The federal government has reversed course on its controversial proposal to tax passive investment income for professionals with Canadian-controlled private corporations (CCPCs).
Last year, the government contemplated heavily taxing business owners who withdrew passive investment income from their companies. In what is being called a much simpler course of action, the federal budget now proposes reducing the private corporation’s ability to use the small business deduction rate, a lower rate of tax for Canadian corporations with annual income of up to $500,000 a year.
Gradual reduction in the small business deduction rate
The budget proposes a gradual reduction in the small business deduction rate for CCPCs with $50,000-$150,000 of passive investment income. Once at that top limit, they will not be able to take advantage of the small business deduction at all, said Bessy Triantafyllos, a partner at Deloitte Private.
“It will affect a lot of businesses,” said Triantafyllos. “Private company owners typically don’t have pension plans or medical benefits so a lot of them are saving money for retirement in their private companies. So where they do save and invest passively they will be negatively impacted by these changes.”
New rules appear simpler
The Canadian Federation of Independent Business said it’s not applauding the move altogether just yet either.
“While we compliment the government for rethinking its plans for taxing passive investments, it remains to be seen how significant this improvement will be,” said CFIB President Dan Kelly. “The new rules appear to be simpler and may improve things for some business owners from the earlier proposals, but others will lose the benefit of the lower small business rate due to past investments.”
Many say they weren’t contemplating much on this issue in the budget given that the federal government announced last fall that it would reduce the small business tax rate to nine per cent in 2019. Larger companies face a rate of 15 per cent.