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.
Issue link: http://digital.canadawide.com/i/1149461
Because of this tax deferral opportunity, common tax planning for private companies includes the use of a holding company. e holding company stockpiles excess cash received from the operating company, and uses it to acquire investments such as real estate or a portfolio of securities. Personal tax is deferred by pursuing such a strategy. Tax is paid once a distribution is made to share- holders, but business owners have flexibility to delay the tax indefinitely. A common comment regarding the strat- egy of reinvesting profits inside a corporation is that "it's just a deferral" of tax, and not a saving. While this is technically correct, the reality is that over the course of, say, 10 years, reinvesting profits inside a corporation may yield 50 per cent more wealth - purely because of the tax "deferral" - compared to paying a dividend or bonus and investing in a combination of non-registered and tax-de- ferred products such as a TFSA or RRSP. e Canadian Department of Finance has obviously recognized the advantage to reinvesting corporate profits. In the govern- ment's view, this is unfair compared to the tax planning available to employees (mainly RRSPs, TFSAs, and pension and life insur- ance products). A common, and valid, response by those in the business community is that the gov- ernment's analysis fails to account for the fact that employees enjoy pension benefits from employer contributions (minimally, CPP contributions), whereas business owners do not. Further, the government's economic analysis did not adjust for the significant- ly higher risk borne by a business owner compared to an employee. But, economic policy and value judgments aside, it is clear that there was a tax advantage to reinvesting profits inside a corporation that had been taxed at the small business rate (and then could still be without planning). THE CCPC INVESTMENT INCOME RULES, SIMPLIFIED e tax rules regarding investment income earned by CCPCs introduced in the 2018 federal budget may operate to reduce the small business limit, and therefore, the available small business deduction. e small business deduction is generally available on the first $500,000 of active business income earned in Canada by a CCPC. e resulting tax rate is 11 per cent compared to 27 per cent which is the general corporate rate (in Alberta in 2019). e small business deduc- tion is worth up to $80,000 per year. But under the new rules, the small business limit is reduced by $5 for every $1 of investment income earned over and above $50,000. If a CCPC has investment income of $150,000 or more, the small business deduction is lost completely, which represents an annual cash loss of $80,000 (more or less, depending on the province). If the investment income is earned by a private corporation that is "associated" with a CCPC, the reduction to the small business limit also applies to the CCPC that is so associated. e "associated corporations" rules are complex, and tax advice is typically required to determine which corporations are associated. One common example of as- sociated corporations is if the CCPC and the investment corporation are controlled by the same person, or related group. It is possible, however, to have two different family mem- bers control the CCPC and the investment corporation without the two corporations' being associated, provided that certain con- ditions are satisfied. In the tax practitioner's language, this would be called "related" but not "associated." If a corporate group were structured in such a way, the small business deduction may not be lost. Historically, the associated corporation rules were mainly relevant for determining whether the small business limit must be shared among a corporate group, or whether the small business limit is reduced as a result of the "taxable capital employed in Canada" (as calculated under the Income Tax Act) being greater than $10 million. Unfortu- nately, it cannot be quickly determined by examining financial statements whether a corporation's taxable capital has reached $10 million. Practically speaking, if it can CMB MAGAZINE cmba-achc.ca summer 2019 | 13 taxreform TAX PLANNING USING PRIVATE CORPORATIONS AT 40 (OTTAWA: DEPARTMENT OF FINANCE, 2017) TAX ADVANTAGE OF RETAINING BUSINESS INCOME IN A CCPC FOR PERSONAL SAVINGS PURPOSES 40,000 55,000 70,000 85,000 100,000 115,000 130,000 145,000 YEAR 1 2 3 4 5 6 7 8 9 10 11 Additional savings from holding savings in a private corporation Return on Personal Savings account Tax on Distribution SAVINGS IN CCPC SAVINGS IN TFSA SAVING IN PERSONAL TAXABLE ACCOUNT Over the course of, say, 10 years, reinvesting profits inside a corporation may yield 50 per cent more wealth compared to paying a dividend.