Investment income in a CCPC

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adrian2
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Re: Morneau updates Income Sprinkling

Post by adrian2 »

Koogie wrote: 17 Dec 2017 09:37
adrian2 wrote: 17 Dec 2017 09:28
qasimodo wrote: 17 Dec 2017 07:29
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.
As per above post from couponstrip:
couponstrip wrote: 16 Dec 2017 22:14 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).
The bold part above addresses your point.
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Re: Investment income in a CCPC

Post by izzy »

So here's my situation.
I am 76 years old.
I retired from practice 3 years ago and since I no longer hold a license to practice medicine nor can my CCPC and so it became a holdco.
My wife died last week :? :(
My son who obviously never worked in my medco is 34 years old.
So can I continue to pay him dividends due to the grandfathering provisions?
There seems to be a lot of potential for dispute with CRA here!
And I suspect that once the potential problems sink in,if the opposition parties entered the next election with a promise to roll back these changes ,a promise they could easily voice now,they would get a lot of support from business which might even translate into a landslide victory at the polls-certainly they would gain much financial support!
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Re: Investment income in a CCPC

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izzy wrote: 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 ?
Those generous provisions— six or seven yeats ago, my accountant told me not to contribute to RESPs as a family trust would cover my four kids university expenses. Fast forward to the present— two kids in uni with a third starting next year. The family trust is now useless and the RESPs are badly underfunded. I’m a 50+ MD. I feel like the rules have all been changed late in the game. The hockey game has suddenly become a polo match. I know nothing about polo but the two rich guys in charge have been playng it for years— it will be a rout!
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Re: Investment income in a CCPC

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silverbug wrote: 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.
@silverbug— My thinking is similar to yours. Little incentive to go to work and grind away now— I will dial things way down now. Thanks to a pretty exceptional bull market (2009-?), my nest egg is fully funded. Trudeau and Morneau are nudging me out the door a full 5-10 years before I would likely otherwise exit. Not good for patients/physician supply in Canada...
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Re: Investment income in a CCPC

Post by Koogie »

izzy wrote: 17 Dec 2017 12:35 My wife died last week :? :(
Condolences on your loss.
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Re: Investment income in a CCPC

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Koogie wrote: 17 Dec 2017 13:48
izzy wrote: 17 Dec 2017 12:35 My wife died last week :? :(
Condolences on your loss.
Indeed, I am sorry for your loss. May you receive comfort in this difficult time.
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Re: Investment income in a CCPC

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StuBee wrote: 17 Dec 2017 14:37
Koogie wrote: 17 Dec 2017 13:48
izzy wrote: 17 Dec 2017 12:35 My wife died last week :? :(
Condolences on your loss.
Indeed, I am sorry for your loss. May you receive comfort in this difficult time.
I'm sorry for your loss, too.
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Re: Investment income in a CCPC

Post by izzy »

Thanks guys
She WAS in a lot of pain towards the end and it was not entirely unexpected but it takes time to penetrate my thick skull.Thanks for the distraction of this discussion !
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Re: Investment income in a CCPC

Post by longinvest »

adrian2 wrote: 17 Dec 2017 14:58
StuBee wrote: 17 Dec 2017 14:37
Koogie wrote: 17 Dec 2017 13:48

Condolences on your loss.
Indeed, I am sorry for your loss. May you receive comfort in this difficult time.
I'm sorry for your loss, too.
My condolences, too.
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Re: Investment income in a CCPC

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My condolences too. So sorry.
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Re: Investment income in a CCPC

Post by kcowan »

My deepest sympathy goes your way izzy. As for these new punitive provisions by the Lieberals, I would do what you think makes sense and be prepared to do battle with the CRA. Just treat them with respect that they do not deserve. Just imagine how busy the CRA will be with these complex rules. Be quick to use the Notice of Objection if they get around to challenging your submission.
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Re: Investment income in a CCPC

Post by Koogie »

The politically cynical way this is being foisted on us also gets my blood boiling. While they swan off for 6 weeks of leisure and fundraising,we are left to stew amidst uncertainty.

What do I do come January. Continue to pay myself and DW (who works for me part time) through NE divvys or do we begin to take a salary again ? Should we revert to taking a salary from the operating company or receive our remunerations from the "holding"" company.
So much for tax "planning"
I would normally consult my CA but of course they don't have much more information than the rest of us.

I guess the peasants will just have to wait for the word from on high, whenever it is deigned to be uttered.
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Re: Investment income in a CCPC

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Even worse, I suspect we'll have to wait for some legal challenges and see who wins in court to truly know how best to pay ourselves. The CRA examples state a 20 hour work week is sufficient to allow for dividend splitting, but I could see some misinterpretations of this by auditors and them coming back to the proportion of contribution to the business.

Personally I was income splitting dividends (medical Corp) with the wife and now I'm choosing to employ her and pay out a salary in line with her job description and unfortunately for her she'll have to put in hours to justify it. The glory days are clearly over for 50/50 income splitting , it will be effectively more like 75/25 at least in my case.

