TAX RATE SUMMARY

BC personal and corporate tax rates will not change in 2020:

TAX ON SPLIT INCOME (“TOSI”)

The TOSI rules that came into effect on Jan 1, 2018  limit an owner-manager’s ability to split income with family members who are not active in the business. In some cases, the tax payable on the split income may be greater than the tax that would be payable if the income were paid to the owner-manager instead of to a family member.

PASSIVE INVESTMENT INCOME

For taxation years beginning after 2018, new rules limit a Canadian-controlled private corporation’s (CCPC’s) access to the small business deduction where the company’s investment income exceeds $50,000 annually. The CCPC’s $500,000 “business limit” will be reduced by $5 for every $1 of investment income, and thus will be $0 when investment income exceeds $150,000. Active business income in excess of the reduced business limit will be taxed at the general rate instead of at the small business rate.

COMPENSATION – DIVIDENDS VS. SALARY

Owner-managers have a number of considerations when determining whether to pay salary, dividends or both.

• Tax Integration – What will the total tax burden (corporate and personal) be on salaries versus dividends? For active business income < $500,000, there is a small cost (< 1%) to receiving dividends instead of salary.
• RRSP Contribution Room – Does the owner-manager need salary to generate RRSP contribution room?
• CPP Premiums – Both the employer and the employee portion of CPP premiums will apply to salary paid to the owner-manager.
• BC Employer Health Tax – Commencing January 2019, BC Health Tax premiums will apply to salary, wages and bonus paid by an employer to an employee [2]. Employers with B.C. payrolls of less than $500,000 will not be subject to the tax. Payments of salary to an owner manager could be subject to the tax, or could trigger the tax if payroll is otherwise less than $500,000.
• SRED Tax Credits – Where a CCPC’s taxable income exceeds $500,000, its ability to claim refundable investment tax credits on Scientific Research and Experimental Development expenditures may be impaired. Paying salary to the owner-manager can manage taxable income levels.
• Dividend Refund – Paying a dividend may allow the corporation to recover previously paid refundable tax on investment income.

ACCRUED BONUSES

A bonus accrued in a particular taxation year is generally deductible if it is paid within 179 days of the end of the corporation’s tax year. However, the bonus isn’t included in the owner-manager’s income until it is actually received. Consider accruing a bonus to reduce the corporation’s tax, and withholding payment up to 179 days to defer payment of the personal tax on the bonus.

MAINTAINING QSBC STATUS

When shares of a “qualifying small business corporation” (QSBC) are sold, the shareholder may be able to claim a capital gains exemption of up to $866,912 (2019) against the gain realized. Accumulating too many non-active assets in the company at any time in the 24 months preceding a sale could prevent the shares from qualifying. Consider “purifying” the company by paying down debts, acquiring business assets or paying a bonus or dividend to the owner-manager.

Purification may become important for a company that has undergone a reorganization that introduced a family trust or family members as shareholders. It’s often necessary for such a company to maintain “small business corporation” status at all times subsequent to the reorganization to avoid the corporate attribution rules.

To have this status, the fair market value of the company’s non-active assets must be less than 10% of the fair market value of the company’s total assets, so periodic purification of non-active assets may be required.

SHAREHOLDER DRAWS

Where an owner-manager (or a related person) borrows money from their company in a particular taxation year of the company, and the debt is not repaid within 365 days from the end of that taxation year, the amount of the debt is included in the borrower’s income for tax purposes. Consider whether there are any shareholder draws that should be repaid. Note that if the draws are repaid, and subsequently re-borrowed, the income inclusion could still apply.

It is important to document all such borrowings as loans, and to document the repayment of the loans.  The Canada Revenue Agency (CRA) is quite aggressive in treating shareholder draws as “appropriations” instead of as loans. Like shareholder loans, shareholder appropriations are included in the shareholder’s income, but there is no exception where the “appropriation” is repaid within the time period mentioned above.

CORPORATE INCOME TAX INSTALLMENTS

Income tax installment requirements for the current year are based on the taxable income of the preceding year. If taxable income for the current year will be less than the prior year, it may be possible to reduce the installment payments or to eliminate future installment payments. Evaluate projected taxable income later in the taxation year to see if this is the case.

If required installments are paid late, non-deductible interest and penalty charges will apply. However, if future installments are paid early, the amount of the non-deductible interest charges can be reduced.  Consider prepaying future installments.

ASSET PURCHASES AND SALES

Capital cost allowance can be claimed on fixed assets that are available for use in the taxation year.  Consider accelerating planned asset purchases so capital cost allowance can be claimed in the current year’s tax return. Certain types of property may be eligible for accelerated capital cost allowance claims. Also consider the incentives introduced in the 2019 Federal Budget for zero-emission vehicles.

Contact your DMCL advisor to discuss the impact of these rules on your business.

[1] Assuming < $50,000 of investment income

[2] On payroll up to $1.5M, 2.925% x (Payroll – $500,000). On payroll > $1.5M, 1.95% x Payroll.