Small and medium-sized businesses gained a grab bag of tax treatment goodies in Tuesday’s federal budget affecting everything from their special tax rate to capital tax.

As expected, the qualifying level to take advantage of the special small-business tax rate of 12% is being lifted during the next four fiscal years to the first $300,000 in annual income from $200,000. It will be fully implemented in 2006.

The SME sector also gets a further enhancement of an attractive feature introduced in 2000. With the small-business capital gains rollover measure, investors were allowed to defer capital gains from the sale of eligible small-business shares provided the proceeds were invested in other eligible SMEs. Now, this entitlement is being expanded with the elimination of the $2-million limit on original investment and reinvestment into the new small business.

Ottawa also will now allow this capital gains rollover any time during the year of disposition or 120 days after the end of that year.

“This measure provides an important role in promoting innovation and growth by making it easier for small business, especially startup companies, to access the risk capital needed to expand and grow,” the budget said.

Also being sweetened is the “qualified limited partnership” route to raising venture capital. The budget has removed and relaxed of a wide range of technical qualifying rules (see Budget Plan 2003, pages 330-331). In the 2001 budget, to much fanfare, the Chrétien government made QLPs allowable investments for pension funds, to create a new source of capital for SMEs. Tuesday’s changes are more of the same theme.

In other changes aimed at small business, federal capital tax will no longer apply to the first $50 million of capital in a corporation, effective in fiscal 2004, from the current threshold of $10 million. Ottawa said it intends to reduce the rate of this tax until it is eliminated in 2008.

Not so lucky on capital tax are the banks and other large financial institutions, despite previous hints by this government that their capital taxes would be phased out. Ottawa now says no changes are planned to taxes on bank capital levels. This is to ensure that large financial institutions pay a minimum in taxes, the government says.

Ottawa is also adding $190 million in equity to the Federal Business Development Bank of Canada to expand venture capital available to small business, and $20 million for Aboriginal business Canada in support of entrepreneurship and business development.