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2018 Federal Budget Effects on Small Business Corporations

March 1, 2018

 

The highly controversial and anticipated 2018 Federal budget was released earlier this week unveiling new rules surrounding how passive investment income in a corporation as well as income splitting will be handled moving forward. This article will review the changes and how they will affect your Medical Professional Corporation.

 

Passive Income Cap

 

In July 2017 consultations papers were released detailing major changes to how corporations would be taxed in the future 2018 budget, with much backlash. The release of the 2018 budget provides some much needed simplicity and clarity on how passive investments will be treated going forward.

 

As a small business, your corporation is entitled to the small business tax rate on the first $500,000 of active business income. The small business tax rate in Ontario is 13.5% (2018) and 12.5 (2019) on the first $500,000. Income over $500,000 is taxed at 26.5%.

 

Under the proposed budget, the small business income limits will be reduced where passive investment income is greater then $50,000 (reduced by $5 for every $1 of investment income above the $50,000 threshold). If your passive investment income exceeds $150,000 per year, your corporation will be taxed at the higher corporate tax rate of 26.5%.

 

This chart outlines how the reduction will work in correlation with passive income.

 

 

 

 

For example, if your corporation earns $125,000 in passive investment income, your corporation will pay the lower tax rate only on the first $125,000 of income. The remaining income will be taxed at the general tax rate of 26.5% in Ontario.

 

Income Splitting

 

With respect to income splitting not much has changed from the proposal made in 2017. To be clear income splitting refers to the use of dividends and not salary. In order for an adult (spouse or child between ages 18-24 or individuals over age 65) to receive income splitting through dividends they must be working 20 hours or more per week during the last tax year or any prior 5 years in order for the dividend income to be excluded from the tax on split income rules.

 

If the adult works less than 20 hours per week then income paid to that individual must be deemed reasonable in relation to the work performed. The amount considered over the reasonable amount will be taxed at the highest marginal tax rate.

 

            This budget defines reasonable as follows:

  • the work performed in support of the Related Business;

  • the property contributed directly or indirectly in support of the Related Business;

  • the risks assumed in respect of the Related Business;

  • the total amounts paid or payable by any person or partnership to or for the benefit of the individual in respect of the Related Business; and

  • such other factors that may be relevant

 

SHOULD WE STILL INCORPORATE?

 

This has been the main question from the vast majority of medical professionals since the July 2017 release, and with this finalized budget and review in hand it appears that YES incorporation still makes sense for the medical professional. Even with the new passive income tax rules a corporation’s maximum tax rate if 26.5% vs a personal marginal tax rate of 53% which still shows substantial saves for the incorporated medical professional. There are also many insurance strategies that can be employed to assist in keeping passive income lower than the new small business tax limit. The question now becomes what are the next steps, the right steps, to ensure my corporation receives the maximum benefit under the new 2018 tax budget. Many incorporated medical professionals are now looking into implementing a participating whole life insurance policy that provides tax sheltered growth now and estate conservation and intergenerational transfer of wealth down the road.

 

At professionals’ Insurance Centre we are looking forward to meeting with you and starting to plan for these changes and ensure we have the right tools in place for you and your corporation.

 

 

 

 

 

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