Passive Investment Income Limit - Tax

Passive Investment Income Limit

Morneau’s federal budget announced earlier this year informed us how the government will treat passive income in a Canadian Controlled Private Corporation. (CCPC) The government’s main concern was that under the current rules a “tax deferral advantage” exists since tax on active business income is usually lower than the top personal marginal tax rate. Therefore if the corporate funds were invested for a long period of time, shareholders might end up with more after-tax amount than if it was invested personally.

 

Limiting Access to the Small Business Tax Rate

A key objective of the budget is to decrease the small business limit for CCPCs with a set threshold of income generated from passive investments. This will apply to CCPCs with between $50,000 and $150,000 of investment income. It reduces the small business deduction by $5 for each $1 of investment income which falls over the threshold of $50,000 (also known as the adjusted aggregate investment income). This new regulation will go hand in hand with the current business limit reduction for taxable capital.

The time to act is now, since these changes came into effect on January 1, 2019, a discussion and plan should be prioritized now, since 2018 will be the “prior year” of 2019. To avoid the reduction of income eligible for the small business tax rate, business owners need to minimize or keep the amount below $50,000 of the “adjusted aggregate investment income” (AAII) in 2018. 

We’ve listed some solutions on how to do this:

1)   Corporate Owned Insurance: Exempt life insurance does not produce passive investment income unless there is a disposition. Put a portion of the corporation’s passive investments into a life insurance policy and reduce passive investment income and limit the erosion of the small business limit. Insurance concepts:

●     Insured retirement program: Provide additional retirement funding through transferring excess corporate funds into whole life or universal life insurance. The funds inside the policy grow “tax free” to create significant cash value. At some point when there is a need for cash, the policy is pledged as collateral for a bank loan. The bank loan doesn’t need to be repaid until the life insured dies and the death benefit is used to repay the loan. Any remaining death benefit is paid out.

●     Estate bond: Transfer corporate wealth to the future generation by utilizing whole life or universal life insurance. Essentially replace taxable investment with life insurance, increase funds for a future generation upon death, reduce tax and create a strategy to move funds out of the corporation tax free (through the Capital Dividend Account.)

●     Corporate held Critical Illness with Return of Premium: Purchase corporate owned critical illness, since it doesn’t produce any investment income.

2)   Pay enough salary/dividends to maximize RRSP and TFSA Contributions: A salary of $145,722 will allow the max 2018 RRSP contribution is $26,230 (18% of $145,722). Make sure you also pay enough salary/dividend to maximize your annual $5,500 TFSA contribution.

3)   Individual Pension Plan (IPP): The corporation contributes to the IPP and income earned in the IPP doesn’t belong to the corporation. This should only be considered when the AAII is over $50,000.

4)   Deferred Capital Gains: Capital gains are 50% taxable and are only 50% included in the AAII.

 

Talk to us, we can help you figure out the best solution for your unique situation.

 

Private Health Spending Plans for the Owner/Operator Business - Business

Private Health Spending Plans for the Owner/Operator Business

Individuals who have incorporated their business such as consultants, contractors and professionals often find that providing affordable health and dental care coverage for themselves and their families can be an expensive proposition.

Take Bob for example. Bob had just left his architectural firm to set up on his own. In looking at the options available for him to replace his previous firm’s Extended Health and Dental coverage for he and his family, he discovered that the monthly premium would be between $400 and $500 per month. This was for a plan that didn’t provide coverage for all practitioners and procedures, had an annual limit on the benefits, and a co-insurance factor of 20% (only 80% of eligible costs were covered). There wasn’t even any orthodontia coverage although he could purchase that in limited amounts at an additional cost! He also had to move quickly to replace his lost coverage as he had a pre-existing condition that most likely would not be covered if he waited too long to implement the new plan.

It seemed to Bob that there was a possibility of not receiving full value for his extended health and dental premiums. It was possible that he would spend far less than the $6,000 of premiums he would pay over the course of the year. The monthly premiums were also not tax-deductible. Fortunately, Bob found out about the Health Spending Account (HSA).

What is a Health Spending Account?

