Entrepreneurship & Small Business

Proposed tax changes - passive investments

  • Last Updated:
  • Nov 3rd, 2017 1:59 pm
[OP]
Jr. Member
Aug 12, 2007
139 posts
10 upvotes
Toronto

Proposed tax changes - passive investments

Hi everyone, if the government successfully implements the changes to discourage holding investments passively in your corporations, what will you do? Any good alternative strategies?
14 replies
Jr. Member
May 20, 2002
159 posts
18 upvotes
You can still invest. Just that any income past 50k will be taxed. Their example is if you have 1 million invested at 5% making $50000 it will not be subject to the super tax.

For me I think I will invest each companies retained earnings within each company and not transfering it back to the holding company. I had previously done this for assest protection.

This would give me 3 companies x 1M OR 3 million in investable passive income to invest or 150k annually.

But I am waiting for further clarification on this subject
[OP]
Jr. Member
Aug 12, 2007
139 posts
10 upvotes
Toronto
CowDoc wrote:
Oct 23rd, 2017 2:05 pm
You can still invest. Just that any income past 50k will be taxed. Their example is if you have 1 million invested at 5% making $50000 it will not be subject to the super tax.

For me I think I will invest each companies retained earnings within each company and not transfering it back to the holding company. I had previously done this for assest protection.

This would give me 3 companies x 1M OR 3 million in investable passive income to invest or 150k annually.

But I am waiting for further clarification on this subject
I didn't hear about this until Googleing it just now - that's amazing news! I'm so happy right now :)
Deal Addict
Feb 5, 2009
2370 posts
539 upvotes
Newmarket
CowDoc wrote:
Oct 23rd, 2017 2:05 pm
You can still invest. Just that any income past 50k will be taxed. Their example is if you have 1 million invested at 5% making $50000 it will not be subject to the super tax.

For me I think I will invest each companies retained earnings within each company and not transfering it back to the holding company. I had previously done this for assest protection.

This would give me 3 companies x 1M OR 3 million in investable passive income to invest or 150k annually.

But I am waiting for further clarification on this subject
You are right, we have to wait for the clarification, and see what else they come up with in efforts to protect the votes for next election.
However I wouldn't hold your breath as far as getting the threshold in each corporation you own unless you have them set up as not associated or related, I would imagine the threshold would be spread between each corporation you own, similar to small business deduction.
Imagine if the threshold was for each corporation regardless of the ownership, a very rich individual could set up 100 companies with a million each, and get the excemption each and every time.
Not sure this will fly.

On another thought this would fit Morneau like a glove, he could spread his gazzilions and pay reduced taxes from his own holdings ;-)
Jr. Member
May 20, 2002
159 posts
18 upvotes
You are correct. One is owned by my wife with its own profit stream.
Deal Addict
Oct 7, 2007
3024 posts
675 upvotes
I find this whole thing totally ridiculous for so many reasons. The "leaders" should just find some way to turf this idea and make up some phony story to save face if they feel the need to. They could also be honest and say that they listened to the taxpayers and heard their message loud and clear. Nothing wrong with pretending to be human in such situations. It might actually win more votes in the long run to admit it was a big mistake than to ram it through at all costs.
Deal Fanatic
User avatar
Jun 3, 2008
6297 posts
2151 upvotes
CowDoc wrote:
Oct 23rd, 2017 2:05 pm
You can still invest. Just that any income past 50k will be taxed. Their example is if you have 1 million invested at 5% making $50000 it will not be subject to the super tax.

For me I think I will invest each companies retained earnings within each company and not transfering it back to the holding company. I had previously done this for assest protection.

This would give me 3 companies x 1M OR 3 million in investable passive income to invest or 150k annually.

