Canada Reduces Tax Rates for Small Businesses

The Canadian government has continually shown support for small businesses in several different aspects. The federal budget revealed earlier this year in April confirms that the government is always striving to help its entrepreneurs. Along with a new TFSA contribution limit and lower RRIF withdrawal minimums, the budget also announced that the Conservative government has cut tax rates for small businesses from 11% to 9% over the next four years.

Effective January 1, 2016, the small business tax rate will decrease to 10.5% and continue to drop 0.5% per year until 2019. This change is applicable to businesses with an eligible taxable income limit of $500,000 annually, an amount that has gradually increased since the Harper government came into power in 2006. As the largest tax rate cut in more than 25 years, this adjustment will guarantee an average reduction of $1.2 billion a year in taxes. In addition, the Dividend Tax Credit (DTC) rate will also change accordingly at the same pace to simultaneously “maintain appropriate tax treatment of dividend income.”

Photo by: Chris Tolworthy licensed under Creative Commons Attribution 2.0 Generic

Canada’s Views on Small Business Taxes

Canada’s philosophy on taxes is based on the principle that small businesses are an integral part of our economy. Measures approved by the Parliament are always taken with the intention of helping smaller companies. For example, the government is strongly committed to keeping taxes low for businesses with under $15 million in taxable capital. By keeping taxes down, this ensures that small businesses can retain more earnings. Furthermore, these numbers have already been reduced significantly from 13.12% in 2006 to 11% in 2008, when the annual eligible income for this rate was also raised from $300,000 to $500,000. As a result of the most recent tax rate cut, almost 700,000 businesses across the country will benefit from the lower rates. This, in turn, will generate additional resources for job creation and sustained growth in the Canadian economy.

How the Government Helps Small Businesses

The federal government frequently recognizes that small businesses are “engines for job creation” and understands the importance of encouraging entrepreneurship in Canada. It has been especially keen on helping these enterprises by offering ongoing support with substantial tax assistance and improved access to financing. With the proposed tax rate cut, the federal corporate income tax in 2015 will be 34% lower than in 2006. By the time the small business tax rate is dropped down to 9% in four years, the amount of federal corporate income tax paid will be 46% lower than in 2006. This will reflect an overall reduction of $38,600 a year to fuel business growth.

Other projects that the Canadian government have participated in include:

The Venture Capital Plan to improve access to venture capital funding needed to create jobs
The Business Innovation Access Program in 2013 to access business services and technical assistance at Canada’s learning institutions
The Lifetime Capital Gains Exemption, which has been steadily increasing since 2007 to bring tax relief to small business owners
Futurpreneur Canada, by providing $14 million to support young entrepreneurs
Action Plan for Women Entrepreneurs, as a channel to encourage women business leaders

Related Links
Canada’s Economic Action Plan
http://actionplan.gc.ca/en

New TFSA Limit 2015
https://www.ironshield.ca/articles/new-tfsa-limit-reaches-close-but-not-quite-to-proposed-11000/

Lower RRIF Withdrawal Minimums Benefit Seniors
https://www.ironshield.ca/articles/lower-rrif-withdrawal-minimums-more-flexibility-for-seniors/

Lower RRIF Withdrawal Minimums—More Flexibility for Seniors

The annual federal budget revealed in April 2015 brought along changes that have a profound impact on the financial industry. Along with the decision to raise the contribution limits of TFSAs, it was also announced that the government has proposed new rules for Registered Retirement Income Funds (RRIF) and lowered the mandatory withdrawal minimum for seniors significantly. In today’s blog post, we will take a quick look at how the new RRIF rules will affect seniors and their retirement savings.

Currently, seniors that have reached 71 years of age are required to withdraw the minimum amount from their RRIF each year. Up until the federal budget of 2015, this amount was 7.38% of an individual’s RRIF. The new changes will decrease the mandatory withdrawal significantly to 5.28%, but will continue to increase at a slightly faster rate per year. However, instead of capping off at 20% by the age of 94, the cap will now be reached at age 95.

Photo by: American Advisors Group licensed under Creative Commons Attribution 2.0 Generic

Reasons for the Change
Living in Canada has changed dramatically since 1993, the year when the former 7.38% withdrawal rate came into effect. Since then, the average life expectancy in Canada has improved from about 77 years to 81 years by 2012; it is certainly even higher today. The proposed RRIF rules are meant to reflect the change in the Canadian way of life and “reduce the risk of people outliving their savings.”

