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Taxation of private corporations

The federal budget provided more details on the proposed private corporation tax changes.

Budget 2018 includes the promised details on the government’s plans to limit the deferral advantages from holding passive savings in a corporation, but takes a substantially different approach than previously announced. The government’s three key principles in designing these rules are to:

  • protect passive investments already made by private corporations’ owners, including the future income earned from those investments
  • implement a $50,000 threshold on passive income in a year (equivalent to $1 million in savings, based on a nominal five per cent rate of return) to give flexibility for business owners to hold savings, for example, for sick leave, maternity or parental leave, or retirement
  • maintain incentives to continue to encourage Canada’s venture capital and angel investors to invest in the next generation of Canadian innovation.

Budget 2018 accomplishes these goals through two measures, described below. These measures take effect for taxation years that begin after 2018. We welcome the delayed effective date to allow business owners and their advisors to adjust to the new rules, as we recommended in earlier submissions to the government. Further, while we are pleased to see that the current proposals are simpler than earlier indications, such rules should be assessed as part of a detailed review of how they fit within the broader tax system.

LIMITING ACCESS TO SMALL BUSINESS TAX RATE

Under the first measure, the government proposes to reduce the business limit on a straight-line basis for Canadian controlled private corporations (and their associated corporations) having between $50,000 and $150,000 in investment income. This measure will operate alongside the current business limit reduction for CCPCs with taxable capital over $10 million, so that the business limit will be the greater of the reduction under the new measure and the existing reduction based on taxable capital. The budget includes details on the types of passive investments that are included in calculating the new limit.

REFUNDABILITY OF TAXES ON INVESTMENT INCOME

Under the second measure, the budget aims to end the tax advantage for larger CCPCs by paying out lower-taxed dividends from active income taxed at the general corporate rate and still claiming refunds of taxes paid on their investment income which is intended to be taxed at higher tax rates.

The budget introduces a second refundable dividend tax on hand (RDTOH) account, which will track refundable taxes (Part IV tax) on eligible portfolio dividends. Any taxable dividend (i.e., eligible or non-eligible) will entitle the corporation to a refund from its eligible RDTOH account. The current RDTOH account (now called “non-eligible RDTOH”) will track refundable taxes on investment income (under Part I) and non-eligible portfolio dividends (under Part IV). Refunds from this account will be obtained only on paying non-eligible dividends.

OTHER OUTSTANDING MEASURES FOR PRIVATE CORPORATIONS

Among other previously announced measures, Budget 2018 says the government intends to move forward with the small business tax rate reductions announced on October 16, 2017 and the measures to address income sprinkling announced on December 13, 2017. Unfortunately, unlike the passive investment proposals, the government did not simplify the rules or delay their application to give business owners time to adjust, as CPA Canada and others have recommended.

 

Source: CPA Canada
Article Link: https://www.cpacanada.ca/en/members-area/profession-news/2017/july/finance-canada-consultation

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