Canadian business owners have been obsessed with the tax changes proposed by the federal government back in July. The change I am talking about today is the additional tax that the feds are looking to charge on investment income earned in an active business.
Any small business that carries on an active business pays corporate tax at around 14%. This leaves 86% of profits available to retain in the business or pay out as dividends to the shareholders. Remember we are talking about profits – the amount that is left over after all expenses have been taken into account. If your business has a profit of $10,000 you pay $1,400 in taxes and have $8,600 left over for the shareholders.
The federal government sees a problem with this because it means that a business owner has more money left over in their corporation than an employee would have left over after paying personal taxes. The feds want to figure out a way to tax income that is retained in the business at a higher rate – somehow.
The issue is not so much with the income earned on investments. Any income earned by the corporation as dividends, interest and capital gains is already taxed at a higher rate because it is not active income.
To come to the point – In October the federal government established a threshold for the new (as yet unexplained) rules. If the business has enough surplus investment on their books that they are earning more than $50,000 a year in income from this investment then a higher tax will apply – somehow.
This change is welcome. In order to earn more than $50,000 a year in investment income it is estimated that you would need to have $1,000,000 invested. Most of the business owners I talk to do not have more than $1,000,000 invested inside their small business corporation.
Most small business owners no longer have to worry about any proposed rules changing the amount of tax they are paying – because they don’t have $1,000,000 in investments inside their corporations.