2018 Proposed Tax Changes. Holm Raiche Oberg Chartered Professional Accountants P.C. Ltd.

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1 2018 Proposed Tax Changes Holm Raiche Oberg Chartered Professional Accountants P.C. Ltd.

2 Introduction Who am I? I am not tiny! Came from truck drivers Dad told me to sit in a different chair NOT POLITICALLY CORRECT (regarding tax)

3 Disclaimer Everything I talk about can/will change. Budget 2018 (usually in March) Rule will change as these are based on draft legislation or guidelines

4 WHY!!! Liberal s talked about this in election platform March 2017 budget made mention of issues regarding taxation of small business corporations.

5 Small Business Deduction Reduce multiplication of the small business deduction (that wonder $500,000 taxed at 12.5%) Specified corporate income Northwest Terminal letter? Tax at a higher rate. Farm in a partnership, joint corporations?

6 Small Business Deduction Assign your small business deduction to your other family members Paying brother, dad s, uncle company for services you can be offside and might have to assign them some small business deduction

7 Summer Ruined!! July 18, 2017 proposed tax changes TOSI tax on split income Limitation of lifetime capital gain exemption Taxing investment income (passive income) Consultation period ends October 2, 2017

8 Arizona vacation or work October 16-19, 2017 Small business tax rate - from 10.5% to 9% by Abandonment of LCGE proposal Clarification of TOSI rules (to be changed again) Clarification of passive income rules.

9 Christmas Gift!! December 13, 2017 Clarification of the TOSI rules Narrowed the rules of July 18 and October 18 New terminology (again) Effective for January 1, 2018

10 Current structure Corporate tax rates less than personal tax rate Different rates creates deferral of tax Extend the taxation period (over years, long term) Corporation like a RRSP keep cash in it until we actually need it Living needs vs. excess cash invest in corporation Lifetime capital gains exemption how we structure our corporation to multiply this Family Trust planning (estate / succession planning)

11 TOSI - Current Income splitting why? Lower marginal tax rates Personal tax rates Deduction of the life time capital gains deduction Neuman Vs. queen court case Dividends don t have to be reasonable

12 TOSI - Current Watch for potential issues: Wages must be reasonable Attribution (back to spouse, to parent) Under 18 year of age Kiddie tax (Jan 1, 2000) high tax 48% Under 18 years old Loss of personal tax credits TOSI expanded Kiddie Tax

13 TOSI Proposed Who is incorporated? Who has paid their kids wages or dividends before? Did they work on farm (or go to school)? Who would pay that same amount to my kids? Who has a trust set up? In their corporation

14 TOSI Proposed Source individual Individual resident in Canada who is related to the tax payer to specified individual Related business where source individual: Personally carries on a business Actively engaged in the business which carries on a business Owns property of value is derived from shares of the corporation which has a value no less than 10% of value of all shares Member of a partnership which carries on the business

15 TOSI Proposed What is split income Taxable dividends Shareholder benefits Interest on debt obligations issued Capital gains realized on disposition of shares Wages fall under a different section of tax rules were always subject to REASONABILITY

16 TOSI Proposed Any income source from: Corporation Partnership Trust distributions

17 TOSI - Proposed What is tax on TOSI? Highest tax rate 48% No marginal tax rates & personal tax credit $60,000 income will lead to $28,800 in income tax Trusts no longer a vehicle for income splitting, but do have other functions

18 TOSI - Proposed Government was nice!! Exceptions and exclusion They did not want to attack everyone Can I pay my family still?

19 TOSI Excluded Business 18 years of age or over actively engaged on a regular and continuous basis in current year or last 5 years. actively engaged average 20 hours per week if not based on hours other facts may work

20 TOSI Excluded Shares 24 years of age or over Own more than 10% of shares (votes and value) Focus on common shares they share in the growth of company Preferred shares (script shares) watch out!! December 31, 2018 deadline!! Restructure your corporations?

21 TOSI Excluded Shares Not a Professional Corporation (doctor, lawyer, accountant, vet, dentist) Business must derive less than 90% of its income from provision of service All or substantially all income of the corporation must come from sources other than related business Do you own more than one corporation??

22 TOSI Excluded Shares Provision of service Are you selling product? Are you selling labour (services)? Plumber, electrician, farm contractor No definition of what provision of service is Watch out if you have farming income and have services income.

23 TOSI Reasonable Return Income from reasonable return will be excluded. Over 24 years old Work performed Property contributed Risk assumed Amounts paid or payable Ages 17 to 24 Safe harbor capital return Reasonable return on arm s length capital

24 TOSI - Exclusion Capital gains Can still be subject to TOSI Gains from deemed disposition on death will be exempt Farm shares should be exempt Retirement income If recipients spouse is age 65+ and income would meet any of the various exceptions

25 TOSI - Conclusion Talk to your accountant or advisor If you don t have one get one!

26 LCGE Proposal abandoned per October 16, 2017 announcement Everything will stay the same for now? All shareholders can claim the LCGE, active or not (good for trust planning) Uncertainty if 84.1 will still be changed (changes capital gains into dividends on disposition of shares to non-arm s length person Might be changes in March, 2018 budget.

