The federal Liberal government introduced their third budget yesterday. Budget 2018 concentrated more on spending and a political agenda rather than tax changes. We have outlined the key measures in the budget that will affect our clients.
Passive Investment Income
As expected, the budget introduced measures relating to holding passive investments inside a private corporation. The good news is that the proposed changes are more targeted and simpler compared to what the government had been proposing in the July 2017 consultation paper on tax planning strategies involving private corporations.
The two measures proposed will be effective for taxation years that begin after December 31, 2018.
Small Business Limit
This measure is intended to limit the ability of businesses, with investment income of more than $50,000 of passive income in a year, to benefit from the current small business deduction limit of $500,000. The small business deduction will be gradually reduced by $5 for every $1 of investment income over $50,000 until it is reduced to zero at $150,000 of investment income earned in the corporation (together with any associated corporations). Assuming a 5% return on investments, the business limit would effectively be reduced on a straight-line basis for CCPC’s having between $1 million and $3 million of passive assets.
Refundable Tax
Currently, passive investment income of private corporations taxes income from passive investments at approximately the top personal income tax rate while that income is retained in the corporation. Some or all of these taxes are added to the corporation’s refundable dividend tax on hand (RDTOH) account and are refundable at a rate of $38.33 for every $100 of taxable dividends paid to shareholders. The second measure in the budget limits the access to recovering refundable taxes on the payment of eligible dividends. A CCPC will only be entitled to a refund of taxes paid on investment income by paying non-eligible dividends. An exception will be provided in respect of RDTOH that arises from eligible portfolio dividends received by a corporation. A new RDTOH account will be added (“eligible RDTOH”) and it will track refundable taxes paid on eligible portfolio dividends. The current RDTOH account (which will now be referred to as “non-eligible RDTOH”) will track refundable taxes paid on other investment income and refunds from this account will be obtained only upon the payment of non-eligible dividends. Upon the payment of a non-eligible dividend, a private corporation will be required to obtain a refund from its non-eligible RDTOH account before it obtains a refund from its eligible RDTOH account. There are transitional rules to convert the current RDTOH account to the eligible and non-eligible RDTOH accounts.
Tax Support for Clean Energy
Class 43.2 that provides accelerated capital cost allowance rates for investments in specified clean energy generation and conservation equipment will be extended for another five years to property acquired before 2025.
Trust Reporting Requirements
As of 2021, most inter-vivos trusts will have to identify all trustees, beneficiaries, and settlors of the trust. The government will also impose higher penalties for not filing or for late filing.
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