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Steve Willems March 1, 2018 Wealth Planning

2018 Federal Budget Commentary

On February 27, 2018, federal Finance Minister Bill Morneau tabled the Liberal government’s highly anticipated budget – the third since the October 2015 election. The budget, titled “Equality & Growth – A Strong Middle Class”, focused primarily on gender equality and investing in the middle class.

After accounting for Budget 2018 proposals, the budgetary balance is expected to show deficits of $19.4 billion in 2017-18 and $18.1 billion in 2018-19. Over the remainder of the forecast horizon, deficits are expected to decline gradually from $17.5 billion in 2019-20 to $12.3 billion in 2022-23. The federal debt-to-GDP ratio is projected to decline gradually after 2019-20 to the end of the fiscal horizon, reaching 28.4% in 2022-23.

Budgetary revenues are expected to increase by 5.5% in 2017-18. Over the remainder of the forecast horizon, revenues are projected to grow at an average annual rate of 3.8%, in line with projected growth in nominal GDP.

There were no changes to personal or corporate income tax rates. The budget announced long-awaited measures that will affect corporations with passive investment income. Below is a summary of those measures.

Click here to download the entire commentary.

Passive investment proposals

Budget 2018 proposes the following two new measures to limit what the federal government has identified as tax-deferral advantages from holding passive investments in a corporation:

  1. Reducing access to the small business tax rate for corporations with passive investment income through the introduction of an additional eligibility mechanism based on the corporation’s passive investment income levels; and
  2. Limiting refundable taxes in connection with the payment of eligible dividends.

1)  Reducing access to the small business tax rate rate where passive investment income exceeds $50,000

Gradual reduction of access to small business tax rate

Budget 2018 proposes that if a corporation and its associated corporations earn more than $50,000 of passive investment income in a given year, the amount of the corporation’s income eligible for the small business tax rate will be gradually reduced by $5 for every $1 of investment income above the $50,000 threshold. Under this measure, a corporation’s limit of $500,000 in income that can be taxed at the small business tax rate (the “small business limit”) is reduced to zero if the corporation and its associated corporations together earn $150,000 or more of passive investment income (which, for example, is equivalent to the annual return on $3 million in passive investment assets at a 5% rate of return).

This measure will result in potential taxation at the general corporate tax rate (15% federally in 2018) of active business income that is currently taxed at the small business tax rate (10% federally in 2018) for a corporation that, together with its associated corporations, earns more than $50,000 of passive investment income annually.

“Adjusted aggregate investment income”

For the purposes of the $50,000 threshold, a corporation’s passive investment income will be measured by a new concept called “adjusted aggregate investment income”. “Adjusted aggregate investment income” will be based on “aggregate investment income” (a concept currently used in computing the amount of refundable taxes in respect of a corporation’s investment income and which includes net taxable capital gains) with certain adjustments, as

  • Taxable capital gains (and losses) will be excluded to the extent they arise from the disposition of certain active business assets, or shares in connected Canadian-controlled private corporations (CCPCs) where the fair market value of the connected CCPCs are attributable to certain active business assets used principally in an active business;
  • Net capital loss carryovers will be excluded;
  • Dividends from non-connected corporations will be added; and
  • Income from savings in a non-exempt life insurance policy will be added to the extent the income is not otherwise included in aggregate investment income.

As is the case with aggregate investment income, adjusted aggregative investment income will not include income incidental to an active business.

Interaction with current small business reduction

Currently, the $500,000 small business limit is reduced on a straight-line basis for a CCPC and its associated corporations having between $10-15 million of total taxable capital employed in Canada. Budget 2018 proposes that the reduction in a corporation’s small business limit will be the greater of the reduction under this Budget 2018 measure reducing access to the small business tax rate for corporations with significant passive investment income and the existing reduction based on taxable capital.

Application and anti-avoidance

Budget 2018’s measure to reduce access to the small business tax rate for corporations with significant passive investment income will apply to taxation years that begin after 2018.

The federal government indicated in Budget 2018 that rules will apply to prevent transactions intended to avoid this measure, such as the creation of a short taxation year to defer its application, as well as the transfer of assets by a corporation to a non-associated related corporation.

2. Limiting refundable taxes in connection with the payment of eligible dividends

Budget 2018 proposes that a refund of a corporation’s refundable dividend tax on hand (RDTOH) be available only in cases where a corporation pays non-eligible dividends. An exception will be provided in respect of RDTOH arising from eligible portfolio dividends received by a corporation. In this case, the corporation will still be able to obtain a refund of that RDTOH when it pays eligible dividends.

Addition of second RDTOH account

To implement this measure, Budget 2018 proposes to add a new RDTOH account, such that a corporation will now have two RDTOH accounts:

  1. Eligible RDTOH Account: This account will track Part IV refundable taxes on eligible portfolio dividends. The payment of any taxable dividend (i.e., both eligible and non-eligible) can trigger a refund from this account;
  2. Non-Eligible RDTOH Account: This account will track Part I refundable taxes on investment income as well as Part IV refundable taxes on non-eligible portfolio dividends . Only the payment of non-eligible dividends can trigger a refund from this account.

An ordering rule will apply with respect to these two accounts, which will require a corporation to obtain a refund from its Non-Eligible RDTOH Account first before it can obtain a refund from its Eligible RDTOH Account when paying non-eligible dividends.

Existing RDTOH balances

In connection with this measure, Budget 2018 proposes that a corporation’s existing RDTOH balance will be allocated as follows:

  • For CCPCs, the lesser of the existing RDTOH balance and an amount equal to 38 and 1/3% of the balance of its general rate income pool, if any, will be allocated to its Eligible RDTOH Account, and any remaining balance allocated to its Non-Eligible RDTOH Account.
  • For non-CCPCs, all of the existing RDTOH balance will be allocated to its Eligible RDTOH Account.

Application and anti-avoidance

Budget 2018’s measure to limit refundable taxes refunded in connection with the payment of eligible dividends will apply to taxation years that begin after 2018.

The federal government indicated in Budget 2018 that rules will apply to prevent deferral of the application of this measure through the creation of a short taxation year.

Click here to download the entire commentary.


Although this publication has been compiled from sources believed to be reliable, we cannot guarantee its accuracy or completeness. All opinions expressed and data provided herein are subject to change without notice. The author of this publication is employed by an affiliate of CI Investments Inc. (“CI Investments”). This publication is provided solely for informational and educational purposes and is not intended to provide, and should not be construed as providing, individual financial, investment, tax, legal or accounting advice. Professional advisors should be consulted prior to acting on the basis of the information contained in this publication. CI Investments and its affiliates will not be responsible in any manner for direct, indirect, special or consequential damages howsoever caused, arising out of the use of this communication. The Assante symbol and Assante Wealth Management are trademarks of CI Investments Inc., used under license. Published February 2018.