Hi-tech sector major winner in mini-bugdet

In a change designed to attract venture venture capital into startup and small businesses, Ottawa is sweetening the tax relief it granted in last February’s budget for tax-free rollover of capital gains from small business investments.

Effective immediately, an investor will be able to take profits from one small business investment up to $2 million and roll them into another small business tax free. The limit for tax treatment on profits had been $500,000.

The size of small business eligible for the rollover rises to $50 million from $10 million. The Department of Finance wants to encourage angel and venture capital investors to continue investing in small and emerging businesses.

Also accelerated is relief in corporate tax rates for several sectors, including high tech, currently in the high end at 28%. Martin announced in Feburary that this group’s tax rate would go down to 21% over five years. With today’s announcement, it will hit 21% at the end of threes instead of five.

In another boost for investors, Martin accelerated favourable tax
treatment for capital gains.

As previously rumoured, the capital gains inclusion rate was cut to 50% from 66 per cent, effective immediately. This comes after the inclusion rate was cut from 75% last February.

The effective average combined federal-provincial tax rate on capital gains has now gone to 23% from 31% in nine months. By comparision the rate in the United States is 25%.

As a result of the changes in capital gains, tax treatment for employee stock options also got better.The deduction for employee stock options increased to one-half from one-third to make it consistent with the new inclusion rate.

In the annex portion of Martin‚s mini-budget, the Chretien government is now claiming significant tax advantages over the U.S., ranging from a five-percentage-point difference in corporate income taxes to far sweeter incentives for research and developments.

In other moves appealing to entrepreneurs and business, in January self-employed Canadians will get an extra credit for Canada Pension Plan contributions. Self-employed taxpayers now get a 17% tax credit on both employer and employee contributions. As of January, they will receive a 100% tax credit for employer contributions to match the credit available to incorporated businesses.