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Following Finance Minister Bill Morneau's magical misdirection on Monday, October 16, 2017 (whereby the federal Liberal government made us look one way in their announcement of the promised reduction of the small business tax rate to avoid us looking the other way at their July 2017 tax proposals), Mr. Morneau today announced "target tax fairness measures" regarding the use of passive investments in Canadian-controlled private corporations (CCPCs) (which includes professional corporations).
Here are three things everyone who has a CCPC needs to know:
1. Grandfathering for income already in the CCPC
The Liberal government has stressed many times, and reiterated in today's announcement, that all past investments and income earned from those investments will be protected. So, it appears relatively clear that anything invested in a CCPC before draft legislation is released will be grandfathered. It will be interesting to see how the draft legislation released as part of Budget 2018 deal with this given the tracking and complexity that will be involved.
2. The CCPC can keep a contingency fund to save for emergencies or future investments in the business
The July 2017 tax proposals drew immense criticism from the tax and small business communities that the Liberal government did not appreciate that many business owners need to keep some income in the CCPC to deal with possible future events. The Liberal government has responded with a $50,000 threshold on passive income in a year (equivalent to $1 million in savings based on a nominal 5% return) which will be permitted to provide flexibility for business owners to hold savings for multiple purposes. There will be no tax increase on investment income below this threshold. The Liberal government's announcement notes that only 3% of the CCPC population has taxable passive income over $50,000.
3. There is still (some) time
Draft legislation will be released as part of Budget 2018 (usually released sometime in March). The Liberal government has also stated that they will include incentives in the Budget 2018 legislation for venture capital and angel investors for the technology industry. All advisors and small business owners will be watching Budget 2018 carefully to see how the draft legislation will work.
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