While the 2012 federal budget brought good news for entrepreneurs and their businesses, it also held some bad news for companies with certain types of employee compensation arrangements. Some of the budget changes take effect right away, so now is a good time for business owners to assess the impact those tax changes will have on their companies.
On the good news side, private companies may benefit from increased flexibility in paying lower-taxed “eligible” dividends and higher thresholds to allow more businesses to use simplified methods for calculating GST/HST and the related input tax credits.
However, the budget tightens the tax rules applying to arrangements for employees’ profit sharing, retirement compensation arrangements and sickness or accident insurance.
Budget changes to support for research and development, on the other hand, are a mixed bag for private companies. While the budget reduces the tax credit available under the Scientific Research and Experimental Development program for many companies, it also provides more direct funding for R&D.
As with many tax matters, whether your company will do better or worse under the new regime will depend on its circumstances.
SR&ED tax credit The general SR&ED tax credit rate will go down but the higher special rate for qualifying Canadian controlled private corporations will remain the same. Under the SR&ED program, a wide range of activities are eligible, including work to improve processes and trying different technologies to accomplish a result.
The SR&ED general tax credit rate will be reduced to 15% from 20% as of Jan. 1, 2014. CCPCs will still be eligible for a 35% refundable tax credit on SR&ED expenditures up to $3-million, and 15% on expenditures over that amount. This 15% credit for CCPCs is only partly refundable.
For all companies, capital expenditures will no longer qualify for the SR&ED credit but all other expenses such as salary and wages, materials, overhead expenses and contract payments will remain eligible, although only 80% of contract payments are eligible for the credit as of Jan. 1, 2013.
Companies using the simplified proxy method to determine eligible overhead expenses will have to reduce the proxy amount to 55% of direct labour costs from 65%, as of Jan. 1, 2014.
Although some companies may get less from the tax credit after this year, the government says it will provide $400-million for venture capital activities for private sector investments and an additional $110-million a year for the Industrial Research Assistance Program, which supports R&D projects by small and medium-sized businesses.
Eligible dividends If your company pays tax on any of its income at the general corporate rate rather than the small business rate, it may pay its shareholders eligible dividends, which are taxed at a lower rate than non-eligible dividends. Shareholders may save up to 12% in tax, depending on their province of residence.
Before the budget, the rules for paying eligible dividends were strict — the full amount of a dividend had to be either eligible or non-eligible and the eligible designation had to be made when the dividend was paid. As of March 29, 2012, corporations can designate part of a dividend as eligible and part as non-eligible. If they don’t designate any amount as eligible when the dividend is paid, they may be able to do so within three years after the designation was first required, but the Canada Rev-enue Agency has to agree to the late designation.
GST/HST The budget doubled the thresholds for using simplified methods to calculate GST/HST to remit and to claim input tax credits, which may allow more small businesses to streamline GST/HST administration. Your business can use the Quick Method for GST/ HST if you have $400,000 or less in annual GST/HST-included taxable sales (up from $200,000).
To use the Streamlined Input Tax Credit Method, your business must have $1-million or less of annual taxable sales (up from $500,000) and $4-million or less of annual taxable purchases (up from $2-million). These changes will apply to businesses’ GST/HST reporting periods after 2012.
Compensation arrangements The budget tightens the tax rules affecting plans private companies may have set up for retirement compensation arrangements, profit sharing or sickness or accident insurance for their employees. For example, if an employee in your company’s profit-sharing plan is a significant shareholder or a family member, he or she may be subject to a new tax if the company’s contribution to the plan for that employee exceeds 20% of the employee’s salary. These plans have been popular for deferring tax, especially for business owners and family member employees. The changes will make these plans significantly less attractive.
Also, if you have a retirement compensation arrangement (RCA) — a supplemental, non-registered pension plan for key employees — the RCA will no longer be allowed to invest in your company or other related entities. RCAs may hold investments that were previously permitted but have become prohibited. Consult your tax advisor for help with the complicated new rules that apply to RCAs and certain other employee compensation arrangements.
With a majority government in power, we expect these tax measures to become law without significant changes. Planning ahead can help your company take the best advantage of any tax savings opportunities the budget might offer you.
Deb MacPherson is a partner with KPMG Enterprise in Calgary.