You may recall from our previous post that one the new signifcant tax changes announced in 2017 was a proposal to increase taxes on passive income (generally rental and investment income) held inside corporations. The initial proposals were clearly unfair and would have seen a tax of more than 70% apply in some cases; shortly after that we heard promises of grandfathering for existing companies and exempting the first $1,000,000 of investments. Lots of questions were raised, with few answers to be had until now.
The 2018 federal budget has the details on the new regime, and while it’s not as punitive as what was previously proposed, it’s still bad news for many business owners. Here are the highlights:
- The first $50,000 of income from passive assets will be exempt from the new investment regime.
- For every dollar over that amount, the small businesses deduction available to the associated group gets reduced by $5. This means that if you have a holding company with $150,000 or more of passive income in a year, and an associated operating company, your operating company would no longer have access to the small business deduction.
- Capital gains on the sale of property used in active business or the shares of an active business that is a connected CCPC corporation will be exempt from this new investment regime (but still taxable as they previously were).
- A new RDTOH system will likely mean more complicated tracking and tax planning is required for corporations with investment income.
Also included in the federal budget was an announcement that trusts will need to start reporting comprehensive details on trustees and beneficiaries starting in 2021. While this is not concerning in itself, the news coupled with some of the original proposals from July 2017 that would have affected trusts (which were later dropped) seem to suggest that the government is taking a much closer look at trusts, and in particular may be looking to eliminate or reduce the use of discretionary inter-vivos trusts as a tax planning tool.
Employer Health Tax
The biggest news announced in the 2018 BC Budget for businesses was the new employer health tax. This is a tax of up to 1.95% that applies on an employer’s payroll, and will begin in 2019. Businesses with less than $500,000 in payroll won’t have to pay the new tax, but anything over that amount will start to be taxed at just less than 1% with a rate that moves up gradually to a maximum 1.95% for payroll amounts of over 1.5 million. No details are available yet as to what costs specifically are included in the definition of payroll, but it is safe to say that many businesses will be hit hard by this new tax, particularly those that are already paying for their employees’ MSP premiums, which won’t be eliminated entirely until 2020.
While the above are a few important announcements that related to businesses, both the BC Budget and the Federal budget included other smaller measures relating to personal taxes, health and welfare trusts, and more. If you’d like more details on these or any of the above changes, please contact us and we’d be happy to discuss.