Investment income in a CCPC

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Koogie
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Re: Investment income in a CCPC

Post by Koogie » 05 Dec 2017 10:01

silverbug wrote:
04 Dec 2017 10:31
Koogie wrote:
04 Dec 2017 09:26
I did precisely the same manoeuvre a couple of years ago, using RRSP deductions to cover dividend taxes. Unfortunately, I have run out of RRSP room to do it again. Also, unfortunately, I still have about 2/3rds of our invested assets in the CCPC so getting them out in a hurry isn't going to happen. I can only hope Morneau stands by his "grandfathering" provisions.
That's the first I"ve heard of someone else doing this, people in finance were telling me to wait and not make hasty decisions but I did it anyway. I was scrambling between the consult period announcements and october 1st as I didn't know what was coming , my accounts look insane (took about 300k out in a series of dividend payouts to the spouse and I), then shuffled them over to the bank that has my mortgage and made the RRSP contribution, came down to the last 48 hours and I believe my last transaction was right on October 1st ...can at least breathe a sigh of relief that the mortgage is out of the way. I was like you and planned around the CCPC for kids school and long term/retirement savings, it sucks to sacrifice long term investment to pay off a 2.5% mortgage, ah well, time to join the middle class...
I was in a position that probably few find themselves in, that DW and I had accrued a lot of unused RRSP space (low six figures) and were in the process of purchasing another house. The idea just popped into my head one day and I ran it through the calculator at taxtips a few times to optimize the withdrawal and minimize the tax. Ran it past my CA and then went for it. Sadly, as I said, a one time scenario.
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Re: Investment income in a CCPC

Post by Doug » 08 Dec 2017 19:48

https://www.theglobeandmail.com/news/po ... e37184876/

About the changes in dividend sprinkling, the spokesperson for Finance MInister Bill Morneau has stated:

"the updated rules, including written guidance from the Canada Revenue Agency, will be released before they take effect on Jan. 1."

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Re: Investment income in a CCPC

Post by Penquin007 » 09 Dec 2017 10:01

Anybody considering borrowing money to invest a little more inside the CCPC before december 31 2017?

Suppose you used to invest 50k/year inside the CCPC, why not borrow 50k and invest in advance for 2018?

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Re: Investment income in a CCPC

Post by Koogie » 11 Dec 2017 10:39

Now the tax courts are warning that this is going to be a sh*tshow as well. Particularly challenges made to what "reasonable" means..

ottawas-tax-changes-threaten-to-swamp-the-court-chief-justices-warn
http://business.financialpost.com/perso ... tices-warn
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Re: Investment income in a CCPC

Post by Penquin007 » 11 Dec 2017 18:13

WHY IPPS CAN HELP MORE BUSINESS OWNERS THAN YOU’D EXPECT
http://www.advisor.ca/retirement/retire ... ect-245592

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Re: Investment income in a CCPC

Post by kcowan » 12 Dec 2017 08:36

Aha! The dreaded IPP surfaces as a necessary approach from Morneau-Chapelle to overcome Morneau's revised tax code. Let us fire the ethics commissioner to deflect the attention from Morneau's clear conflict of interest. Obviously it was the commissioners fault because poor Morneau has not idea what constitutes conflict of interest!
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Re: Investment income in a CCPC

Post by Peculiar_Investor » 12 Dec 2017 09:04

kcowan wrote:
12 Dec 2017 08:36
Morneau-Chapelle
You have used this spelling in a couple of posts and I don't know whether it is intentional or not, but the correct name is Morneau Shepell.
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Re: Investment income in a CCPC

Post by cheech10 » 12 Dec 2017 11:52

Doesn't detract from his point though. IPPs have become much more appealing to CCPC owners with the tax changes, and Morneau Shepell is a major administrator of IPPs.

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Re: Investment income in a CCPC

Post by tdiddy » 12 Dec 2017 13:09

judging by the by-election results I fear we will have more aggressive tax changes coming our way in the coming years.

my understanding was that there is no real reason to start IPP more than 5 years prior to retirement. Further, if you haven't been paying yourself T4 income, or are not in your 50's the benefits are pretty modest to offset the fees/nuisance of the whole process.

Perhaps if you're at the 50K passive investment limit, RRSP is maxed out and additional funds set aside to start your IPP down the road will be taxed higher then the 5 years prior to retirement bit no longer applies. Probably depends on the annual fees.