An HSA is becoming a popular alternative to traditional health insurance. An HSA is defined by the Canada Revenue Agency as a Private Health Spending Plan. Under the terms of a PHSP, eligible small business owners can;

• pay for their family’s medical expenses

• deduct the cost from the business income

• not have the benefit taxable to the business owner/employee

This article focuses on HSA as it applies to a one-person owner of a small business corporation. As you might expect, there are guidelines that must be met and restrictions that will apply.

• These plans cannot be for shareholders only. The shareholder must be a valid employee and receive a portion of his or her remuneration in the form of salary.

• The CRA prefers that the corporation employ the services of a third party to manage the plan and adjudicate the claims.

It is in the business owner’s best interests to use the services of a Third-Party Administrator (TPA) who specializes in PHSP’s to ensure that all the requirements are met, and all claims and payments are valid.

What does an HSA cost?

The cost of the Third-Party Administrator is very reasonable. There is usually an initial set up charge of a few hundred dollars and on-going fees run 5% to 15% of the claimed amount (plus taxes), with the typical fee being approximately 10%.

Some firms also charge an annual fee, so it is best to shop around or ask your financial advisor for advice. Being able to submit claims online and receive reimbursement by EFT almost immediately is a benefit that many of the third-party administrator’s offer.

How does it work?

Bob’s first experience with his HSA illustrates how the plan works. The HSA that Bob had implemented is referred to as a Cost-Plus plan which is the most popular arrangement with one-person corporations.

Let’s Break it Down

• Bob’s daughter started orthodontic treatments and his first charge was $1,000.

• Bob paid this amount by credit card (yes, he got points for that).

• Bob then forwarded the receipt for his payment directly to the TPA who would reimburse Bob his full $1,000.

• The TPA then bills Bob’s company for the amount of the treatment plus their 10% charge.

• Bob’s company pays the invoice and gets to deduct the $1,100 from corporate taxable income.

• The payment Bob’s company made is not taxable to Bob.

A good result! Bob has his expense reimbursed tax-free while his company gets to deduct the amount of the payment plus the administrative cost.

What are the advantages of an HSA?

• All medical procedures, necessary equipment and certified practitioners as listed by the CRA are covered in full.

• There are no medical questions for starting a plan and no pre-existing conditions clause to satisfy.

• All dependents may be covered.

• Deductible portions or shortfalls in other plans can be claimed.

• Benefits are not taxable while the costs to the corporation are tax-deductible.

As with any government regulated plan, make sure you employ the services of those who are experienced in advising on PHSP’s. They will not only guide you as to the best way to set up your plan, they will keep you out of trouble once you do.

As always, please feel free to share this with anyone you think may find it of interest.

Individual Pension Plan

If you are a business owner, incorporated professional or executive concerned about the most effective way to save for retirement, you may want to consider an Individual Pension Plan.

What is an Individual Pension Plan (IPP)?

An Individual Pension Plan (IPP) is a defined benefit pension plan for the benefit of one or two individuals. There are significant advantages that Individual Pension Plans have over Registered Retirement Plans (RRSPs).

Are you eligible for an Individual Pension Plan?

The ideal candidate for an IPP is an individual who:

  • is at least 45 years old

  • an employee of a corporation (could be a business owner/executive/incorporated professional)

  • historically has had employment income of at least $100,000/year since 1990

  • reliable future employment income stream in excess of $100,000/year

  • has no foreseeable need to access the funds set aside for retirement (ex. retirement funds should not be needed for an emergency) since funds inside an IPP are locked in.

Advantages of Individual Pension Plan

  • Increased Contributions- a company can contribute more to the owner’s retirement fund at a higher level than the individual could contribute to his/her RRSP. Why? The max contribution for an RRSP is the same at all ages vs. in an IPP, this can increase with age.

  • Additional Contributions for Past Service- Past service contributions might be possible, if the owner has been receiving salary in past service years. This can be useful for individuals that have significant RRSPs and high incomes to transfer company surplus into retirement savings for the owner on a tax deductible and deferred basis.

