New Tax Rules Small Business Owners – Problems & Possible Solutions
Summary of the Rules
- Tax Rate 10% to 9%
- Limited Access To Small Business Tax Rate
- Tax on Split Income
Small Business Tax Rate Reduction
- Reduction from 10% to 9% Effective January 1, 2019
Small Business Tax Rate Reduction Problem
- Problem: Lower corporate tax rates results in more capital trapped inside the corporation
Possible Solution for Small Business Tax Rate Reduction
- Life insurance- Life insurance proceeds credit the capital dividend account on death allowing for the tax-efficient distribution of funds from the corporation to the estate
Limited Access to Small Business Tax Rate
Passive Investment Income greater than $50,000 / year reduces the Small Business Limit for Small Business Tax Rate The business limit would be reduced to zero at $150,000 of investment income. Effective January 1, 2019.
Understanding the Adjusted Aggregate Investment Income (AAII)
Passive Income Tax Treatment Table
Check what makes up your Adjusted Aggregate Investment Income.
Limited Access to Small Business Tax Rate Problem
- For companies with passive income over $50,000, the small business limit will be reduced and, thus, increase the total amount of tax you have to pay
Possible Solutions of Limited Access to Small Business Tax Rate Problem
- Corporate Owned Insurance – Insured Retirement Program, Estate bond, Corporate held Critical Illness Insurance with Return of Premium
- Individual Pension Plan (IPP) – The corporation contributes to the IPP and income earned in the IPP doesn’t belong to the corporation. This should only be considered when the AAII is over $50,000.
Pay enough salary/dividends to maximize RRSP and TFSA Contributions – A salary of $145,722 will allow the max 2018 RRSP contribution is $26,230
- Deferred Capital Gains – Capital gains are 50% taxable and are only 50% included in the AAII.
Tax on Split Income
Income meeting the definition of TOSI is removed from the individual’s net income and taxed separately at the top marginal tax bracket in his or her province of residence. In addition to paying tax at the top tax rate, the individual may claim only the dividend tax credit, tax credit for mental or physical impairment and foreign tax deduction
Possible Solution – Tax on Split Income
Exceptions to the TOSI rules: The rules provide that an individual is deemed to be ‘Actively Engaged’ if the individual works in the business at least an average of 20 hours per week during the taxation year or meets this requirement in any five prior years.
Next Steps before Jan 1, 2019 Deadline
- Review your current situation Are you affected?
- Meet with your Financial Team: Financial Advisor Accountant Lawyer
- Identify Possible Solutions & Implement
- Review Solutions
This presentation is not intended to provide legal, accounting or other advice in individual circumstances. Seek professional assistance before acting upon information included in this publication.