Myself I'm hoping to be retiring early 50s so IPP isn't going to help me much.

good article on different options for grandfathering we may see: http://www.airdberlis.com/insights/publ ... ndfathered

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Morneau updates Income Sprinkling

Post by DavidR » 13 Dec 2017 14:54

Today, the Government published details of its proposals to simplify and improve the treatment of income sprinkling, which are proposed to be in effect for the 2018 tax year and beyond. The Canada Revenue Agency (CRA) has also released guidance with respect to these measures. The revised measures are designed to ensure that they do not affect family members who make meaningful contributions to a family business. The measures include several automatic, bright-line tests to make eligibility easy and simple to assess.
Lots of stuff on Finance Canada site http://www.fin.gc.ca/n17/17-124-eng.asp

Even some FAQs https://www.canada.ca/en/revenue-agency ... kling.html

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Re: Morneau updates Income Sprinkling

Post by izzy » 13 Dec 2017 23:42

DavidR wrote:
13 Dec 2017 14:54
Today, the Government published details of its proposals to simplify and improve the treatment of income sprinkling, which are proposed to be in effect for the 2018 tax year and beyond. The Canada Revenue Agency (CRA) has also released guidance with respect to these measures. The revised measures are designed to ensure that they do not affect family members who make meaningful contributions to a family business. The measures include several automatic, bright-line tests to make eligibility easy and simple to assess.
Lots of stuff on Finance Canada site http://www.fin.gc.ca/n17/17-124-eng.asp

Even some FAQs https://www.canada.ca/en/revenue-agency ... kling.html
Unfortunately my wife is recently deceased so for me these new rules are now mostly academic and even should I remarry (unlikely at age 76) my new spouse will NOT have contributed to my professional corporation so unless I am able to roll over the corporation to her in my will there will be little benefit.
That and the inability to pay dividends to my son will therefore mostly limit my options for estate planning -not sure how the grandfathering will affect things but I suspect not favorably.
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Re: Investment income in a CCPC

Post by silverbug » 15 Dec 2017 18:52

The last benefit of a corporation in my opinion is tax deferral (at least for those of us in the accumulation phase, even if one can defer 1 tax cycle of excess). If not for that, I see no advantage at all of a CCPC under these new conditions . Not sure the IPP is a wise decision given the uncertain long term outlook for CCPCs, and what professional would knowingly sign up with Morneau-Shepell after all that's happened ?

One thing that's incredibly shortsighted about this government is the assumption that professionals will keep spinning their wheels and net the finance department the $250mil or whatever figure they're projecting. I'm in a service profession, reduced my hours substantially and workload, I will pay way way less tax because I'm choosing to earn less. I'm spending less every month personally, discontinued service with several people (accountant, lawn care, pool service etc.) and continue to look for where I can axe unnecessary spending. What's the spillover effect on GDP and money velocity when society's high earners pull back, not sure our national newspapers or finance department will report that?

They will have no choice but to helicopter drop money in the future when they realize there is no productivity, no new hiring, and no fundamentals driving the economy.

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Re: Investment income in a CCPC

Post by Doug » 16 Dec 2017 02:15

http://www.pbo-dpb.gc.ca/web/default/fi ... PII_EN.pdf

Analysis of Changes
to the Taxation of
Corporate Passive
Investment Income

Office of the Parliamentary Budget Officer

Nov 23/17

Our estimate is based on the following changes to the current corporate tax
system for Canadian Controlled Private Corporations (CCPCs):
1. Refundable taxes on property income, portfolio dividends and capital
gains would no longer be refundable where the source of funds for these
investments benefited from low corporate tax rates;
2. Capital gains dividends, which are currently distributed to shareholders
tax-free via the Capital Dividend Account, would now be taxed as
dividends; and,
3. Existing passive investment portfolios as defined by their nominal dollar
value per firm(2) would not be affected by the changes. Rather, the policy
changes would apply only to passive investment income on new
investments exceeding an income threshold of $50,000.

(2. We use a firm’s retained earnings as a proxy for its passive investment asset
portfolio. As the new policy is phased in, the ratio of old vs. new retained
earnings determines the amount of investment income subject to the new
rules. There are pros and cons to this approach discussed in Annex A.)

