Upcoming Changes to Taxation of Passive Income Earning Inside a Corporation (Update)

In July 2017, the Federal government announced significant changes to taxation of small businesses in Canada. In particular, small business tax planning which is perceived as providing unfair advantages to families earning business income as compared to those earning employment income. The Department of Finance announced an update on October 18, 2017, which is summarized below.

The government announced that they intend to move forward with changes to ensure that Canadian Controlled Private Corporations cannot be used to reduce personal income tax obligations rather than to support small businesses.

In relation to passive investment income earned inside a corporation using small business profits which were taxed at the low small business corporate income tax rate, the government intends to limit tax deferral opportunities. They have announced the following points which they have expressed are aimed at ensuring that small business growth is not negatively affected. First, past investment assets and related income will be protected. Next, business savings will be continued to be allowed to be invested. Up to $50,000 in passive investment income could be earned per year. Finally, incentives exist for venture capital and angel investors to earn from their investments.

The update states that a small percentage of Canadian corporations (i.e., those at the top) will be affected by these measures and thus the vast majority of Canadian small businesses will not face challenges resulting from these measures. Specific implementation plans, timing, and transition remain yet to be announced.





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