Industry insider says business owners may have to get creative to negotiate new rules
Advisors may have to get creative when helping clients deal with the new tax changes to passive investment income inside private corporations.
Carol Bezaire, vice president of tax and estate planning with Mackenzie Investments, said Finance Minister Bill Morneau’s scaled-back version of the plans, announced in Tuesday’s budget, will still force business owners to take a fresh look at their strategy in order to “purify” their corporation.
Companies earning more than $50,000 a year in passive income will see less of their business income eligible for the small-business tax rate, which will be 9% as of next year. At $150,000 of passive income, the small-business rate is eliminated and all amounts of business income are subject to the full corporate tax rate.
Bezaire said the net result could be the return of Individual Pension Plans as people direct money away from their corporation’s accounts.
She said: “With this proposal, you just want to change the way you are investing. Instead of having your retained earnings in your company and running into this issue, now – and I just did a presentation on this – we are going to watch Individual Pension Plans come back because it’s before-tax money for the business owner and they can actually save for retirement on a tax deferral outside of their corporation.
“That’s deductible to the company before tax and the IPP has been around since 1991, so it’s a good way to kick-start business owners’ retirement and remove all of that problem from their corporation going forward.
“People are going to be more creative. It’s not going to hit everybody. A little company with $100,000 investment income would have a business limit reduction to $250,000. The government says it’s only going to hit 3% but it’s going to hit more than that of the CCPCs (Canadian Controlled Private Corporation).”
Bezaire said the other thing to consider is that the refundable mechanism for tax paid will now require people to have two RDTOH accounts.
She explained: “One that’s eligible and one that’s non-eligible for your passive investments. So, for example if you have after-tax money and you pay it out as a non-eligible dividend to yourself, then you’re going to get back one dollar for every three paid out.
“Now if you have portfolio earnings, you own stock in your corporation for investment purposes, the dividend taxed within your corp is not going to be tax refundable when you pay out a non-eligible dividend. It’s going to add complexity; it’s also going to add cost to the business owner to be able to do the new accounting.”
