Budget 2018
- Reduction of small business deduction (SBD) for CCPC’s that have significant passive investment income
- Theory appears to be a CCPC that has accumulated a material amount of passive investments ($1 million) is taking undue advantage of the tax deferral afforded by the small business deduction
- Will apply to tax years beginning after 2018
Small Business deduction changes
- The SBD will be reduced to extent the CCPC (and associated corporations) earn more than $50,000 of adjusted aggregate investment income (AAII) in a year
- The SBD will be ground to zero once AAII reaches $150,000 in a year (resulting in approximately $75,000 more tax being initially payable by the corporation)
- Will not have a significant impact on “larger” CCPCs as their SBD is already ground down to nil once taxable capital reaches $15 million
Adjusted Aggregate Investment Income
- Generally, the aggregate investment income of the CCPC But
- Excludes capital gains/losses on the disposition of “active assets” (property used in the business)
- Excludes gains on shares of connected CCPC carrying on active business
- Excludes capital losses of other years carried over
- Excludes investment income incidental to an active business (e.g. interest earned on working capital account)
- Includes dividends from non-connected corporations
Corporate Owned Insurance
- Includes accrual income earned in a non-exempt policy
- Includes annuity income
- Includes income arising from the disposition of an exempt policy
- Does not include the accumulating reserve (including the cash value) of an exempt policy
But…need to ensure you are marketing exempt insurance for risk protection and not as a way to avoid the grind to the SBD
How Will It Work
- Jane owns all of the shares of a Holdco that has a passive investment portfolio. In the current year, it will earn $100,000 of investment income (AAII)
- Holdco also owns all of the shares of a CCPC that carries on an active business. The business is expected to have profits of $500,000 in the current year after issuing a bonus to Jane. SBD reduction = ($100,000 – $50,000) x $5 = $250,000
- CCPC pays small business rate on $250,000, and the regular business rate on $250,000
*Based on 2018 Ontario tax rates with Ontario introducing similar restrictions
Loss Deferral
- SBD grind is a loss of the tax deferral gained from the lower small business tax rate
- Fully integrated, overall tax is generally intended to be similar
Important Things to Note
- No grandfathering for current passive investments
- Investment income includes income from the disposition of an exempt life insurance policy, income from non-exempt insurance policies and annuity income (but not tax-deferred accumulation in an exempt policy)
- There is no “income averaging provision” to account for “choppy” investment income
- Certain provinces could choose to “opt out” of these changes to the SBD (Quebec and Ontario have announced they will adopt these rules)
- These rules are not effective until 2019 – planning opportunities in 2018…
Planning Opportunities
- Planning generally to invest so as not to produce AAII:
- Corporate-owned life insurance
- Individual Pension Plans (IPPs)
- Retirement compensation arrangements (RCAs)
- Capital gains and gains realization strategies
- Managing investment expenses