Tax changes affect small business, shareholder loans

The new Liberal government’s first budget is 269 pages. That’s a lot thinner than in previous years, but there is no lack of tax changes.

Here are some ways the budget could affect your farm.

The former Conservative government had committed to reducing the federal small business tax rate to nine percent from 11 by 2019. The tax has been decreased to 10.5 percent for 2016, but the drop has been halted there.

The budget had no comments on whether this will be re-visited, but don’t expect further decreases at this time.

The small business tax rate applies to the first $500,000 of taxable income earned in a corporation.

Farming businesses often structure their operations to multiply access to this $500,000 and the lower tax rate.

The budget indicates that the government will implement more restrictive rules to limit a person, family or business from setting up structures to expand the small business deduction.

For example, two neighbours farm together in a partnership. Each neighbour also has a separate farming corporation that isn’t directly connected to the farming partnership. The partnership pays custom work fees to the corporation. Under the old rules each receives a small business limit of $500,000 for income received from the partnership — $1 million in total. The new rules will require the small business deduction to be split between the two corporations, resulting in only $250,000 of the small business limit to each partner.

Owing a farm corporation money for more than one year can result in shareholder benefit rules that can result in double taxation. Strategies have been created to move this debt around to avoid these tax consequences.

The budget has introduced more restrictive rules to ensure that these debts are taxed.

The budget did not change the $1 million threshold for the sale of qualified farm property.

Eligible capital expenditures for items such as water rights and quota have been until now tracked and reported differently for tax than are other assets. This system allowed for a tax deduction to be claimed for these expenditures similar to de-preciation.

However, the gain earned on a sale was taxed at the lower active business tax rate rather than the higher tax rate on capital gains.

This budget implements rules that will treat these purchases the same as any equipment purchases under the capital cost allowance system.

The allowance (depreciation) on these types of assets will be five per-cent a year, which will be claimed as an expense. Also, any gain on the sale will be treated as a capital gain.

The budget expects a $29.4 billion deficit in 2016, and the government does not plan to have a balanced budget by 2020.

The anticipated deficit makes it hard to predict what tax changes will be coming in the next few years.

Colin Miller is a chartered accountant and partner with  KPMG’s tax practice in Lethbridge. Contact: colinmiller@kpmg.ca

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