March 2, 2018

The 2018 Budget was tabled on February 27, 2018 and although many were expecting drastic changes to the taxation of small businesses based on the government’s previous proposals in July (link to blog post), October (link to blog post) and December (link to blog post), the 2018 Budget was lighter than expected in this area.  Below is a brief summary of the tax changes affecting small businesses in Canada.

  • Passive Investment Earned in Private Corporations: two changes were made to the taxation of passive investment earned in a private corporation that will effect taxation years beginning after 2018:
  • Small business deduction – certain Canadian business are eligible for a lower rate of tax on the first $500,000 of active business income earned in Canada. The government proposes to reduce the amount eligible for this low rate of tax by five times the amount of “aggregate investment income” (“AAII”) exceeding $50,000 earned by an active business or its related corporations.  An operating company that does not earn significant investment income (either itself or in a related corporation), will not be affected by these rules.
  • Refundable Dividend Tax on Hand (RDTOH) Adjustments – presently, private Canadian companies earning investment income pay a refundable tax that is refunded to the company when a dividend is paid to its shareholders. The budget proposes to restrict the refund so that it is only paid to the extent a dividend is paid out of the same type of income that generated the refundable tax in the first place.
  • New Reporting for Trusts: Beginning in 2021, with limited exceptions, trusts will be required to file a T3 return whether or not there is any activity in the trust to report. In addition, Trusts will have to report the identities of the trustee(s), settlor(s) and all beneficiaries of the trust. Penalties will be imposed for failing to report.

By LaBarge Weinstein’s Taxation, Tax Planning, and Tax Litigation team.


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