Mortgage Broker

Summer 2019

Mortgage Broker is the magazine of the Canadian Mortgage Brokers Association and showcases the multi-billion dollar mortgage-broking industry to all levels of government, associated organizations and other interested individuals.

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Page 10 of 47

CMB MAGAZINE summer 2019 | 11 taxreform IS IT TIME TO REEXAMINE YOUR CORPORATE STRUCTURE? Practical considerations for the investment income rules for private companies BY ROB WORTHINGTON, FIELD LAW C anadian private companies have seen much newsworthy tax reform in recent years. One change is in the area of income sprinkling. Another major change in tax law is the rules on investment income earned by Canadian-controlled private corporations (CCPCs). e CCPC investment income rules, generally effective starting in 2019, result in various pitfalls where there is more than $50,000 of investment income in a year for an associated corporate group that includes a CCPC. ese rules tend to be particularly punitive for corporations or associated groups with an asset value in the range of $3 million to $10 million, including investments such as real estate or securities. Prudent business owners whose interests fall within this range should take time to revisit their corporate structures. BACKGROUND – INVESTING USING DOLLARS TAXED ONLY AT CORPORATE RATES Investment income earned by CCPCs has long since been taxed at a higher rate than active business income. e rates for CCPCs' investment income generally range from 50 to 55 per cent. Part of this tax is refundable, and so the long-run corporate tax rate will typically approach 20 per cent once dividends are paid out to the shareholders. e theory is that when the corporation pays dividends, the remaining tax is then paid at the personal level to result in a combined or "integrated" tax rate of around 50-55 per cent. Despite the higher tax rates for investment income, you can defer tax by using corporate profits to make passive investments instead of paying dividends or bonuses to shareholders or owner-managers. e difference is illustrated in the table below (using 2018 Alberta rates where the small business deduction is available and assuming the highest marginal personal tax rate applies): Reinvestment in Corporation Pre-Tax Profits 100,000 100,000 (12,000) (12,000) 88,000 88,000 88,000 51,357 Deferred (36,643) Corporate Tax (12%) Profits Net After Tax Personal Tax Cash to Invest Investment at Personal Level

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