What you need to know about the latest tax revisions
Family Business Atlantic hosted a well-attended breakfast session on Wednesday, June 13 concerning the government’s recent changes to the Federal Income Tax Act. André Boudreau of PwC and Chair of our Advisor Committee led an informative discussion with our panel of tax experts to address the complexity and lack of clarity surrounding many of the tax amendments announced in December 2017 and in the recent Federal budget.
“The government has essentially created a new playing field for families in business,” says Earl MacLeod, Partner and Business Advisor at MNP LLP. “We’re still left with many uncertainties, but it’s important to recognize these changes are significant, pervasive and shouldn’t be ignored.”
Earl MacLeod was one of three panelists speaking on Wednesday, alongside Heath Moore, Partner and National Tax Service Line Leader with Grant Thornton and Jeffrey Blucher, Partner and Practice Group Leader for Tax & Estate Planning at McInnes Cooper.
The presentation brought to light many different topics such as income sprinkling, passive income and capital gains, but how each of the revisions may impact your business depends on a variety of factors. Is your company service or product based? How do the tax implications vary for active versus inactive family members? What does your family trust look like and what is the structure of issued shares?
Prior to 2018, a Canadian controlled private corporation (CCPC) could effectively split income by paying dividends and capital gains to beneficiaries of family trusts that owned shares of a CCPC, shifting income within different tax brackets. However, with the new tax on split income (TOSI) rules, the highest marginal tax rate on dividends of 42% may apply to beneficiaries of family trusts and family members, with exceptions based on age bracket, activity in the business (contributing over 20 hours of week in the business) and meaningful contributions by these family members and beneficiaries.
The rules on income sprinkling are now much more complex and each situation needs to be reviewed.
“Families should be thinking about their structure; who currently owns shares in the business and who should own shares moving forward,” says Moore. “If income sprinkling applies to your business, you may want to consider restructuring how the income is split between family and non-family shareholders.”
The Department of Finance also made changes to the small business deduction, reducing the effective income tax rate to 11,% beginning in 2019 for Nova Scotia CCPC’s. Starting in 2018, any CCPC that is now considered a “service company” will lose the small business deduction and pay corporate income taxes at 31%.
The rules surrounding deductible passive income can also seem complicated, but essentially, if a CCPC that is currently entitled to the small business deduction and earns more than $50,000 yearly (combined with associated corporations) in passive (net investment income) the amount of active income eligible for the small business tax rate is reduced, and once passive income reaches $150,000 per year, the deduction phases out.
Potentially, the full loss of the small business deduction to a CCPC is approximately $97,000 per year. The calculation of the net aggregate investment income of all associated companies is done on an annual basis.
“The changes to the rules around passive income have the ability to influence the types of investments businesses make going forward and how they’re managed,” says MacLeod. “I don’t recommend clients make investment decisions based on tax, but it’s important for businesses to identify their accumulating and foreseeable assets, what investments are generating income and determine how each of these impact the small business deductions.”
Changes to the refundable dividend tax on hand (RDTOH) are also before us; starting in 2019, the rate reduction rate will decrease from 10% to 9%, federally, and only non-eligible dividends will qualify. “The old refundable pool still stays, but may be treated differently going forward,” says MacLeod, “these adjustments may result in a decreased refundable tax on investment income, all in an attempt to streamline tax integration.”
With many of the amendments effective to date, now is a critical time to look at your own situation carefully and determine what new strategies will work for your business. “Financial strategies implemented in previous years may not be the ideal direction for the future,” explains Blucher. “There may be new rules to the tax act, but there are also new opportunities to get creative and mitigate these rules.”
Since these changes have been announced, it’s been top of mind for advisors to educate their clients on how they’ll be impacted, but the onus is on the business owners and their families to ask questions, find clarity and develop an action plan with their advisor(s) that makes the most sense for their company and family, before the December 31 deadline.
To read more about the amendments, visit the Department of Finance’s website.