The federal budget, employment insurance and small business

How the federal budget affects EI and small business

The budget overhauls the employment insurance system but doesn’t change the corporate tax rate for small businesses


Budget 2016 banner V2

The federal budget takes big steps to overhaul the employment insurance system but does not change the corporate tax rate for small businesses as anticipated. Changes include:

No. 1: Shorter waits for Employment Insurance benefits

Those hit by job loss will find some significant changes to Employment Insurance (EI). The waiting period for benefits will be reduced from two weeks to one week.

No. 2: Increased eligibility to EI benefits

How a person qualifies for EI will change. For instance, Donald lives in Winnipeg, Man., where he has worked part-time over the past six months since graduating from college. He was recently laid off. Under current EI eligibility rules, Donald would be considered a new entrant to the labour force. As a result, he would need to have worked at least 910 hours over the past 52 weeks to qualify for EI benefits. Since Donald only worked 780 hours over this period, he does not qualify for benefits. Under the proposed changes, Donald would face the same EI eligibility requirements as other claimants in his region. That would mean he could qualify for EI as long as he worked 665 hours. Since Donald qualifies for EI under the new rules he could receive up to 17 weeks of EI benefits while he looks for new work to start his career. These changes will take effect in July 2016.

The regions that will benefit from these proposed changes include:

  • Newfoundland/Labrador
  • Sudbury
  • Northern Ontario
  • Northern Manitoba
  • Saskatoon
  • Northern Saskatchewan
  • Calgary
  • Northern Alberta
  • Southern Alberta
  • Northern British Columbia
  • Whitehorse
  • Nunavut

In these regions, the unemployment rate increased by two percentage points or more for a sustained period between March 2015 and February 2016, compared to its lowest point between December 2014 and February 2015, without showing significant signs of recovery.

No. 3: Help for oil workers

Because of dramatic job losses due to declines in global oil prices, this Budget proposes legislative changes to extend the duration of EI regular benefits by five weeks,
 up to a maximum of 50 weeks of benefits for anyone living in a resource-dependent region.

For long-tenured workers in these regions, these changes could mean an additional 20 weeks of EI regular benefits up to a maximum of 70 weeks of benefits.

These extended benefits will be available for one year starting in July 2016, with the measure being applied retroactively to all eligible claims as of January 4, 2015.

How this works:

Gary lives in Red Deer, Alberta, where he has worked as a pipe fitter in the oil and gas sector earning $60,000 per year for the past 12 years. He was recently laid off, and is worried about making ends meet for his family. The unemployment rate in his region has increased from 5.4 per cent in February 2015 to 8.3 per cent as of March 13, 2016.

Gary worked 1,750 hours in the 52 weeks prior to losing his job. In his economic region, this means that he qualifies for up to 40 weeks of EI benefits at a weekly benefit rate of $537. In total, under the program’s current rules, Gary will receive $21,480 in income support while he looks for work. However, under the temporary measures proposed in Budget 2016, Gary would be entitled to receive an extra five weeks of benefits. In addition, Gary has been paying maximum EI premiums and has never had a prior claim for benefits. As a result, he would also qualify to receive up to an additional 20 weeks of benefits for long-tenured workers. These additional weeks of benefits bring Gary’s total support under the EI program to 65 weeks of benefits. At his weekly benefit rate, this adds up to $34,905 in income support. The extended weeks of benefits will provide Gary with the peace of mind that he can provide for his family while he transitions to new employment.

No. 4: Working while on EI is extended until August 2018

The Working While on Claim pilot project lets people earn and keep up to 50 cents of their EI benefits for every $1 they earn, up to a maximum of 90% of their weekly insurable earnings (used to calculate their EI benefit amount). This pilot project will be extended until August 2018.

No. 5: Investment in youth employment

The Liberals will invest $165.4 million in the Youth Employment Strategy this year that will include: creation of green jobs, increased access to Skills Link program and increased job opportunities in the heritage sector.

This funding is in addition to the $339 million already announced for the Canada Summer Jobs Program—funding that will be rolled out over the next three years, starting in 2016.

No. 6: More co-op placement opportunities

Under this Budget, the Liberals pledge to spend $73 million over the next four years to help employers and post-secondary institutions create new co-op placements for students.

No. 7: Extension of the Automotive Innovation Fund

Currently scheduled to end in 2017, this Budget will see this fund extended until 2020/2021. As before, this injection of funds will help leading employers and exporters directly employing more than 125,000 Canadians in the automotive industry.

No. 8: Closing tax loopholes used by small businesses

A concern on the domestic front is the ability of high-net-worth individuals to use private corporations to inappropriately reduce or defer tax. To help address this, Budget 2016 will:

  • Prevent business owners from multiplying access to the $500,000 small business deduction using complex partnership and corporate structures;
  • Ensure that investment income derived from an associated corporation’s active business is ineligible for the small business deduction (and taxed at the general corporate income tax rate) in certain circumstances;
  • Ensure that associated corporations cannot avoid the $15-million taxable capital limit in certain circumstances; and
  • Close loopholes that allow private corporations to use a life insurance policy to distribute amounts tax-free that would otherwise be taxable.

No. 9: No further reduction of the small business tax rate

Small businesses currently have a reduced income tax rate of 10.5% on their
 first $500,000 of active business income. This reduced rate allows them to retain more earnings that can be reinvested to support growth and job creation. Further reductions in the small business income tax rate will be deferred into the future.

No. 10: New capital cost allowance deductions

Eligible capital property for income tax purposes includes intangible property such as goodwill and licenses, franchises and quotas of indeterminate duration, as well as certain other rights. To help simplify the income tax system, this Budget will repeal the eligible capital property regime and replace it with a new capital cost allowance (CCA) class.

As part of this change, small balances of eligible capital property carried over to the new CCA class will be allowed to be deducted more quickly, and allow up to $3,000 in incorporation costs to be deducted as a current expense. The latter measure will allow approximately 80% of newly incorporated businesses to deduct the full amount of the incorporation expenses in their initial year.