Time to Reconsider Remuneration Method for CCPC Shareholders

During the summer of 2017, CCPC shareholders and tax advisors across Canada were surprised with by the announcement of new tax rules and restrictions that were being planned by the Minister of Finance.  Basically, Ottawa felt that the existing rules at the time were too generous for the CCPC shareholders and intended to scale the “tax perks” down considerably.

Almost two years later and with much drama during the interim, the new tax regime is now in place and time will tell how much extra tax revenue Ottawa will receive from it.

In summary, the corporate tax rate for active business income qualifying for the small business deduction (“SBD”) is 11% for 2019 for BC.  Tax on split income (“TOSI”) has been in place since 2018.  New tax rules to grind down the SBD when investment income exceeds $ 50K is in effect starting 2019.   Finally, the personal tax rate applied on ineligible dividends has quietly increased substantially over the past six years.

As the 2019 personal tax season comes to an end, it is time to revisit corporate tax planning sooner than later.

For many years now, the favored remuneration method has been taking out dividends as opposed to employment income for the CCPC shareholder.  With CPP premiums high, paying for both the employee and the employer portions, and ineligible dividends getting a better tax rate than employment income, dividends made sense.

More recently, all the personal tax rates on ineligible dividends have been increasing and along with the new TOSI rules that prevent income splitting, the personal tax bill has been escalating.  Continuing to receive ineligible dividends may not be the better option.  But with the employment income option, CPP premiums are expected to increase substantially in the near future years as well.  However, CPP contributions made today will result in higher CPP benefits in the future.  (Whether the future value of today’s CPP contributions will at least equal the future benefit is another debate.)

Essentially, there is not a clear winning option here.