The 2019 small business tax changes you need to know about

Lighten your load

It’s tax season again and if you run your own business, you need to know about small business tax changes for the 2018 fiscal year.

The tax deadline for self-employed individuals is June 17, but interest starts accruing on any taxes owed after April 30.

There is a lot of good news for small businesses, as the Canadian government focuses on supporting them. In addition to a reduction in the small business tax rate, there are:

  • New rules for writing off machinery and equipment
  • Incentives for investing in clean energy equipment
  • New business investment incentives

These small business tax changes will allow businesses in a variety of sectors to acquire the assets and equipment they need to grow.

Related: Everything you need to know about working capital

5 changes you should know about

Here are the five tax code changes that could reduce your tax obligation for fiscal year 2018.

  1. Small business tax relief.
  2. Accelerated investment incentive.
  3. New rules for writing off machinery & equipment.
  4. Clean energy equipment changes.
  5. Changes in income-splitting rules.

Don’t pay more than you should — claim the tax credits you’re entitled to.

1. Small business tax relief

One of the first small business tax changes you should know about is the reduction of the small business tax rate.

Effective January 1, 2018, the small business tax rate dropped from 10.5% to 10%.

There’s even better news for next year, when the Canadian government will cut the rate from 10% to 9%. But for now a half-point decrease will go a long way.

The Department of Finance claims this could mean up to $7,500 in federal tax savings for small businesses every year. The savings can be used to reinvest in development, equipment and hiring.

Editor’s note: If your business doesn’t have a website, consider using your 2018 tax savings to build one. It’s one of the best long-term investments you can make.

2. Accelerated investment incentive

For the 2018 fiscal year, the government has brought in accelerated capital cost allowances on assets purchased after November 21, 2018.

Small businesses can now claim deductions earlier than in past years.

 

Capital cost allowances work like this:

  • Businesses can deduct the cost of purchases of depreciable property when it becomes available.
  • The property must be used to generate income in the year that the business claims a deduction.
  • The business cannot deduct the full amount right away. Rather, they must deduct a percentage over time to accurately reflect the property’s depreciation
  • The accelerated investment incentive excludes machinery and equipment used by manufacturers and producers.

Historically, capital cost allowances have been subject to the half-year rule. This rule reduces the cost of acquisition by 50 percent when it was purchased close to the end of the year.

Thanks to the accelerated capital cost incentive, businesses can now deduct larger amounts up-front. The new incentive is designed to encourage small businesses to invest and expand sooner. Capital purchases made after November 21 and available for use before 2024 can be deducted in the first year.

Furthermore, the accelerated investment incentive suspends the half-year rule.

Related: Digital security checklist — 5 simple steps to protection

3. New rules for writing off machinery & equipment

The new rules for writing off machinery and equipment allow businesses to immediately expense the full cost of equipment used in manufacturing and processing.

This small business tax change will help industry grow.

 

In previous years, manufacturers could only deduct a quarter of the cost in the year the purchase was made.

For example, a business earning $150,000 a year purchases equipment that costs $100,000. Under previous rules, only $25,000 of the purchase could be deducted in the initial year, leaving $125,000 of taxable income.

Now, the businesses can reduce their taxable income to $50,000 by claiming the full $150,000. Immediately expensing the full cost of new equipment purchases will make it easier for manufacturing and processing businesses to expand.

4. Clean energy equipment changes

Small Business Tax Changes Men Installing Solar Panels
As of 1 January 2018, businesses can expense the full cost of eco-friendly improvements.

Businesses can also immediately expense the full cost of clean energy investments. The incentive is designed to both help businesses expand and to switch over to clean energy equipment, a win-win for both business and the environment.

Qualifying clean energy items include equipment such as:

  • Solar panels
  • Ground source heat pump systems.
  • Specified-waste fuelled electrical generation systems.
  • Wind energy conversion systems.
  • Heat recovery equipment.
  • Wave or tidal energy equipment.
  • Small-scale hydro-electric installations.
  • Geothermal electrical generation equipment.

You can find more information about clean energy equipment eligible for immediate full-cost expensing from Natural Resources Canada.

Related: Time is money

5. Changes in income-splitting rules

Income-splitting rules have changed, making it harder for businesses to use income-splitting as a way of reducing their tax burdens.

In the past, small business owners could reduce their taxes by paying dividends to family members.

Small Business Tax Changes Student with Backpack
Photo: Element5 Digital on Unsplash

Many small business owners used these dividends to help fund their children’s education funds and make cash flow more flexible for their families. By splitting or sprinkling income through the family, dividends could be paid out in smaller income tax brackets.

The new rules require small business owners to prove how family members have contributed to the business in the last five years in order to receive dividends at a lower tax rate.

Now family members need to have an active role if they are going to take money out of the business.

If you are a small business owner who has used income-splitting in the past, this could mean reevaluating your personal and family finances. You may want to look into new ways of reducing your expenses to offset this small business tax change.

Take a long hard look at your budget and see where you can cut costs on entertainment, internet and cell phone bills, utilities like electricity, grocery store bills, and with the new carbon tax, transportation costs.

It’s also a smart idea to start using cash exclusively. Set a realistic amount of money to live on each week and withdraw that amount of cash. If you want to know how to budget and stick to your plan, leave the credit cards at home.

Make the most of the small business tax changes

Despite the changes to income-splitting, there is still plenty of small business tax relief to enjoy. Talk to your accountant about how you can take advantage of new rules for writing off equipment and capital investments, as well as adapting to new income splitting rules.

Stay on top of your tax deadlines and make sure you take full advantage of new small business tax changes. These changes are designed to help small businesses invest in themselves, hire new employees and make major capital purchases sooner.

Richard Sklar
Richard Sklar is a Chartered Insolvency Restructuring Professional and Certified Insolvency Counsellor based in Toronto. He helps his clients get the fresh financial start they need and provides tons of information regarding personal debt and other financial topics over at the David Sklar & Associates blog. Richard has taken on the additional task of helping those Toronto-area residents who are in need of debt management support find their solutions at David Sklar & Associates. He knows that debt resolution is not the end — it is a new beginning — a fresh start for a brighter financial life.