The Federal Budget was released on February 27, 2018. At a really high level, there is a $17,800,000,000.00 deficit. Yes, that is a lot of 000’s.
There are no changes to the corporate or personal income tax rates for 2018. The fun income sprinkling rules were released in December 2017 and came into effect on January 1, 2018.
At VR, we’re already tax planning behind the scenes to find the best options for you.
In the interest of saving you time, we’re going straight to the issues that you’ve been asking about.
Passive Investment Changes
Good news – the new measures are applicable for tax years beginning after 2018.
Bad news – the new measures also include an “anti-avoidance” provision. In other words, you cannot change your fiscal year-end to delay the application of the new measures.
The proposals released last fall raised many questions and complexities with regards to grandfathering existing investments. We heard from a lot of you about planning for the unknown implications this might have. The Budget includes a more simplified approach for addressing passive income above the $50,000 threshold.
There are now two new measures for the taxation of passive investment income:
– business limit reduction; and
– limiting access to refundable taxes.
Business Limit Reduction
When you have more than $50,000 of passive investment income, your small business deduction will be reduced by $5 for every $1 of investment income. If you had $150,000 of investment income, your small business deduction will be nil. This effectively means that you are paying a higher corporate tax rate on active business income once you exceed the $50,000 passive income threshold.
Limiting Access To Refundable Taxes
Currently, your corporation pays a higher rate of tax on passive income. Your corporation can receive a refundable dividend tax on hand (RDTOH) refund when paying eligible or other than eligible dividends to shareholders. The RDTOH refund effectively reduces your corporate tax rate.
For years beginning after 2018, the recovery of the RDTOH refund will require the payment of other than eligible dividends. Your corporation will no longer be able to use eligible dividends to recover the higher rate of tax. This means that you could potentially be paying more personal tax on your dividends. Each situation will be assessed individually to ensure that you are paying the lowest amount required (corporate and personal combined).
There is an exception for eligible dividend income received by your corporation. That eligible dividend income will be tracked in a separate RDTOH account and can be recovered by paying any type of dividend.
*Our very limited summary of the Budget has focused on the areas where you have expressed concerns. There are further tax items related to at-risk requirements for partnerships and reporting requirements for trusts that may also be applicable.
And if you’re still reading – you made it! Or maybe you just skipped to the good stuff. Either way, we’ve got your back.
Let us help you navigate the 2018 Federal Budget