The Liberal government delivered its third federal budget on February 27. While you’ve probably seen plenty of media coverage, I thought you’d appreciate an overview related to your investments and taxes.
The budget had no new personal or corporate tax rate changes. Instead, the big news was the passive investment measures for corporations. Here’s an overview of some of the proposals:
Business tax measures
The government is particularly concerned with the rising number of business owners who hold passive investments inside corporations, benefitting from a tax deferral advantage instead of distributing the assets from the corporation and personally investing. Rather than following through with their stringent 2017 proposals, it appears the government listened to the 21,000 submissions and simplified and narrowed their approach. They propose two new measures that will apply in taxation years that begin after 2018:
- For federal tax purposes, the first $500,000 or small business limit of active usiness income is taxed at a reduced rate called the small business tax rate, which the government has proposed to reduce from 10.5% to 10% for 2018. Any active income above this $500,000 small business limit is taxed at the higher general business tax rate, which is 15% for 2018. The amount of active income eligible for the small business tax rate will be reduced by five dollars for every dollar of passive investment income earned by a corporation and its associated corporations, above $50,000 in a given year. This means the small business limit is reduced to zero if $150,000 of passive investment income is earned in a year. ($500,000-(excess of $50,000 x $5)). Any active income earned above the small business deduction, as reduced by this calculation, is taxed at the higher general business tax rate.
- Passive investment income is taxed at a high rate within a corporation with a portion of the tax refunded to the corporation when the passive investment income is paid out to shareholders. Currently, a corporation can pay out dividends from its active income and still claim a refund—providing a tax advantage. The government is changing the rules by restricting the ability of a corporation to obtain a refund of taxes paid on passive investment income while distributing dividends from active income.
The taxation of passive investment income isn’t changing, just the ability to benefit from the small business tax rate and claim the refundable tax. In terms of investment choices within a corporation, tax efficiency and tax deferral continue to be important considerations.
Personal Tax Measures
- Mineral Exploration Tax Credit for flow-through shares extended for another year.
- Registered Disability Savings Plan (RDSP)
- Where contractual capacity is in doubt for an adult entering into an RDSP with no provincially/territorially recognized legal representative; a parent, spouse or common-law partner can be the plan holder. This temporary measure was set to expire at the end of 2018 and the budget extends it by five years to the end of 2023.
- The Medical Expense Tax Credit is extended to include eligible expenses incurred for service animals that are specially trained to perform tasks for a patient with severe mental impairment.
As you can see, the announced proposals can have significant implications particularly for certain business owners and professionals. I hope you found these highlights helpful.
If you’d like to discuss these or other federal budget initiatives and how they affect your financial strategies, please don’t hesitate to contact me.