Unexpected changes for small business owners
As expected, the federal government’s December 7 Notice of Ways and Means Motion introduced changes to personal income tax rates affecting middle- and high-income earners. The motion also introduced several unexpected changes for small business owners.
The government strives to ensure that a taxpayer pays the same amount of income tax regardless of whether the income is earned directly by the individual (i.e., investment income) or indirectly through a corporation (i.e., corporation earning investment income and paying dividends to a shareholder). So when tax rates change, the Canadian government evaluates the impact and addresses potential gaps. As such, the new 33% top personal rate means the government must change provisions that affect Canadian controlled private corporations (CCPCs).
- A CCPC’s additional refundable tax will increase from 6.67% to 10.67%. The Department of Finance has indicated the increase is intended to “reduce personal income tax deferral possibilities that individuals earning income directly might otherwise obtain by earning such income through a CCPC.”
- Part IV tax levied on dividends received by a private corporation is increasing from 33.33% to 38.33%.
- Similarly, the refund of refundable taxes will increase from 33.33% to 38.33%.
For a discussion of how these tax elements interact, read Help corporations save taxes through RDTOH account.