  • Additional Contribution at Retirement

  • Offset Any Investment Underperformance

  • Creditor Protection- Assets held inside an IPP are protected from creditors of both employee and the employer under provincial pension benefits standards legislation

  • IPP Costs are Deductible to the business- The IPP is a company obligation and all costs- administrative, actuarial, investment management and accounting are tax deductible to the corporation.

  • Possible Inter-Generational Transfer of Pension Assets

  • Spousal Pension Planning

Disadvantages of Individual Pension Plan

  • Costs- An IPP is considerably more costly to establish and administer than RRSPs, they require setup, annual and tri-ennial valuation fees.

  • Complexity- An IPP has annual filing requirements with CRA and fiduciary responsibilities on trustees.

  • Inflexible- No access to the funds while the business owner is employed and a member of the plan

  • Minimum annual contribution requirements

  • Administrative Reporting- There are several administrative requirements involved in establishing and maintaining an IPP. This includes CRA registration, Investment restrictions, annual filings, tri-ennial actuarial valuations.

  • Public Disclosure- Certain information relating to registered plans is available to the public.

Determine if an IPP makes sense

An IPP can have significant tax benefits if an individual’s circumstances make sense. Talk to us and we can help guide you to ensure you’re making the right choice when it comes to funding your retirement.

Canada Emergency Wage Subsidy expanded to include more businesses! - Sri Sagar Singh Somvati Mahavidyalaya, Bahorikpur

Canada Emergency Wage Subsidy expanded to include more businesses!

On July 17th, Finance Minister Bill Morneau announced proposed changes to the Canada Emergency Wage Subsidy (CEWS) that will expand the number of businesses that qualify for the program.

The major changes he announced were:

“First, we’re proposing to extend this program through until December 19th.”

“Secondly, we know that it’s also critical that we have the businesses able to continue to hire people even as they get into the restart and we know that the requirements in businesses have a 30% reduction in revenue is not helpful in that regard.”

“businesses will get the wage subsidy if they’ve had any reduction in revenue so it’s going to go all the way down to businesses who even have a small amount of revenue reduction they’ll get the subsidy and it will be in proportion to the amount of the revenue reduction that they will get a subsidy.”

“Third, we’ve tailored the program so that it helps those organizations that are particularly hard hit. So for organizations with over a 50% reduction of revenue over the last few months they’ll actually get a top up, they’ll get up to 25% additional subsidy so that they can deal with this really challenging time for their businesses.”

“What that means for businesses, those that were already in the program that have that 30% revenue decline that will continue to be the case for July and August. For those businesses as I said that are particularly hard hit it will be even more. It will go up to 85% wage subsidy or $960 per person.”

“For those businesses less hard hit but still hit they will be able to get into the program. The program will continue but as we restart, the program will be tailored to help businesses appropriately in that restart.”

The new rules will be retroactive to July 5th but require parliamentary approval.

Canada Emergency Wage Subsidy extended into December! - Erythroderma

Canada Emergency Wage Subsidy extended into December!

On July 13th, Prime Minister Justin Trudeau announced the extension of the Canada Emergency Wage Subsidy (CEWS) until December. The Prime Minster stated:

“You’ve seen me come out to talk with Canadians about what we’re doing to help you and your family, your employer, your local businesses deal with this Pandemic.

We’re going to continue to do that vital work.

This week we’ll be announcing an extension to the wage subsidy program until December to give greater certainty and support to businesses as we restart the economy.”

More details will be released during the week.

CERB Extended | Business Owners who did not qualify previously - expanded CEBA starts June 19th - Venkata Padmavathi Institute of Medical Sciences (VIMS)

CERB Extended | Business Owners who did not qualify previously – expanded CEBA starts June 19th

CERB Extended 2 more months

Great news for Canadians out of work and looking for work. The CERB will be extended another 8 weeks for a total of up to 24 weeks.

As the country begins to restart the economy, the Federal government will be making changes to the program to encourage Canadians receiving the benefit to get people back on the job. From Prime Minister Justin Trudeau’s website:

“The Government of Canada introduced the CERB to immediately help workers affected by the COVID-19 pandemic, so they could continue to put food on the table and pay their bills during this challenging time. As we begin to restart the economy and get people back on the job, Canadians receiving the benefit should be actively seeking work opportunities or planning to return to work, provided they are able and it is reasonable to do so.

