Investment income in a CCPC

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silverbug
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Re: Investment income in a CCPC

Post by silverbug »

Hi personalinflation,

your portfolio idea is reasonable. I'd consider a smaller number of ETFs personally for your equity, one all world , one Canada? You'll find most global markets tend to move together and you'd want some cash, gold or bonds as the buffer. Smaller number of fees will also make it easier to rebalance and save transaction fees along the way.

1) swap ETFs make total sense as the cap gains are treated more favorably and you can defer tax for longer and I've played this game many times in the ccpc.

2) they could be flowed out, but the paperwork at tax time might be a small headache unless your portfolio is large enough to justify it and you want the annual income

3) not having to account for international dividends saves some headache come tax time, you might be taking a small hit on withholding taxes in the swap based etf as it's Canadian domiciled but I'm not an expert on that. I go primarily for low mer and fewest transactions , that alone should get you most of the way there.

4) yes , my understanding is that a percentage of the capital gain can be paid out of the ccpc by election (research capital dividend account?)
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Re: Investment income in a CCPC

Post by Koogie »

So, bad news if you are a smoker or some idiot named Koogie who followed the rules and has a large retained earning..... :evil:

Federal Budget 2018
http://nationalpost.com/news/politics/f ... ess-outcry

“The new rules appear to be simpler and may improve things for some business owners from the earlier proposals, but others will lose the benefit of the lower small business rate due to past investments,”

"The new proposal comes at the problem from a different direction. Under these rules, the amount of business income that qualifies for the small business tax rate would be reduced depending on how much annual passive income is declared above $50,000 — and eliminated completely once passive income rises above $150,000. The thresholds are not indexed to inflation."

"The new rules would kick in for tax years starting after 2018."

"Including the government’s earlier proposal to crack down on income sprinkling, the budget estimates the tax changes on private corporations will bring in $925 million annually by 2022-23."

Or, counted another way, about 92.5 Khadr payments per annum. :roll:
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Re: Investment income in a CCPC

Post by Penquin007 »

So with this new budget:
1) Maximise RRSP/TFSA every year
2) Invest the rest in the corporation in 100% equity index funds/etf with low dividend/interest (total market etf)
3) Pay off mortgage if not already done
4) If Fixed income/ obligations investments are needed , invest these in RRSP/TFSA (not in corporation)
versus non registered personnal accounts (to maximise tax-free growth of registered accountd) ?
5) Consider corporate-owned wholelife insurance If more fixed income investment is needed and wish to leave money to your children.
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Re: Investment income in a CCPC

Post by Penquin007 »

Once you reach the 50k/year for passive income target, how will this affect the GRIP (general rate income pool) and the ability to use eligible dividends?
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Re: Investment income in a CCPC

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Re: Investment income in a CCPC

Post by ClosetIndexer »

This definitely seems like an improvement as far as the passive income stuff goes.

Unfortunately there was still a lot of uncertainty in the latest income splitting update, particularly with respect to optco/holdco arrangements and family trusts; I don't see that addressed here at all unfortunately.
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Re: Investment income in a CCPC

Post by Penquin007 »

http://www.advisor.ca/tax/tax-news/feds ... ion-251274
Currently, private corporations’ investment income is taxed at a higher rate, a portion of which is refunded when investment income is paid out to shareholders in dividends. In practice, though, taxable dividends can allow for a refund of taxes on investment income, whether that dividend comes from investment income or active business income (which is taxed at a lower rate), the document says.

This allows CCPCs to pay out lower-taxed dividends from their active income and claim a refund on taxes paid on their investment income, which the budget calls “a significant tax advantage.”

The budget will prevent CCPCs from being able “to obtain refunds of taxes paid on investment income while distributing dividends from income taxed at the general corporate rate,” the budget says.

A refund of the refundable dividend tax on hand (RDTOH) will only be available “in cases where a private corporation pays non-eligible dividends,” the accompanying Tax Measures document says.

“There was always a quirk in the tax system that you could earn business income, and pay a lower-rate dividend and trigger a dividend refund at the same time,” Ball says. “What they’ve done is they’ve tried to get you to trace the sources of the refundable tax to match it up with the appropriate dividend that’s paid out.”
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Re: Investment income in a CCPC

Post by couponstrip »

It seems like products like Horizons HXT will be more popular to minimize the passive income in a CCPC and accumulate more money without incurring the SBD clawback.

