Buchanan Barry LLP - Chartered Accountants

Interest Points - February 2018

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In general terms, income sprinkling occurs where a private corporation pays out dividends to shareholders who are not necessarily involved in the business of the corporation, or where an individual receives income from the provision of goods or services through a trust or partnership to a “related business” carried on by a related person. The proposals will take effect retroactive to January 1, 2018, even though they will not be passed by Parliament for some time (and conceivably could be held up by the Senate). However, the proposals were amended significantly on December 13, 2017; the amendments are meant to simplify and improve the rules.

Under the income tax laws before 2018, a tax on split income (“TOSI”) often applies to the above types of income, but only to children who are under the age of 18 at year-end. The TOSI is a flat tax equal to the highest personal rate of tax, which obviously makes income splitting undesirable when it applies. The July 18, 2017 draft legislation proposed to extend the TOSI to private corporation dividends and the other types of income received by adults in many situations.

The December 13, 2017 changes simplify the original proposals. In general terms, the changes provide that the TOSI will not apply in the following circumstances:

  • It will generally not apply to income received from an adult directly or indirectly from an “excluded business”, generally meaning a business in which the adult is engaged on a "regular, continuous and substantial" basis, either in the relevant taxation year or any five previous taxation years;

  • It will not apply to adults who are 25 or older by year-end, who receive income from an “excluded share” of a corporation, generally meaning the adult has a significant equity investment in the corporation (10% or more of the shares on a value and votes basis) that earns less than 90 per cent of its income from the provision of services, where the corporation is not a professional corporation and does not derive its income directly or indirectly from a related business;

  • It generally will not apply to a spouse of the owner of the related business if the owner significantly contributed to the business and is age 65 or over by the end of the year; and

  • It will not apply to capital gains from the disposition of qualified farm or fishing property of the individual, or of qualified small business corporation shares that are eligible for the capital gains exemption, regardless of whether the exemption was claimed (except where the sale is by a minor to a non-arm’s length person – this rule has been in place for several years).

As noted, the proposals take effect beginning on January 1, 2018. In this regard, one of the main criticisms regarding the proposals has been the lack of adequate time to restructure business affairs to take into account the proposals. Nonetheless, the January 1, 2018 start date appears to be set.

Please contact your Buchanan Barry LLP partner if you have any questions.

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In the July 18, 2017 income tax proposals dealing with small business tax issues, one of the main proposed changes relates to the taxation of passive investment income earned by a Canadian-controlled private corporation (“CCPC”) by using its after-tax business income. Under current rules, there is a tax deferral advantage because the active business tax rate for a CCPC (between 11% and 15% depending on the province) is significantly lower than the top marginal tax rate that could apply to the individual shareholder (50% or higher). Even though the integration system of taxing dividends imposes tax on the individual receiving dividends so that the total tax rate is the same, the initial lower corporate tax rate leaves a CCPC with much more income that can be invested until it is eventually paid out.

The Department of Finance announced that it would eliminate that tax advantage, although the change would not be effective until a later date when specifics were provided (those specifics are expected to come in the 2018 Federal Budget). In general, the new system would impose a new tax on investment income of a CCPC so that the top rate of combined corporate and personal tax on such income would be much higher than the current rate – typically somewhere around 73%.

However, in October 2017 the Department back-tracked somewhat in response to a political uproar, and said that the first $50,000 of CCPC passive investment income per year (representing a 5% return on up to $1 million of investments) would not be subject to the new proposals.

So it will still be advantageous – to a certain point – to earn passive income inside of your CCPC. This is an advantage that you would not have if you carried on your business personally or through a partnership rather than through the CCPC. The following example illustrates the tax savings that can still result.



  • 50% personal tax rate

  • 13% tax rate on CCPC active business income

  • 50% “refundable tax” on CCPC passive investment income

  • Perfect “integration” between the personal tax and corporate tax, meaning that the total corporate and personal tax on CCPC income that is subsequently paid out as a dividend to a shareholder is equal to the CCPC shareholder’s marginal rate of tax

  • $500,000 of business income, and

  • Rate of return on passive investments of 10%

Taxpayer 1 carries on a business personally and earns $500,000 in year 1, leaving him with $250,000 after the 50% ($250,000) tax. He invests the after-tax amount at the beginning of year 2, earning another $25,000 by the end of year 2. The $25,000 is subject to 50% tax, leaving $12,500. Taxpayer 1 is left with a total of $262,500 ($250,000 plus $12,500).

Taxpayer 2 carries on a business through a CCPC, which earns $500,000 of active business income in year 1, leaving it with $435,000 after the 13% ($65,000) tax. That amount is invested at the beginning of year 2, earning another $43,500 by the end of year 2, when the maximum amount is paid out as a dividend to the shareholder Taxpayer 2. Assuming perfect “integration” between the personal and corporate tax, the $43,500 of investment income will be subject to total tax of 50% (CCPC refundable tax net of refund, plus personal tax on dividends), leaving $21,750. The $435,000 part of the dividend will be subject to a further tax of $185,000 tax in the hands of Taxpayer 2 (i.e. the $185,000 tax plus the initial CCPC tax of $65,000 equals 50% of the $500,000 business income), leaving $250,000. In total, Taxpayer 2 is left with $271,750 ($250,000 plus $21,750).

In the example, Taxpayer 2 has a significant advantage over Taxpayer 1, owing to the effective tax deferral of a large portion of the $500,000 of business income. That is, since the CCPC was subject to initial tax of only 13% compared to Taxpayer 1 who was subject to initial tax of 50%, the CCPC had a “head start” in terms of how much it could invest. (As noted, the example assumes perfect integration between the personal and corporate tax. In most provinces the integration for CCPC investment income is currently less than perfect. So Taxpayer 2 might be left with less than $271,750, but will definitely be left with more than the $262,600 amount for Taxpayer 1.)

In short, business owners who carry on their businesses through a CCPC have significant tax advantages over those who carry on businesses personally. In addition to the small business tax rate for CCPCs, there is also the lifetime capital gains exemption for gains on shares of qualified small business corporations, and, as illustrated above, an advantage for earning passive investment income.

Please contact your Buchanan Barry LLP partner if you have any questions.

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In December 2015, the Auditing and Assurance Standards Board (“AASB”) issued the new Canadian Standard on Review Engagements effective for periods ending on or after December 14, 2017. The new standard replaces the existing review engagement standard for financial statements and other historical financial information. The changes are significant and will require additional file preparation time and documentation.

Here are the highlights.

  • A New Independent Practitioner’s Review Engagement Report - The new review engagement report includes new paragraphs clearly outlining the practitioner’s and management’s responsibility with regards to the financial statements. Additionally, there is a formalized conclusion paragraph which is similar to the assurance provided in the previous review engagement report.

  • Enhanced Systems Documentation - Practitioners are now required to have a thorough understanding of the client’s accounting systems, policies and procedures in order to assess whether the data we obtain from the client’s accounting system is reliable. This allows the practitioner to perform review procedures in order to support the conclusion in the Independent Practioner’s Review Engagement Report.

  • Does the New Review Engagement Standard Affect Your Company? - If the answer is yes, then your Buchanan Barry LLP partner or manager connection will be contacting you or your management presently with a system documentation questionnaire. We will then follow up of how to best complete the documents either through a phone call, e-mail or face to face meeting.

Please contact your Buchanan Barry LLP partner if you have any questions.

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