27 Passive Income Corporate investment income Interest Rental Taxable capital gains Royalties And more

28 Passive Income Why government want to change Perceived advantage of corporations ability to invest in passive investments To promote fairness and neutrality Targets private corporation only why pick on them? Yet they lowered the tax rate for corporations?

29 Passive Income - Current Current rules already prevent tax deferral on passive income itself (increase tax issue) Corporate income tax rate (12.5% or 26.75%) less than personal tax rate (48% at the top) Lower corporate tax more after tax funds to retain for future investment. Without preventive measures, rate differential create incentive to earn passive investment income inside corporations. To promote neutrality, current regime imposes higher corporate tax (10.7%) upfront that is partially or fully refundable when dividend paid to individual (RDTOH) Investment income in corporation is 50.7%

30 Passive Income - Current Corporate tax rate is 50.7% RDTOH corporates get some tax back Pay dividends to shareholders corporate gets back 30.67% on investment income, Pay dividends corporate pays 20% tax (net overall never to get back). The current system prevents deferral on passive income Government has issues with more after tax funds being used for investing

31 Passive Income Current Why do corporations invest? No pension (use corporation like RRSP) No safety net for running your own business Cash for business cycle (up and down during year) Unstable economy (oil and gas) Unforeseen expenses/ capital purchases Better financing terms Future business expansion/acquisitions

32 Passive income Proposed (July) Government proposal July 18, 2017 two ways to track source of income Deferred income approach two options 50.7% tax on investment to be permanent (removal of RDTOH) No CDA pool Intention double tax Shareholders then pay tax at their marginal rate on dividends received (possible 70% tax or more)

33 Passive Income Proposed (July) Apportionment method lots of tracking of revenue sources Retained earnings subject to general tax rate (27%) (like GRIP pool eligible dividends) Retained earnings subject to SB tax rate (12.5%) (like SBD pool ineligible dividends) Corporate capital from shareholder s after tax income new pool to track After tax income allocated to one of the three pools. Payment of dividends come from a specific pool dividend tax rates for dividend based on pools this will be an administrative nightmare!!!!

34 Passive Income Proposed (July) Elective method less tracking, but less benefit of personal tax rates on dividends Avoid tracking the above (apportionment method) Default method all passive income from retained earnings subject to small business deduction removal of GRIP pool Election made corporate loses access to the small business rate complete. Eligible dividends can be paid going forward. Elective method no preferential treatment for passive income earned from shareholder contributions Special election for investco s Refundable tax still applies (RDTOH 30.7%) Lack of detail on the election process Very complicated administrative policy Accountants will have a lot of extra time to prepare the tax returns.

35 Passive Income Oct 18 Rules modified to allow for the following: Investments already made by private corporations (including future earnings) are protected (grandfathering rules) Protecting ability of business to save funds for future Purchase of assets Hiring staff Training cash Business expansion Government telling the business community that they heard our concerns?

36 Passive Income Oct 18 Income threshold of $50,000 per year following old rules (RDTOH) To cover personal benefits Sick leave Parental leave Retirement All passive income above this are taxed under new rules (no RDTOH? dual taxation) What are the new rules? No refundable feature? AgriInvest will be explicitly carved out from these new changes

37 Passive Income Oct 18 Proposal General Rate Income Pool (GRIP) Grandfathered Passive Investments Pool Non-grandfathered Passive Investment Pool Changes required No proposed changes Current (RDTOH) structure -50,000 under current; over 50,000 is new non-refundable tax structure

38 Passive Income Oct 18 Grandfathering rule What is grandfathering date? July 18, 2017 Oct 18, 2017 Budget 2018 Monitor grandfathering amount If taken out and put back into investments? Do I lose it that grandfathering room? Succession transfer of company grandfathering still apply?

39 Passive Income Oct 18 Non-taxable portion of capital gain CDA account still alive? If non-taxable portion of capital gain exceeds $50,000? How dealt with? No draft legislation?

40 Now What / Where do we go What changes can we make now with your clients Have you talked to their accountant? Payout additional dividends to build shareholder loan room to draw down in the future 2017 is last year with no TOSI Identify the TOSI rules to see if clients are off-side Any parent/kid relationships that need to be reviewed rental agreements, preferred shares etc. Write job description give support to CRA

41 Passive income thoughts before grandfathering rules Invest in active business Own building instead of renting/leasing Instead of investing repay business debts Invest partnerships Most revenue earned is considered active income (watch out for new small business deduction issues) this may change to investment in future. Invest in more than 10% - if corporation is connected, then dividends should not be corporate tax at all Invest in appreciating stock, rather than dividend paying future government might remove these rules!! Actively trade vs. passively invest (turn your activities into active income day trader rules)

42 Passive income thoughts after grandfathering rules With these proposed changes on October 18, 2017 we may want to take our excess cash and invest in passive investments build up the allowable balance that will be grandfathered. What investment will qualify Not sure, but it will need to be something that will generate passive income

43 Common Concerns Can salaries be paid to family members Yes falls under different section not under TOSI. Wages must be reasonable still. Creates CPP. Trusts Still good planning tool. Have other purposes vs. income splitting. Will my tax on death increase Could, if government reviews capital gains even more critical to post mortem plan

44 Do you have a TEAM? Your advisors Accountant Financial Advisor Lawyer Succession planners These rule changes are complex and communication should happen with the clients accountant and investment advisor.

45 QUESTIONS?