The RDTOH elimination for eligible dividends is a difficult item for at least one person I know who pays the general rate on almost all of their retained earnings due to being part of a large partnership that is required to split the SBD. I suspect this effectively eliminates any tax advantage of having a CCPC for such individuals. I'll have to do the math, but I wonder if it might even be punitive to earn through a CCPC vs personal in that circumstance.
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Re: Investment income in a CCPC

Post by ClosetIndexer »

couponstrip wrote: 27 Feb 2018 23:14 It seems like products like Horizons HXT will be more popular to minimize the passive income in a CCPC and accumulate more money without incurring the SBD clawback.

The RDTOH elimination for eligible dividends is a difficult item for at least one person I know who pays the general rate on almost all of their retained earnings due to being part of a large partnership that is required to split the SBD. I suspect this effectively eliminates any tax advantage of having a CCPC for such individuals. I'll have to do the math, but I wonder if it might even be punitive to earn through a CCPC vs personal in that circumstance.
It shouldn't be punitive. (Aside from accounting costs associated with a corp.) The ability to clear rdtoh with eligible dividends, while replenishing investments with sbd money, was a legitimate 'loophole' imo. Honestly, these proposals seem far more reasonable than anything floated earlier. (And I say that as someone who will be paying a fair bit more tax as a result.)
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Re: Investment income in a CCPC

Post by icudoc »

This is my first post on FWF ... but let me start by thanking each and every one of you for all the teaching over the years.

Before I ask my accountant, I want to ensure I have understood the situation properly.
My corporate tax year ends April 30.
In 2017, I reshuffled my CCPC portfolio to 1M VCN, rest in Horizons (HXT/HBB), and given VCN has a dividend yield of <3%, I anticipate passive income to be well below 50K. Active income is below 500K. So, going forward, I do not anticipate increasing CDA (meaning no share sales either) or GRIP until retirement (~15 years away).

As it stands, RDTOH is 79K and GRIP is 57K.

I want to confirm:
1. NO change to CDA regime, but triggering big investment gains is passive income which could exceed 50K, lowering SBD. So rebalancing and triggering gains is dangerous.
2. small changes to RDTOH regime. I can pay eligible dividend from GRIP OR ineligible (regular) dividend anytime but only the latter allows RDTOH to benefit corporation.

Do my wise forum teachers agree with my conclusions? Thanks,

icudoc
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Re: Investment income in a CCPC

Post by izzy »

What a message !
"Be frugal and save a little for your future -but not too much because otherwise government will tax it away and redistribute it to those who those who didn't -nothing new there except that if you squawk too much they may give you SOME of it back and then EVERYBODY will be happy ! " :?
Message received and understood I suppose but it sets an interesting precedent for your RRSP savngs!
Not sure I'd put money in an RESP that early in life either as it seems an obvious future target for similar treatment to ensure nobody gets a better education than the rest!
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Re: Investment income in a CCPC

Post by couponstrip »

icudoc wrote: 28 Feb 2018 09:35
I want to confirm:
1. NO change to CDA regime, but triggering big investment gains is passive income which could exceed 50K, lowering SBD. So rebalancing and triggering gains is dangerous.


icudoc
I might be reading it incorrectly, but I think that all capital gains are excluded from the 50k passive income threshold. Realized capital gains will not cause SBD clawback. Only dividend and interest income greater than 50k results in SBD clawback.
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Re: Investment income in a CCPC

Post by couponstrip »

ClosetIndexer wrote: 28 Feb 2018 00:03
It shouldn't be punitive. (Aside from accounting costs associated with a corp.) The ability to clear rdtoh with eligible dividends, while replenishing investments with sbd money, was a legitimate 'loophole' imo. Honestly, these proposals seem far more reasonable than anything floated earlier. (And I say that as someone who will be paying a fair bit more tax as a result.)
For a CCPC that does not have any significant SBD available to it, I'm getting about 1.5% greater tax when earning income through a PC at the general rate (27%) and paid out as an eligible dividend for various amounts 6 figures and higher, all Alberta rates. I'm guessing they will tweak some of these rates in 2019 so the integration works better.

There would still be the potential for deferral of 21% tax (48%-27%:Alberta) for retained income and the ability to distribute income at lower brackets/average tax rate in retirement than what would have been paid in the earning years had the income all been earned personally.

