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2018 Federal Budget and its Impact on Planning for your Clients

On February 27, 2018 the federal government released Federal Budget 2018. It’s titled, Equality and Growth, A Strong Middle Class.

You can view the entire 369 page report at this link, but perhaps first read this quote from Jamie Golombek, Managing Director, Tax and Estate Planning with CIBC in Toronto:

“There’s not a lot there for the average individual, and not a lot of changes from a personal tax perspective…very few changes in tax credits.”

The most headlined topic of Budget 2018 is “how the government will deal with passive investment income inside a private corporation”

In fact, you can listen to a great summary from Jamie in just 4 minutes at this link.

If you have been waiting until the weekend to dive into the budget further, I hope I can save you a few minutes by answering the questions that are likely top of mind:

  1. Are there any changes to personal tax that will affect my clients?
  2. How did the government address the disputed proposal towards taxation of passive investment income for my small business clients?
  3. What has changed in Snap Projections as a result?
  4. What strategies can I consider to better serve my clients?

Are there any changes to personal tax that will affect my clients?

Short answer – No. Not really. The highlights in this area are changes and modifications to the Working Income Tax Benefit (WITB), tax deductibility for service dogs and administrative changes to the RESP to increase awareness. A great summary of these specific changes can be found in this economic analysis in Macleans here.

How did the government address the disputed proposal towards taxation of passive investment income for my small business clients?

In July 2017, the proposals were announced and consultations and feedback were taken for changes in 3 main areas:

Income Splitting

The federal budget has not added any further changes to these proposals that were finalized in an update on December 13, 2017. Essentially, what we have called “kiddie tax” in the past, now applies to adults, with a number of unique exceptions.

If your clients are using income splitting strategies using dividends from their corporation, you will want to be familiar with these changes as they are in effect. The changes were effective January 1, 2018 and if you are not yet familiar with the new legislation BDO has summarized it nicely here.

Converting Income into Capital Gains

The federal budget has not added any further changes in this area as well. The proposals introduced in July were scrapped during small business week last October. The reasoning behind this (mainly due to what was found during the consultation period) is summarized by BDO here.

Passive Investments in a Corporation

This was the headliner. The government dislikes that corporations have a tax deferral advantage that essentially allows someone who is incorporated to accumulate more money inside the corporation.

The proposal in July was complex and would clearly have taken a lot of effort to track. It was a disputed change and in October it was not abandoned but we were left hanging without much direction and many unanswered questions.

In Federal Budget 2018, the government has completely scrapped previous proposals and has taken a different approach, which is a significant improvement, here are the key points:

When passive investment income inside the corporation is greater than $50,000 the small business deduction (SBD) will be reduced by $5 for $1; eliminating the SBD when investment income is above $150,000.

For example, Diane is a physician who has accumulated $1,000,000 in her corporation and it earns a 5% rate of return. The $50,000 of investment income is under the threshold and she will not be affected by the new rules.

The technicalities of what defines passive income, what is included and excluded, and detailed changes to RDTOH will be important to know if the changes will affect your clients.

Key Takeaway

A client can only be affected by these rules if they are earning active business income. Even if they are affected, integration still works, investment income is still taxed at the same rate and overall taxation is not higher. Rather, the limitation on the SBD only removes the opportunity to defer taxes.

For more clarifying examples, see the link for IE webinar below and go to minute 33:00.

What has changed in Snap Projections as a result?

There have been no changes required to the software as a result of this federal budget, other than the changes we had already released in the first week of January of this year. This is due to the fact that some proposals were abandoned and others will not be effective until January 1, 2019. We will be addressing these changes and making the required updates to the software later this year to ensure Snap Projections is accurate and up to date with all new legislation.

What strategies can I consider to better serve my clients?

Investment Executive hosted a webinar with Jamie Golombek focused on how Federal Budget 2018 will affect the industry. You can listen to the whole webinar here. At the 34:30 mark, Jamie shares some of his thoughts:

New Passive Income Rules

  • Keep corporate passive income under $50,000 using buy and hold strategies and investments that primarily provide capital gain income
  • Consider Permanent Life Insurance within a Corporation
  • Consider IPPs
  • Invest corporate funds to maximize the RRSP and TFSA

Other

  • Spousal loans – instigate before CRA’s prescribed interest rate doubles to 2% at end of March 2018 (40:30)

Still have questions? In the same webinar Jamie was able to answer all of the common questions from advisors live on the call (the Q/A starts around 46:00).

For a more in-depth analysis and additional information, I would like to recommend an excellent analysis by BDO Canada titled: 2018 Federal Budget: Equality and Growth.