Roar like a Lion, then Baa like a SheepSubmitted by Foundation Private Wealth Management on March 5th, 2018
For all the hype that this past Federal Budget received, it seems like we have escaped the jaws of a lion and can sleep easy enough for the foreseeable future, counting the sheep! To put this in context, the main element of the proposed budget that many of our clients were concerned about, ourselves included given that we are a Canadian Controlled Private Corporation that generates income at the small business rate, were the measures aimed at small businesses.
Over the summer of 2017, Bill Morneau, the Finance Minister, proposed a series of sweeping changes to the way small businesses, and businesses in general, are taxed. The goal was to even the playing field from a tax perspective between small business and individuals, while not considering the risk and volatility that small business owners face on a day-to-day basis. In the discussion paper that was proposed while most of the country was busy enjoying the few summer days we had in 2017, a new convoluted and overcomplicated series of proposals were laid to make things “fair”.
Over the ensuing months, small business rose up and MP’s on all sides of the fence questioned the new fairness measures in a way that I have not seen with any proposal of this sort in my working career. At the same time, many things came to light of how Bill Morneau, the architect of these fairness measures, structured his personal and corporate affairs. Most of the strategies he employs would not be accessible to the vast majority of small business owners in Canada, as they simply are just not as wealthy as Mr. Morneau. I am sure that this took a bit of a bite out of his proposals!
To that end we ended up with a proposed budget that “bah’ed like a sheep”, compared to the roar of the summer, and did not do much to egregiously attack Canadian small business owners. The net result is a slight change to how the small business limit will be assed based on the amount of passive income a corporation generates. The Small Business Rate (SBR) under the proposed budget will work as follows:
- For passive non-business-related income above $50,000 the SBR of $500,000 maximum will be adjusted:
- For every dollar above $50,000 of passive income the SBR will be reduced by $5
- If a corporation generated $150,000 of passive income, then the SBR would be reduced to 0 and the corporation would pay tax at the general rate
- As an example, if a corporation generated $75,000 of passive income the SBR would be reduced to a maximum$375,000 and everything above this would be taxed at the general rate
- The sale of real estate that is used for operating the business will not be factored into the passive income calculation thus not reducing the limit of the SBR
- There will also be a change to the way Refundable Dividend Tax on Hand (RDTOH) is calculated, whereby a larger, private corporation will not be able to flow though passive investment income, in the form of a eligible dividend, and then claim the dividend tax refund
- Also, there were no changes to the to passive investments inside a holding company, which is great news.
All in all, from a planning perspective, this budget will not change the way we manage client assets on a go forward basis. It will however strengthen the strategies we have employed, and will continue to use, to minimize the tax that our clients pay. This is an important element to investment management we do not take lightly.
With respect to individuals, there was not much in the budget outside of the following key items:
- Qualifying family members can continue to be plan holders of an RDSP adults, this was set to expire in 2018 but will continue until 2023
- Expanded medical expense credits for animals specially trained to perform tasks for patients that have a severe mental impairment
- Deductibility of employee contributions to the enhance portion of the Quebec Pension Plan, this will begin 2019 and be fully phased in b 2025
- The Government proposes to extend eligibility for the mineral exploration tax credit for an additional year, to flow-through share agreements entered into on or before March 31, 2019.
Under the proposed budget, trusts will be required to provide additional information annually and will impose an obligation to file a T3 return where one does not currently exist. The new requirements will apply to returns filed for the 2021 and subsequent taxation years.
Outside of this no major spending plans were announced although several targeted measures were included for various groups.
As a final thought, looking at this budget from a fiscal responsibility standpoint, it does nothing to rein in the current deficit situation or consider potential geopolitical issues that we as a country may be facing in the months and years to come. In a sense this budget leaves no dry powder in the barrel if things turn sour, and we believe that some might be required in the near future, so it will be interesting to see how the current government deals with any bumps in the road.