On October 18, 2017, the Minister of Finance announced that the July 18
proposed changes to passive income taxation would not apply to existing
assets, future income arising from existing assets, or investment income
below a threshold of $50,000.5 The Government also signaled that it will
release draft legislation for these changes as part of Budget 2018

We also make the following assumptions:
• The nominal stock of passive investment assets from the first year of
simulation remains in a “grandfathered” pool; income from these assets
remains subject to current tax rules;
• Passive investment income on new investments below a threshold of
$50,000 per year for each CCPC remains subject to current tax rules.22 In
contrast, passive investment income on new investments exceeding
$50,000 is subject to the new rules;
• New investments – including re-invested passive investment income –
are added to the new pool each year;

Edited to include the following;

We assume that the proposed changes will result in each Canadiancontrolled
private corporation (CCPC) having two potential pools of passive
investment assets for tax purposes:
1. Existing assets, assumed to be the nominal dollar value of a CCPC’s
passive investment portfolio at the time the new rules come into force;
and,
2. New assets, which are acquired after the new rules come into force
including those from re-investing income from grandfathered assets.9

Income from this pool would generally not be eligible for refundable
taxes, and capital dividends would be taxed as a dividend.

Edited a second time to omit a redundancy.
Last edited by Doug on 17 Dec 2017 09:15, edited 2 times in total.

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Re: Investment income in a CCPC

Post by kcowan » 16 Dec 2017 06:40

God help us. Morneau had better upgrade the quality of his trained monkeys at the CRA to even attempt to apply these rules. Oh wait! The responsibility for the CRA lies with another minister. OK then he is off the hook because administering his new complex rules is beyond his control!
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Re: Investment income in a CCPC

Post by max88 » 16 Dec 2017 15:04

I literally had to shake my head as I felt a little dizzy trying to read the PDF. It takes a **cking full time job to comprehend.
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Re: Investment income in a CCPC

Post by StuBee » 16 Dec 2017 15:51

What a mess!!!

#1 As an income splitting tool forget it unless the family member is a serious part of the buisness (i.e. contributes actively with a significant amount of their time or has provided a significant amount of equity). The exception is if the people involved in the splitting manoeuvre are over 65.

#2 Passive income appears to be unaffected (in so far as it does not exceed 50K$ annually). This is good news. Presumably (at least in my thinking) passive income includes realized CG's. Grandfathering is also good news.

So, accumulated retained earnings (including their accumulated passively generated earnings) of less than 750K$ to 1M$ (or thereabouts...) should not cause any excess income. Obviously, excessive accumulated retained earnings (that CRA considers passive) ought to be withdrawn to avoid punitive taxation. ISTM that this means that somewhere in a MD's career his/her CCPC ceases to be useful (i.e. has to stop growing).
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Re: Morneau updates Income Sprinkling

Post by adrian2 » 16 Dec 2017 18:17

DavidR wrote:
13 Dec 2017 14:54
Today, the Government published details of its proposals to simplify and improve the treatment of income sprinkling, which are proposed to be in effect for the 2018 tax year and beyond. The Canada Revenue Agency (CRA) has also released guidance with respect to these measures. The revised measures are designed to ensure that they do not affect family members who make meaningful contributions to a family business. The measures include several automatic, bright-line tests to make eligibility easy and simple to assess.
Lots of stuff on Finance Canada site http://www.fin.gc.ca/n17/17-124-eng.asp

Even some FAQs https://www.canada.ca/en/revenue-agency ... kling.html
Whew, it seems that my family members have bitten the bullet.

From the first link:
CRA, with my bold, wrote:The changes include clear, "bright-line" tests – or off ramps – to automatically exclude individual members of a business owner's family who fall into any of the following categories:

* The business owner's spouse, provided that the owner meaningfully contributed to the business and is aged 65 or over. In recognition of the special challenges associated with planning for retirement and managing retirement income, the new approach to income sprinkling will be better aligned with the existing pension income splitting rules. This also reflects the fact that a business can play an important part in supporting its owner in retirement.

* Adults aged 18 or over who have made a substantial labour contribution (generally an average of at least 20 hours per week) to the business during the year, or during any five previous years. For businesses with seasonal operations, such as may be the case with farms and fisheries, the labour contribution requirement will be applied for the part of the year in which the business operates.

* Adults aged 25 or over who own 10 per cent or more of a corporation that earns less than 90 per cent of its income from the provision of services and is not a professional corporation.

