The third Liberal budget was presented on February 27, 2018. It focused mainly on innovation, skill development and gender equality. However a few measures also impact investors and business owners.
Personal Measures
Despite much speculation, the capital gains inclusion rate remains at 50%.
CRA Funding: To combat tax evasion and tax avoidance, the government will invest $90 million over five years to target non-compliance in high risk areas including individuals with offshore accounts.
Reporting requirement for Trusts: Starting in 2021 and subsequent years, trusts will be required to report the identity of all trustees, beneficiaries and settlors. This will create a filing obligation for certain trusts where one does not currently exist. Penalties for failure to file will be $25/day with a minimum of $100 and a maximum of $2,500. Gross negligence penalties could be as high as 5% of the maximum fair market value of trust property held in the year.
Small Business Owners
Small business tax rate: A private corporation currently pays tax at 10.5% on its first $500,000 of active business income. The government confirmed it will proceed with lowering the small business tax rate to 10% starting January 1, 2018 and to 9% starting January 1, 2019. Tax rates on non-eligible dividends will be increased accordingly.
Passive investments: New rules have been introduced to limit the ability of earning passive investment income inside a corporation. Effective for tax years starting after 2018, if a private corporation (or its associated corporations) earn more than $50,000 of “aggregate investment income” it will see a grind on the $500,000 federal small business limit. The small business limit will be reduced by five dollars for every dollar of investment income in excess of $50,000. Thus will be fully eliminated once passive income exceeds $150,000.
The “Aggregate Investment Income” used in the calculation will not include capital gains on the sale of active business assets or shares of qualifying small business corporation (or certain partnerships that meet tests similar to those of a qualifying small business corporation). Net capital losses from other tax years will not be considered in the calculation but taxable dividends form non-connected corporations and investment income from non-exempt life insurance policy will increase “aggregate investment income”.
A second refundable dividend tax on hand (RDTOH) account will be created. The first RDTOH account will keep track of refundable tax on investment income and the second will keep track of refundable tax on portfolio dividends from Canadian corporations. A private corporation will no longer be able to pay eligible dividends to recover refundable tax on investment income. Instead, only non-eligible dividends will recover refundable tax on investment income. Only once that RDTOH account is depleted will the corporation be able to pay eligible dividends to recover refundable tax on Canadian portfolio dividends.
Income Sprinkling: The government confirmed its intention to proceed with the “income sprinkling” measures announced on December 13, 2017. These rules are effective for 2018, meaning that paying dividends to certain family members may no longer be an effective strategy of reducing a family’s overall tax burden.
Clearly some big changes for business owners as none of the new measures included grandfathering as was previously expected. We will be happy to meet with you to review and discuss your current passive holdings and how your small business deduction or investment strategy may be impacted.
Rob Tétrault, B.A., J.D., MBA, CIM
Senior VP and Portfolio Manager
Cedric Paquin, CPA, CA, CFP
Wealth Planning Consultant
