On June 21, 2018, Bill C-74 received Royal Assent. The bill, Budget Implementation Act, 2018, implements a number of the measures outlined in the 2018 Federal Budget. Some of the key changes for small business owners to note include:

1. Reduction in the small business tax rate

The small business tax rate is 10% in 2018 and will be reduced to 9% for 2019. For shareholders receiving non-eligible dividends, there are corresponding reductions in the gross-up to the taxable amount and in the dividend tax credit.

2. Tax on Split Income

The provisions to the tax on split income are complex. The focus remains on shareholders under 25 years of age, but may apply to those 25 and over. The key exemptions for excluded amounts include inheritance, divorce, capital gains on qualified farm and fishing property or qualified small business shares, or where the recipient is a full-time student or qualifies for the disability tax credit. There are also exclusions that correlate the income received with the contributions made by the individual and include safe harbor returns, reasonable return, excluded business, and excluded shares. Please consult your BNG advisor before paying income or realizing gains on shares.

3. Reductions in the Small Business Deduction

Associated corporations are required to share the small business deduction (SBD) of $500,000. If the associated corporations’ taxable capital is greater than $10 million there is a reduction in the SBD. Where taxable capital is more than $15 million the SBD is eliminated altogether. For taxation years beginning after 2018, the SBD is reduced by $5 for every $1 of “adjusted aggregate investment income” (passive income) exceeding $50,000 in the preceding year. If $150,000 in passive income is earned the SBD will be eliminated. If both reductions are applicable to the SBD, than the larger reduction applies.

4. Restricting Dividend Refunds on Eligible Dividends Paid

In 2018, the payment of a taxable dividend will result in a dividend refund equal to the lessor of the refundable dividend tax on hand (RDTOH) and 38.33% of the taxable dividend. For taxation years beginning after 2018, the RDTOH will be divided into two pools: Eligible RDTOH and Non-eligible RDTOH. The result is that the Non-eligible RDTOH may only be accessed for a refund on the payment of non-eligible dividends. In addition the Non-eligible RDTOH must be paid out before the Eligible RDTOH can be refunded. There are transitional rules to be applied in 2019 to any RDTOH balance existing at the end of 2018. Please consult your BNG advisor before paying eligible dividends.

Disclaimer: This article is intended for general information only and is not intended as legal opinion or advice. The views and opinions expressed do not reflect the official position of BNG Bossy Nagy Group or any other affiliate.