The 2018 federal budget brought much needed peace of mind to the private business community. Though the announcement didn’t clarify all unanswered questions around tax reform measures proposed in July 2017, some headway was made.
One of these original announcements was to increase tax on passive investment income in private corporations. Corporate income is taxed at a lower rate than personal income with the intention that businesses reinvest that money on job creation and growth. The government’s primary concern was that this gave business owners and professionals a deferral advantage wherein the lower tax enabled greater personal savings purposes within the corporation by deferring the higher personal income taxes.
Intentions to reform this tax was met with outcry from the private business community last year. Changes would mean a potentially significantly higher tax burden and increased administrative complexity. The good news? Budget 2018 expressed a much more conservative solution from the government.
Companies earning more than $50,000 a year in passive income will see less of their business income eligible for the small-business tax rate, which will be 9% as of next year. The straight-line reduction of the small-business deduction limit will be $5 for every $1 of investment income above $50,000. The eligibility cut off for the small business deduction is now $150,000. If a company exceeds this, all amounts of business income will be subject to the full federal tax rate.
Other changes? This budget didn’t offer additional information around income sprinkling or capital gains and dividend taxation changes. In December 2017, draft legislation was introduced to address the ability for private corporations to income sprinkle – as a means to utilize the lower marginal tax brackets available to a lower-income spouse or an adult child attending postsecondary education. That remains in place as of this time. Similarly, the budget didn’t build on the October announcement that the government would not proceed with draft proposals relating to the multiplication of the lifetime capitals gains exemption it announced in the previous July. The capital gains inclusion rate stands at 50%.
The government is also staying the course when it comes to corporate tax rates and personal income tax rates. These remaining question marks aside, the 2018 budget does suggest some interesting opportunities for Canada’s private businesses. Companies should take time to familiarize themselves with passive income investment updates but also review what increased investment in women entrepreneurship and a refocusing of innovation programs could mean to them.
Chris Jerome is a Tax Partner in EY Canada’s Private Client Services practice. Access the complete EY Canada Private Client Services post-budget Tax Alert, here. For more insight, visit ey.com/ca/private.