The Federal Government released their budget for 2018 on February 27, 2017 and as a result, we have some clarity on a number of outstanding questions from the announcements released in July 2017 and December 2017 regarding Tax on Split Income (“TOSI”) and on passive investments within corporations.
Please note that all of the comments below are broad strokes and there may be nuances that apply to your specific situation. If you have any specific questions, I would be happy to discuss how these changes may apply.
Passive Income Earned by Private Corporations
The budget provides detail on two new provisions which were first announced on July 18, 2017.
$500,000 Business Limit Reduction
Beginning for taxation years that begin on or after January 1, 2019, the new provision will reduce an associated group’s small business reduction where the group earns “adjusted aggregate investment income” (“AAII”) between $50,000 and $150,000, eliminating the small business rate where AAII is over $150,000 for these businesses and pushing them from the 12% combined Federal / BC tax rate to 27% combined Federal / BC tax rate.
AAII will be adjusted for dividends from non-connected corporations, taxable capital gains will be excluded, and income from savings in a life insurance policy, that is not an “exempt policy” will also be added if it is not already included in aggregate investment income.
So in an associated group of companies, that includes a holding company that earns significant investment income, not only will they share the small business reduction, but the investment income in the holding company could grind down the small business reduction for the active business and increase the tax rate for the whole group.
Changes to RDTOH
Bear with me on this because it gets technical… Refundable dividend tax on hand (“RDTOH”) is also being restructured for the same taxation years as noted above. RDTOH will be divided into eligible and non-eligible RDTOH. Eligible RDTOH will include Part IV tax paid on eligible dividends received (usually from investments in public companies or mutual funds). When a Canadian-controlled private corporations (“CCPCs”) issues a non-eligible dividend it will recover non-eligible RDTOH before eligible RDTOH, unless it issues an eligible dividend.
Income Sprinkling Measures
The Finance Department will be proceeding with the draft proposals that were made available on December 13, 2017 for Tax on Split Income (“TOSI”).
These, again, can be technical, but where income is deemed subject to TOSI, it will be taxed at the highest marginal rate (49.8% for 2018 in BC). Taxable capital gains on the sale of qualified small business shares that would qualify for the life-time capital gains exemption will not be subject to TOSI.
Broadly, TOSI will apply to income (usually dividends) from a business unless:
- the income is reasonable given the investment of capital or risk
- the income is derived from an “excluded business” where the individual is actively engaged in the current or any five previous years (these do not need to be sequential).
- Actively engaged is defined at least 20 hours per week
- the income is derived from an “excluded share”. To be an excluded share, :
- the individual must directly own at least 10% of the votes and value of the corporation (this eliminates family trusts from some planning)
- the corporation must earn less than 90% of its income from the provision of services (so if more than 10% of income is derived from the sale of products or manufacturing and the other points apply, then TOSI will not apply)
- the corporation cannot be that of a medical doctor, dentist, accountant, lawyer, chiropractor or veteranarian
- Substantially all of the corporation’s income is derived from businesses that are unrelated to the individual.
- the income is earned by a spouse of a business owner that is at least 65 years old. This mimics the pension splitting opportunities available to seniors. The spouse need not be 65 in this case.
There are special restrictions for individuals between the age of 18 and 24.
Other Highlights include:
- Reducing the federal small business tax rate to 10 per cent effective January 1, 2018 and 9 per cent as of January 1, 2019
- Additional reporting requirements for trusts (effective 2021 tax year)
- Extending eligibility for accelerated capital cost allowance for certain clean energy equipment
- The mining exploration tax credit for flow-through share investors has been extended again
- The filing deadline of the T1134 has been shortened from 15 months to 6 months to coincide with the deadline for the corporate tax return
- Enhancing and renaming the Working Income Tax Benefit (starting 2019)
- Annual indexation of the Canada Child Benefit (starting July 1, 2018)
- “Use it or lose it” EI parental benefits (expected availability June 2019)
- Applying GST/HST to management and administrative services provided to an investment limited partnership by the general partner (after September 8, 2017)
- New cannibis taxation framework
- Additional new measures to prevent tax avoidance
- Grants and funds to attract women to “Red Seal” trades and construction (starting 2018–19)
- Pre-apprenticeship assistance for underrepresented groups (starting 2018–19)