However, for CCPC's which are not part of a partnership (most of us here, I think) and with less than 50k dividends/interest income (which is the majority of CCPC's according to CRA data), things will be business as usual. The value of this structure as a tax deferral scheme remains intact with strategies that can be used to minimize dividend/interest income should the 50k threshold resulting in SBD clawback be a concern in the future. I am pleased with the outcome, particularly considering what was proposed earlier this year.

The loss of the ability to sprinkle dividends from the CCPC remains the one significant disappointment.
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Re: Investment income in a CCPC

Post by qasimodo »

couponstrip wrote: 28 Feb 2018 12:02
However, for CCPC's which are not part of a partnership (most of us here, I think) and with less than 50k dividends/interest income (which is the majority of CCPC's according to CRA data), things will be business as usual. ... I am pleased with the outcome, particularly considering what was proposed earlier this year.

The loss of the ability to sprinkle dividends from the CCPC remains the one significant disappointment.
Still this whole episode makes me uneasy about the long term viability of current plans for eventual transferring of assets to beneficiaries (e.g. pipelining)
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Re: Investment income in a CCPC

Post by tdiddy »

I am also quite pleased with this outcome.

The converting income to capital gains piece is still absent. Assuming one doesn't need the funds immediately, would the long term treatment of passive income personally unreg vs CCPC make this a strong move in 2018 or with these new rules would the holdings still be better in corp (can still pay out RDTOH and CDA)? Any thoughts?
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Re: Investment income in a CCPC

Post by qasimodo »

couponstrip wrote: 28 Feb 2018 10:36
icudoc wrote: 28 Feb 2018 09:35
I want to confirm:
1. NO change to CDA regime, but triggering big investment gains is passive income which could exceed 50K, lowering SBD. So rebalancing and triggering gains is dangerous.


icudoc
I might be reading it incorrectly, but I think that all capital gains are excluded from the 50k passive income threshold. Realized capital gains will not cause SBD clawback. Only dividend and interest income greater than 50k results in SBD clawback.

I believe that realized capital gains are generally included
Simplified, the new concept requires you to start with existing aggregate investment income—as defined in subsection 129(4) of the Act—and adjust as follows:

1. reduce such amount by any taxable capital gains (and losses) to the extent they arise from the disposition of a property that is used principally in an active business carried on primarily in Canada by the CCPC or by a related CCPC or for such taxable capital gains (and losses) that arise from the disposition of a share of another CCPC that is connected with the CCPC, where in general terms, all or substantially all of the FMV of the assets of the other CCPC is attributable directly or indirectly to assets that are used principally in an active business carried on primarily in Canada;
https://moodysgartner.com/2018-budget-summary/
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Re: Investment income in a CCPC

Post by couponstrip »

Oh yes, I think you are correct. The exclusion of capital gain is for that specific quoted circumstance and wouldn't apply to the sale of shares in the market.
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Re: Investment income in a CCPC

Post by slim »

For Those of Us Retired:

If our corporations no longer have active business income, (a "holding co")
Then passive income didn't qualify for the SBD anyways, so I don't think we are affected at all....except that if you are over 65, you can split the passive income with your spouse, (limited income sprinkling).

So I think we escape the sticky fingers of the liberals for the time being...

(Have I read the summary of the budget correctly??)
Thanks.
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Re: Investment income in a CCPC

Post by icudoc »

Thanks to everyone.

OK, so I now understand there are 4 accounts where there used to be 3.

GRIP as before, but I now realize it is increased by BOTH excess ABI over SBD AND by eligible dividends received. So VCN will increase my GRIP by about 20K per year. We should anticipate dividend tax rates will increase due to lower corporate tax rates and integration, so there is a small incentive to pay out eligible dividends sooner rather than later.

CDA as before.

RDTOH, which will soon be called noneligible RDTOH. This increases with share sales and the small interest distribution from VCN for me.
The new eligible RDTOH which will increase with VCN dividends.

Since I pay out both eligible and ineligible dividends, there is an opportunity to deplete both RDTOH accounts, and there is no rush for me to deplete my current RDTOH balance.

