From the Editor: The Yin and Yang of Being Canadian

Q1 | March 2018

Laptop, notebook, Tablet and coffee on work desk

Topic: Tax Planning

Dianne C. White, CPA, CA, CFP, TEP

March 21, 2018

Image used with permission: iStock/PRImageFactory


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From the Editor: The Yin and Yang of Being Canadian

Q1 | March 2018

Canada was a medal-winning machine at the Pyeongchang Olympics with an overall third place finish and a record setting 29 medals. As one of the sports writers who covered the games for the Globe and Mail wrote ”the rest of the world started to notice that Canada was no longer the kind of milquetoast pipsqueak who is off-limits to criticism.” (1) And there was plenty of that (think the women’s curling team), as well as some ugliness at the end with a Canadian athlete arrested for allegedly stealing a vehicle.

Turning to the economy – where once Canada was an attractive tax regime for business investment, it now appears that the winds of change are upon us. The 2018 federal budget was released at the end of February and was alarmingly light in substance given the economic challenges Canada faces. In particular, Canada’s long-standing corporate tax advantage over the U.S. is gone given the recent business tax reform south of the border. In addition, the U.S. personal tax system is more favourable for skilled workers when compared to Canada’s high personal income tax rates. This, and other challenges like the NAFTA renegotiations, means we no longer have the same competitiveness when it comes to business investment. It was a disappointment to many that these issues were not addressed in the budget. In addition, there was no clear plan established to return to a balanced budget. In fact, since being elected, this government has increased program spending by an incredible 20.1% from 2014-2015 to 2017-2018. This represents an annualized growth rate of 6.3% which has dwarfed the 3.3% growth in revenue! (2) Planned future spending announced in the budget will make deficit matters worse by increasing program spending 23% over the next five years.

To say there was a silver lining in the budget would be an overstatement, but there was a sigh of relief when the pending tax proposals around the taxation of passive investments inside a Canadian Controlled Private Corporation (“CCPC”) were essentially scrapped, including any grandfathering treatment of existing passive investments. Instead, the government introduced two new measures that will come into force in 2019. The first restricts access to the small business deduction (that allows active business income to be taxed at the lowest business rate) for those that have passive income (portfolio income) inside their corporation exceeding $50,000. The proposal reduces the amount of business income eligible for the small business tax rate by $5 for every $1 of passive investment income above the $50,000 threshold, such that the small business deduction is reduced to $0 when passive investment income reaches $150,000.

Guidance was provided for computing what is included in the $50,000 of passive investment income. It will be defined as “adjusted aggregate investment income” and there will be amounts to add and subtract in the calculation. Most notably, it will include realized capital gains from portfolio investments, but not gains that come from the sale of property from an active business.

The second measure refines how corporate and personal tax integration works with regard to dividends paid out of a corporation to a shareholder and amends the existing refundable tax regime. This measure is quite technical. Suffice it to say that the government is trying to ensure that the deferral between personal income tax rates and the CCPC small business tax rate is minimized. There will be more to come over the months ahead that will detail how changes to the refundable tax regime will affect planning for those with professional corporations and holding companies.

In this issue of Nexus Notes we introduce you to the Nexus adds Depth to the Investment Team Roster, discuss the recent market volatility in the context of history and revisit our Leaving a Legacy series on estate planning.

(1) “How did the Canadian Olympians become the new Ugly Americans?”, Cathal Kelly, The Globe & Mail, February 25, 2018.

(2) “Balanced Budget Still within Trudeau’s Reach” Charles Lamman and Hugh MacIntyre, the Globe & Mail, February 23, 2018.

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