Are lower taxes for small businesses a good idea or bad idea?

Why small businesses and economists differ in opinion

small business, entrepreneurs, taxes, tax breaks, budget 2015, federal budget, Tories, CanadaAlthough the federal budget was largely praised by the Canadian Federation of Independent Business (CFIB) and by small businesses themselves, not everyone is on board with what the Tories are proposing. Lowering the small business tax rate is great for owners and entrepreneurs, but remains a sticky point amongst economists.

So, why the difference in opinion?

The reduction of the tax rate is something the CFIB and independent businesses have been lobbying for for several years. The reasoning behind the government’s decision is to help small business owners retain more earnings that can in turn be used to reinvest and create jobs. Over the four-year period, owners are expected to save about $2.7 billion in taxes. Almost 700,000 small businesses will benefit.

However, economists looking at the bigger picture and the greater Canadian economy have a problem with this reasoning. According to UBC economics professor Kevin Milligan, many people set up small businesses to avoid taxation on a personal level, meaning not many jobs will actually be created.

The new tax rate also increases the tax gap between large and small companies, providing an incentive for businesses to stay under the $500,000 profit threshold, which is bad for the overall economy, says Jock Finlayson, chief economist with the Business Council of British Columbia.

Regardless, small businesses still need support, but Milligan would rather see a simplification of their administrative burden, and imports and exports, or a reduction of tariffs.

The next post in the series looks at how the budget affects female entrepreneurs.



Personal finances and the federal budget

How the budget affects your personal finances and family

federal budget, Family Tax Cut, TFSA, budget 2015, ToriesWhen announced in April, the Tories’ latest budget was lauded for how it helped small business owners. As any entrepreneur knows, not only do you have to take care of the business side, you need to keep your personal finances organized as well.

Luckily, we’ve got your back. Let’s review the three major changes to personal finances: Tax-Free Savings Account contribution limit, the Family Tax Cut and other measures, and the Registered Retirement Income Fund.

Tax-Free Savings Accounts (TFSAs)

The new TFSA contribution limit is now $10,000, up from the original $5,000. So, who benefits from this?

  • Those who use the full limit will save $3,708 in taxes over 10 years. However, the limit will no longer increase with inflation, meaning any further changes have to be legislated.
  • The change could make TFSAs more desirable than RRSPs for lower income households and retirees.
  • Wealthier Canadians can now move non-registered savings into TFSAs.
  • The middle income bracket (earning $50,000) won’t be affected as much, but it allows their financial advisors more creativity when planning.

The new limit is estimated to cost the government $1.1 billion in taxes by 2020.

The Family Tax Cut (FTC) and other personal touches

The Family Tax Cut is for two-parent families with at least one child under the age of 18 living at home. It’s based on income-splitting, but does not actually include the travel of of income from one partner to the other. One spouse receives a credit (up to $2,000) based on the tax they would have saved if income had travelled from the higher earner to the lower. So, who benefits from this?

  • The greater disparity of income between the earners, the greater the savings. If one spouse earns $100,000, and the other isn’t earning anything, they benefit the most. The higher earner “transfers” up to $50,000 (the limit) to the other. Both individuals are taxed in the $50,000 income bracket, which equals a lower rate and higher savings.
  • Other scenarios still benefit such as that between a $100,000-earner and a $75,000-earner who would save roughly $484; or between a $50,000-earner and a $40,000-earner who would save about $277.
  • Those in the same income bracket would not benefit from this. It only works if you’re shifting income to a lower tax bracket.

The FTC has been met with its share of controversy, as critics say it benefits the wealthy and only 15 per cent of households. Others believe it will lead to a small drain on the workforce, giving incentive for lower-income workers to stop working, particularly women.

Other family measures include expanding the Universal Child Care Benefit and raising the Child Care Expense Deduction limit.

Seniors and RRIFs

The budget proposes to reduce the minimum withdrawal rates on RRIFs for seniors 71 to 94 years old. This takes into account the longer life expectancy of Canadians living today. Seniors and disabled people can also use the Home Accessibility Tax Credit (HATC) to pay for renovations that make their homes safer and more accessible.

If you’d like to learn more about the changes, PwC outlines all the changes of the 2015 federal budget.

How the federal budget affects you

federal budget, balanced budget, Canada, Joe Oliver, small business, entrepreneursIt’s been a month since the Tories released their federal budget. The Economic Action Plan 2015 includes many funding and tax changes, particularly for small businesses.

In fact, many pointed to small business owners as the big winners of the federal budget — mostly due to the planned tax cut, from 11 to nine per cent over the next four years.

But besides the tax cut, how else does this budget affect small businesses? Here’s a breakdown of what to consider over the next few years:

  • Personal taxes: Once fully implemented, the tax cut will result in savings of $10,000 per year. However, these savings will likely be offset by higher personal tax on dividends paid out of small business earnings. When looking at this tax cut, it’s important to account for both corporate and personal taxes. (We’ll be discussing TFSA changes, the family tax, and other personal tax changes next week.)
  • Eligibility: The small business eligibility criteria is changing, meaning you can stay a small business for longer. A small business will soon include a business with gross annual revenues of up to $10 million, rather than capping at the current $5 million.
  • RRIFs: As a business owner, succession planning and retirement should always be on your mind. And it’s important to start early. The Tories will be reducing the amount that seniors are required to withdraw at the age of 71 and at the age of 80. It will then increase at 94 years old.
  • Young entrepreneurs: The budget also earmarks $14 million over two years for Futurpreneur Canada. It comes at a time when Futurpreneur is seeing more young people turn to entrepreneurship than ever. However, this money is conditional on Futurpreneur raising matching funds from non-federal sources.

Stay tuned next week when we discuss personal tax changes, including changes to the TFSA contribution limit and the family tax credit.

Your business and the federal budget

So the Tories released their balanced budget at the end of April. Since then, thoughts and opinions have been flying about the pros and cons of this budget. But what does this mean for you and your small business? At Homeroom, we thought we’d break it down for you in a new series, Your Business and the Federal Budget.

In this series, we’ll delve into:

  • The Budget 101 and the small business tax
  • Why the difference in opinion between the Canadian Federation of Independent Business and economists
  • New changes to the Tax Free Savings Account contribution limit and the family tax credit
  • How the budget affects female entrepreneurs

Keep checking back here, as we’ll be publishing a new post every Thursday. Stay tuned!