Investment income in a CCPC

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DmDave
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Re: Investment income in a CCPC

Post by DmDave »

I really hope T2 doesn't do that. That only sends the message that the new government isn't looking out after small businesses.
izzy
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Re: Investment income in a CCPC

Post by izzy »

DmDave wrote:I really hope T2 doesn't do that. That only sends the message that the new government isn't looking out after small businesses.
But wouldn't that mean that such CCPCs would still be able to declare eIigible dividends to the extent that they had paid tax at the general rate? There might not be as much income deferral but for retirement planning that would bring them more in line with RCAs (which pay a 50% refundable tax).Not as good but not terrible either
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Re: Investment income in a CCPC

Post by DmDave »

For sure, with integration, the tax refund mechanism should refund the tax paid at the higher general rate. But if you run an actual business, that means the owner has less capital to work with and reinvest back into the business. Now, if the cut off is based on the number of employees hired by the CCPC, how does CRA differentiate between a doctor using a CCPC for tax planning, vs a business consultant who wants to separate personal assets from business liabilities?
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Koogie
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Re: Investment income in a CCPC

Post by Koogie »

Another rehash of the dividend versus salary debate:

owners-face-a-pay-predicament-salary-or-dividend
http://www.theglobeandmail.com/globe-in ... e28709092/

FWIW, after 14 years I have switched to a full dividend remuneration this year. Various reasons why. Most are personal and have to do with our financial arrangements (RRSPs in particular). That might change depending on the March budget.
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Koogie
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Re: Investment income in a CCPC

Post by Koogie »

This blog has been mentioned numerous times here and I have found it interesting and informative:
www.thebluntbeancounter.com

At the end of a recent article: "What Small Business Owners Need to Know - Intercorporate Dividends are not Necessarily Tax-Free Anymore" http://www.thebluntbeancounter.com/2016 ... -know.html

he offers to add readers to a mailing list he runs for tax matters of importance for small business owners. Might be of use to some here.
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Re: Investment income in a CCPC

Post by kcowan »

Part of the gap closed wrote:Canadian controlled private corporations (CCPCs) are often set up by doctors, lawyers and other professionals. Under current rules, income inside a CCPC is taxed at the small business tax rate of $10.5%. The budget commits to "ensure that investment income derived from an associated corporation’s active business is ineligible for the small business deduction (and taxed at the general corporate income tax rate) in certain circumstances."

“Active versus passive [investment] income is an important area to clamp down on,” said Lindsay Tedds, an economics professor at the University of Victoria who studies taxation.

“We should have been doing it a long time ago.”

Tedds said it is unknown how common the practice of shielding investment income inside CCPCs is, but “we know it’s significant enough that it’s a budget item.”
Still the practice of income sharing among household members to remain intact.
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DavidR
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Re: Investment income in a CCPC

Post by DavidR »

kcowan wrote:
Part of the gap closed wrote: Under current rules, income inside a CCPC is taxed at the small business tax rate of $10.5%. The budget commits to "ensure that investment income derived from an associated corporation’s active business is ineligible for the small business deduction (and taxed at the general corporate income tax rate) in certain circumstances."
As noted by Josh (in the reader comments on the news article) "Passive income is already excluded from the small business limit. Does she mean they are going to be looking closer to see if people are complying with the existing rule?"
“Active versus passive [investment] income is an important area to clamp down on,” said Lindsay Tedds, an economics professor at the University of Victoria who studies taxation.
Tedds said it is unknown how common the practice of shielding investment income inside CCPCs is, but “we know it’s significant enough that it’s a budget item.”
Guess there's been some cheating or misunderstanding going on....
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Re: Investment income in a CCPC

Post by izzy »

I don't think it will make a great deal of difference as long as dividends paid out in a particular year exceed the passive income generated,if the income has been taxed in the corporation at the low rate then they are non eligible dividends and the dividend gross up and credit will reflect that and if taxed at the higher rate then they will be eligible dividends and the gross up and credit will reflect that so unless they are going to fiddle with integration the total tax paid SHOULD be the same.
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Re: Investment income in a CCPC

Post by scorpionman »

Is it allowed to pay a salary from a CCPC that exceeds the net income (before salary) for that year? In other words, the salary comes in part from retained earnings of previous years and in part from current year earnings?
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adrian2
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Re: Investment income in a CCPC

Post by adrian2 »

scorpionman wrote:Is it allowed to pay a salary from a CCPC that exceeds the net income (before salary) for that year? In other words, the salary comes in part from retained earnings of previous years and in part from current year earnings?
Yes.
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Re: Investment income in a CCPC

Post by couponstrip »

A simple question I should probably know:

When paying out an ineligible dividend from the corp, would the entire dividend be subject to ineligible dividend tax rates, or only the portion that was originally taxed at the small business rate (with SBD)?