But I am waiting for further clarification on this subject
They will probably have the $50k threshold split between an associated group of corporations.
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Deal Addict
Jul 3, 2006
1130 posts
175 upvotes
the real question on 50k is it only for dividends or is it also for capital gains? If its for capital gains it could be a win for few folks.
[OP]
Jr. Member
Aug 12, 2007
139 posts
10 upvotes
Toronto
J_u_n_i_o_r_3 wrote:
Oct 25th, 2017 9:19 pm
the real question on 50k is it only for dividends or is it also for capital gains? If its for capital gains it could be a win for few folks.
Is it possible that it doesn't apply to capital gains? All of my investments are in capital gains-only derivatives (e.g. HXT). Does anyone have the answer to this question?
Deal Addict
Feb 5, 2009
2370 posts
539 upvotes
Newmarket
WBP_Akdmk wrote:
Oct 26th, 2017 3:46 pm
Is it possible that it doesn't apply to capital gains? All of my investments are in capital gains-only derivatives (e.g. HXT). Does anyone have the answer to this question?
My understanding at the moment is that it would not include capital gains, but who a heck knows what they will end up with.
Jr. Member
May 20, 2002
159 posts
18 upvotes
I agree. The only thing I have read is that it will not affect anything existing. The finance minister has said that anything prior to the NEXT budget will not be affected. Typically the budget is in February or March.

I can try to find a source but I think it was a quote in the globe and mail.

My plan is to sock in as much as possible before year end or at the latest feb1. For me this means forgoing tfsa and resp contributions this year.
Sr. Member
Feb 25, 2007
905 posts
362 upvotes
Ottawa
As other have said, details still to come. Since it seems likely previous retained earnings will be exempt, for most people it will realistically be several years until it truly bites, and so it's not as if it needs immediate action this very moment anyway. Though of course some investment strategies genuinely take a long-term view, so clarity sooner rather than later will be appreciated.

Chatter I've heard is that going assumption is that the $50k limit will probably be split between associated companies. Opinions vary about applicability to capital gains; seems there's not quite enough clarity.

Depending on an individual's situation, seems likely strategies will shift to a combination of

1. Take out more as dividends versus retaining in the company, even though those dividends will be taxed, and then invest in a personal taxable account. This will reduce the current benefit of greater invested capital due to income tax deferral, but the treatment of actual investment gains is already sometimes better personally anyway.

2. Behave more like an employee, taking a salary, paying CPP, earning RRSP room, and investing in an RRSP plus excess in a personal taxable account

3. Setting up an IPP and possibly buying back years of service, basically a supersized RRSP. This has complexities and will involve 3rd parties, and their associated cut of the pie, but seems that for big nest eggs is the next best thing (I haven't researched it enough).

1. and 2. are what the government wants. 3. isn't, and so may lead to further regulatory cat'n'mouse. That's what keeps tax advisors and accountants in business.
Sr. Member
Oct 6, 2015
806 posts
409 upvotes
These changes are irrelevant for 99% of businesses. For the 1% of businesses, the answer is pretty clear, don't leave excessive retained earnings in the business. Pull it out, stuff one's RRSP/TFSA/etc. full. This also affords a level of protection against future insolvency, helping the business owner.
Newbie
Mar 16, 2014
23 posts
3 upvotes
Toronto
burnt69 wrote:
Nov 1st, 2017 11:52 pm
These changes are irrelevant for 99% of businesses. For the 1% of businesses, the answer is pretty clear, don't leave excessive retained earnings in the business. Pull it out, stuff one's RRSP/TFSA/etc. full. This also affords a level of protection against future insolvency, helping the business owner.
This effects probably at least ~5x more than the "1%" of businesses. MOF data estimates that 3% have > 1 million, anyone who is using funds such as HXT, HXS etc will not have fit into that. Additionally, a significant portion of SMB owners/pros who incorporate probably setup holding and op co, so of course the op co isn't effected but the business owner is skewing this data.

Nor is the answer clear at this point, we don't know how they will target capital gains, whether they count as "passive income" etc I hope and suspect they will because it would be downright dirty and misleading for them not to, and I don't think they can afford further political backlash at this point. There is still even a slim chance that they realize this is too challenging to implement and drop passive investment bit altogether. I would assume most individuals with > 1 million inside their CCPC have already filled up their RRSP/TFSA space so beyond that its not entirely clear that taking it out is any better than keeping in corp if in top tax bracket. Keeping it in affords some further flexibility, there is still a bit of tax deferral wrt dividend tax, keeps options for lump sum top up of IPP in the future, possible exception for venture capital investment, whole life insurance, possibility that Conservatives win and dump these changes etc

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