What are the two topics at the top of every Canadian small business's complaint list? Taxes and paperwork. The federal government is working on making both of these perennial thorns less irritating with the introduction of "substantial" tax reduction measures.
Any business tax reduction is a good thing, in my opinion, and what I especially like about this package of business income tax changes for 2008 is that there truly appears to be something for everyone. It may or may not be substantial, but every small business should see some benefit from these tax reductions, either by paying less income tax or by having less paperwork to do.
Here's a list of the Canadian federal government's 2008 income tax changes that may affect your business taxes in 2007 and 2008.
1. Corporate Income Tax Reduction
Effective January 1, 2008 the corporate income tax rate falls to 19.5% from 22.5%. Yearly tax reductions will see the corporate income tax rate fall to 15% as of January 1, 2012. These corporate income tax reductions, says the Department of Finance Canada, will give Canadian corporations the lowest tax rate on new business investment in the Group of Seven (G7) by 2011 and the lowest statutory tax rate in the G7 by 2012 (CNW Group Press Release, December 28, 2007).
2. Small Business Tax Rate Deduction
Another 2008 income tax change that applies to incorporated businesses is the decrease in the small business tax rate, which falls to 11% from 13.12% as of January 1, 2008. The small business tax rate is the the federal tax rate that applies to the first $400,000 of active business income of a qualifying Canadian-controlled private corporation.
3. Changes in Capital Cost Allowance Rates
In an attempt to make the Capital Cost Allowance (CCA) rates better match the length of time business assets actually last, the federal government has made several changes to the Capital Cost Allowance system. Computers and buildings are the two particular types of assets affected by Capital Cost Allowance rate changes that will affect the income taxes of most small businesses. The new CCA rates apply to assets acquired on or after March 19, 2007.
- Buildings used for manufacturing or processing:
New CCA rate: 10%
Old CCA rate: 4%
- Other non-residential buildings:
New CCA rate: 6%
Old CCA rate: 4%
- Computers:
New CCA rate: 55%
Old CCA rate: 45%
Note that there are some catches to applying the new Capital Cost Allowance rates to buildings. The new rates are offered as an additional allowance. In order to be eligible, a building must be placed in a separate class and "at least 90 per cent of the building (measured by square footage) must be used for the designated purpose at the end of the taxation year" (Budget 2007, Annex 5: Tax Measures: Supplementary Information).
There do not seem to be any such restrictions on applying the new CCA rates to computer equipment.
4. Temporary Incentive for Manufacturing and Processing Machinery and Equipment
The federal government is trying to encourage manufacturing by providing a temporary incentive that allows manufacturing businesses to write off their capital investments in machinery and equipment faster by using a special two-year 50% straight-line Capital Cost Allowance rate. This incentive applies to eligible machinery and equipment purchased on or after March 19, 2007 and before 2009.
Currently the CCA rate for such equipment would be 30%. Now it's not quite 50% off a year because of the half-year rule (which limits the CCA claim in the year an asset is acquired to one-half of the normal CCA deduction). So in year one, the deduction rate would be up to 25% (half of 50%), in year two up to 75%, and in year three, up to 100% (less any deductions claimed for previous years).
Businesses will also benefit from the 2008 tax changes that govern who has to make tax instalments and how often. These changes are presented on the next page of this article.
