be able to claim a $5,250 deduction from the goodwill until the goodwill balance is fully depleted.

Under the new rules, 100% of the amount paid for goodwill ($100,000 in this case) can be depreciated, but by a reduced amount of 5% per year.

This means that Roger now claims a $5,000 deduction from the $100,000 of goodwill. Although the new rules allows 100% of costs to be depreciated, the lower annual rate of 5% (previously 7%) means that Roger is claiming $250 less in comparison to the old rules.

Other Relevant Changes

There is a now a new federal tax bracket for the top 1% in Canada, or those making more than $200,000 in taxable income in a year.

2015: 29%
2016: 33%

If you are apart of the middle class making an income between $45,000 and $90,000, the new changes will be beneficial toward you.

2015: 22%
2016:20.5%

Income splitting for families, also known as the Family Tax Cut, will also be affected by the 2016 budget changes. The Family Tax Cut allowed a higher- income partner to transfer up to $50,000 of taxable income to their lower-income partner in order to reduce the couple’s total income tax by up $2,000. The government has proposed to eliminate the Family Tax Cut entirely in 2016, however, Pension Income Splitting will not be affected by these changes.

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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