From tax expert Gerry Vittoratos
September 19, 2018
In the July 2017 announcement, the federal government announced some significant changes to the taxation of passive income within corporations, specifically CCPCs. After a strong backlash from business owners, the government released a more “watered down” version of these changes in the 2018 budget. In this instalment, we take an in-depth look at these new rules.
The rules mentioned below will be applicable for taxation years that begin after 2018.
Business Limit Reduction
The first change is in annual business limit. The business limit, which is at $500,000, will be reduced on a straight-line basis for passive income that is above $50,000 [ITA 125(5.1)(b)]. This limit is eliminated once passive income is above $125,000. If the active business income [ITA 125(1)] is below this reduced limit, the CCPC’s tax rate will not be affected.
Table - Active business income qualifying for the small business tax rate under new business limit ($)*
*Reproduced from the 2018 budget
The formula for this reduction of the business limit is [ITA 125(5.1)(b)]:
D/$500,000 × 5(E − $50,000)
D represents the business limit, E represents the “adjusted aggregate investment income” [ITA 125(7)] (defined below) of the CCPC, or any corporation that is deemed to be associated with that CCPC (see below).
A new anti-avoidance rule has been added that defines associated companies for the purposes of this reduction. On top of existing association rules as defined in ITA 256(1), 3 more rules are added that deem companies associated to each other [ITA 125(5.2)]:
What is interesting in this anti-avoidance rule is that government does not allow a shift of passive income between corporations, even if this transfer is not to an associated company.
Adjusted Aggregate Investment Income
The income that triggers the reduction of the business limit is the “adjusted aggregate investment income” [ITA 125(7)]. This new concept starts at “aggregate investment income”, as defined in ITA 129(4), and makes adjustments to that amount. The adjustments are:
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