One of the most anticipated aspects of the 2018 Federal Budget was the changes to the taxation of passive investments held within a private Canadian owned corporation. The Budget release, to much relief, has proposed a simplified approach for the taxation of passive income earned inside a private corporation.
The new proposed measures will be effective for taxation years beginning after 2018.
New Small Business Deduction (SBD) Limit Grind:
The new 2018 Budget measures will erode the existing Small Business Deduction (SBD) limit of $500K that is available for Canadian Controlled Private Corporations (CCPC) based on the amount of passive income generated within a corporation (and associated corporations). The business limit will be reduced when investment income is greater than $50,000 on a straight-line basis and eliminated when investment income is $150,000 in a year.
This grind will operate in conjunction with the existing reduction to the SBD limits that occurs for taxable capital in excess of $10M, and the reduction to the SBD will be the greater of the two possible outcomes where applicable.
What Type of Investments are Not Trapped?
As part of these new measures, there will be a modification to the existing Aggregate Investment Income and the introduction of a new concept, “Adjusted Aggregate Investment Income”. Capital gains (losses) realized from disposition of active business assets and shares of a connected CCPC that operates an active business will be excluded from the calculation of Aggregate Investment Income. Accordingly, the gains on these types of investments will not impact the availability of the SBD.
The new SBD grind will be an annualized test based on the prior year’s investment income. As a result, a corporation could lose the SBD one year and regain it the next year, if investment income goes down.
Overall, these changes are welcome news when compared to what was initially proposed in July 2017.
Contact us today for more information on how the 2018 Federal Budget may affect you and your business.