The federal government is stepping up its plans for sweeter tax treatment of small business.

Small businesses with income of $300,000 or less will qualify for the lowest taxation rate of 12% by 2005, the federal budget said today.

Last year’s budget announced plans to increase the small business deduction limit to $300,000 from $200,000 over four years. Now, Ottawa says, it wants to help small businesses retain more of their income for reinvestment and growth by granting access to the full $300,000 limit in 2005.

The accelerated tax relief will cost the federal treasury $20 million in the fiscal year of 2005-06, budget documents say.

The new small-business deduction limit was among several measures ranging from better loss carry-forward to reforms in tendering for government contracts that, Ottawa says, this sector needs to create more jobs.

Also going to small business is easier access to the enhanced 35% refundable scientific research and experimental development (SR & ED) tax credit.

Under current rules, two or more small businesses may not have full access to this credit if they have common investors supplying venture capital and other types of funding, even if the investors are not acting together.

The budget says the government plans to remove this impediment by ensuring that small businesses that conduct SR & ED and raise funding from venture capitalists and other common investors not acting as a group have full access. It did not spell out how this access will be guaranteed.

Because it can take many years to make smaller companies profitable, small business is also getting more generous loss carry-forwards.

Current rules allow small businesses to carry back non-capital losses three years and forward seven years — a time frame, small businesses complain, that is not long enough, particularly for companies undertaking risky ventures. The non-capital loss carry-forward period moves to 10 years.

In a measure aimed at all taxpayers but of particular interest to small business, the budget also gives lifts the capital cost allowance (CCA) for information technology. As a result, yearly depreciation on a business-owned computer will rise to 45% from 30%, allowing 90% write-off of a computer in two years instead of three.

The CCA rate applying to broadband, Internet and other data network equipment rises to 30% from 20%.

Ottawa says a key to higher productivity is increased investment in information and communications technology.

The CCA rate for ICT assets was last increased in 1976.

The changes will mean a small software-development firm that would take seven years to deduct all of its investment in advanced computer equipment will now need only five years.

The CCA changes will cost the federal treasury $110 million in the coming federal fiscal year, starting April 1, and $255 million in the following fiscal year.

The review of CCA rates is ongoing.

In other developments for small business:

  • Ottawa wants to make it easier for small business to land government contracts. In response to complaints from the Canadian Federation of Small Business and the Canadian Construction Association, the Government Electronic Tendering Service will be made more user friendly by next June. Subscription fees are being cut by 30% and will be phased out altogether by March 2005.
  • An entrepreneur‚s time is best spent growing the business and creating jobs instead of shuffling paper and coping with bureaucratic red tape, Ottawa says. So the government will work with small business to cut the paper burden imposed by government regulation. The CFIB found that 61% of its members cited government regulations and paper burden as having a significant impact on operations.