October 3, 2017 Bill Morneau, Minister of Finance stated*

These corporations are not taking advantage of the system; they are simply incorporated and following the Income Tax Act. Some are simply companies earning an honest income in their corporation, and wow, has that changed over the last 6 years!

January 1, 2018 – Tax Changes to Income Splitting and Introduction of the TOSI Rules

Prior to this date, you could add a child or spouse as a shareholder to your corporation even though they were not working in the business. Essentially, a high-income earner, such as a physician taking and spending, I might add, $250,000 a year, could split that income with their spouse and each pay tax on $125,000, therefore paying less tax.

You could also pay a dividend to a child who may be in university, for example, with no income, have them pay the tax, and then ask for the money back. Again, you have paid less income tax.

The government introduced the TOSI rules / Tax on Split Income. I can understand why this had to change, and you could no longer income split from your corporation. Although this seems fair, it was a big setback for a lot of Canadians.

January 1, 2019 – Passive Income Changes

The next corporate change was made in 2019 to passive income. The government doesn’t encourage saving and investing in your corporation. They want the money spent and going back into the economy, so there was an introduction to further penalize corporations that were accumulating too much investment and passive income. Passive income is investments within your corporation such as GICs, investment portfolios, rental income, etc.

The government decided to penalize anyone who has $50,000 or more in passive income in their corporation. For every $1.00 of passive income over $50,000, your small business deduction limit is reduced by $5.00. As a reminder, the small business deduction provides a 19% reduction to the tax rate on the first $500,000 of active business income ($600,000 for Saskatchewan Provincial Corporate Tax). The more passive income you have, the more tax you pay on your active income. For example, a $1,000,000 investment portfolio earning 5% would have passive income of $50,000. You would then experience a clawback on your small business limit for any passive income above this. Once you reach $150,000 of passive income, you no longer have any tax benefit from the small business deduction and will be paying tax on all active income at the higher corporate rate.

January 1, 2024 – GAAR Changes

GAAR (General Anti-Avoidance Rule) in simple terms, allows CRA to tax taxpayers even though they are following the letter of the law but using the current tax rules to save tax.

This is a very frustrating change to the legislation as it essentially indicates that if you have structured your affairs according to the rules but are only doing it to save tax, then the government can tax you as if the restructuring did not occur.

Further, they have required that taxpayers and their advisors report what they have done to the government when they do any serious planning. This is required under the threat of serious penalties.

GAAR has always been there; however, effective January 1, 2024, the rules were expanded, allowing CRA to tax you more.

June 25, 2024 – Capital Gains Tax

Investment advisors could invest your portfolio in investments that are tax-deferred and produce capital gains tax to lighten the tax burden. The government has now attacked capital gains income, and instead of allowing half the amount to be taxed, they have increased this to 2/3 taxable. The result is more tax in your corporation, a higher amount of small business deduction clawback, and also reduces your CDA credit (capital dividend account, which is a notional account that allows you to draw monies out tax-free from your corporation so that the effect is the same as if it was earned by an individual).

What’s Next!

The government has continued to follow through with reducing tax benefits to corporations. It’s never been more important to aware yourself the strategies that still exist.  We will dive further into the detail of the following corporate tax planning strategies in future videos:

Corporate class investments

Capital gains stripping (situational)

Flow-through planning

High cash value insurance

Estate freezes

Corporate asset meltdown

Critical illness strategies

*Morneau, Bill. "Speech by the Honourable Bill Morneau, Minister of Finance." Department of Finance Canada, 3 Oct. 2017.Minister Morneau Brings Listening Tour to Fredericton