February 27, 2018, Canada's Minister of Finance, Bill Morneau, tabled his government's budget for 2018-2019. The budget contains many fiscal measures for businesses, including measures pertaining to the taxation of private corporations' passive investment income applicable to fiscal years that begin after 2018.
Taxation of private corporations - Passive investment income
Subsequent to the feedback received in response to the consultation document that accompanied the July 18, 2017, legislative proposals regarding the tax deferral on passive investment income earned within private corporations, the federal budget proposes two new measures applicable to taxation years that begin after 2018.
Reduction of the business limitThe business limit of $500,000 will be reduced on a straight-line basis for corporations whose adjusted aggregate investment income (AAII), including that of associated companies, is between $50,000 and $150,000. The AAII will be based on aggregate investment income, with certain adjustments. In particular, for the purposes of AAII, accrued income from the savings in an exempt life insurance policy is not included in the definition of adjusted aggregate investment income. However, any gain realized on the disposition of the policy is included in adjusted aggregate investment income.For example, the business limit of a corporation earning $80,000 of AAII in a given year will be reduced by $150,000 based on the following formula: 5 x ($80,000 - $50,000). Its business limit of $500,000 will be reduced to $350,000.A corporation with business income of $75,000 will therefore have to earn more than $135,000 of AAII before its business limit is reduced below its business income of $75,000.Assuming a return of 5%, the corporation's business limit will be reduced on a straight-line basis if it has passive assets of between $1 million and $3 million.Corporate income that is higher than the reduced business limit will continue to be subject to the general corporate tax rate (15% at the federal level). As announced earlier, the reduced corporate tax rate will be 10% in 2018 and 9% starting in 2019.New Refundable Dividend Tax on Hand (RDTOH) accountsThe budget proposes the creation of new refundable dividend tax on hand (RDTOH) accounts paying "eligible" dividends, while former RDTOH accounts would pay "non-eligible" dividends.After making such payments, private corporations that paid non-eligible dividends would be obliged to obtain a refund from their "non-eligible" RDTOH accounts before obtaining a refund from their "eligible" RDTOH accounts.Rules have been provided for allocating existing RDTOH balances between the two types of RDTOH accounts.
- The budget confirms the proposal of September 8, 2017, regarding the application of GST/HST to the management and administration services rendered by a general partner to an investment limited partnership, specifying that the measure applies to the services rendered starting September 8, 2017, but also to those rendered prior to that date so long as the general partner has already received the GST/HST. The budget also proposes to make GST/HST payable on the fair market value of the management and administration services at the time they were rendered.
- As of January 1, 2019, the scope of the special rules regarding the HST currently applicable to investment plans shall be extended to investment limited partnerships. The budget proposes to allow investment limited partnerships to make an election to advance the application of the special HST rules as of January 1, 2018.
- The government announced its intentions to carry out consultations regarding certain aspects of the rule which allows a holding company to claim tax credits on inputs in order to recover the GST/HST paid on expenses relating to a different body corporate.
- extending by 5 years the eligibility to Category 43.2 for investments in clean energy generation and conservation equipment in order to make it available to assets acquired prior to 2025;
- expanding the scope of the rules regarding artificial losses using equity-based financial arrangements and of the securities lending arrangement rules;
- changing the stop-loss rules on share repurchase transactions pertaining to shares held as mark-to-market property;
- clarifying the details such that at-risk rules apply appropriately to each partnership tier of a limited partnership structure;
- adding transparency rules in order to counter cross-border surplus stripping using partnerships and trusts;
- tightening the rules targeting foreign affiliates;
- applying only one set of tax rules to health and welfare trusts and to employee life and health trusts.