[CIBC logo. Update - Private Corporation Tax Changes January 2018]
[Jamie Golombek appears with a map of the world in the background.]
[Jamie Golombek, Managing Director, Tax & Estate Planning, CIBC Financial Planning and Advice]
In December 2017, we saw the third installment of the CCPC tax changes.
This all started back in July, of 2017, when the government announced 3 broad policy changes to the taxation of private corporations.
The first was limitations on dividend sprinkling, the second one was on the conversion of income from regular income into capital gains income and the third one was the passive investment limitations; where private companies retain income inside the corporation indefinitely.
[Where are we right now?]
So, where are we right now?
So, what we are waiting for right now is the final installment which will come in Budget 2018. But sort of to bring you up to speed.
First of all, some of the roles have been abandoned completely. So, the proposal to tax dividend income as capital gains or conversion rules, because of numerous complications associated with that and a lot of lobbying, has been abandoned altogether.
There was another proposal to limit the multiplication of the lifetime capital gains exemption on the sale of a small business corporation via a trust or other ways. Again, that proposal has also been removed.
[Remaining changes to the taxation of private corporations]
So, what we're left with right now is a couple of major changes to the taxation of private corporations. One of them is in effect today.
In other words, in 2018, there are very severe limitations on the ability to sprinkle income.
Now, there are two ways that business owners often split income among family members. One is by way of salary and the other is way by way of dividends.
Now, with salary income there was always a reasonableness test and that has not changed. If you want to pay your spouse or partner or even kids money as salary or bonus from the business, the amount has to be reasonable given the age, the amount of work that they're doing, the hours worked and that has not changed. If the amount is not reasonable, the corporation is denied a deduction for those amounts paid.
The more common way that people were sprinkling income through private corporations, was by issuing shares to the spouse, to the kids. Sometimes directly, sometimes via a family trust. Now, for the past 20 years there has been a rule against dividend sprinkling for minor kids under the age of 18. The new rules in effect, for the current year, 2018 and forward, extend that rule.
So, there is no longer — with certain exceptions — dividend sprinkling permitted to a non-involved spouse and non-involved adult children.
Now again, there are some detailed exceptions in our report that look at excluded shares, share ownership rules, different rules for kids under 25 and over 25, and even more restrictions for whether or not your corporation is a professional corporation or not.
But I think the general rule would say, that you can no longer sprinkle income with a non-involved spouse and a non-involved child from your business, subject to those limitations. Perhaps the most important exception to that is if you've got the business owner who is over the age of 65, the opportunity to be able to sprinkle dividend income to a spouse and retirement is something that is available for many corporations.
[More Changes Expected in Federal Budget 2018]
The other major change that is forthcoming in the budget, in 2018, will be the rules to limit the passive investment income to 50,000 dollars annually.
So, right now there's a significant advantage for private companies if they retain income in the corporation that they don't currently need.
In other words, if a business owner earns income subject to either the small business rate or the general corporate rate, once that income is taxed in there, they leave the retained earnings in that company and don't pay it out for 10, 20 years; there’s a natural deferral. Can be as high as 40 percent depending on the small business rate and the province.
The government doesn't like the fact that people are able to retain this income at a low-tax rate inside their corporation. And, therefore, they're planning to introduce a new rule. We don't have any details on this yet, and again we don't know the effective date. But a new rule would limit the amount of investment income that you could earn in that corporation from retained earnings to 50,000 dollars annually.
Now, they are saying that all existing amounts will be grandfathered but there is uncertainty as to how that grandfathering will apply.
The action: there is nothing to do except for wait. In other words, there's nothing to do in terms of preemptory planning on this because they are promising full grandfathering. So, we're not telling people to pay out dividends or do anything, you know, by putting extra money in the corporation to try to get ahead of these rules. Because again, they are saying we're going to have full grandfathering.
So, this is going to be a wait and see approach. Let's see what happens in Budget 2018.
[Private Corporation Tax Changes
- Some proposed changes have been completely abandoned
- In 2018, very severe limitations on the ability to sprinkle income
- We expect rules to limit passive investment income to $50,000 annually, or corporations will face high tax rates on the excess
- ‘Wait and see’ until Canada’s Federal Budget revealed]
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