Vancouver Tax Planning Dilemmas As 2017 Come To A Close

2017 has been a year of drama for Vancouver tax advisors and I am happy that it is coming to an end.  I have to admit, it is not so much January 1, 2018 I am looking forward to.  I am anxiously waiting for the 2018 budget date which may bring all Canadian private corporations more clarity on their financial and tax future.

Vancouver Tax Planning – Changes For Private Coporations

On July 18, 2017, Ottawa proposed dramatic changes to the taxation of private corporations.  Since then, Ottawa has softened its tone on dividend income sprinkling and the taxation of passive income earned by Canadian private corporations.  Soften does not mean clear cut income tax rules to work with.  Not even close.  As 2017 comes to an end, tax advisors are left wondering the CRA implementation of terms such as “dividends that reflect spouse’s contribution”.  As well, if and how the $ 50,000 passive income ceiling will be implemented is an endless discussion for those who understand how complex the new rules will be once in coexistence with the existing rules.

With every December, there is the year end tax planning to execute.  For 2017, it will be to dividend more or less.   For the spouse and adult children who are inactive shareholders or beneficiaries of the family trust, this may be the last year to distribute the maximum amount of dividends that facilitate tax minimization.  However, since Ottawa has thus far promised to grandfather existing retained earnings under the existing rules, maximizing the balance of retained earnings by the end of 2017 year to accrue all future investment income outside the $ 50,000 passive income limit could create great future value.

Vancouver Tax Planning Tips: Put Excess Funds Into The TFSA or RRSP

The better of the two choices depends on what the shareholder expects his near future cash requirements are.  Given current expensive living conditions in Vancouver with parents having to assist adult children buy a principal residence, maximizing out on the dividends during 2017 with adult children and spouse is not bad tax planning.  Excess funds held personally can always be put into the TFSA or RRSP.  Investment income and capital gains can accrue tax free by each adult member in these registered accounts.  TFSA is a very flexible and tax free way to access cash when needed.  Future draws of dividends from retained earnings will likely to limited except to the active shareholder(s) which means higher marginal tax rates could apply as the dividends increase to one person.

Similarly, the same argument applies to the extraction of the Capital Dividend Account by the end of 2017.  If not for the tax proposals hanging over, with the strong performance of the stock market and real estate, many portfolios are sitting with healthy capital gains and a CDA balance (which can be increased by crystallizing gains) for extraction.  However, given the current state of flux, maximizing 2017 retained earnings would be good tax planning.  This would mean foregoing the CDA extraction until 2018 or further clarity from Ottawa.  The problem is capital gains could quickly turn into capital losses and this could reduce the CDA balance.

At this point, there is no certainty if, when, and how the new tax rules will be enacted.  The devil will be in the details.

The bright note is Canadian private corporations have been gifted a tax cut from Ottawa in the mist of these discussions.  This is a sure thing – for the time being.