2018 – the year of the tax misplays? It certainly feels that way. Every client we work with seems to have been caught in at least one of the tax changes this year. It could just be our math, but this appears to be more than the 3% that were originally predicted to be impacted.
#5 – Small Business Tax Rate (Tax Play)
Let’s start with a small win in the big picture of things. For 2019, the combined Small Business Tax Rate will decrease from 12% to 11% on your first $500,000 of active business income. In the world of football, let’s call this a first down.
#4 – BC Speculation Tax (Tax MISplay)
For those of you with an extra property in the defined region, this could cost you an extra .5% on the assessed value of your property. All is not lost though. There could be an opportunity to designate the BC property as your principal residence. There are also various exemptions available (i.e. longer-term rentals). If you own a property in BC, you’ll want to check this out.
#3 – Accelerated CCA for Eligible Property (Tax Neutral)
This was the only tax change in the Fall Economic Update. It changes the first-year CCA deduction for property acquired after November 20, 2018. Overall, equipment will have CCA at 1.5 times the normal CCA rate in the first year. Manufacturing and processing and clean energy equipment will have full deductions in the first year of use.
The increased first-year CCA is being sold as a tax advantage but it’s actually a timing thing. Accelerated CCA in the first year allows a greater CCA deduction now, but the total CCA deducted over the life of the asset remains the same. Given the full first-year deduction for manufacturing and processing, it may be worthwhile to review the category definitions to see how that might work in your favor. Perhaps a new play?
A warning though – this is like kicking a field goal when you need a touchdown for the win.
#2 – Passive Income Changes (Tax MISplay)
The full impact of this tax misplay is going to be first noticed in 2019. It’s going to be that nagging injury from our glory days that we’re going to have to switch strategies for.
When your passive income exceeds $50,000, every $1 will grind your SBD by $5. If you reach $150,000 of passive income, there will be no SBD available in the following year. This means that your corporate tax rate on active business income will increase to 27%. It also means that you may have access to “eligible” dividends, which have a more favorable personal tax rate. It changes where the majority of your tax is paid (corporate vs personal). Here’s the nitty gritty that we discussed earlier in 2018.
We’re calling this one a misplay though because it discourages saving for retirement inside your corporation. Penalizing entrepreneurs for the rewards earned on the risks they have undertaken in order to remove their “advantage” is a short-sighted strategy.
#1 – Tax on Split Income (Tax MISplay)
This one is hitting hard. Like a repeat punch to the gut. There’s quite a spread in the final score (or net cash to the family) from 2017 to 2018. We’ve talked about this with most of you this year. Which just tells you what kind of havoc this tax change is causing. A more detailed analysis of the increased personal tax can be found here.
This is a MAJOR tax misplay. The failure to recognize risks undertaken by non-primary shareholders is egregious. Although they may not be directly involved day to day, every small business is a team effort.
The rules of the game are changing. So, we revisit current short-term goals, take an even closer look at the long game and, adapt. Design the new plays, so to speak. Eye on the prize.