Tax Series: Strategies for Private Corporations

Last summer, Finance Minister Morneau announced a number of tax reforms for Small Business Owners, including the changes to income sprinkling, minimizing the incentives to keep passive investments and reducing the transfer of corporate surpluses to capital gains.

 

This year’s Federal Budget focused on tax tightening measures for business owner:

●     Small Business Tax Rate Reduction from 10% to 9%.

●     Passive Investment Income held within the corp (Reduction begins at $50,000)

●     Tax on Split Income

 

Since these changes will be effective January 1, 2019, a discussion and plan should be prioritized now, since 2018 will be the “prior year” of 2019. Life insurance is a great solution to help business owners address these problems.

 

Reduced Small Business Tax Rate

●     Key Change: Effective January 1, 2019, the small business tax rate will be reduced from 10% to 9%

●     Problem: Lower corporate tax rates result in more capital trapped inside the corporation.

●     Possible Solution: Life Insurance Proceeds credit the capital dividend account on death allowing for tax-efficient distribution of funds from the corporation to the estate.

 

Limited Access to Small Business Tax Rate

●     Key Change: Passive investment income greater than $50,000/year reduces the small business tax rate limit for small business tax rate. The business limit is reduced to zero at $150,000 of investment income.

●     Problem: For companies with passive income over $50,000, the small business limit will be reduced and thus, increase the total amount of tax you have to pay.

●     Possible Solution: Exempt life insurance does not produce passive investment income unless there is a disposition. Put a portion of corporations passive investments into a life insurance policy and reduce passive investment income and limit the erosion of the small business limit. Concepts such as Corporate Estate bond, Corporate Insured Retirement Program, Corporate held Critical Illness with Return of Premium

 

Tax on Split Income

●     Key Change: Tax on split income (TOSI) rules extended to cover adult children in certain cases. Different rules depending on age of adult children

●     Problem: For adult children receiving income and don’t pass the TOSI rules, income is taxed at the highest personal marginal tax rate on the first dollar. More trapped funds inside the corporation due to fewer tax-effective strategies.

●     Possible Solution: Put a portion of corporation’s trapped surplus into a corporate owned life insurance policy which results in tax-efficient distribution of funds from the corporation to the estate. 

BC Budget Highlights 2018

BC Finance Minister Carole James delivered the province’s 2018 budget update on February 20, 2018. The budget anticipates a surplus of $219 million for the current year, $281 million for 2019 and $284 million in 2020.

Corporate and personal tax rates remain unchanged.

The biggest changes are:

  • Elimination of Medical Services Plan (MSP Premiums) effective January 1, 2020
  • Addition of the Employer Health Tax (EHT)
  • Provincial Property Taxes
  • Childcare

The Employer Health Tax and Medical Services Plan premiums:

Effective January 1, 2020, the Medical Services Premium (MSP) will be eliminated. In last year’s budget update, MSP was reduced by 50% effective January 1, 2018. Starting in 2019, the budget introduces the Employer Health Tax (EHT). The EHT is to help fund the elimination of the MSP premiums.

The Employer Health Tax will be calculated as a percentage of payroll:

Provincial Property Transfer Taxes

Effective February 21, 2018, the following will occur:

  • The provincial property transfer taxes (PTT) will increase to 5% (from 3%) on residential property values above $3 million.
  • The PPT applies to foreign purchasers of residential properties in BC will increase to 20% (from 15%) and the tax will extend to include the Fraser Valley, Capital, Nanaimo and Central Okanagan Regional Districts.
  • There is a new speculation tax on residential property in BC. This tax is targeted at foreign and domestic homeowners who don’t pay income tax in BC. Starting in 2018, it’s a rate of $5/$1,000 of assessed value, in 2019, this will increase to $20/$1,000.

Childcare

There will be a new affordable child care benefit that will reduce child care costs by up to $1,250 per month per child by 2020. The new benefit will apply in September 2018. Families with pre-tax incomes of $45,000 or less will receive the full benefit, (up to the cost of care) while those who make up to $111,000 will receive a reduced amount, scaling based on income. The government will be releasing an online benefit calculator to help parents budget.

The budget will provide up to $350/month directly to licensed child care providers to reduce fees. They will be the following:

  • Up to $350/month for group infant/toddler care
  • Up to $200/month for family infant/toddler care
  • Up to $100/month for group care for children aged 3-5
  • Up to $60/month for family care for children aged 3-5

To learn how these changes will affect you, please don’t hesitate to contact us.

2018 Federal Budget Highlights for Business

The government’s 2018 federal budget focuses on a number of tax tightening measures for business owners. It introduces a new regime for holding passive investments inside a Canadian Controlled Private Corporation (CCPC). (Previously proposed in July 2017.)

Here are the highlights:

Small Business Tax Rate Reduction Confirmed

Lower small business tax rate from 10% (from 10.5%), effective January 1, 2018 and to 9% effective January 1, 2019.

Limiting Access to the Small Business Tax Rate

A key objective of the budget is to decrease the small business limit for CCPCs with a set threshold of income generated from passive investments. This will apply to CCPCs with between $50,000 and $150,000 of investment income. It reduces the small business deduction by $5 for each $1 of investment income which falls over the threshold of $50,000. This new ­regulation will go hand in hand with the current business limit reduction for taxable capital.

Limiting access to refundable taxes

Another important feature of the budget is to reduce the tax advantages that CCPCs can gain to access refundable taxes on the distribution of dividends. Currently, a corporation can receive a refundable dividend tax on hand (known as a RDTOH) when they pay a particular dividend, whereas the new proposals aim to permit such a refund only where a private corporation pays non-eligible dividends, though exceptions apply regarding RDTOH deriving from eligible portfolio dividends.

The new RDTOH account referred to “eligible RDTOH” will be tracked under Part IV of the Income Tax Act while the current RDTOH account will be redefined as “non-eligible RDTOH” and will be tracked under Part I of the Income Tax Act. This means when a corporation pays non-eligible dividends, it’s required to obtain a refund from its non-eligible RDTOH account before it obtains a refund from its eligible RDTOH account.

Health and welfare trusts

The budget states that it will end the Health and Welfare Trust tax regime and transition it to Employee Life and Health Trusts. The current tax position of Health and Welfare Trusts are linked to the administrative rules as stated by the CRA, but the income Tax Act includes specific rules relating to the Employee Life and Heath Trusts which are similar. The budget will simplify this arrangement to have one set of rules across both arrangements.