The Minister of Finance unveiled his long-awaited federal budget on February 27, 2018. Long-awaited because the tax community has been in a tizzy since the Liberal government announced changes to the taxation of private corporations in the summer of 2017, as discussed in our prior update on this topic.
Here are three things that everyone needs to know about Budget 2018:
1. Passive Investment Income – Its Bark Was Worse Than Its Bite
The talk leading up to Budget 2018 was that the changes to the passive investment income regime (i.e., the taxation on investment income earned by a Canadian-controlled private corporation (a "CCPC")) would be a complex, inoperable set of rules designed to ensure "tax fairness." The rules proposed in Budget 2018 are significantly less complex than originally proposed and back off certain anticipated changes. The proposed changes are two-fold: (i) a gradual reduction in the availability of the small business corporation tax rate as the amount of passive investment income in a CCPC grows above $50,000; and (ii) changes to the way the refunds on dividends work when paid out to shareholders. These measures will apply to taxation years that begin after 2018.
What these proposed rules do not address or alter is the ability of a CCPC to invest after-tax business income in passive investments. Recall that one of the "unfair" uses of a CCPC was the ability of a CCPC to invest high after-tax amounts (taxed at 26.5% or lower) as compared to an individual earning the income directly (taxed at 53.53%). The proposed changes in Budget 2018 do not alter this planning. The days of the professional corporation are not over just yet!
2. Canada's Response to US Tax Reform
At the end of 2017, the United States implemented significant tax reform, most importantly reducing its basic corporate income tax rate to 21%. Overnight, the US corporate tax rate dropped below the Canadian corporate tax rate. At the same time, there is great uncertainty as to the future of NAFTA. You would think that Budget 2018 would have been an opportune time to address concerns that investment in businesses may flood to the US given these changes and uncertainty, but you would be wrong. The Budget (not including the specific tax sections) is just about 300 pages long with various chapters on growth, progress, reconciliation, advancement and equality. Buried on page 296 of Budget 2018 is a throwaway statement that the Department of Finance will analyze the US federal tax reforms to "assess any potential impacts on Canada." Time will tell what Canada's response will be, and it is hoped that it will not be too late.
3. Taxation of Cannabis
Summer 2018 is quickly approaching and Budget 2018 includes provisions on the taxation of cannabis and cannabis-related products. Under the proposed rules, excise duties will be imposed on federally licensed producers of cannabis at the higher of a flat rate applied on the quantity of cannabis contained in a final product, or a percentage of the sale price of the product sold by a federal licensee. It is hoped that these rates will be low enough to drive the illegal drug dealers out of business.
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