Passive Investment Rule Changes and More

Well dressed Chartered Professional Accountant

On February 27, 2018 the federal government released the 2018 budget. Here are some take-away tax measures that may impact your business for passive income and health & awareness Trusts. As always, the actual rules can be quite complex so further guidance from us related to your specific situation is recommended.

Passive income rules:

-Corporations gain tax advantages by holding corporate income inside their corporation and re-investing it within the corporation, as it is taxed at lower rates than personal income.

-Corporations that are Canadian controlled private corporations also gain access to a small business deduction which further reduces the rate to 12% in Alberta for income up to $500,000 per fiscal year.

-The original proposals, which, in certain situations, could have resulted in up to a 72% tax on passive income on eventual flow out, have been backed away from. The government has moved away from these very punitive proposals when earning passive income in a corporation.

-The proposals aim to limit the small business deduction eligibility. You begin to lose the deduction if you earn over $50,000 in investment income in a year, and you lose it completely if you earn $150,000 or more. The new definition of what is considered an investment income for this calculation will determine whether this impacts your company.

-Currently, when you earn investment income in a corporation it generates a “refundable tax pool”, which is an additional tax that is paid and received back when dividends are flowed out of the corporation. The proposals have introduced a second measure where the type of dividend (non-eligible or eligible) impacts whether a refund from the pool is available.

-In general, the above measures aim to further limit access to the small business rate, as well as align the refund of taxes on investment income with the dividends paid out of that income.

-The new proposals are applicable for taxation years after 2018, so they will not apply until year ends falling into the 2019 year.

In conclusion, the above changes may impact corporations that 1) earn over $50,000 in investment income, and 2) regularly pays eligible dividends.

Health and Welfare Trusts:

Some of our clients may be impacted by changes to the Health and Welfare Trust rules. The new budget requires Health and Welfare Trusts in a corporation be converted to a Employee Life and Health Trust. Health and Welfare Trusts had little statutory guidance, and with these changes we have more clarification regarding these rules.

If you have been self administering a Health and Welfare Trust through your company please talk to us about transitioning this to an Employee Life and Health Trust.

The above is not a comprehensive analysis of the budget but only some considerations for further discussion. For more detailed explanations and consideration to your specific situation please contact us to discuss the above changes and how it may apply to you.