Incidentally, someone on FWF posted a few years ago that diversification across tax regimes would be prudent. I have dramatically increased dividends over the last few years and was unsurprised when Morneau came gunning for CCPCs. Those who made that suggestion (and there have been more than one) should really pat themselves on their backs.

icudoc
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Re: Investment income in a CCPC

Post by bluebumbler »

With regards to CDA payments. Anyone who has submitted a t2054/schedule 89, how long did it take for a response from CRA? I have been waiting 3 months now, thinking maybe need to resubmit everything. Thanks.
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Re: Investment income in a CCPC

Post by MikeFreedom49? »

It took CRA 3.5 months to verify the amount for my CDA account, it’s still not updated online at My Business Account. I phoned CRA to confirm that they received it, which they had, but it was forwarded to PEI to be processed. You can always phone them to make sure that they received it, the wait time was only a couple of minutes for the corporate line.
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Re: Investment income in a CCPC

Post by bluebumbler »

MikeFreedom49? wrote: 07 Mar 2018 14:28 It took CRA 3.5 months to verify the amount for my CDA account
Thanks Mike, CRA got back to me from Saskatoon Tax Centre. Said was going to be 2 years to process as they were still working on 2015 claims. Hopefully PEI is a little quicker for you.
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Re: Investment income in a CCPC

Post by Yoder »

Apologies for the basic nature of my questions... I *believe* this has been already answered, but I'm looking for clarity.

********

CCPC contains 1.5 million in a portfolio... Mixture of equities, and bonds.

My questions:
#1. Unrealized capital gains... -> ... I assume no change under any of the new rules... unrealized is unrealized?
#2. Realized capital gains... -> In year A, I sell all of my GOOG for a capital gain of 100K, and under the new rules -> what exactly happens?
#3. Eligible Dividends -> In a different scenario, in year B, CCPC receives 100K of Eligible dividends from a mixture of Canadian companies. Lets say the CCPC pays the owner/shareholder a dividend of 100K in the same year.
#4. In year C, the CCPC sells real estate (a medical-building that had been used principally for the practice of medicine) for a capital gain of 100K.

Can someone have a go at explaining the tax implications for the CCPC of those scenarios (with the new vs. old regulations?)

yoder.

p.s. for bonus marks, or perhaps what I'm really getting at ->: Under the *new* rules can someone explain to me what is now probably the *most reasonable* way of proceeding with an existing CCPC portfolio? e.g. Cap the portfolio at about ? 1$ million, try to harvest about 50K per year of dividends/capital gains? etc... Sorry for the simplistic thinking. I'm not looking for aggressive edge-case scenarios, but rather a middle of the road conventional wisdom...
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Re: Investment income in a CCPC

Post by icudoc »

Hi Yoder.

Let me take a shot.

1. would have been better to realize cap gains before Jan 1. At this point, unrealized is unrealized, but do not crystallize them until you are sure you are prepared to exceed $50K passive income and thus have your SBD reduced.
2. when you realize $100K, you have exceeded $50K passive income, and thus your SBD is reduced by an amount proportional to your excess passive income.
3. receive eligible dividend, increase eligible RDTOH. Pay out dividend, deplete APPROPRIATE (there will now be 2) RDTOH.
4. sorry, but a tax expert will have to advise you. I think most will tell you this is passive income like any other, but you can probably find an aggressive advisor tell you to try to call this business income. If I were the CRA I would ask "what is your corporation?". If you answer "MPC" then the cap gain is passive income. If you answer "real estate management", then you can try to call the cap gain something else.

Most reasonable?

If you use Horizon's, you can invest billions without passive income. If not, then 1M targeting 50K passive income sounds fine (most equity index ETFs currently yield around 2.5%, so you could invest around 2M BTW).

icudoc
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Re: Investment income in a CCPC

Post by Yoder »

Thanks for your replay Icudoc,

Some f/u questions:

1. Re: Capital gains in a CCPC.
So.... if I realize 100K of capital gain... presumably that would only represent 50K of passive income (because only 50% is taxable)? - i.e. I would reach the threshold immediately?

2. Re: using Horizons -> I understand that I can invest 'billions' with Horizons "total-return-swap" ETFs, but ultimately, the same problem comes down to harvesting capital gains - does it not? I suppose that at some point in the future, I will no longer have any Active Business Income, making the reduction on the Small Business Deduction meaningless? At which point capital gains could be harvested in a more accelerated fashion...?

3. Does anyone know whether the CDA (Capital Dividend Account) has been affected at all by the new rules?

4. One new question: since the new rules don't come into effect until AFTER 2018.... does this mean that during the 2019 Corporate year, it would probably be reasonable to pay out eligible dividends to clear out the RDTOH before it changes its name to the "non-eligible-RDTOH"?

5. Another NEW question: "income-sprinkling" as they like to call it... would still be allowed during the 2018 Corporate Taxation year? (and thereafter not?)

Yoder
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