Why the federal budget’s passive income changes have many breathing sigh of relief
Small business owners, along with incorporated doctors, lawyers and other professionals, breathed a collective sigh of relief on Tuesday night as they started to parse through the government’s entirely new approach to dealing with passive investment assets held by Canadian controlled private corporations (CCPCs).
You’ll recall that the small business tax debacle began last summer when the government announced that it was conducting a review of tax planning strategies involving private corporations. The Department of Finance released a paper in July 2017 outlining three areas of concern: income sprinkling using private corporations, converting a private corporation’s regular income into capital gains and passive investments inside private corporations. The government announced in October 2017 that they were not proceeding with the proposals regarding converting regular income to capital gains. The income sprinkling proposals were revised in December 2017 and the detailed rules concerning restricting the earning of passive investment income inside a corporation were to be released as part of the 2018 federal budget.
Last fall, the government stated that investments already made inside of private corporations, including the future income earned from such investments, would be protected. The rules were to apply only on a go-forward basis and the first $50,000 of passive income annually would not be subject to the new rules.
During the period of consultation, the government heard that its proposals, which would have taxed investment income earned in a corporation at punitive total effective tax rates exceeding 70 per cent, could be very complex and the tracking of pre- and post-grandfathered assets would add significant administrative burdens on businesses.