Published On: Thursday, 10 May 2018

Options Available For Small Businesses Facing New Tax Hikes

Options Available For Small Businesses Facing New Tax Hikes

By Mark MacDonald

When the NDP government announced its onerous Medical Services Plan tax in the provincial budget, it caught many businesses by surprise.

While the NDP followed through on former Premier Christy Clark’s plan to eliminate MSP payments, Finance Minister Carole James unveiled her plan to make business pay for the loss in revenue. Companies with payrolls over $500,000 are expected to pay a 1% tax on payroll, with the rate rising to 1.95% annually for companies over $1,5 million. In real dollars, that means businesses at the lowest threshold would pay $5,000 per year, while a company with a $3 million in wages would face a $60,000 increase.

On January 1, 2019, B.C. will implement the employee payroll tax - but residents’ MSP premiums won’t be eliminated until January 1, 2020. This means that the province will collect MSP premiums from both employers and individuals next year - a move that will dramatically impact small business owners, particularly considering the federal government intends to hike CPP premiums during the same timeframe.

It’s double tax-hit for companies in the first year. Employers who currently cover the cost of MSP premiums for employees will continue to pay that, plus the new tax.

What is a company to do? Pass the unexpected overhead increase on to customers through higher rates for goods and services? What if the market won’t bear it? Should owners just shrug their shoulders, cut a cheque to the government and chalk it up to an increased cost of doing business in B.C.?

There may be options to consider, and there is the fact that the government has yet to introduce an ironclad structure to the tax, so alterations could be made.

Some companies may decide to cover the increase by reducing current benefits to employees.

Before doing that, however, Tara Benham of Grant Thornton LLP in Duncan states: “You need to weigh the savings of the business owner against the impact on staff morale. If businesses end up cutting down on employee benefits, that would mean this tax is indirectly having a negative impact on the people the government is trying to help.”

Carla Boehm, a partner in Johnston, Johnston & Associates in Nanaimo, concurs.

“While a company could consider reducing benefits paid or future wage increases to employees to recover some of these costs, there is always the risk that both staff morale and public opinion could be impacted negatively as a result.”

One way an employer can avoid the new payroll tax is by making employees shareholders.

“In this case, while all non-cash benefits would be subject to the new tax, the employer still has the option of using dividends,” Benham notes. “There may be a few options for deferral, e.g. payment through the use of stock options, but that would still result in the tax down the road once the employee is able to cash out.

“One way employers could consider lowering their costs is by reviewing their benefits packages to make them as tax efficient as possible for both parties. For example, the employer may provide certain benefits that are tax deductible to the company but not a taxable benefit to the employee and, therefore, not subject to payroll tax.

For smaller companies sitting just above the $500,000 payroll tax threshold, it may make sense for a small business owner to pay themselves dividends and opt out of Canada Pension to avoid the new tax.

“Because CPP can be a significant portion of a small business owners’ retirement income, I would encourage them to first review their salary/dividend mix and consider reducing their wages and topping up the difference with dividends,” says Benham.

Boehm notes there is no quick and easy general answer.

Eliminating wages and moving to dividends as the only form of compensation would help reduce the payroll tax, however, there are other factors to consider. Dividend income does not create RRSP contribution room; dividends are not ‘earned’ income, so it can affect the ability to deduct some items such as child care expenses on their personal tax returns, and dividends are not considered CPP pensionable earnings, which would reduce CPP pension income earned in retirement. 

”Before making any changes to their remuneration structure they should speak to their accountant to ensure that works with their long term plans.”

In regards to CPP, Benham states “To determine their wage amount, I would review the actual outlay, if any, for the employer payroll tax, and then consider how much CPP they wish to contribute to maximize their CPP on retirement. Additionally, if contributing to an RRSP is important to the business owner, they should also evaluate how much room they should create.

“By reducing wages and paying out more dividends, however, the company will have a higher tax bill as dividends are not deductible. Therefore, the cash flow of both the business owner and the company need to be considered.”

Discussions of this nature between business owners and their accountants are strongly recommended before considering any option.