Since tax changes were proposed for Canadian Controlled Private Corporations (CCPCs) in July 2017, small business owners, incorporated professionals and their tax advisors have been in a holding pattern as to how to manage passive assets. Proposals at the time called for two pools of assets: Pre Jan 1, 2018 and post Dec 31, 2017. The potential for having to track and then determine several different tax rates was of great concern. On Feb 27, 2018 the Finance Minister clarified the rules.
In terms of passive assets in a corporation: Passive income earned up to $50,000 will have no impact. For every $1 of passive income that exceeds $50,000, the small business deduction (SBD) level of $500,000 will be reduced by $5. This equates to a full reduction of the SBD when passive income is greater than or equal to $150,000. The good news is the amounts reset the following year with no carryover.
Coupled with the Fall update regarding dividend sprinkling rules in which Tax On Shared Income (TOSI) rules were extended to shareholders not working 20 hours or more in the business, we now have a clearer path to move forward.
These changes, combined with the integration between dividends and income, should lead to a more traditional T4 compensation model going forward, which will allow business owners and professionals to utilize RSPs, Individual Pension Plans (IPPs,) or Retirement Compensation Arrangements (RCAs), where funding room is determined by T4 earnings and not dividend compensation.
The IPP and RCA can help balance one’s retirement plan by redeploying corporate assets into a creditor proofed vehicle earmarked for retirement and assisting in stripping out passive assets. This can help mitigate your passive income and preserve the SBD.
There were some potential changes with respect to the Health and Welfare Plan. There are new measures in place that eliminate the administrative rules around Health and Welfare Trusts and replacing them with the Employee Life and Health Trusts. Many of the rules still hold true but this change primarily impacts Single Shareholder Employee Corporations or plans where the higher earning individuals have significantly higher benefits than those of the general staff. The Health and Welfare Plan we employ is a form of Private Health Services Plan and we are looking into the potential impacts of this change.
Overall, the clarity around the July 2017 proposals was much needed and in general, the 2018 Budget was more about themes rather than specific tax changes.
By Fraser Lang, CFP, CHS Senior Vice President Sales and Business Development, GBL
Founded in 1995, GBL is a leading provider of retirement and health solutions for business owners across Canada. For more information on our services and strategies contact: email: firstname.lastname@example.org Phone: Eastern Canada 1-416-941-9829 Western Canada 1-403-249-1820