Investment industry groups, including CALU, and seniors’ organizations, such as CARP, have been active over issues regarding an individual’s retirement savings for years. They have often voiced their concerns about eliminating or pushing back the age at which the mandatory withdrawals began. Now, seniors can accumulate their savings longer and have more flexibility when it comes to managing their money in a tax-efficient way.

Useful Tips and Advantages
The new withdrawal minimum in RRIFs allows almost 50% more capital to be preserved by the age of 90. It is estimated by the federal government that the RRIF changes will save seniors $670 million in taxes over the next five years until 2020.

For wealthier Canadians, it is best to remember not to leave too much money inside your RRIF because this will lead to a higher tax liability upon death. While withdrawing a certain amount of money will trigger some taxes, it will correspond with your marginal tax bracket at the time. Therefore, the longer you accumulate your money, the more likely it is for taxes to be triggered in an estate and pushed to a higher tax bracket.

Four Mistakes to Avoid When Creating a Retirement Plan
https://www.ironshield.ca/articles/four-mistakes-to-avoid-when-creating-a-retirement-income-plan/

New TFSA Limit Reaches Close—But Not Quite—to Proposed $11,000

Last month, the federal budget revealed that the new Tax-Free Savings Account (TFSA) limit had been raised from $5,500 to $10,000 per year. While this is nearly doubled the original limit, it falls short of the expected $11,000. Still, the 82% increase in contribution room will have a significant change in your financial planning. In today’s blog post, I want to take a look at how the new TFSA limit will affect you.

Photo by: GotCredit licensed under Creative Commons Attribution 2.0 Generic

If you are an eligible client who has not contributed since the TFSA was introduced in 2009, you now have a contribution limit of $41,000. Investors who put the full $10,000 will save $3,708 in tax over the course of ten years, and increase their after-tax investment income by 12%, at a 5.5% rate of return. Taking advantage of the new limit produces better results than if you had contributed $5,500 at the original limit and $4,500 to a non-registered account.

Although the budget hasn’t technically been passed yet, the CRA has announced that the change in the TFSA contribution room is effective immediately. So if you had already used up the $5,500 annual limit this year, don’t worry—you can still add an additional $4,500 without being penalized.

It’s safe to say that even with the change, Canadians in the middle tax brackets—those who earn around $50,000 a year—are not likely to contribute more than the original $5,500. This is because that amount represents nearly 20% of their pre-tax earnings, so these numbers make it highly improbable that middle-income clients would make use of the full $10,000 in any case.

The good thing about the new limit is that it greatly benefits both lower-income and wealthy clients. If you are making less than $50,000, the extra contribution room makes TFSAs more preferable to RRSPs because investment income made in a TFSA and withdrawals are both tax-free. With the increased limit, you will find that a TFSA may be ideal for long-term purposes such as retirement. Similarly, clients nearing retirement will find that they can make withdrawals earlier and move their proceeds from a RRSP to a TFSA. Traditionally, the money in a RRSP is left alone for as long as possible before making withdrawals in order to continue the tax deferral. With the money being in a TFSA, they will be now be able to withdraw without incurring taxes.

If you are making more than $50,000 annually, you can now transfer investments in a non-registered account to a TFSA. With more contribution room, clients should look at how much those assets have increased in value and why the money is needed before moving these investments. In addition, you want to put in investments that don’t have much capital gain in order to avoid taxes upon withdrawal. Moving money between a non-registered account and a TFSA allows advisors to manage their clients’ investments more effectively.

A new limit for the TFSA allows advisors more creativity when it comes to helping their clients with financial planning. Be sure to speak with your financial advisor today about what works for you and how to make the most of the new TFSA limit.

Quick Facts

In 2013, 11 million people had opened TFSAs and 1.9 million people had hit their contribution limits.
The new TFSA limit will cost the government about $1.1 billion in reduced taxes by 2020—within 5 years

Related Links
Top TFSAs Myths Debunked
https://www.ironshield.ca/articles/tax-free-savings-accounts-tfsa-myths-and-tips/

TFSA vs RRSP
https://www.ironshield.ca/articles/tfsa-vs-rrsp-wheres-the-best-place-for-your-money/

Tag Archives: federal budget 2015

Canada Reduces Tax Rates for Small Businesses

Lower RRIF Withdrawal Minimums—More Flexibility for Seniors

New TFSA Limit Reaches Close—But Not Quite—to Proposed $11,000

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