In addition to the proposed legislation to reduce Canada’s small business tax rate to 9% (from 10.5%) by 2019, Canada Finance Minister Bill Morneau’s fall economic update also makes consequential adjustments to the dividend tax credit rate and enhances the Canada Child Benefit, among other changes.
Finance recently announced that it would reduce its small business tax rate along with other changes it intended to make to its proposals on the taxation of private companies.
This Fall Economic update reaffirmed Finance’s intentions to clarify and cancel certain aspects of these proposals, but it did not provide any further information.
Canada Reduces Small Business Tax Rate to 9%
The fall economic update decreases the federal small business income tax rate that applies to the first $500,000 of qualifying active business income of a Canadian-controlled private corporation to 9% (from 10.5%), to be phased in as follows:
- 10% effective January 1, 2018
- 9% effective January 1, 2019
The reduction in the small business income tax rate will be prorated for corporations with non-calendar taxation years.
Increase in Tax on Dividends
As a result of the proposal to reduce the small business income tax rate, the fall economic update also proposes to adjust the gross-up factor and dividend tax credit that applies to non-eligible dividends (generally, dividends distributed from corporate income taxed at the small business rate).
The effective federal tax rate on non-eligible dividends for taxpayers subject to the top marginal tax rate will increase as follows:
Dividend Tax Credit
Top Marginal Tax Rate
Note that this table reflects only the federal effective tax rate on non-eligible dividends.
The combined federal and provincial effective tax rate will depend on the individual’s province or territory of residence.
Enhanced Child Care Benefit
Canada’s fall economic update indexes the Canada Child Benefit to inflation.
As a result, the monthly payments provided under the benefit to eligible families will increase to a maximum annual benefit of up to $6,496 per child under the age of 6 (from $6,400) and up to $5,481 per child for those aged 6 through 17 (from $5,400) for 2018-19.
The income thresholds will also increase in these years so that families with less than $30,450 in net income will receive the maximum benefit (previously $30,000), with benefits phased out where adjusted family net income exceeds $65,975 (previously $65,000). The indexing of these amounts was originally scheduled to begin on July 1, 2020
This will provide low and middle-income families with an additional $5.6 billion over a 5 year period starting July 2018.
For a family with two dependents, the CCB entitlement will increase by approximately $200 in 2018 and by approximately $500 in 2019.
Working Income Tax Benefit
Canada’s fall economic update also introduces measures to provide additional funding to the Working Income Tax Benefit, a refundable tax credit for low-income workers.
The government indicated it will be providing an additional $500 million annually to the program commencing in 2019.
The government will provide further details on the design of this new incremental enhancement in its 2018 federal budget.
July 19 Consultation Paper
The government reconfirmed its intention to move forward with its previously-announced dividend sprinkling and passive income tax measures and its intention to not move forward with its proposed measures limiting access to the Lifetime Capital Gains Exemption and curtailing surplus stripping by converting income into capital gains.
More details on the dividend sprinkling measures are expected before the end of this year, and the passive income tax measures will be detailed in the 2018 Federal budget.