Budget 2018 – Tax Changes for CCPCs
Budget 2018 introduced a better, less complicated approach to address the tax deferral advantage from accumulating surplus savings in a Canadian controlled private corporation (a “CCPC”). These new amendments abandon the complex suggestions made in the consultation paper released in July 2017, which included a “super-tax” of up to 73% on “second generation income.” The latest proposal will be better for most investors than the earlier proposals.
The budget proposes two new measures applicable to CCPCs for taxation years beginning after 2018 — a business limit reduction and a change to limit certain tax advantages in the distribution of dividends (which has little application to real estate investments). The new proposal also walks back the promise to grandfather existing investments, made on October 18, 2017. That is the main downside to the Budget proposal.
None of the proposals have suggested any change to the ability to claim the standard corporate tax rate of about 27% when a rental business employs more than five full time employees. None of the proposals would reduce that cut off, below which rental property is deemed to be passive income, subject to the highest corporate tax rate of about 50%. All the proposals are about dealing with the use of funds which have benefited from the 14% small business tax rate on active business income. All the figures are Canada-wide averages (since the exact rates vary between provinces.)
Business limit reduction
If the Budget legislation is adopted (which is highly likely), CCPCs with no active business income will not be affected. Any CCPCs with less than $50,000 of rental or other investment income in a year will also continue to be largely unaffected. The budget proposes to reduce the small business limit for CCPCs that have between $50,000 and $150,000 of investment income, by $5 for every $1 of investment income above the $50,000 threshold. The business limit would be zero at $150,000 of investment income. See Table 1.
Table 1 Reduction of the small business limit
Currently, the small business limit is reduced when the corporation has taxable capital employed in Canada between $10 million and $15 million. The reduction in a corporation’s business limit will be the greater of the reduction under the new measure and under the existing taxable capital reduction provisions.
For purposes of determining the reduction of the business limit of a CCPC, the budget proposes that the investment income will be measured by a new concept referred to as “adjusted aggregate investment income” (AAII). Generally, the AAII will exclude taxable capital gains (and losses) from the sale of active investments and investment income that is incidental to the business. That may assist some companies which both manage and own rental properties.
Other tax measures
The rules about income sprinkling will be as announced on December 13, 2017, and will apply in 2018. That includes certain bright line tests under which income splitting will still be allowed, including the ability to split income from CCPCs with a spouse once the business owner reaches age 65. However, the open-ended ability to split income which applied until December 31, 2017, will be no more.
Story by John Dickie, President, Canadian Federation of Apartment Associations (CFAA)