As the summer of 2018 comes to an end, vancouver tax advisors are starting to contemplate the tax planning work that will be required for CCPC come fall 2018.
At the start of 2018, tax advisors and incorporated businesses awaited the 2018 federal budget with high level of anxiety. After all, the initial announcement to eliminate the tax deferral advantage that a CCPC enjoyed using its after-tax business income to earn passive income was severely punitive. As time passed and Ottawa responded to input from the business community and tax advisors, the 2018 federal budget announced during February was a relief to vested parties.
Let’s take a step back before tackling the taxation of investment income, which is a problem for more mature successful incorporated businesses.
Vancouver CCPC – New Tax Changes
First of all, the corporate tax rate on income subject to SBD has been lowered to 12% in BC. This is great news to young entrepreneurs who are starting out with little retained earnings. This means that up to $500,000 of business profit earned within a CCPC is only subject to $60,000 corporate taxes in total. This type of low tax rate will allow a budding successful business to retain earnings which will greatly facilitate expansion.
The changes to the taxation of investment income earned by a CCPC’s retained earnings will impact a more mature business. Many CCPC’s that have extra funds that are not required for expansion or capital investments will place those funds in an investment portfolio or real estate. The investment portfolio can hold stocks, foreign currencies, or any other asset class. Investment portfolios generate interest, dividends, and capital gains while real estate will general net rental income and capital gains.
Under the new rules, a CCPC can earn up to $ 50,000 in passive income without being impacted by the new rules. For an additional $1 earned after the $50,000, a CCPC SBD limit will be reduced by $5. In other words, a CCPC that earns $ 150,000 in passive income will receive no SBD in the calculation of its corporate tax and will pay 26% tax rate on all business profits earned.
The new rules pertaining to passive income will apply for taxation years that start after 2018. However, 2018 investment income will impact the grind down of SBD for the 2019 tax reporting year so tax planning is called for during the 2018 taxation year.
The 2018 new rules to tax passive income have further burdened what was already a complex taxation system involving higher tax rates and a refundable tax pool. Starting 2019, tax advisors will have to deal with two refundable tax pools and perhaps a different remuneration method to the shareholder(s) to avoid the SBD grind. This in conjunction with the end of dividend sprinkling after 2017 will surely add to the tax planning work required during the fall of 2018.
Vancouver Corporate Tax Advisors
Mew & Company Chartered Professional Accountants in Vancouver BC are experts in helping small business owners to save time and money in managing their businesses.
If you are looking for personal or corporate tax planning services, or if you have questions, please don’t hesitate to contact us to learn more about how we can help you!
Call us at 604-688-9198 to learn more about how we can help.