Some of the tax examples are iffy, I might start a thread on salary vs dividends but it looks like a greater proportion of income in salary form may be worthwhile than in past years (I was previously living off about 95% dividend)
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Re: Investment income in a CCPC

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The only consolation lies in the very ambiguity of the changes.It is my impression that judges (even in tax court) tend to adjudicate ambiguous legal provisions by referring back to previous precedent.Perhaps any lawyers on here might comment?
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Re: Investment income in a CCPC

Post by kcowan »

Peculiar_Investor wrote: 12 Dec 2017 09:04
kcowan wrote: 12 Dec 2017 08:36Morneau-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.
Hey show a little sensitivity to the Shepell family who did not want their name associated with this group:
Shepell fought in court to get their family name removed
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Re: Investment income in a CCPC

Post by Penquin007 »

Corporate-owned wholelife insurance also suddenly becomes a little more attractive for business owners (as an estate planning strategy)
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Re: Investment income in a CCPC

Post by couponstrip »

Doug wrote: 17 Dec 2017 09:33
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.
The language seems to indicate that the income splitting rules will apply starting in 2018 tax year. The cutoff date for the segregated grandfathered assets will either be July 18 or Oct 18, 2017. I can't tell which by reading the CRA site. There will be more information in the 2018 budget.

There are still questions about CG taxation. How and what will be grandfathered? Could a long term holding have two different CG tax rates applied to one capital gain?
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Re: Investment income in a CCPC

Post by LadyGeek »

izzy wrote: 17 Dec 2017 12:35 ...My wife died last week :? :(
I'm very sorry to hear that, my condolences on your loss.
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Re: Investment income in a CCPC

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izzy wrote: 17 Dec 2017 12:35My wife died last week :? :(
Very sorry to hear of your loss as well. Always a life churning event. My sincere condolences.
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Re: Investment income in a CCPC

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Meanwhile the CRA tries to hide their incompetence by misleading the public

Just watch the dog and pony show develop in the coming years. :twisted:
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Re: Investment income in a CCPC

Post by silverbug »

In this new era of negativity for CCPCs, thoughts on owning high yielding equities (such as dogs of the TSX or preferred share ETFs) in a CCPC and streaming the income as eligible dividends? It seems like the numbers still make it worthwhile, am I mistaken?
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Re: Investment income in a CCPC

Post by biggreydog »

silverbug wrote: 24 Dec 2017 14:17 In this new era of negativity for CCPCs, thoughts on owning high yielding equities (such as dogs of the TSX or preferred share ETFs) in a CCPC and streaming the income as eligible dividends? It seems like the numbers still make it worthwhile, am I mistaken?
No, I certainly believe you have it right. Exactly what I am doing, with grandfathered investment amount and future retained earning amounts living under the future passive income $50K threshold. Means a few million dollars in capital producing Canadian dividend incomes taxed under the existing regime with maximum tax efficiency (under the circumstances).

Edit: My CCPC earnings are taxed entirely at the general corporate rate not the small business rate.
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Re: Investment income in a CCPC

Post by Koogie »

The Revised Tax On Split Income Rules
http://www.thebluntbeancounter.com/

- just a little bit of interpretation on what (little) has been announced so far. Personally, I can't decide right now how to remunerate ourselves for 2018. I guess information is being held hostage until the spring budget.
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Re: Investment income in a CCPC

Post by Doug »

A problem with investment taxation in a CCPC is foreign dividends ends up having a higher tax rate than if you owned them personally. This assumes that investment income from the corporation is distributed to the owner(s). The reason for this is that the mechanism to recover foreign withholding taxes in a CCPC doesn't work well.

One solution to this is to decrease exposure to foreign withholding tax. If you buy an American domiciled ETF, your dividends from that ETF will have a 15% withholding tax on them. However, if you buy an Irish domiciled ETF, there is no withholding tax. Irish domiciled ETFs are commonly used in Europe, and there's a reasonably good selection.

Now that doesn't mean that the Irish domiciled ETF that you buy isn't exposed to withholding tax itself. For example, if that Irish domiciled ETF invests in the USA, a Canadian investor wouldn't be able to recover the withholding tax on the American exposure. However, if a Canadian investor owned an American domiciled ETF investing in American stocks, at least some of the withholding tax would be recoverable.

For stock exposure outside the USA, an Irish domiciled ETF is an option to consider for CCPC owners, as opposed to a US domiciled ETF.

I'm ignoring Canadian domiciled ETFs.
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Re: Investment income in a CCPC

Post by PersonalInflation »

Hello all, I have a quandry I'd like to run by everyone and hopefully get some feedback.

I own a CCPC that earns about $200,000+ in profits after taxes per year, currently sitting with about $300,000 after taxes.

I only take out $50,000 per year in dividends for personal expenses, so the CCPC is accumulating $150,000 in cash per year that I'd like to invest in index funds.

I was thinking of a portfolio that looks like:

23% VCN (Vanguard FTSE Canada All Cap Index)
18% HXS (Horizons S&P 500® INDEX ETF Total-Return)
6% VXF (S&P Total Market Index, excluding all S&P 500 stocks.)
18% HXDM (Horizons INTL DEVELOPED MARKETS EQUITY INDEX ETF Total Return)
5% XEC (iShares Core MSCI Emerging Markets IMI Index ETF)
30% HBB (Horizons CDN SELECT UNIVERSE BOND ETF)

I have a few questions:

#1. Does it make sense from a tax standpoint to use swap-based ETFs like HXT if I'm going to be taking a yearly dividend from the business as well and could therefore take advantage of capital dividends?

#2. My understanding is that dividends from Canadian companies can be flowed out to myself, so maybe it doesn't make sense to use them for Canadian equities?

#3. However, does it make a lot more sense to use them for foreign equities and fixed-income invesments?

#4. Can the corporation sell shares in a swap-based ETF, realize a capital gain, then flow out the eligible portion of that gain to me as a shareholder?

Any thoughts or advice would be very helpful!
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