7 Measures in the 2013 Federal Budget that Affect Your Small Business

While the Federal 2013 budget or the (more interestingly named) Economic Action Plan delivered on March 21, 2013 was not earth shattering in any way, it is interesting to note how well Canada is performing relative to other countries in the G7.  According to the EAP, The Canadian economy has experienced the best performance among the Group of Seven (G-7) countries over the recovery, with the strongest record of economic growth and job creation.  950,000 jobs have been created since July 2009, the majority of which are full time positions in high wage industries. Additonally, Canada is only G-7 country to also have more than fully recovered business investment loss during the recession.  And although the recovery has been broad based, investment in the manufacturing sector has been particularly strong.

The EAP also notes that while GDP growth over the next five years remains unchanged, expected growth for 2013 has been revised to 1.6% down from 2.0%.  This will be offset by higher estimated growth between 2015 and 2017.  Consequently, economists expect lower inflation in 2013.  The CPI inflation in January 2013, compared with the prior year, was 0.5% while inflation for all of 2013 is expected to be lower than average at 1.3%.   They also expect that the Canadian dollar will remain at par with the US dollar.

The 2013 budget introduces and extends certain initiatives for small business, while also impacting taxes payable for small business owners:

Lifetime Capital Gains Exemption

The lifetime capital gains exemption, has been increased for the first time since 2007, from $750,000 to $800,000, effective for the 2014 taxation year and applies to the sale of qualified property, small business corporation shares and farm and fishing equipment. The exemption will be indexed to inflation for taxation years after 2014.  This can be particularly beneficial to small business owners who are looking to sell their businesses for retirement (or an extended vacation to a warm sunny beach) as it can result in up to $12,000 in tax savings (for taxpayers in the highest tax brackets).

Hiring Credit for Small Business

The hiring credit, which provides a tax credit of up to $1,000 to businesses that pay more in EI over the previous year, has been extended.  This is a small, yet effective (and pleasant when accompanied by a reduction in payroll taxes payable) hiring incentive for small business.

 Tax Rate for Eligible Dividends

Unfortunately for small incorporated business owners who pay themselves dividends, the effective tax rate for dividends is increasing. In theory, tax on dividends (which is somewhat complicated as it involves grossing up the dividend and then providing a tax credit) should be effectively the same as paying a salary.  In practice, there has been imbalance due to a reduction in tax rates over the years without a corresponding change in dividend tax rates.  This budget attempts to correct that imbalance by reducing both the gross up amount, from 25% to 18% ,and the dividend tax credit from 2/3rd to 13/18th.  The net effect will be a decrease in the tax credit from 16.67% to 13.00% of the dividend amount. 

Accelerated CCA for Machinery and Equipment

 In 2007 the government introduced a measure to allow companies in the manufacturing sector to depreciate machinery and equipment using a 50% straight line depreciation rate compared with 30% declining balance rate.  This benefits manufacturers by providing them with tax savings that will allow them to reinvest in their businesses.  This measure has been extended to M&E purchased in 2014 and 2015. 

Canada Job Grant

Any businesses that intend to train workers for an existing job or a better job will be allowed to apply for a Canada job grant.  The federal government will contribute up to $5,000 assuming that both the applicable province and employer match these amounts, towards training at eligible training institutions.  This falls under the labour market agreement which is expected to be renewed with the provinces and territories starting in 2014.

Apprenticeships

Canada has a significant shortage of skilled workers, which is hampering growth.  To this end the EAP proposes to reallocate $4 million over a period of three years towards harmonizing the requirements for apprentices among the provinces and other measures to ensure that apprentices complete their training and are mobile across the country.  Already in place are apprenticeship grants and tax credits, available to both apprentices and employers that incentivize completion of the training program.  

Red Tape Reduction Efforts

Per the EAP, a dedicated small business team has been put into place “for coordinating and addressing small business issues”.  They have introduced a number of electronic services and are collaborating with provinces to make the CRA business number the common identifier, the goal of which is to reduce time wasted on contacting several departments  ( for anyone who has ever tried to change their address with the government  this is a huge step).  Agents at the CRA are also now required to provide their first name and agent ID to increase accountability.  Finally the approval time for third party representatives has been reduced from 14 business days to 5, while an online option is slated for implementation in 2014.

At December 31, 2011 there were 1.1 million businesses in Canada, of which 98% were considered small (less than 100 employees).    Recognizing their importance to the Canadian economy, the government does seem committed to reducing the barriers to entry for small business and ensuring that tax rates remain manageable.