February 27th Federal Budget Update


inance Minister Morneau tabled
a consultation paper and draft
legislation in July 2017 that
proposed to significantly increase the
tax burden on private corporations
and their shareholders. The proposal
was met with significant backlash
from professional groups and business
owners who voiced their concerns. On
February 27th, the much anticipated
Federal Budget was released, finally
providing clarity to tax payers and
business owners. More so than any
new provisions that came out of the
Federal Budget, what is interesting are
the proposals and changes that the
Federal Budget did not end up making.

What the Federal Budget
Didn't Do
There were several rumors leading
up to the budget that were not
included in the budget. These were:
* There was no change to the
inclusion rate for capital gains
* There was no change to the taxation
of exempt life insurance policies
* The Capital Dividend Account was
not reduced or taken away
* The TOSI (tax on split income) draft
legislation was not changed and is
in effect for 2018
* The proposals for taxation of
passive income were dropped
* Taxation of Charitable Flow Through
Strategies was not changed
* Taxation of Immediate Finance
Arrangements (IFA's) was
not changed

What the Federal Budget
Did Do
* Replaced the passive income
proposals with a proposal to reduce
the amount of income taxed at the
small business rate where there is
over $50,000 of investment income
* Adjusted the refundable dividend
tax system

Small Business Deduction
The February budget proposes
a reduction to the small business


deduction of $5 for each dollar of
investment income over $50,000
starting in 2019. This limit is for
associated companies so would
apply to an OPCO/HOLDCO situation.
The expected combined rate of tax in
2019 on small business income in B.C.
is 11%. The expected general rate of
tax in BC is 27% leaving a 16% increase
tax on active income subject to the
adjustment subject to the adjustment
for investment income. In other
words, the general rate is 245% of the
small business rate.
Investment Income A new term
"adjusted aggregate investment
income" is used for this purpose.
Ordinary investment income is
subject to the following adjustments
in determining aggregate investment
income. Taxable capital gains are
excluded if:
* The property is used in an active
business or
* Property sold shares of a subsidiary
where all or substantially all of
the property is used in an active
business in Canada
* Net capital losses carried over from
another taxation year are excluded
* Dividends from non-connected
corporations are added
Refundable Dividend Tax The
changes to refundable dividend tax
are intended to restrict dividend
refunds to situations where ineligible
dividends are paid. The concept is to
prevent dividend refunds resulting
from investment income being
paid out when lower taxed eligible
dividends are paid.

Opportunities Going Forward
Companies that will have their small
business deduction reduced because
of investment income exceeding
$50,000 will be looking for ways to
reduce or shelter investment income
over time. Different investments are
taxed in different ways with different
effects on investment income. For
example interest is fully taxable while
capital gains are 50% taxable and
returns of capital are not taxable.



IPP's are like corporate RRSP's that
allow for higher contribution limits
and the possibility of tax deductible
past service contributions. IPP's are
designed to build up pension income.
The IPPs work well for incorporated
professionals and shareholders
of incorporated small businesses.
Qualifying T4 income is required to be
able to contribute to an IPP. It might
be useful to obtain an IPP quote which
would show current and past service
amounts. We would be happy to
arrange for you.
IPP's are especially helpful for
professionals who can no longer split
dividends and save tax.
Tax Sheltered Life Insurance
policies may be an option to shelter
investment income from tax (by
reducing investment income and
maximizing the Small Business Limit).
These policies work as follows:
* deposits are made to the policy
* mortality costs and expenses are
charged to the account
* the balance is invested and
tax sheltered while retained in
the policy
* universal life and whole life policies
are suitable
* the accumulated cash value can
be withdrawn later on in partial
withdrawals or a stream of loans
can be organized providing
retirement income using the
policy as security (this may provide
a tax preferred method of accessing
the accumulation later on)
* the tax sheltered insurance
plan works best when there is
an otherwise determined life
insurance need financial planning
strategies need to be revisited to
minimize the effects of TOSI and
the new adjustments to the Small
Business Deduction. Products
such as IPP's and tax sheltered life
insurance can be helpful to build
up retirement assets and minimize
income tax. 


Table of Contents for the Digital Edition of BUILDING SUPPLY INDUSTRY ASSOCIATION- July/August 2018