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CORPORATE INVESTMENT STRATEGIES
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Corporate Investment Strategies
For Business Owners And
Incorporated Professionals
ONE OF the changes
introduced by the government
to combat what it felt was
inappropriate tax planning by
small business owners, along
with incorporated doctors,
lawyers and other professionals,
was limiting the small business
deduction based on passive
investment assets held by
Canadian controlled private
corporations (CCPCs).
The government’s concern was
that under the current rules, a
“tax deferral advantage” exists
because the tax rate on active
business income earned in a
corporation is generally much
lower that the top marginal tax
rate for individuals earning
business income or employment
income directly. If this after-tax
corporate business income is not
needed for a shareholder’s living
expenses and is retained in the
corporation, there is more after-
tax income to be used as capital
for investment than there would
be if the business income was
earned by the individual.
If these corporate funds are
invested for a sufficiently long
period of time, shareholders may
end up with a higher after-tax
amount than if income was
earned directly by the individual
shareholder and invested in the
shareholder’s hands, due to the
larger amount of starting capital
to invest. The purpose of the
new passive investment income
rules is to remove some of this
tax deferral advantage.
The size of the tax deferral
advantage depends on the
difference between the
applicable corporate tax rate
and the shareholder’s personal
tax rate.
Federally, the first $500,000
of active business income is
taxed at the small business
deduction tax rate (SBD rate).
This $500,000 is referred to as
the “business limit.” The SBD
rate is a lower tax rate than the
general corporate tax rate on
active business income (ABI);
thus, the tax deferral advantage
is magnified for small business
income and the deferral ranges
from 35.5% to 41.0% in 2018,
depending on the province. For
ABI, the tax deferral advantage
ranges from 20.4% to 27.0%.
To curb this deferral advantage,
the government introduced a
rule restricting access to the
SBD rate starting in 2019.
This new measure will reduce
the business limit for CCPCs
with over $50,000 of “adjusted
aggregate investment income”
(AAII) in the previous year. The
business limit will be reduced
to zero, on a straight-line basis,
once $150,000 of adjusted
aggregate investment income is
earned in the previous year. Put
another way, each dollar of AAII
above $50,000 annually reduces
the CCPC’s business limit for
the following year by $5.
Essentially, in certain
circumstances, this new measure
will limit the tax deferral
advantage available on “new”
(i.e. post-2018) ABI to the
Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As
a member of the CIBC Financial Planning & Advice team, Jamie works closely with advisors
from across CIBC to support their clients and deliver integrated financial planning and strong
advisory solutions. He joined the firm in 2008 after 12 years with a global investment company,
where he was involved in both internal and external consulting on all areas of taxation and estate
planning. Jamie has also worked for Deloitte’s as a tax specialist in the Toronto office, where he
specialized in both personal and corporate tax planning.
[email protected]
difference between the personal
tax rate on ordinary income and
the tax rate on ABI earned in a
corporation that is not eligible
for the SBD rate.
For example, let’s take
Marni, an incorporated B.C.
physician, who earns $500,000
of net income annually in her
professional corporation. She
has accumulated $2,000,000
of retained earnings that will
be used to fund her retirement.
Assume she earns a 5% annual
rate of return that produces
$100,000 of annual investment
income.
The new rule means that,
starting in 2019, Marni’s
corporation would only be
entitled to the SBD rate
on $250,000 ($500,000 –
($100,000 – $50,000) x $5) of
her professional income. Does
that mean Marni actually pays
more tax? Yes, but only slightly
more (1.5% in B.C.) on a fully
integrated basis (i.e. once the
funds are distributed from the