2017-18 Federal Budget Status Update


Since the announcement of the 2017-2018 federal budget proposal, a flood of concerns and uncertainties have been raised for Private Corporations. This has been a hot and heated topic of discussions and debates throughout Canada as the proposal goes under heavy criticism in assessing the impact, fairness, equality, and administrative effectiveness.

The implementation of this new regime on taxation of private corporations may be not within our control as corporate business owners, but KNOWLEDGE IS POWER in proactively planning for anticipated tax implications.

As the proposals are still in the consultation process, it is to be expected there will still be further amendments made prior to the finalized budget decision. And it is important to note the following proposals are highly probable, yet still lacks assurance until the process is finalized in 2018.

If you have any questions or concerns regarding how your private corporation may be affected by the following, please contact me to further schedule a consultation session. My upcoming availability can be found at https://www.kliuaccounting.com/booknow.

THE GOOD

Intentions to Reduce Small Business Tax Rate to 10% effective January 1, 2018 & 9% effective January 1, 2019 (currently 10.5%)

THE BAD

Restrictions on income-splitting & dividend sprinkling

  • Current State: Kiddie Tax / Tax on Split Income (TOSI)

  • Purpose

  • To prevent income splitting with minor children (under age 18)

  • Tax Implication

  • Minor child pays highest personal tax rate on TOSI income and loses personal tax credits

  • Proposed Changes

  • Restrictions for 18-24 year olds, and amounts received by adult family members must be "reasonable"

  • What is "reasonable"?

  • Amounts received must be reasonable compensation for individual's contribution to the business: e.g. labour and capital contribution.

  • Capital gains on sales of private corporation shares to non-arm's length person may lose 50% inclusion rate

  • What type of income is applicable?

  • Capital gains on sales of private corporation shares

  • Taxable dividends received on private corporation shares

  • Income from partnership or trust

  • What is the purpose of this?

  • Eliminates existing tax planning strategies of income sprinkling among non-involved family members

  • What is the complication in this?​

  • Every dividend paid to a person will be measured against the “reasonableness” standards

  • Complexity in tracking of contribution in business

  • What is reasonable? Reasonableness is not clearly identified.

  • Ignores family member’s contributions to the success of business e.g. stay-at-home spouse, elderly family members whom is no longer active shareholder

  • When can this become effective?

  • January 1, 2018

  • What does this mean?

  • 2017 is the LAST CHANCE to sprinkle!!!

  • Document CONTRIBUTION in the corporation

  • Define interest on shareholder loan

  • Define loans from related parties

  • Holdings of corporation shares

  • Assess and document involvement and contribution in corporate activities: e.g. working hours, management/consultation services, board of director roles & meeting involvements, etc.

  • Ensure fair market compensations are paid

Private Corporation Passive Income

  • What is passive income?

  • Income not generated from active business activities - aggregate investment income: rents, royalties, interest, net taxable capital gains

  • Current State: higher corporate tax imposed on passive income but is partially or fully refundable through dividends

  • Purpose

  • To prevent tax deferral on passive income, but with lower corporate tax rate on active income, it allows more after-tax retained earnings for corporations to reinvest in the business.

  • Tax Implication

  • Passive income can generate Refundable Dividends Tax on Hand (RDTOH) to be refunded to the corporation on passive income related dividends, this dividend income also receives Dividend Tax Credit in the taxpayer's hand

  • Proposed Changes

  • Elimination of Refundable Dividend Tax on Hand (RDTOH) and Dividend Tax Credit on passive income

  • You can potentially pay 50% corporate tax on passive income received in the corporation

  • Grandfathered

  • All past investments and future income on past investments are protected, with $950,000 threshold on passive income to be taxed under old regime

  • Allowance of $50,000 annual passive income that will be exempt from the new regime

  • What is the purpose of this?

  • To promote fairness and neutrality, as passive income through a corporation should result in equitable after-tax return as if it were received at personal level.

  • What is the complication in this?

  • Lacking consideration for the fact the passive income funds are corporate business owner's retirement investment and safety net, and such risks are minimized at the personal level.

  • Complication in segregating and tracking passive income pool that is grandfathered, allowable, or tax treatment under the new regime

  • When can this become effective?

  • Uncertain what date would be effective for the grandfathering: July 18, 2017, October 18, 2017, January 1, 2018, or release date of legislation

  • What does this mean?

  • "Stuffing" corporation with assets to maximize the grandfathering pool can be a potential strategy, however due to uncertainty of grandfathering date, this may or may not be beneficial if you have not done so before any of the above dates listed.

  • Seek professional advice from your financial adviser to determine the best investment portfolio that can minimize your corporation tax liabilities on passive income

  • K Liu Accounting Services Inc. offers consulting and tax planning services in helping you assess the tax implications of passive income held in corporation or held personally

AVAILABLE RESOURCE & CASE STUDIES

https://moodysgartner.com/wp-content/uploads/Sept-1-2017-Private-Company-Taxation-Seminar.pdf

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