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Small business corporations hit by new tax rules

Some major changes to how Canada Revenue Agency handles small business corporations are costing incorporated farms, especially those focused on expansion

Tax rules change. Some governments try to lower taxes, others claw back those tax wins. Currently, Ottawa seems to be gnawing away at what some see as the very foundation of this country’s economy, small business profits.

Incorporated businesses may be losing some of the tax advantages they’ve had over sole proprietorships, but are still in a much better tax position. The combined federal and provincial corporate tax rate on income up to the small business limit is 18.5 per cent or less in all provinces and territories — much lower than the general corporate rates. Previously, the federal portion of this small business tax was to decrease from 11 per cent to nine per cent over four years, starting in 2016. However, last year’s federal budget stopped that and instead said the rates wouldn’t go down in 2017 to 2019 and the small business federal tax rate will be 10.5 per cent indefinitely.

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Another big bite comes from a change in definition. Back in 1994 Revenue Canada started reducing the small business tax rate for corporations with more than $10 million worth of capital assets. Now farm corporations containing $15 million in net book value (the amount originally paid for it), no longer fall into the lower “small business” tax rates. This means some farms will now be considered a “large” corporation with assets worth more than $15 million, and taxed at a much higher rate.

Under this next category, the income tax rate jumps significantly but it varies between provinces. For example, in Alberta it went from 12.5 per cent to 27 per cent, says Kimberly Shipley, CPA with MNP in Red Deer, Alta.

Keep in mind that capital held inside a farm corporation is included in this taxable capital limit, but if held outside a corporation it isn’t part of the total capital calculation. So land or quota bought many years ago or personally owned doesn’t affect the small business designation. “It hurts younger farmers, who are growing aggressively and who have bought assets at a much higher value,” says Shipley.

According to Ron Friesen, CPA and partner for MNP in Saskatoon, the small business cap itself has not been re-evaluated or adjusted for inflation since 1994. “The $10 and $15 million benchmarks for taxable capital limits would have been aimed at large businesses 23 years ago, but in today’s dollars they’re impacting far more small- to medium-sized agricultural businesses.”

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Plus the tax hit will have to be paid a month sooner as the deadlines for defined “large” corporations is only two months and not the three for small business corporations, says Shipley.

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Additionally, new tax rules in effect for 2017 eliminate some tax synergies between multiple corporations. Family farms used to be able to pool their assets in a third company and include only a pro-rated percentage of the assets in the third company. Now the whole corporate group will only be entitled to one taxable capital limit of $15 million.

Also, profits shared between companies are being curtailed by a new way to refer to “intercorporate,” called “specified corporate income.” Certain profits generated through costs charged between two related groups or corporations, such as use of equipment or rent, might no longer benefit from the small business tax rate.

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It’ll likely benefit you to strategize now with your accountant on how to limit the effects of these changes on your family farm corporation, before the next tax year.

For further information read Ron Friesen’s article called Agriculture Businesses Caught in the Crossfire as Government Targets Large Tax Structures at www.mnp.ca.

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