Federal Budget 2009: Business benefits from budget

Go out and buy computers. That was the Tory government’s clearest message to business owners in its 2009 budget released on Tuesday in Ottawa. Included in the specifics is a 100% capital cost allowance (CCA) for computers bought between January 27 of this year and February 1, 2011.

Debbie Meloche, Canadian private company services tax leader at Price Waterhouse Coopers says that goodie was a pleasant surprise. “Those [expenditures] were the types of things companies may have been putting off,” she says. “So this may have some stimulus.”

For many brokers, however, technology investment is not a zero-sum game and this announcement will simply be a bonus to an already existing plan to spend.

“We purchased new computers and servers last year so this acceleration in capital cost allowances won’t make a big difference to us,” explains Nick Leadbetter, president of Halpenny Insurance Brokers in Ottawa. “But, like most businesses, we are buying bits of technology all the time—particularly since technology really makes a big difference [in this industry].”

Given the continued pressure to innovate, he thinks that many brokerages will welcome the feds temporary 100% CCA for computers, but doubts this will fuel any major spending in the industry.

The budget also extended CCA adjustments to a 50% straight-line accelerated rate for equipment purchased by manufacturers during 2010 and 2011. Budget
documents say the changes are designed to “provide economic stimulus and assist Canadian businesses during this challenging economic period.” In theory, the changes will benefit the manufacturing sector, notes Michael Templeton, a senior tax partner McMillan LLP.

“These incentives will help bring more confidence to the economy and help sectors such as manufacturing, retail and transportation—all sectors that buy insurance,” says Philomena Comerford, CIP, president of Baird MacGregor Insurance Brokers, based out of Toronto. In her three decades within the industry, Comerford has noticed that, “When the economy is strong the P&C industry is strong.”

The problem, says Templeton, is that the manufacturing sector is already hurting, which means most firms will likely have enough write-offs to see them through. It’s also limited in terms of who can qualify, he notes.

Meloche agrees: “The problem with this budget is you have to be taxable to benefit from some of this. They have to be profitable,” she says. “And as we know a lot of companies aren’t in that position. So they don’t get anything out of this, ie: no cash.”

Of more interest, though, are plans to increase the amount of small business income eligible for a reduced 11% federal tax rate from the current $400,000 to a clean half million retroactive to this January 1. Leadbetter, a self-proclaimed fiscal conservative, says the change is welcome. Budget documents estimate the $100,000 shift will cost $45 million in fiscal 2009/2010 and $80 million in 2010/2011.

“It’s a measure that builds on small business, and that’s good for the economy,” says Leadbetter. “What we agonize over [as a nation] is supporting big business.”

Dan Danyluk, CEO, IBAC agrees. “Income eligible for the small business tax rate being increased from $400,000 to $500,000 is a very good thing. It will certainly touch brokers . . . There are very few brokers, even if they’re dealing primarily with auto and home, that aren’t also doing small business. So anything that makes it easier for small businesses to survive and encourages them to prosper is going to impact every brokerage.”

Bob King, CMA, CIP and president of Vancouver-based GNK Insurance Services, sees potential changes in the broker landscape based on these budget announcements.

“Measures which increase the small business tax deduction and the acceleration of write-offs for computer software and equipment, combined with a weakened economy, will promote consolidation in the broker sector,” says King. “Brokers will now be able to take advantage of economies of scale and still stay within the small business earnings cap,” providing them incentive to go after bigger contracts to compete in different markets.

Big businesses also benefit, despite no further capital tax exemptions. A repeal of rules under section 18.2 of the Income Tax Act aimed at preventing double-dipping on interest deductions will help businesses, particularly those that operate outside of Canada’s borders. “There are going to be a lot of big businesses cheering on that one,” says Kim Moody, CA, TEP, at Moodys LLP Tax Advisors in Calgary.

Rules scheduled to take effect in 2012 were designed to prevent scenarios in which a Canadian company borrowed money to fund a business venture overseas, and then took both a Canadian interest deduction and a foreign interest deduction. “The Canadian authorities looked at this practice and said it was improper,” says Templeton, “so they made an anti avoidance rule that was so broad that it would make problems for many multi-jurisdictional operations.”

Templeton notes Canadian corporations have a “tough enough time competing internationally” and it’s a good move on the part of Parliament to repeal rules that would have made it worse.

Moody adds another good fix is a change in the rules related to the selling of a Canadian Controlled Private Corporation. The existing rules place the sale of a corporation in the beginning of the day the sale takes place, but that created a timing glitch for the disposition of the company; which could put at risk utilization of the capital gains deduction.

That’s a big downside, notes Meloche, because being out of control can mean an owner’s  not eligible for a $750,000 tax deduction. “It could make a very big difference for someone,” she says. “If you had two or three owners and this happens, each person is losing that. So it’s a good change.”

King also sees hope for brokers in the Finance Minister’s announcement to promote home buying and home renovations.

  • Homeowners will get a 15% tax credit, up to $1,350 in tax relief, on home improvement projects undertaken in the next 12 months. The tax credit can be claimed on the home, cottage or condo unit as long as the property is owned and used for personal use. The renovation cannot exceed the maximum of $10,000 per family and homeowners will need to undertake and complete these renovations before Feb. 1, 2010, keeping all receipts and claiming the credit on their 2009 tax return.
  • The budget also allows first-time home buyers to borrow up to $25,000 per person from a registered retirement savings plan, without paying tax or interest, as long as the money is repaid within 15 years. This is the first increase in limit to the RRSP home buyers plan since it was first introduced in 1992 with the $20,000 per person limit.
  • Finally, first-time buyers will get a tax, which could amount to $750 worth of savings on closing costs for anyone purchasing a new home.

“This will help the small broker as more buyers are qualified and values improve with renovation.”

The one incentive that is missing, according to Dan Danyluk, CEO, IBAC, is tax relief in terms of transfers of business within families.

Originally published on Advisor.ca and Canadian Business Insurance Magazine on January 28, 2009 and co-written with Philip Porado