Federal taxation rules will greatly impact how business owners can save for their retirement and strategize for succession planning
While the tax reforms imposed by the provincial and federal governments in their latest budgets stunned many in the business community, they didn’t surprise Craig Prenter, CPA, CA, partner at Manning Elliott LLP. “Unfortunately they aren’t without precedent, and we could see them coming,” he says, referring obliquely to the NDP’s past history of punitive tax measures and Prime Minister Justin Trudeau’s misperception that the success of corporations comes at the expense of the average worker.
Even though the provincial and federal tax proposals were revised following public outcry, industry groups say the changes don’t go far enough.
The B.C. budget brings in a new "speculation tax" to be levied on owners of residential properties in British Columbia. For 2018, this tax will be applied at a rate of 0.5 percent of the taxable assessed value of the property. Beginning in 2019, the 0.5 percent rate will continue to apply for B.C. residents who are Canadian citizens or permanent residents — but the rate for out-of-province Canadian residents who are Canadian citizens or permanent residents will be one percent, and the rate for foreign investors, including satellite families, will be two percent (Victoria defines satellite families as households with high worldwide income but who pay little income tax in B.C.).
Other budget measures pertaining to real estate include an addition to the school tax rate on properties valued at $3 million or more of 0.2 percent on the portion of residential assessed value over $3 million but less than $4 million, and 0.4 percent on the residential assessed value over $4 million.
Beginning in 2019, under the Trudeau Liberal’s amended rules on the taxation of passive investment income for Canadian-controlled private corporations, the amount of active business income that qualifies for the federal small business deduction (SBD) tax rate of nine percent may be reduced or eliminated depending on how much annual passive investment income the corporation earns in a year. Currently the first $500,000 of active business income qualifies for the SBD rate. Under the proposed legislation the amount of active business income qualifying for the SBD rate is reduced, on a straight-line basis, for each dollar of passive investment income the corporation earns in excess of $50,000 and eliminated completely once annual passive income rises to $150,000. A company’s active business income not qualifying for the SBD rate will be taxed at the regular federal corporate tax rate of 15 percent. As an example, assuming a five per cent rate of return on $1.5 million of corporate investment assets, the company would earn $75,000 of passive investment income and its active income qualifying for the SBD rate would be reduced to $375,000 from $500,000.
At the very least, the federal taxation rules will greatly impact how business owners can save for their retirement and strategize for succession planning. “Plus, it’s almost as if Ottawa regards business owners as people who `got lucky’ rather than worked around the clock and took enormous amount of risks to get where they are today,” says Prenter.
As for the B.C. speculation tax, Prenter notes that it will be costly for residents of the rest of Canada who own a BC vacation property in a high-value location and who don’t rent it out; satellite families will face a greater tax cost. “The tax was intended to make properties more affordable, but in reality it’s just a revenue generator for the government,” he says. “I have many clients who live outside the country but spend their summers here; they buy cars here, invest here, pay for all the services here. In short, they’re an asset to the province, not a liability.”
Prenter says there are many options that his clients at Manning Elliott will be able to take advantage of. “But first we’ll thoroughly study the legislations as well as analyze the structure of our clients’ portfolios, in order to propose solutions that work best.”
He concludes, “We will definitely be able to navigate the murky waters that lie ahead, it’s just that financial plans may well change and clients will have to do things differently. But rest assured we will still be able to meet their needs.”
Craig Prenter provides individual, corporate, estate and trust taxation, business succession and tax planning, and general business advisory services primarily to owner-managed private companies. He has worked with clients in a wide range of industries including real estate development and investment, construction and millwork, software development, medical, as well as working with incorporated professionals.
Manning Elliott LLP is one of the province’s largest independent regional accounting and business advisory firms with offices in downtown Vancouver (604-714-3600), Burnaby (604-421-2591), Surrey (604-538-1611), and Abbotsford (1-604-557-5750). The firm has been around for more than 60 years and employs over 200 professionals and staff.