That is why the government will also make changes to the CERB attestation, which will encourage Canadians receiving the benefit to find employment and consult Job Bank, Canada’s national employment service that offers tools to help with job searches.”

More small businesses can apply for CEBA $40,000 no-interest loans

Applications for the expanded Canada Emergency Business Account (CEBA) will be accepted as of Friday, June 19th, 2020. Small businesses that are:

“… owner-operated small businesses that had been ineligible for the program due to their lack of payroll, sole proprietors receiving business income directly, as well as family-owned corporations remunerating in the form of dividends rather than payroll will become eligible this week.”

Apply online at the financial institution your business banks with:

There are restrictions on the funds can be used. From their website https://ceba-cuec.ca/:

“The funds from this loan shall only be used by the Borrower to pay non-deferrable operating expenses of the Borrower including, without limitation, payroll, rent, utilities, insurance, property tax and regularly scheduled debt service, and may not be used to fund any payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends, distributions and increases in management compensation.”

Small Businesses!  Applications for Canada Emergency Commercial Rent Assistance starts May 25th - Logo

Small Businesses! Applications for Canada Emergency Commercial Rent Assistance starts May 25th

Lower rent by 75% for small businesses that have been affected by COVID-19

The Application portal for the Canada Emergency Commercial Rent Assistance (CECRA) opens at 8:00am EST on May 25th. The description from the CMHC website:

“Canada Emergency Commercial Rent Assistance (CECRA) for small businesses provides relief for small businesses experiencing financial hardship due to COVID-19. It offers unsecured, forgivable loans to eligible commercial property owners to:

  • reduce the rent owed by their impacted small business tenants

  • meet operating expenses on commercial properties

Property owners must offer a minimum of a 75% rent reduction for the months of April, May and June 2020.”

Application Dates

Due to expected high volumes of applications, the application dates will be as follows:

  • Monday – Property owners who are located in Atlantic Canada, BC, Alberta and Quebec, with up to 10 tenants who are eligible for the program

  • Tuesday – Property owners who are located in Manitoba, Saskatchewan, Ontario and the Territories, with up to 10 tenants who are eligible for the program

  • Wednesday – All other property owners in Manitoba, Saskatchewan, Ontario and the Territories

  • Thursday – All other property owners in Atlantic Canada, BC, Alberta and Quebec

  • Friday – All

Eligibility

From the CMHC website:

“To qualify for CECRA for small businesses, the commercial property owner must:

  • own commercial real property* which is occupied by one or more impacted small business tenants

  • enter (or have already entered) into a legally binding rent reduction agreement for the period of April, May and June 2020, reducing an impacted small business tenant’s rent by at least 75%

  • ensure the rent reduction agreement with each impacted tenant includes:

    • a moratorium on eviction for the period during which the property owner agrees to apply the loan proceeds, and  

    • a declaration of rental revenue included in the attestation

The commercial property owner is not and is not controlled by an individual holding federal or provincial political office.

CECRA will not apply to any federal-, provincial-, or municipal-owned properties, where the government is the landlord of the small business tenant.

Exceptions

  • Where there is a long-term lease to a First Nation, or Indigenous organization or government, the First Nation or Indigenous organization or government is eligible for CECRA for small businesses as a property owner.

  • Where there are long-term commercial leases with third parties to operate the property (for example, airports), the third party is eligible as the property owner.

  • Also eligible are post-secondary institutions, hospitals, and pension funds, as well as crown corporations with limited appropriations designated as eligible under CECRA for small businesses.

NOTE: Small businesses that opened on or after March 1, 2020 are not eligible.

* We define commercial Real Property as a commercial property with small business tenants. Commercial properties with a residential component and multi-unit residential mixed-use properties would equally be eligible with respect to their small business tenants.

NOTE: Properties with or without a mortgage are eligible under CECRA for small businesses.

What is an impacted small business tenant?

