Morneau Backs Down

Good day,

Unless you’ve been living under a rock, you’ve heard that the highly anticipated and controversial Canadian Federal Budget was released earlier this week. While the budget contained many proposals on an array of financial matters, many of our firm’s clients across the country are incorporated business owners and the tax treatment on corporately held passive assets would greatly impact their financial well-being.

If the original tax ideas on corporately held passive assets (stock/bond investment portfolios, rental properties etc.) had been implemented, many business owners could have seen tax bills of as high as 70%+ on such assets. There was significant outrage by the business community for many reasons and such measures could hurt the entire country in so many ways: brain drain, lack of business competitiveness when compared with other countries, penalizing entrepreneurs who are the backbone of job creation etc.

This week’s budget proposes that corporations with significant passive assets could have their small business deduction (SBD rate) on the first 500K of active business income reduced or eliminated, depending on the level of passive income generated from the buildup of the corporation’s passive assets. Any income from passive assets below 50K/year would not negatively affect the business owner. Income above 50K would begin to gradually eliminate the SBD rate and should passive income reach 150K/year, the SBD rate on the entire 500K of the business’ active income would be eliminated. For greater clarity, a business owner generating 100K/year in passive income (half way between 50K and 150K), would lose the SBD rate on 250K of the corporation’s active business income (500K/2).

While the impact of these changes will increase the total amount of tax some business owners will pay, the end result is immaterial when compared to the 70%+ tax contemplated last fall. Some tax planning opportunities do exist and the wise will be strategic about the passive investments they hold inside corporately held accounts. If done correctly, the negative impact of the proposed tax changes could be eliminated altogether or at least significantly reduced. More evidence that the liberal government’s assumption that these measures will bring in more tax dollars to offset the aggressive spending is incorrect.

Some hints: Only half of the capital gains on passive assets are taxable meaning that Canadian business owners investing inside their corporations can realize up to 100K/year in capital gains and lose none of the SBD rate. In addition, unrealized capital gains regardless of their size will have no impact on the SBD rate. Interest bearing and dividend-paying investments could also be held inside corporate accounts on their own or in conjunction with those producing capital gains if calculations have been done to eliminate or minimize any negative impact of the proposed tax measures.

Have a good weekend!


Daniel Popescu CFP, CIM, FMA, FCSI

President & CEO



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