Preface
In 2017, the federal Liberal government sent shock waves rippling through Canada’s small business and corporation owners with the announcement of their intention to make certain changes to how passively held income within a private company is taxed. After their initial proposal faced some harsh feedback and criticism, the government took a period of time to closely examine their desired changes and refine the plan’s focus and scope. These changes will come into affect in 2019, so here is a brief summary of what private corporation owners should be expecting as well as some possible strategies to mitigate the impact.
This blog submission is provided by our friends from the Sonoda Team at TD Wealth. |
What you need to know
From the 2019 tax year onward, certain Canadian Controlled Private Corporations (CCPCs) will have their small business deduction (SBD) reduced by $5.00 for every $1.00 of passive investment income that exceeds $50,000. The SBD allows a portion of a CCPC's active business income to be taxed at a lower rate up to a certain limit.
This is visually illustrated by the following:
A detailed numerical example
Consider a corporation with active business income (e.g.: net sales income, net consulting fees, etc.) of $350,000 and passive income of $100,000. This would result in the corporation’s SBD being reduced by $250,000 (computed as: $50,000 of passive income in excess of the $50,000 threshold = $50,000 x $5 for a reduction = $250,000 from the $500,000 limit). As a result, $250,000 of the corporation’s $350,000 of active business income will be taxed at the small business corporate tax rates. The remaining $100,000 would be taxed at general corporate tax rates.
What Companies are affected?
| Impacted CCPCs | Non-impacted CCPCs |
|---|---|
| Canadian corporations (along with any "associated corporations" such as a holding company) that utilize the SBD and generate passive income above the $50,000 threshold. | Investment holding companies are not impacted as only active business income benefits from the SBD. A holding company typically does not generate active business income. |
| Passive income includes, but is not limited to, interest income, dividends, capital gains, and rental income. | Corporations that only hold passive real estate would not be affected unless the business is a larger operation with more than five full-time employees and has access to the SBD. |
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Solutions
Potential planning opportunities to discuss with your tax advisor include:
Reducing your corporation(s) net investment income through:
Generating expenses which may help reduce gross investment income such as interest expenses.
Utilizing deductions to reduce net income.
Reviewing the types of passive investments held inside your corporation (and its associated corporations, if any). For example, growth investments may generate less annual taxable income compared to interest or dividend paying investments.
Reviewing your Capital Dividend Account (CDA) balance to determine whether a tax-free capital dividend can be paid.
Making charitable donations through your corporation.
Reinvesting back into your business by acquiring assets used in your day-to-day operations.
Funding a corporately owned life insurance policy.
Funding an Individual Pension Plan with corporate earnings that would otherwise have been directed towards passive investments.
Not sure which strategies are applicable to your situation?
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