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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reasonably be expected that the book value of a corporation's assets will approach $10 million, structuring considerations should be addressed. If taxable capital reaches $15 mil- lion, taking into account the entire associated group, the small business deduction will be lost completely. e reduction to the small business deduction where taxable capital reaches $10 million works in tandem with the investment income rules where a CCPC or associated corporation has at least $50,000 of invest- ment income. If taxable capital reaches $15 million, or if investment income reaches $150,000, there is no small business deduc- tion available. STRUCTURING CONSIDERATIONS FOR REDUCTIONS TO THE SMALL BUSINESS DEDUCTION As mentioned, the reductions to the small business limit for taxable capital and invest- ment income operate together. e pitfalls arise where a corporation in an associated group causes the taxable capital or invest- ment income thresholds to exceed $10 mil- lion or $50,000, respectively. A few examples will help illustrate this concept. An Inter-generational business e founder of a business, the father, is retiring and his daughter has taken over day-to-day operations. Daughter is now the main shareholder of the corporation, "Opco," that carries on the business. Father is the shareholder of a private corporation, "Holdco," which has a rental property and a reasonable-sized portfolio. e Holdco investments produce $100,000 of investment income annually, which is sufficient to fund the parents' retirement, but not for an overly extravagant lifestyle. In his succession plan to transfer the Opco to Daughter, Father implements a common reorganization known as an "estate freeze". e result of the estate freeze is that Father owns preferred shares that represent a substantial portion of the votes and value of the business. ese shares are not of a "specified class," as defined by the Income Tax Act, which may otherwise prevent Opco and Holdco from being associated. But since Holdco and Opco are associated, the invest- ment income rules will reduce the small business limit of Opco, costing Opco an additional $37,500 of tax for the year, and a similar amount every year if Holdco maintains similar levels of investment income. Appreciated real estate in the Lower Mainland Retired parents in the Vancouver area own real estate in their "Landco," which has increased in value substantially. ey have mortgaged the real estate to acquire other investments including a rental property in the U.S., which has increased slightly in value in U.S. dollars. When converted to Canadian dollars, the value of the increase is over $2,000,000, consisting largely of an unrealized foreign-exchange gain due to the depreciation of Canadian currency. e un- realized foreign-exchange gain, as well as the mortgage, is included in the taxable capital calculation, pushing the taxable capital of Landco to $12,500,000. Landco generates investment income of $100,000 per year. e shares of Landco are owned by a discretionary family trust. e parents' son is a beneficiary of the trust. Son operates an IT consulting corporation. Unlike the inter-generational example above, Son is the sole shareholder of the "Consult- co," and the parents do not own any shares of Consultco. However, because Son is a beneficiary of the trust, Landco and Con- sultco are associated, even though Consultco is a completely independent business in which the parents have no involvement. e combination of the taxable capital of Landco and its investment income will cause Con- sultco's small business limit to be reduced to nil. Consequently, the Consultco's relatively modest net income of $125,000 will be sub- ject to the higher corporate tax rate of 27 per cent instead of the small business rate. A TIME TO RE-EXAMINE CORPORATE STRUCTURES Oen, the pitfalls resulting from the in- vestment income rules, and the erosion of profits that follow, may be avoided. While a powerful planning tool, discretionary family trusts may cause corporations to be associ- ated inadvertently, as exemplified above. e solution is not to say that trusts should not be used, but rather they should be draed and organized with a view to these new rules. e strategies for business succession to family members should also be considered. Historical estate freezes should be reviewed to determine if the structure of the share- holdings will trigger a needless loss of family wealth. It is unclear whether the Canadian government truly intended or even foresaw all of the negative ramifications of the new investment income rules. What is clear, however, is that business owners who are proactive and seek advice from knowledge- able professionals will find themselves better positioned in the long term. is article was originally published on JD Supra, a legal blog platform. It has been published with the permission of Field Law, and may be republished only with the consent of Field Law. 14 | summer 2019 cmba-achc.ca CMB MAGAZINE taxreform The strategies for business succession to family members should also be considered. Historical estate freezes should be reviewed to determine if the structure of the shareholdings will trigger a needless loss of family wealth."