In February, Canada’s federal government released the Budget 2018, outlining the Liberal administration’s economic agenda for the year.
While this year’s budget focused mainly on providing incentives for Canada’s growing middle class, it also contained a number of changes that directly affect wealthier Canadian entrepreneurs working under the Canadian controlled private corporation (CCPC) structure.
The most resounding of these changes concerns regulations made on the taxation of passive income investments, such as those derived from rental properties, limited partnerships, or other enterprises.
While this passive income has always been taxed, the new budget ties it directly to the small business tax rate starting in 2019. There will be a gradual reduction in access to this low tax rate.
How significant is this change and how does this new threshold work?
Understanding the Implication of the New Passive Income Rules for CCPCs
Before going into the details of the new legislation, it’s worth noting that the budget states that these new rules target the small business tax rate in order to ensure that small businesses “reinvest in their active business, not accumulate a large amount of passive savings.”
In other words, the stated purpose of these changes is not to punish CCPCs for smart passive investment, but rather to reduce passive accumulation of wealth and promote the reinvestment of capital into the corporation.
To do this the new budget incorporates a new passive income threshold of $50,000 for CCPC’s wanting to have full access to the small business rate.
In other words, if a CCPC makes under $50,000 in passive income a year, they will still have access to the $500,000 small business tax deduction (currently in BC, this is 12%).
For example, assuming a $1 million dollar investment, which earns a 5% rate of return.
Once CCPCs surpass this threshold, they begin to lose access to the small business tax rate, to the point that if passive investment income hits $150,000 or more, companies would miss out on that low 12% tax rate altogether.
The new tax rate is 27%. This means that 100% of all profits from active company earnings and passive income is taxed at 27%.
To put that into numbers, it’s a $75,000 increase in tax year over year.
To make that clear:
- CCPCs making less than $50,000 a year in passive income still have complete access to the small business tax rate.
- Once a CCPC reaches $50,000 a year in passive income, the access to the low business rate starts to reduce gradually.
- If a CCPC’s passive income reaches $150,000 a year, they completely lose access to the small business tax rate.
A Potential Solution
For CCPCs who have successful passive income investments, this potential tax hike could be a big deal.
Luckily, there are possibilities of alternative investment planning that will allow CCPCs to restructure their passive income investments to reduce or avoid these taxes.
One such option is Permanent Life Insurance. This insurance is a type of life insurance that provides lifelong coverage (meaning that it never expires) as well as an opportunity to grow your money tax-free.
When compared to similar low risk, fixed income investments (such as bonds, GIC’s, etc.) the long term investment value of the life insurance outperforms them by a longshot.
Investment Life Insurance provides higher liquidity in a tax-sheltered environment, allowing your investment to grow significantly.
There are some other great benefits to this type of investment/insurance including:
- Low risk, high stability
- Higher rates of return (when compared to similar risks and asset classes)
- Low investment management fees
- Flexibility as there are several ways for you to access your investment
- They can be used as tax-free retirement income
Whatever course of action you may choose for your CCPC, it’s important that you make a plan for your passive investment income and execute it before the new rules outlined in the 2018 Budget, coming into effect on January 1, 2019.
Find out if a Permanent Life Insurance Plan is the right choice for you
If you want to discuss if this investment plan can reduce your tax burden, give us a call to set up a time to chat.