No Major Change to Taxation of Corporate Investment Income

Canadians can continue to use holding corporations as part of their tax and estate planning strategies.  The 2018 federal budget did not contain any of the major changes that the government had proposed in its July 2017 discussion paper.

Specifically, no additional tax will apply to investment income earned inside a private holding corporation.  No additional tax will apply when the private corporation pays a dividend out of its investment income.  Inter-corporate dividends paid by a business corporation to a connected holding corporation will continue to pass on a tax-free basis.  So passing surplus funds from a business corporation to a holding corporation still makes sense.

The government has instead opted to restrict the ability of business corporations to pay a low rate of tax on the first $500,000 of business income.  In 2018, this low rate of tax is 12% for income earned in British Columbia by a Canadian-controlled private corporation.  If the corporation and its associated corporations earn more than $50,000 in investment income in any taxation year, the $500,000 threshold will drop by $5 for each $1 of investment income in excess of $50,000.  So if a corporate group has $150,000 in annual investment income ($100,000 in excess of $50,000), the business corporation would not be able to claim the 12% tax rate on any of its business income.  This means that the business income would be taxed at the general 26% business income tax rate.  The 26% rate still means $0.74 in after-tax income per dollar of pre-tax business profit.  This is still below the top marginal rate of tax for individuals.

The restriction on access to the low rate of tax does not apply immediately.  It starts to apply in the first taxation year that starts after 2018 — generally, taxation years that start in 2019.

It will be important to consider the appropriate salary and dividend mix and which corporation should be paying what mix of salary and dividends.

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