Business owners with over $50,000 of investment income in their corporations should take action now to avoid losing the small business deduction under new corporate tax rules taking effect in 2019, warns Jamie Golombek in a new CIBC report
"If you're a business owner and haven't considered the tax implications of the new passive income rules, the time to act is now," says Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Financial Planning and Advice. "Under the new tax rules, if your corporation has more than $50,000 of investment income in 2018, it may lose some, or all, of the small business deduction in 2019 – and the valuable, enhanced tax deferral that goes with it."
In the report, CCPC tax planning for passive income, Golombek and Debbie Pearl-Weinberg, Executive Director, Tax & Estate Planning, CIBC Financial Planning and Advice, outline strategies that business owners can consider using to prevent passive income in their corporations from impacting the small business deduction and preserve the enhanced tax deferral associated with that deduction.
Individual Pension Plans
One way is to use Individual Pension Plans. "Setting up an Individual Pension Plan (IPP) is a way of lowering the amount of passive income in a company and flowing that money to a retirement savings plan," says Pearl-Weinberg. "Also, the company may be able to make higher contributions to the IPP than the individual could make to an RRSP, which may mean more income in retirement."
Golombek also suggests using life insurance. "There is generally a lower after-tax cost for purchasing life insurance inside a corporation as the premiums can be paid with lower-taxed dollars than if the premiums were paid with high, personal after-tax funds," he says. "And, investment income earned in an exempt, permanent life insurance policy does not count as passive income that could impact the small business deduction. Corporate-owned life insurance could be a good investment decision for a business owner with a life insurance need and a desire to lower passive investment income in her corporation."
Other strategies can be found in the report available here. Golombek and Pearl-Weinberg both urged business owners to work with a tax expert before the end of the year to assess and implement the right mix of these strategies.