It’s tax season again and if you run your own business, you need to know about small business tax changes for the 2019 fiscal year.
The tax deadline for self-employed individuals is June 15th, 2020, but interest starts accruing on any taxes owed after April 30th, 2020.
Still 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 changes to EI premiums and accelerated investment incentives.
The changes you should know for 2020
When you own a small business, every penny counts. Be sure to see if you qualify for any of these changes:
- Small business tax relief
- Changes to EI premiums
- Changes to the CPP
- Accelerated investment incentives
- New rules for writing off machinery and equipment
- Clean energy equipment changes
- Changes in income-splitting rules
Let’s look at these one at a time, starting with the biggest one first.
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. In 2018, the Canadian government reduced the small business tax rate from 10.5% to 10%. And in 2019, they made it even lower. As of January 1st, 2019, the small business tax rate is 9%.
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 2019 tax savings to build one. It’s one of the best long-term investments you can make.
2. Changes to EI premiums
Another source of relief for small business owners is that EI (Employment Insurance) premiums have gone down again. In 2019, EI premiums moved from 1.66% to 1.62%.
The Finance Minister claims that this rate is the lowest it’s been since 1980. Any employers who have to pay EI will appreciate the small degree of relief this year.
3. Changes to the CPP
While EI premiums are going down, the Canada Pension Plan (CPP) contributions are going up. As of 2019, the maximum pensionable earnings for the CPP increased to $57,400. In 2020, it will jump to $58,700.
And with that change, the employee and employer contribution rates for the 2019 fiscal year were bumped up to 5.1%. In 2020, it will go up again to 5.25%. As a business owner, you may be expected to make CPP contributions on your employee’s behalf.
4. Accelerated Investment Incentive
As of the 2018 fiscal year, the government brought in accelerated capital cost allowances for assets purchased after November 21st, 2018. Small businesses and self-employed workers can now claim deductions earlier than in past years.
Capital cost allowances work like this:
- 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, 2018 and available for use before 2024 can be deducted in the first year.
Furthermore, the accelerated investment incentive suspends the half-year rule.
5. New rules for writing off machinery and 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.
6. Clean energy equipment changes
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
- 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.
7. Changes in income-splitting rules
Income-splitting rules were officially changed in 2018, 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.
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 changes in income splitting rules and CPP contributions.
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.
UPDATE: This small business tax changes post was originally published on 17 April 2019 and was updated on 11 March 2020.