Although the corporate tax rate remained unchanged, tax bills for these owners could increase as more “loopholes” for deferred or forgiven taxes are closed.
Despite the situation, “there's never been a better time to incorporate than today because rates are lower than they were, the threshold has been increased and the ability to income-split has been enhanced,” noted Ross McShane, McLarty & Co.’s director of financial planning, in a budget-day interview.
“There is wonderful opportunity even without a further reduction in rate today.”
The combined corporate tax rate in Ontario, which stood at 18.6 per cent in 2007, was reduced according to a schedule previously set out by the Conservatives. It fell to 16.5 per cent as of 2008 and then 15.5 per cent in July 2010, its current level.
Firms nationwide will collectively pay around $28.6 billion in corporate taxes in 2010-11, about one-tenth of the total government revenues of $235.6 billion.
Tax paid will be down from $30.4 million in 2009-10 but then increase to $32.1 million next year.
The decision to hold the tax at 15.5 per cent likely did not meet the approval of the Chamber of Commerce, PricewaterhouseCoopers, and OCRI, all of which had called for further tax reductions before the budget.
“It's a matter of being competitive with other jurisdictions,” said Claude Haw, chief executive of OCRI, in a pre-budget interview.
“Companies look at what their tax situation is going to be if we locate here, and what incentives are in place for it.
“And it's not just locating here,” he continued. “Not a high number of companies pick up and move. It's more likely they acquire a local company and then the decision is, do we keep it and grow, or do we wind it down.”
PricewaterhouseCoopers called for a corporate tax reduction and also noted that “high marginal personal tax rates,” which it said the government currently has, “reduce the return on investments in education, and discourage participation in the workforce by skilled individuals.”
As corporate tax cuts stalled, the government proposed a couple of individual taxation measures that could increase the personal tax load for small business owners and employees in startups.
“Some of the corporate interests will not be pleased by the tax loopholes we closed,” Finance Minister Jim Flaherty acknowledged during a budget-day briefing to journalists in the lockup.
Dividends vs. Salaries
There will be a small measure of relief for small corporations this year, which will receive an up-to $1,000 hiring credit to offset Employment Insurance premiums paid in 2010. This credit, which about 525,000 employers qualify for, is expected to reduce their payroll costs by a collective $165 million.
The government will also provide $50 million through 2013-14 to extend the targeted initiative for older workers, which is intended to help people in communities of less than 250,000, and provide $10 million until October to continue a work-sharing program giving employment insurance benefits to employees taking on a reduced work week to help out their company.
Still, as part of a “closing tax loopholes” package expected to yield $240 million in savings this year, individual pension plans would not be eligible for as generous of a tax deferral as they were in the past. Government savings on IPPs would be around $15 million.
Small business owners looking to draw a salary from their company would need to make catch-up contributions to their IPP through their existing RRSP assets, or their remaining RRSP room, as the case may be.
Further, upon retirement owners will need to draw down on their pension plans by a required minimum amount once they reach age 72, following similar requirements for when RRSPs are converted to Registered Retirement Income Funds.
“What that means, at the end of the day, is limited tax deferral and the minimum withdrawal amount is being adjusted,” Mr. McShane said.
An alternative for small business owners would be to instead receive “ineligible” dividends, or profits paid out of small business profits under $500,000. The tax rate would range from 0 per cent to 32.5 per cent, depending on the amount of the profit.
The government also noted there would be a review of current employee profit-sharing plans to see if “technical improvements” are required in this area, as it can be used to avoid Canada Pension Plan contributions and EI premiums since these profits are not paid as salaries.
Although these measures are not specifically billed as tax increases, Mr. McShane noted “the money needs to come from somewhere,” especially with the government running a projected $40.5 billion deficit in 2010-11, somewhat improved from a $55.6 billion deficit last year.
There are other measures passed that could see corporations paying more taxes, should they have a partnership or use flow-through shares.
Corporations with “significant interest” in a partnership would need to report partnership and corporation income in the same year, even if the partnership has a different fiscal year – stopping a past option for a tax deferral.
Capital gain tax benefits would also be reduced on donating flow-through shares, which already receive another tax benefit in the form of a deduction.