Income Tax Update 2019 – Post Election
More on the Federal Budget 2019
Easier Access to Scientific Research & Experimental Development Program (SRED)
- Canadian controlled private corporations (CCPCs) are entitled to a very generous refundable tax credit of 35% on qualifying annual SRED expenditures, up to a maximum of $3 million of expenditures.
- A CCPC is a private corporation, not public which is traded on the stock exchange, and is controlled by a Canadian resident. A Canadian resident for tax purposes is a question of fact based on residential ties.
- Before the federal budget, the SRED expenditure limit and resulting tax credit were reduced the higher the business income.
- After the budget, a CCPC can get this credit irrespective of income.
- This change also bodes well for companies doing research and development work for climate change.
100% Tax Deduction on New Zero Emission Vehicles up to $55,000
What is a Zero Emission Vehicle?
- A plug-in hybrid or
- Fully electric or
- Fully powered by hydrogen
- The above vehicles must be purchased on or after March 19, 2019 and before January 1, 2024.
- Where the cost exceeds $55,000, that balance gets deducted at 30% a year on a declining basis.
Tax on Split Income (TOSI) Rules Here to Stay
- In line with the fairness of our Canadian tax system, these rules were introduced by the Liberal federal government to eliminate a grey area on family income splitting that was being abused by family businesses paying children and spouses something they were truly not earning. Read more on my blog “Proposed Morneau/Trudeau Tax Changes – What You Need To Know”.
- The Conservatives wanted to do away with the rules if they had won the election, but they are here to stay.
2019 Combined Federal and Ontario Personal Taxes
- The marginal tax rates on regular income (i.e. salary, interest) range from 20.05% on the lowest bracket of $43,906 to 53.53% on the highest bracket over $220,000, on capital gains income (from sale of investments) from 10.03% on the lowest bracket to 26.77% on the highest bracket, and on dividend income (distributions to CCPC shareholders of after-tax corporate profits) from 8.89% on the lowest bracket to 47.40% on the highest bracket.
- The Canadian tax system provides Canadian shareholders with a credit for income taxes paid within the corporation, thereby eliminating double taxation on dividends which still exists in the United States.
2019 Combined CCPC Low Corporate Tax Rate – How Do We Compare to the U.S.?
- Since January 1, 2018 the federal corporate tax rate in the United States was reduced by President Trump to 21%, but there are also state corporate taxes to consider. Our combined federal and Ontario low business tax rate of 12.5% on the first $500,000 of “active” business income is still lower that the federal rate of 21% in the United States. Read my blog on “Proposed Morneau/Trudeau Tax Changes – What You Need To Know” which explains the reason behind the attractive low business tax rate on “active” business income.
- It’s good doing business in Ontario!
2019 Salary/Dividend Strategy for Small Businesses
- Pay a salary to generate sufficient earned income to maximize following year’s RRSP contribution (2019 earned income of $151,278 to make a maximum RRSP contribution of $27,230 in 2020).
- Additional amounts needed by shareholders should be paid as salary or bonuses until the business income is at the $500,000 level.
- There is a slight preference for any additional amounts to be paid as dividends if the company is subject to Employer Health Tax. Otherwise pay salary.
Capital Gains Exemption – Thinking of Selling Your Small Business Corporation?
- The Capital Gains Exemption is now $866,912, an increase of $18,660 from 2018. This means that there is no capital gains tax on the sale of the first $866,912 of appreciation in the shares of your small business corporation if it qualifies based on “active” business tests.
Notice to Reader
Dean Constand CPA publishes this blog for information purposes only. Feel free to distribute to colleagues and friends. Although the material has been carefully prepared, it is not a substitute for professional advice.