If the federal government has its way, small businesses will have less paperwork, lower taxes and more financing available, according to proposals unveiled in the federal budget on Tuesday.
The government is proposing that starting in 2016, new employers will be eligible for quarterly tax remitting if they have monthly withholdings of less than $1,000 for all of their employees. These employers must also maintain a perfect compliance record in terms of their Canadian tax obligations.
The current standard is that new employers remit withholdings for personal income taxes, Canada Pension Plan and Employment Insurance (EI) on a monthly basis for at least one year. Following this, employers may be eligible to apply for quarterly remitting if they have an average monthly withholding amount of less than $3,000 and have demonstrated a perfect compliance record over the previous 12 months.
"[The proposed change] is reducing time and compliance costs for small businesses," says Debbie Pearl-Weinberg, executive director, tax and estate planning, wealth advisory services with Canadian Imperial Bank of Commerce in Toronto.
The federal government is also proposing a decrease to the small business tax rate to 9% by 2019 from 11% today. The government is proposing that the tax be reduced gradually to 10.5% in 2016, to 10% in 2017, to 9.5% in 2018 and finally to 9% in 2019.
However, Pearl-Weinberg has flagged one possible concern for shareholders invested in these businesses: as the small business tax rates go down, the personal tax rate for shareholders' non-eligible dividends will go up.
The budget is also proposing that the Canada Small Business Financing Program be available to more businesses by increasing the eligibility criteria to firms with gross annual revenue of $10 million or less from those with gross annual revenue of $5 million or less. The government is also aiming to increase the maximum loan amount for real property from $500,000 to $1 million.
In addition, the government is also aiming to implement a seven-year "break-even" rate-setting mechanism for EI premiums in 2017, the budget document states: "[This] will ensure that EI premiums are no higher than needed to pay for the EI program over time. Any cumulative surplus recorded in the EI operating account will be returned to employers and employees through lower EI premium rates once the new mechanism takes effect."
Although the lower taxes for small businesses are positive, "they only apply to very small Canadian business with annual income of $500,000 a year," says Ian Russell, president and CEO of the Investment Industry Association of Canada. "We would have liked to have seen that figure go up to $1 million, as it would have made a lot more companies eligible.
"We welcome this action, but it could've been more effective," he adds. "The change in the tax rate will have a very small impact because it's staggered and not comprehensive — and we didn't any investment tax incentives that would've made it easier for small businesses to access capital."