* Individuals who receive capital gains from qualified small business corporation shares and qualified farm or fishing property, if they would not be subject to the highest marginal tax rate on the gains under existing rules.
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Re: Investment income in a CCPC

Post by couponstrip » 16 Dec 2017 22:14

adrian2 wrote:
16 Dec 2017 18:17

Whew, it seems that my family members have bitten the bullet.

From the first link:
CRA, with my bold, wrote:The changes include clear, "bright-line" tests – or off ramps – to automatically exclude individual members of a business owner's family who fall into any of the following categories:

* The business owner's spouse, provided that the owner meaningfully contributed to the business and is aged 65 or over. In recognition of the special challenges associated with planning for retirement and managing retirement income, the new approach to income sprinkling will be better aligned with the existing pension income splitting rules. This also reflects the fact that a business can play an important part in supporting its owner in retirement.

* Adults aged 18 or over who have made a substantial labour contribution (generally an average of at least 20 hours per week) to the business during the year, or during any five previous years. For businesses with seasonal operations, such as may be the case with farms and fisheries, the labour contribution requirement will be applied for the part of the year in which the business operates.

* Adults aged 25 or over who own 10 per cent or more of a corporation that earns less than 90 per cent of its income from the provision of services and is not a professional corporation.

* Individuals who receive capital gains from qualified small business corporation shares and qualified farm or fishing property, if they would not be subject to the highest marginal tax rate on the gains under existing rules.
More detail on the bolded exclusion from the technical backgrounder:
Excluded shares
The TOSI will not apply to specified adult individuals over the age of 24 years in respect of income received from "excluded shares" owned by the individual. This exclusion from the TOSI will apply to income received from a share (including from the disposition of the share) if the following conditions are met:

the individual has attained the age of 25 years in or before the year;
the individual owns at least ten per cent of the outstanding shares of a corporation in terms of votes and value; and
the corporation meets the following conditions:
it earns less than 90 per cent of its income from the provision of services;
it is not a professional corporation (i.e., a corporation that carries on the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor); and
all or substantially all of its income is not derived from a related business in respect of the specified individual. This is intended to prevent a service business from inappropriately accessing this exclusion by interposing a non-service entity between it and the intended recipient of the income (e.g., a professional corporation pays rent for the building in which the professional business is carried on to a corporation owned by the adult children of the professional).
For 2018, taxpayers seeking to rely on this exclusion will have until the end of 2018 to meet the condition of owning at least ten per cent of the outstanding shares of a corporation in terms of votes and value.

If an individual aged 25 years or older receives amounts that are not derived from excluded shares (or from an excluded business, as described above), the TOSI will apply only to amounts derived from a related business to the extent that they are unreasonable. Further information on the reasonableness test is provided below.
It looks like an active professional practice disallows this exclusion and so the new splitting rules would apply to physician's/dentist's/lawyer's/accountant's spouse and children.

I can see who this new legislation is targeted for in that list. :?

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Re: Morneau updates Income Sprinkling

Post by qasimodo » 17 Dec 2017 07:29

adrian2 wrote:
16 Dec 2017 18:17

* Adults aged 25 or over who own 10 per cent or more of a corporation that earns less than 90 per cent of its income from the provision of services and is not a professional corporation.
Does a Holdco (passive investments only - Opco has been closed) meet this requirement?
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Re: Morneau updates Income Sprinkling

Post by adrian2 » 17 Dec 2017 09:28

qasimodo wrote:
17 Dec 2017 07:29
adrian2 wrote:
16 Dec 2017 18:17

* Adults aged 25 or over who own 10 per cent or more of a corporation that earns less than 90 per cent of its income from the provision of services and is not a professional corporation.
Does a Holdco (passive investments only - Opco has been closed) meet this requirement?
There is no such thing as Holdco in the Income Tax Act.
A CCPC is a CCPC is a CCPC.

IOW, the answer to your question is "yes" (0 < 90).
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Re: Investment income in a CCPC

Post by Doug » 17 Dec 2017 09:33

Doug wrote:
16 Dec 2017 02:15
http://www.pbo-dpb.gc.ca/web/default/fi ... PII_EN.pdf

Analysis of Changes
to the Taxation of
Corporate Passive
Investment Income

Office of the Parliamentary Budget Officer

Nov 23/17

On October 18, 2017, the Minister of Finance announced that the July 18
proposed changes to passive income taxation would not apply to existing
assets, future income arising from existing assets, or investment income
below a threshold of $50,000.

