Every year, the government brings in a number of new tax laws, and 2018 is no exception. That said, there aren’t a huge number of changes, and you should easily be able to guide your clients through the transitions. Here’s a look at what’s happening.
A Lower Small Business Tax Rate
Effective January 2018, the small business tax rate drops from 10.5% to 10%, and in 2019, it goes down even further to 9%. This rate applies to the first $500,000 of corporate earnings, and even with only a half a percent decrease, your clients can save up to $2,500 per year. Many provinces including Ontario and New Brunswick also lowered the rate for small businesses.
Tracking Business Contributions by Family Members
The federal government also passed a number of laws to reduce income sprinkling, which is when an individual or a business attempts to reduce tax liability by issuing salaries to family members. To legally pass income to family members under the new laws, your business clients have to ensure their family members actually work for the company. For the most part, family members have to work at least 20 hours per week or own at least 10% of the company to receive paycheques.
Your clients don’t have to prove their family members meet these criteria on their tax returns, but they should start tracking hours and financial contributions. If the Canada Revenue Agency wants more information or decides to audit the return, those records can be essential for proving the family member’s contribution.
Luckily, although the change goes into effect Jan. 1, 2018, your clients don’t have to worry about having records until they file their returns at the beginning of 2019 for tax year 2018.
New Income Tax Brackets
Annually, the federal government updates the income tax brackets, and for 2018, the tax rates are as follows:
- 15% on the first $46,605 of taxable income
- 20.5% on taxable income from $46,605 to $93,208
- 26% on taxable income from $93,208 to $144,489
- 29% on taxable income from $144,489 to $205,842
- 33% on taxable income over $205,842
These are the same rates your individual clients faced in 2017, but the slight adjustments to each bracket should help them save a bit of money. For instance, last year the second income tax bracket applied to earnings over $45,916, but that number is close to $700 higher for 2018. Additionally, in 2017, taxable income over $202,800 faced the highest rate, but for 2018, your clients have a few thousand in leeway before they hit that top bracket.
Increases to Employment Insurance Premiums
After going down in 2017, Employment Insurance premiums are going up for 2018, but on a positive note, they’re still relatively low compared to 2016 and previous years. The new rate is 1.66%, and it applies to income up to $51,700. If your clients have employees, make sure they’re ready for this slight change.
Higher Tax on Beer
If you represent brewers or just individuals who like to throw back a cold one, you may want to let them know the excise tax on beer is going up as of April 2018. The increase is for 2%, but it’s been pegged to inflation so you can expect to see even more increases in the upcoming years. Proponents of the increase say it only adds about 5 cents to each case of beer, but people in the beer industry claim the increase is going to hurt sales.
Once you understand these changes, it’s time to dive in and look at the upcoming changes in your province. For tax year 2018, there are arguably more changes to provincial tax codes than to the federal code.