July 18, 2017 Department of Finance Draft Legislation on
Investment Income Inside a Private Corporation
Written By: Paul Morton, CPA, CA, CFP, TEP
Partner, Ginsberg Gluzman Fage & Levitz LLP (an Independent Member of DFK Canada)
Overview of Proposed Changes
Many small businesses hold and invest their retained earnings within the corporation. This income is subject to a special set of taxation rules. Currently a temporary tax is levied on this investment income, or “passive income”. When investment income is paid out to shareholders they are able to claim a refund on the temporary tax.
The Department of Finance’s proposals aim for an individual to pay the same amount of tax on investment income, regardless of whether the income was earned personally or through a corporation. The proposals eliminate the perceived advantages of investing the after-tax income in a corporation.
The proposals outlined by the Department are designed to achieve the following outcome:
The two methods proposed are as follows:
Companies Focused on Portfolio Investments (Holding Companies)
For holding companies that are not taxed at the low corporate tax rates, the system will remain mostly unchanged. The main change for holding companies is that under the old rules, dividends received from a related company were generally exempt from tax. Going forward, the dividends from related companies will be subject to refundable tax rules, similar to dividends from portfolio investments. As a result, holding companies will have less capital to invest.
There will still be advantages of using holding companies:
What Are We Doing?
As part of DFK Canada, we are pro-actively seeking changes to these proposals by discussing their impact with our clients and contacting local MP’s to advise them of the far reaching impact these rule changes will have on all clients. Those most impacted by the proposals are being portrayed as the wealthiest of Canadians. We know otherwise. We will continue to keep our clients up to date as we learn more about the proposed changes.
The information provided in this article is intended for general purposes only. Care has been taken to ensure the information herein is accurate; however, no representation is made as to the accuracy thereof. The information should not be relied upon to replace specific professional advice.