Budget 2018: Corporate Income Tax Changes

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On February 27, 2018 the Honourable Bill Morneau, Minister of Finance, presented the 2018 Federal Budget, Equality + Growth: A Strong Middle Class, to the House of Commons.

The Government’s fiscal position includes a projected deficit in 2017-2018 of $19.4 billion, and projected deficits in the coming years as follows: 2018-2019 of $18.1 billion, 2019-2020 of $17.5 billion, 2020-2021 of $16.9 billion, 2021-2022 of $13.8 billion and 2022-2023 of $12.3 billion.

From Minor & Associates, CPA your Calgary Tax Accountants, in collaboration with Video Tax News Inc., we have provided a summary of the major budget changes over the following blogs:


CORPORATE INCOME TAX CHANGES:

Passive Income

Since Budget 2017 first expressed an intention to reduce the tax benefits of accumulating passive assets in a Canadian-controlled Private Corporation (CCPC), private business owners and their advisors have been faced with a series of proposals and comments on the taxation of passive income.

Budget 2018 includes details of a new passive investment tax regime for CCPCs, proposed to apply to taxation years commencing after 2018. Two significant changes are proposed, first a limit in access to the small business deduction for CCPCs generating significant income from passive assets, and second, a new regime to stream the recovery of refundable tax to the payment of specific types of dividends (eligible versus non-eligible).

 

Access to the Small Business Deduction (SBD)

The first prong of the passive income proposals will reduce access to the SBD for CCPCs having more than $50,000 of passive income. This is consistent with the Government’s October, 2017 announcement that the first $50,000 of passive income would be exempt from any new rules.

CCPCs with passive income in excess of $50,000 will lose $5 of business limit for every $1 of additional passive income, such that the entire business limit will be eliminated for CCPCs having $150,000 or more passive income in the year.

Some CCPCs already have a reduced business limit due to high taxable capital. The greater of that reduction and the new reduction for passive income will apply.

Consistent with the existing SBD rules, passive income of all associated corporations will apply to determine the reduced business limit available to the associated group. The prior year’s passive income will determine the current year’s SBD limit.

 

What is “Passive Income”?

Certain types of income considered “passive” are subject to different corporate tax rules. Common forms of income subject to existing “passive income” rules include interest, rental income, royalties, dividends from portfolio investments and taxable capital gains.

Various exceptions presently apply, and will also apply to these new rules. For example, income incidental to an active business is excluded. As well, income which would otherwise be considered passive which is received from an associated corporation generally retains its character as active income. A common example of this exception is rent paid from a corporation carrying on an active business to an associated corporation which owns the business real estate.

 

For purposes of these new rules, capital gains on certain types of property will also be excluded. These are as follows:

  • Capital gains realized on the disposition of property used principally in an active business carried on in Canada. The active business could be carried on by the owner of the asset, or by a related party. Examples of gains which will not count towards passive income under this exception include gains on sale of the goodwill of an active business, and gains on the real estate from which the active business operates.
  • Capital gains realized on shares of another CCPC all or substantially all of whose assets are used in an active business carried on in Canada will generally be excluded, provided the seller has a significant interest (generally over 10%) in that corporation.
  • Similarly, capital gains realized on an interest in a partnership all or substantially all of whose assets are used in an active business carried on in Canada will generally be excluded where the seller has a significant interest (generally over 10%) in the partnership.

Where capital losses realized in a different taxation year are applied to offset capital gains realized in the current year, these losses will not reduce passive income for these new rules.

Recovering Refundable Taxes 

Passive income is subject to a high corporate tax rate. However, a portion of these taxes are refunded when the CCPC pays taxable dividends. The Government had previously suggested eliminating the refundability of this tax. That suggestion has been abandoned.

However, the second prong of the passive income proposals will add a new restriction. Recovering refundable taxes will generally require the payment of non-eligible dividends. These carry a higher personal tax cost than eligible dividends.

The exception will be refundable taxes arising from eligible dividends received. Most public corporations pay eligible dividends. This refundable tax will continue to be recoverable by paying any type of dividends, including eligible dividends.

 

Additional Complexities

The proposals also include anti-avoidance measures.

While these new rules will generally apply only to taxation years commencing after 2018, they will apply earlier where planning transactions are undertaken to delay their application.

As well, transfers of passive assets between related corporations may result in the transferor and transferee corporations being required to combine their passive income for the purposes of the reduction to their SBD limits. This provision could apply, for example, if a corporation transfers investment assets to a second corporation owned by the spouse or children of the owner of the first corporation.

 

Clean Energy Generation Equipment

A variety of assets related to clean energy generation and energy conservation qualify for accelerated capital cost allowance at rates of either 30% (Class 43.1) or 50% (Class 43.2). Access to the 50% rate is currently available only for assets acquired before 2020. Budget 2018 proposes to extend this to assets acquired before 2025 (so on or before December 31, 2024).


 DISCLAIMER:

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

 No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

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