February 27, 2018

In January, Razor Logic Systems released our tax update for RazorPlan that included known income tax rates and government benefits. We also added a feature dealing with corporate passive investment income that allowed you to place a limit on the amount of passive income that qualified for the 30.67% refundable tax or RDTOH.

Last year, Finance had provided guidance on how it planned to limit the amount of passive income you could earn in a corporation to $50,000 with 2 promises.

1. More details would be provided in the 2018 budget.
2. There would be no impact to existing plans.

What Budget 2018 revealed was a substantially different direction then originally proposed. Instead of limiting access to the refundable tax, thereby creating an effective tax rate of 70% or higher, they instead decided to restrict access to the $500,000 of qualifying active business income (business limit).

This news is good for your small business owner clients.

Under the new rules, starting in 2019 the business limit will be reduced on a straight-line basis for a Canadian Controlled Private Corporation (CCPC) having passive investment income between $50,000 and $150,000. For each dollar of passive income over $50,000, the business limit is reduced by five dollars.

For example, assuming a 5% return, there is no impact to businesses that have $1,000,000 of passive investments or less. At $2,000,000 of passive investments, the business limit is reduced to $250,000, calculated as ($100,000 – $50,000) X 5. A CCPC with passive investments of $3,000,000 will have the business limit reduced to zero.

How does this change impact RazorPlan?

Although a reduction to the $500,000 active business income will increase corporate tax, potentially reducing the amount available for investment, the new passive income rules have very little impact to RazorPlan tax update.

All you need to do is set the “Passive Income Threshold” to a number greater than the passive income earned by the corporation. In a future release we will remove the passive income threshold data with no impact to your client files.

For more information on Budget 2018, we have provided three links that you should find useful.

Jamie Golombek, click here
Managing Director for Tax and Estate Planning at CIBC Financial Planning and Advice

Kim Moody, click here
Director, Canadian Tax Advisory at Moodys Gartner Tax Law

Supplementary Information, click here
Government of Canada, Tax Measures