We also make the following assumptions:
• The nominal stock of passive investment assets from the first year of
simulation remains in a “grandfathered” pool; income from these assets
remains subject to current tax rules;
• Passive investment income on new investments below a threshold of
$50,000 per year for each CCPC remains subject to current tax rules.22 In
contrast, passive investment income on new investments exceeding
$50,000 is subject to the new rules;
• New investments – including re-invested passive investment income –
are added to the new pool each year;
The new rules don't apply to existing assets or the income arising from existing assets. But if you sell those assets, do those dollars continue to be grandfathered? One possibility, consistent with what is written above, is that they are no longer grandfathered. In that case, it may make sense to have those grandfathered assets in investments with a very long holding period. If what I've written in this paragraph is accurate, a second question is when do the new rules apply? When the budget comes out, will the government give warning or will the new rules come into effect on the day of the budget? If it is the latter, one might want to have corporate assets in long holding period investments, prior to the budget coming out.

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Re: Morneau updates Income Sprinkling

Post by qasimodo » 17 Dec 2017 09:36

adrian2 wrote:
17 Dec 2017 09:28
qasimodo wrote:
17 Dec 2017 07:29
adrian2 wrote:
16 Dec 2017 18:17

* Adults aged 25 or over who own 10 per cent or more of a corporation that earns less than 90 per cent of its income from the provision of services and is not a professional corporation.
Does a Holdco (passive investments only - Opco has been closed) meet this requirement?
There is no such thing as Holdco in the Income Tax Act.
A CCPC is a CCPC is a CCPC.

IOW, the answer to your question is "yes" (0 < 90).
Thanks

(Holdco / Opco / Invesco / Newco etc are shorthand ways to characterize the nature of the CCPC)
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Re: Morneau updates Income Sprinkling

Post by Koogie » 17 Dec 2017 09:37

adrian2 wrote:
17 Dec 2017 09:28
qasimodo wrote:
17 Dec 2017 07:29
adrian2 wrote:
16 Dec 2017 18:17
* Adults aged 25 or over who own 10 per cent or more of a corporation that earns less than 90 per cent of its income from the provision of services and is not a professional corporation.
Does a Holdco (passive investments only - Opco has been closed) meet this requirement?
There is no such thing as Holdco in the Income Tax Act.
A CCPC is a CCPC is a CCPC.
IOW, the answer to your question is "yes" (0 < 90).
Are you quite sure of that interpretation ? I mean if so, isn't that a VAST loophole ? Nearly everyone I know that runs a small business runs a second linked "Holdco" CCPC doing nothing but investing the retained earnings and the shareholders of that are primarily the spouse or adult children and they would certainly own over 10% of the shares each.

Also, why are they now creating some sort of artificial age limit around 24/25 years of age ? Other than for purely political reasons of course.
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Re: Investment income in a CCPC

Post by Doug » 17 Dec 2017 10:23

Doug wrote:
16 Dec 2017 02:15
http://www.pbo-dpb.gc.ca/web/default/fi ... PII_EN.pdf

Analysis of Changes
to the Taxation of
Corporate Passive
Investment Income

Office of the Parliamentary Budget Officer

Nov 23/17

(2. We use a firm’s retained earnings as a proxy for its passive investment asset
portfolio. As the new policy is phased in, the ratio of old vs. new retained
earnings determines the amount of investment income subject to the new
rules. There are pros and cons to this approach discussed in Annex A.)
This is not coming from the Finance department. But since it's coming from the Office of the Parliamentary Budget Officer, it should be looked at seriously.

Assume the ratio of old vs. new retained earnings determines the amount of investment income subject to the new rules. This means that even if there is no investment income from the new retained earnings, it would be possible for the corporation to have investment income subject to the new rules, with their higher tax rates.

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Re: Investment income in a CCPC

Post by izzy » 17 Dec 2017 10:31

Because most children over 25 have completed university and are earning enough to put them in a high enough tax bracket that the benefit of dividends from a CCPC is minimal.Under 25 they might be using the money to supplement the "generous "provisions of the RESP and an educated populace might not be grateful enough for their "largesse" and vote for them ?
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