On February 27, Finance Minister Bill Morneau tabled the 2018 federal budget. While this bill likely won’t create major disruption for Canadians, it does include certain changes in corporate income taxation.
This means that many companies might well have to rethink their strategy based on Ottawa's proposed new budgetary measures.
A budgetary measure for passive investment income
With this new budget, the Canadian government is proposing certain amendments to limit the benefits of the tax deferral related to passive investment income earned in private corporations. If all goes as planned, these amendments will be effective next year.
What is passive investment income?
When a company makes a profit, it can decide to reinvest its capital in several ways. One of them is to invest money in order to make it grow. This way, the company earns revenue without having to produce or supply anything. This is called passive investment income.
Business ceiling adjusted downwards for some companies
In general, Canadian businesses enjoy a lower tax rate than what is imposed on individuals. This rate is calculated based on the revenues generated by the company. This type of tax measure is aimed primarily at helping small and medium-sized businesses trying to find their place in the market. As such, there is a ceiling above which firms are taxed at a higher rate.
However, some companies derive great benefits from their passive income. In order to promote a more egalitarian redistribution of wealth, the federal government proposes in its budget that corporations earning over $50,000 in passive investment income in a year have the amount of income become eligible for the adjusted small business tax rate.
The application of this budgetary measure
In Minister Morneau's 2018 budget, it is proposed that the small business deduction limit for small and medium-sized businesses be reduced by $5 for each $1 of investment income above the $50,000 passive income threshold.
In other words, if a company remains under $50,000 of passive income, its deduction limit will not be lowered, but as soon as that threshold is reached, every dollar of additional passive income will reduce the limit by $5.
This means that companies with more than $50,000 in passive income may need to re-evaluate their financial strategy.
Benefit from corporate taxation advice
Although this budgetary measure will undoubtedly have the most significant impact on Canadian businesses, other minor adjustments are also part of the 2018 budget tabled by Minister Morneau.
If you want to know more about these changes and benefit from advice to minimize the potential negative impact of these new measures on your company, do not hesitate to contact T2inc.ca's team of tax specialists.
Frédéric Roy-Gobeil
CPA, M. TAX
As President of T2inc.ca and an entrepreneur at heart, I have founded many start-ups such as delve Labs and T2inc.ca. A former tax specialist at Ernst & Young, I am also a member of the Ordre des comptables professionnels agréés CPA and have a master's degree in taxation from the Université de Sherbrooke. With a passion for the world of entrepreneurship and the growth mindset, I have authored numerous articles and videos on the industry and the business world, as well as on accounting, taxation, financial statements and financial independence.