Impacted small business tenants are businesses — including non-profit and charitable organizations — that:

  • pay no more than $50,000 in monthly gross rent per location (as defined by a valid and enforceable lease agreement)

  • generate no more than $20 million in gross annual revenues, calculated on a consolidated basis (at the ultimate parent level)

  • have experienced at least a 70% decline in pre-COVID-19 revenues **

NOTE: Eligible small business tenants who are in sub-tenancy arrangements are also eligible, if these lease structures meet program criteria.

** Small businesses can compare revenues in April, May and June of 2020 to that of the same period in 2019 to measure revenue losses. They can also use an average of their revenues earned in January and February of 2020.

For Full Details and to apply:

Expanded eligibility for CEBA $40,000 interest-free loan - Canada Emergency Response Benefit

Expanded eligibility for CEBA $40,000 interest-free loan

“If you are the sole owner-operator of a business, if your business relies on contractors, or if you have a family-owned business and you pay employees through dividends, you will now qualify.” – PM Justin Trudeau

Eligibility

The Prime Minister outlined the expanded eligibility for the Canada Emergency Business Account and highlighted companies such as hair salon owners, independent gym owners with contracted trainers and local physio businesses will now be eligible.  

The eligible amounts are being expanded to include businesses with 2019 total payroll between $20,000 – $1.5 million.

How do I apply?

Prior to applying, please make sure you have this information readily available:

  • Canada Revenue Agency Business Number (BN 15 digits)

  • 2019 T4 Summary of Remuneration Paid (T4SUM)

Apply online at the financial institution your business banks with:

There are restrictions on the funds can be used. From their website https://ceba-cuec.ca/:

“The funds from this loan shall only be used by the Borrower to pay non-deferrable operating expenses of the Borrower including, without limitation, payroll, rent, utilities, insurance, property tax and regularly scheduled debt service, and may not be used to fund any payments or expenses such as prepayment/refinancing of existing indebtedness, payments of dividends, distributions and increases in management compensation.”

Apply starting Friday for Canada Emergency Student Benefit!  Help on the way for seniors. - Logo

Apply starting Friday for Canada Emergency Student Benefit! Help on the way for seniors.

Students can apply for $1,250 through the Canada Emergency Student Benefit starting Friday

From canada.ca:

“The Canada Emergency Student Benefit (CESB) provides financial support to post-secondary students, and recent post-secondary and high school graduates who are unable to find work due to COVID-19.

This benefit is for students who do not qualify for the Canada Emergency Response Benefit (CERB) or Employment Insurance (EI).

From May to August 2020, the CESB provides a payment to eligible students of:

  • $1,250 for each 4-week period

  • $2,000 for each 4 -week period, if you have dependants or a disability”

Seniors to receive up to $500 one-time payment

The Government of Canada will be providing help to vulnerable seniors by providing a one-time tax-free payment of $300 for seniors eligible for Old Age Security (OAS). For seniors eligible for the Guaranteed Income Supplement (GIS), they will receive an additional $200.

Extended!  Canada Emergency Wage Subsidy extended beyond June - Wage subsidy

Extended! Canada Emergency Wage Subsidy extended beyond June

On May 8th, Prime Minister Justin Trudeau announced that they will extend the Canada Emergency Wage Subsidy (CEWS) beyond June. This measure gives qualifying employers up to $847 per employee each week so they can keep people on the payroll.

Eligibility

To be eligible to receive the wage subsidy, the Government of Canada website states you must:

  • be an eligible employer. Eligible employers include:

    • individuals (including trusts)

    • taxable corporations

    • persons that are exempt from corporate tax (Part I of the Income Tax Act), other than public institutions:

      • non-profit organizations

      • agricultural organizations

      • boards of trade

      • chambers of commerce

      • non-profit corporations for scientific research and experimental development

      • labour organizations or societies

      • benevolent or fraternal benefit societies or orders

    • registered charities

    • partnerships consisting of eligible employers

    Public institutions are not eligible for the subsidy. This includes municipalities and local governments, Crown corporations, public universities, colleges, schools and hospitals.

  • have experienced an eligible reduction in revenue.

  • have had a CRA payroll account on March 15, 2020

Online Calculator

The Canada Revenue Agency launched an online calculator to help businesses determine the amount they can expect from the wage subsidy program.