Transcript: Update – Private Corporation Tax Changes: March 2018


Jamie Golombek – Update - Private Corporation Tax Changes: March 2018

Length 4:06 

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Jamie Golombek, Managing Director, Tax & Estate Planning, CIBC Financial Planning and Advice 

“What I really want to talk about for a couple of minutes today is the changes, the dramatic changes that were announced, almost a back stepping of sorts from the federal government on private corporations particularly CCPCs, Canadian controlled private corporations, and the rules relating to passive investment income. If you recall back in July of 2017, the government attacked three areas of small business taxation that they were worried about. Number one was income sprinkling of dividends to family members. Number two was the conversion of income using what's called a surplus strip transaction to capital gains which are preferential. And then number three was retaining passive investment income inside the corporation.

The first one we dealt with in December of 2017 where they put in restrictions about the ability to split dividend income, essentially meaning that you can no longer pay dividends to the spouse and kids other than certain limited exceptions unless they're actively involved in the business. The second one, converting of income to capital gains, they abandoned that completely back in the fall so we won't even talk about that. But the third one is what we saw the biggest announcement for in budget 2018.

The initial rule was to say if you had more than $50,000 of passive, which is investment income, inside your private corporation, you could face total combined tax rates in excess of 70%. And that was obviously very punitive and there were enormous consultations and discussions and submissions made on that topic. In the budget 2018, they reversed course entirely. And they came up with an entirely different approach.

Under the new rules, which will be effective Jan 1st, 2019, a private corporation that has more than $50,000 of passive investment income will now see its small business limit reduced, and effectively the small business limit is the preferential tax rate on the first $500,000 a year of active business income. And that's a very low small business rate, but to the extent that you have income over the $50,000 threshold, every additional dollar that you have will reduce the small business limit by five dollars. So for example, if you have $50,000 of passive investment income, no change. Once you have a dollar over that, you have to reduce that $500,000 small business limit by five dollars. So effectively when you go from 50 to 150, so $150,000, take off the first 50 that's a $100,000 at five dollars. That's the full $500,000. So once someone has more than $150,000 of passive income, they won't get the small business rate. So effectively what that simply means is that, you know, all the money that's in there, all the retained earnings, you continue to earn investment income on that, no change to any of that. Once your investment income reaches a level in your corporation of more than $50,000, what it means is that in that particular year, you will not get the small business rate on your a full amount of income. It will be reduced. So you'll be taxed at the general corporate rate.

At the end of the day with full integration, you're not going to pay much more tax. Maybe it's a couple of percent the end of the day once it's fully integrated and paid out as a dividend. But you'll lose the benefit of the substantial tax deferral, which is really the point of the whole thing. So in other words, right now we have a tax deferral of around 40% on active business income. If you no longer qualify because of your reduced small business limit, that tax deferral drops to only 25%. So again it's not the end of the world. There's still an advantage to earning income in a corporation. But they thought of a very smart way of getting the same policy effect without all the administrative complexity that would have been involved by trying to track pre and post investments under the new budget regime.” 

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