Finance Minister Joe Oliver’s first federal budget may have focused on pocketbook measures for voters, but small businesses should look closely at some of the promises made and incentives offered by the federal government. If you’re a manufacturer looking for a break during a rough time for the industry, an entrepreneur looking to exit and donate some of the proceeds to charity, a startup looking to buy your first office or a firm desperately in need of skilled workers, the budget holds the promise of better times ahead.
Every small business also stands to save from the reduction in the effective federal corporate income tax rate, and that’s good for the country according to David Steinberg, Partner and National Co-Leader for Private Mid-Market at EY. “All these tax changes are helpful for the economy because it allows small business owners to invest in the economy because they save more dollars,” he says.
Here’s how the budget could affect your business.
1. Tax relief
While large companies face a net federal corporate income tax rate of 15%, firms that qualify for the small business deduction pay an effective rate of 11% on the first $500,000 of their income. The budget proposes to drop this effective rate to 9% by January 2019, with a half-percent reduction every year beginning in 2016. Canada already offers one of the lowest tax environments in the world for businesses.
Finance Canada believes the change will save businesses $1.2 billion per year once fully implemented. The Canadian Federation of Independent Business (CFIB) said the move was a direct way to support SMEs. “Reducing the small business corporate tax rate was viewed by CFIB members as the most effective measure the federal government could take to strengthen the performance of small firms,” federation president Dan Kelly said in a statement.
2. Help with property purchases
The Canada Small Business Financing Act provides federal government-guaranteed loans to firms seeking capital to buy or improve property. The budget boosts the maximum borrowing amount from $500,000 to $1 million for property purchase, and raises the eligibility ceiling from $5 million in annual revenues to $10 million.
3. Training skilled workers
Finding the right talent to fuel growth is an increasingly critical concern for many businesses. Job candidates often lack the necessary training and abilities to step into the openings that companies are looking to fill. The so-called “skills gap” leaves businesses needing to train new recruits before they can start work and unspecialized job seekers frustrated at the meagre opportunities on offer.
The federal government is seeking to close the skills gap by bringing business and academia closer together. The budget provides for $65 million over four years (beginning in 20162017) to connect business and industry associations with post-secondary institutions to bring teaching in line with the needs of employers.
There’s also $4 million for “labour market information portal” and another $7 million to “support the relocation of youth and immigrants to areas where job opportunities exist.” But those sums are unlikely to go very far, and represent reallocations rather than new priorities.
4. EI reductions
The Employment Insurance (EI) Operating Account is currently taking in more than it’s paying out. If there’s one thing employers and employee can agree on, it’s that the EI surplus is a bad thing: employees would like the money to go to more generous benefits, while employers want their premiums reduced.
The budget sides with employers, but takes a long-term approach to getting there. It sets out a seven-year EI premium rate-setting mechanism that will peg premiums to the amount the government needs to pay in benefits, starting from 2017. Any surpluses in the EI Operating Account would be returned to payees (both businesses and their workers) via lowered premiums.
By current estimates, the change would mean a one-fifth drop in the EI premium rate from by 2017 (from $1.88 to $1.49).
5. Innovation incentives
Research and development (R&D) is an expense that too few companies prioritize. A 2013 report from the Council of Canadian Academies suggested Canada trailed OECD competitors in terms of innovation investment.
Businesses are increasingly outsourcing innovation to academic institutions, seeking to leverage pre-existing research capabilities in exchange for funding. The budget backs this kind of R&D, adding $56.4 million in funding starting in 20162017 for Mitacs, a non-profit that facilitates research internships at businesses for graduate students and postdoctoral fellows. “This new funding will support R&D collaborations, which will see graduate students transfer their skills from theory to application while our partner companies grow through innovation,” Mitacs CEO and Scientific Director Alejandro Adem said in a statement.
6. Manufacturing aid
Canadian and international companies alike have been doing less and less of their manufacturing in Canada, as other jurisdictions offer ever-juicier credits and subsidies to move factories elsewhere. For small manufacturers who wish to remain at home, the budget offers an incentive: a 10-year extension of the accelerate capital cost allowance (ACCA) provisions, which allow companies to depreciate the value of new machinery and tools at the accelerated rate of 50% per year for tax purposes.
While the government has telescoped its intention to extend the provisions for some time, Steinberg says the form that the extension will take was slightly unexpected. “It’s not quite as advantageous as it was under the temporary measure, but that is certainly a nice permanency to something that was around for a few years,” he says. “Under the temporary measure, you were allowed to write off your manufacturing equipment over three years, essentially. This measure is over a longer period, but essentially 90% is eligible to be written off over four years.”
7. Export support
Negotiating free trade agreements has been a central concern of the government in recent years. Deals with South Korea and Honduras have taken effect over the last 12 months, and a blockbuster deal with the European Union was agreed in principle. Trade Minsiter Ed Fast has publicly exhorted Canadian firms to take advantage of these deals, and now the government is backing up that suggestion with funds.
The budget includes $50 million over five years for an export market development program that will subsidize SMEs looking to enter new geographies. It also establishes an Internal Trade Promotion Office that could benefit firms struggling to break out of their home province.
8. Charitable rebates
In addition to the economic benefits generated by their businesses, many entrepreneurs have a charitable streak. But corporate social responsibility only lasts as long as there’s a company to back the initiatives. And while individuals are not taxed for the gains they receive from donating shares of a public company to charity, there’s no such provision for the owners of private firms. That’s set to change. “The budget is proposing starting in 2016 that if the business owner of a private business sells their company, and then within 30 days donates to a charity, the portion of the gain related to the donation will not be taxable,” says Steinberg.