It’s Official:  Government Is Moving Ahead with Tax on Passive Income

Finance Minister Morneau today announced that his department will move forward with their goal to tax passive investment income earned within private corporations.  What’s becomes apparent from the minimal details released, is that not much has changed in the government’s intentions, since the measures were first floated on July 18, 2017.

The government holds on to its clearly articulated view that “wealthy individuals” should not have access to unlimited tax assisted savings over and above the RRSP and TFSA limits available to everyone else.  The details of the move will be released in draft legislation with the next federal budget in 2018.

Here are some of the tweaks from today’s announcement:

First, the measure will not affect income earned from past investments. However, going forward, the government plans to tax passive income – that’s rents, royalties, interest and dividends - earned above a $50,000 threshold.  This $50,000 savings threshold, the government argues, should allow small business owners to save for sick-leave, maternity, parental leave or retirement.  According to the backgrounder documents, there will be no tax increase on investment income below this threshold.

An immediate flaw in the provision is that this threshold appears to be un-indexed.   It also makes no effort to allocate different tax attributes to different types of investments, all of which carry different risk factors.

Also unclear is whether capital gains will be taxed differently under the new rules.   The Government will give consideration to whether capital gains realized on the sale of shares of a corporation engaged in an active business, should be exempted.  However, many small business corporations own buildings which house the business and receive rental income.  It appears that future rents and appreciation on those real estate acquired after 2018, may be caught by the new rules.

Farmers will be happy to know that the proposed changes to the taxation of passive investment will not apply to income from AgriInvest, a self-managed producer-government savings account.  Currently that income is considered to be active business income.

Evelyn Jacks is Founder and President of Knowledge Bureau and author of 52 consumer books on the subject of tax preparation, planning and family wealth management.

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