Some clarity for business owners holding passive investments in their corporations.
On February 27th, the Department of Finance released the government’s third federal budget, including details on holding passive investments inside a Canadian Controlled Private Corporation (CCPC).
To many, tax accountants & ourselves included, additional details of this proposal were the most anticipated budget item following the October decision to drop proposals targeting the conversion of regular income to capital gains, and the December revision to income sprinkling rules. Finance’s initial July 2017 proposal on how to handle the concern surrounding the ‘tax deferral advantage’ that exists from the difference between lower corporate tax rates compared to an individual’s personal tax rate received strong opposition based on its administrative complexity and punitive effective tax rates. With this budget, Finance listened and decided to take a completely different approach with two new measures, effective January 1, 2019:
A.) Restricting access to the lower Small Business Deduction (SBD) tax rate. For every dollar over $50,000 of passive Adjusted Aggregate Investment Income’ (AAII) the amount of active business income that can access the lower SBD rate is reduced from the $500,000 initial limit, with complete elimination at $150,000 of AAII.
B.) Restricting payouts from the Refundable Dividend Tax On Hand (RDTOH) for larger CCPCs. Passive income earned inside a private corporation is taxed at roughly the equivalent to the top personal tax rate. This is primarily to prevent individuals from paying less tax by incorporating an investment portfolio. RDTOH is a mechanism which prevents double-taxation, by refunding a portion of the tax to the corporation once a dividend is paid to shareholder, and subsequently subject to personal income tax. Currently, any taxable dividend paid by a private corporation triggers the RDTOH mechanism, regardless of the source of the dividend. This means a larger CCPC could obtain the dividend refund irrespective of whether the source of the dividend was coming from passive investment income or the lower-taxed active business income. This budget proposes establishing two RDTOH accounts – one for higher-taxed, non-eligible dividends, and a second for lower-taxed eligible dividends.
Alternative corporate investment opportunities using exempt, corporate-owned life insurance and individual pension plans (IPP) remain options for those seeking tax-efficient growth within their companies. Talk to your RGF Integrated Wealth Management advisor if you would like to know more.
Shaun Sun is an Financial Advisor with RGF Integrated Wealth Management . The views expressed are those of the authors, and not necessarily those of RGF Integrated Wealth Management, which makes no representations as to their completeness or accuracy.
©2018 RGF Integrated Wealth Management Ltd. | RGF Wealth Management Ltd., Member - Canadian Investor Protection Fund
On February 27th, the Department of Finance released the government’s third federal budget, including details on holding passive investments inside a Canadian Controlled Private Corporation (CCPC).
To many, tax accountants & ourselves included, additional details of this proposal were the most anticipated budget item following the October decision to drop proposals targeting the conversion of regular income to capital gains, and the December revision to income sprinkling rules. Finance’s initial July 2017 proposal on how to handle the concern surrounding the ‘tax deferral advantage’ that exists from the difference between lower corporate tax rates compared to an individual’s personal tax rate received strong opposition based on its administrative complexity and punitive effective tax rates. With this budget, Finance listened and decided to take a completely different approach with two new measures, effective January 1, 2019:
A.) Restricting access to the lower Small Business Deduction (SBD) tax rate. For every dollar over $50,000 of passive Adjusted Aggregate Investment Income’ (AAII) the amount of active business income that can access the lower SBD rate is reduced from the $500,000 initial limit, with complete elimination at $150,000 of AAII.
B.) Restricting payouts from the Refundable Dividend Tax On Hand (RDTOH) for larger CCPCs. Passive income earned inside a private corporation is taxed at roughly the equivalent to the top personal tax rate. This is primarily to prevent individuals from paying less tax by incorporating an investment portfolio. RDTOH is a mechanism which prevents double-taxation, by refunding a portion of the tax to the corporation once a dividend is paid to shareholder, and subsequently subject to personal income tax. Currently, any taxable dividend paid by a private corporation triggers the RDTOH mechanism, regardless of the source of the dividend. This means a larger CCPC could obtain the dividend refund irrespective of whether the source of the dividend was coming from passive investment income or the lower-taxed active business income. This budget proposes establishing two RDTOH accounts – one for higher-taxed, non-eligible dividends, and a second for lower-taxed eligible dividends.
Alternative corporate investment opportunities using exempt, corporate-owned life insurance and individual pension plans (IPP) remain options for those seeking tax-efficient growth within their companies. Talk to your RGF Integrated Wealth Management advisor if you would like to know more.
Shaun Sun is an Financial Advisor with RGF Integrated Wealth Management . The views expressed are those of the authors, and not necessarily those of RGF Integrated Wealth Management, which makes no representations as to their completeness or accuracy.
©2018 RGF Integrated Wealth Management Ltd. | RGF Wealth Management Ltd., Member - Canadian Investor Protection Fund
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