2018 Budget Overview: Specific Tax Provisions for Business

New 2018 Federal Budget includes business tax provisions addressing tax changes for business income.

Passive Investment Income

Proposed for taxation years after 2018

As promised, Budget 2018 proposes to limit the tax deferral advantages on passive investment income earned inside private corporations on taxation years that begin after 2018 through two measures. Previously announced measures include the reduction of the tax rate for qualifying active business income of CCPCs. The current rate of 10.5% will be reduced to 10% for 2018 and then again reduced in 2019 to 9%.

The first measure results in a reduction of the $500,000 small business deduction limit based on passive income of greater than $50,000 and less than $150,000 as shown in the table below.

Active business income qualifying for the small business tax rate under new business limit ($)

Note: Assumes that the corporation has less than $10 million of taxable capital.

Source: Budget Document

Active business income qualifying for the small business tax rate under new business limit for illustrative passive assets ($)

Note: Assumes that the corporation has less than $10 million of taxable capital.

(*) Assuming a five-per-cent rate of return. (**) Assuming a two-per-cent rate of return.

Source: Budget Document

Canadian controlled private corporations (CCPC) with active business income more than the reduced limit will be taxed at general rates, currently 15%. The small business deduction reduction is in conjunction with existing reductions for CCPCs with more than $10 million in taxable capital. Thus, the reduction is the greater of passive income or the taxable capital methods.

Adjusted Aggregate Investment Income equals:

Adjusted Aggregate Investment Income is defined as:

Aggregate investment income less taxable capital gains (and losses) will be excluded to the extent they arise from the disposition of;

• a property that is used principally in an active business carried on primarily in Canada by the CCPC or by a related CCPC
• or a share of another CCPC that relates to the CCPC, where, in general terms, all or substantially all of the fair market value of the assets of the other CCPC is attributable directly or indirectly to assets that are used principally in an active business carried on primarily in Canada, and certain other conditions are met
• net capital losses carried over from other taxation years will be excluded
• dividends from non-connected corporations will be added
• income from savings in a life insurance policy that is not an exempt policy will be added, to the extent it is not otherwise included in aggregate investment income

Taxable income exceeding the Adjusted Small Business Deduction will be taxed at General Rates (GRIP).

The second measure relates to Refundable Dividend Tax on Hand (RDTOH) for CCPC’s. The creation of a second RDTOH pool – “Eligible RDTOH” applies only to eligible portfolio dividends received by CCPC resulting in Part IV tax. The current RDTOH pool is renamed “Non-Eligible RDTOH” and applies to refundable Part I tax and non-eligible portfolio dividends. The current method for connected corporations remains however, the allocation will no longer be applied to Part IV RDTOH but will follow the pool paid from by the connected corporation.

For a CCPC the allocation of an existing RDTOH pool will be the lesser of its existing RDTOH balance and an amount equal to 38 1/3 percent of the balance of its general rate income pool, if any, will be allocated to its eligible RDTOH account. For any other private corporation, the entire corporation’s existing RDTOH balance will be allocated to its eligible RDTOH account. RDTOH refunds will first apply to the non-eligible RDTOH account then to the eligible RDTOH account.

There will be no grandfathering provisions for existing passive assets regardless of their value.

There will be a new anti-avoidance rule to prevent the deferral of these measures through the creation of a short taxation year.

Health and Welfare Trusts

Effective 2021

Health and Welfare Trusts will soon be required to transition to the existing Employee Life and Health Trust category. This will ensure that only one set of rules applies instead of the current set of rules for each type of health trust.

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