Finance Minister Bill Morneau has announced the next steps in the federal government’s plan to make changes to ensure that Canadian-controlled private corporations are not used “to reduce personal income tax obligations for high-income earners rather than supporting small businesses.”
An announcement issued by the Department of Finance Oct. 18 stated that the government will “move forward with measures to limit the tax deferral opportunities related to passive investments, while providing business owners with more flexibility to build a cushion of savings for business purposes – for example to deal with a possible downturn or finance a future expansion – as well as to deal with personal circumstances, such as for parental leave, sick days or retirement.
The government says the intent of the new rules “will be to target high-income individuals who can benefit under current rules from an unlimited, personal, tax-preferred savings account via their corporation, far beyond the pension, RRSP and TFSA limits available to other Canadians.”
$50,000 threshold on passive income
The announcement also stated that its measures will ensure that all past investments and the income earned from those investments will be protected and that businesses can continue to save for contingencies or future investments in growth. It will also establish a $50,000 threshold on passive income in a year (equivalent to $1 million in savings, based on a nominal 5-per-cent rate of return). This amount, which the government says is exceeded by only about three per cent of corporations, will be available to provide more flexibility for business owners to hold savings for multiple purposes, such as providing savings for sick-leave, maternity or parental leave, or retirement.
“Every small business owner knows that success often means taking risk. I’ve met with and listened to small business owners all across Canada and I know that their success also depends on flexibility in how they save for things like maternity leave, sick leave and their retirement. The changes we will make, including lowering taxes on small business to nine per cent, are helping us take one more step towards an economy that works for the middle class,” stated Morneau in the announcement.