I'm thinking of a situation where the corporation is decades old and has equity assets that were derived from 20% active business income and 80% capital gains...or something like that. Then, a security is sold for the purposes of paying a dividend. Does the 80% capital gain get taxed in the CCPC and then after that subject to ineligible dividend tax rates as well?
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Re: Investment income in a CCPC

Post by DavidR »

couponstrip, Eligible dividends are paid out of the General Rate Income Pool. Capital gains are taxed at the Investment income rate - with a large refundable portion - not at the general rate. Your CCPC could have a GRIP balance if its' investment portfolio has been earning dividends from public companies that pay Eligible dividends. Capital gains however will not form part of the GRIP balance.
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Re: Investment income in a CCPC

Post by adrian2 »

couponstrip wrote:I'm thinking of a situation where the corporation is decades old and has equity assets that were derived from 20% active business income and 80% capital gains...or something like that. Then, a security is sold for the purposes of paying a dividend. Does the 80% capital gain get taxed in the CCPC and then after that subject to ineligible dividend tax rates as well?
Capital dividends explained
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Re: Investment income in a CCPC

Post by couponstrip »

Thank you both. Very helpful.
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Income splitting with minor kids

Post by Penquin007 »

While it’s generally problematic to lend funds directly to minor kids, investors who want to take advantage of this strategy will often use a discretionary family trust, naming their minor kids as beneficiaries. In this case, a loan is made to the family trust at the one per cent prescribed rate, and the trust invests the funds. Anything the trust earns above the one per cent interest it pays on the loan can be distributed to the minor kids, either directly, or to pay their expenses. In most cases, the kids will likely have no or minimal tax to pay on this income
http://business.financialpost.com/perso ... es-to-come

Does anybody have heard of this income splitting strategy with minor children? Would it be possible to implement this strategy with a CCPC and a family trust?
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The enhanced CPP comes with a tax change — and that’s a good thing

Post by Penquin007 »

http://business.financialpost.com/perso ... good-thing

Interesting article about recent CPP changes. It makes CPP (and salary instead of dividends) a little more interesting for high income business owners.
As part of CPP enhancement, the government announced a surprising, but welcome, tax change. Beginning in 2019, employee contributions associated with the enhanced portion of CPP will be eligible for a tax deduction instead of the current tax credit. This is being done “in order to avoid increasing the after-tax cost of saving for Canadians.”
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Re: Investment income in a CCPC

Post by tdiddy »

So the first Liberal budget wasn't as bad for small business corporate investors as I feared. I'm currently drawing a salary to max out RRSP space (and live/pay off debt), and leaving the rest in the corp for investment.

I have a big chunk of portfolio in XEF (global ETF) the distributions of which isn't taxed very favorably on the corporate side. I have significant unused space in my RRSP. I had been holding off using it for last year as I was/am afraid that rules may change re CCPC for the worst. If they did I'd be really glad to have that excess RRSP contribution room to use for my >200K personal income.

THoughts, am I being paranoid? Now that liberals have released 1st budget should I relax on this, or is there more tightening of CCPC regulations to come?
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Re: Investment income in a CCPC

Post by Penquin007 »

Another article about RRSP vs TFSA vs CCPC for investments:

https://www.pwlcapital.com/pwl/media/pw ... f?ext=.pdf
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Re: Investment income in a CCPC

Post by Penquin007 »

Interesting article about the taxation for foreign income inside a CCPC:

Taxation of Foreign Income in a Corporate Account
http://www.canadianportfoliomanagerblog ... e-account/
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Re: Investment income in a CCPC

Post by Doug »

Thanks for the links Penquin.
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Why Canadian Stocks Should Be in the CCPC

Post by Doug »

https://www.pwlcapital.com/pwl/media/pw ... f?ext=.pdf

"Investors who split their equity holdings between personal taxable and corporate accounts
have an additional asset location decision. In general, these investors should hold Canadian equities in their corporate accounts
whenever possible, while foreign equities should go in their personal taxable accounts.
There are two reasons for this. First, foreign income is taxed at a higher rate within a corporation than in a personal account.
And second, the gross-up on Canadian dividends in a personal account may lead to a clawback of Old Age Security benefits
in retirement (the gross-up within the corporate account does not affect your personal income, unless dividends are paid to you
directly"
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Re: Investment income in a CCPC

Post by t705cda »

I am not sure if I should post here or start a new thread.

I am curious if/when it makes sense to trigger an investment income capital gain to payout a dividend vs. paying an ineligible dividend from active income.

Looking at Ontario rates on Taxtips.ca shows the 2017 rate for ineligible dividends is 33.46% in the $91,831 to $142,353 tax bracket. Capital gains will about 25% taxed in the CCPC.

So if I need to pull out $10k in this bracket would it be more advantageous through the capital gain? Also by how much?

If there is an advantage, my plan would be to sell an index ETF with gains. Since I want to continue holding the same amount of this ETF, I would then repurchase it after triggering the gain (making up for the lost taxed portion with new active income). I understand part of the capital gain will flow through the CDA and also increase the adjusted cost base.
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Re: Investment income in a CCPC

Post by scorpionman »

I think you're right, - look at the example here - https://www.sunnet.sunlife.com/files/ad ... _RDTOH.pdf

You get an extra $2668 with the Refundable Dividend on Hand system. But see if your situation matches the example, maybe it won't be quite as big a difference when the numbers are computed depending on the mix of income streams you have.

I'm surprised in that document there is no mention of the risks because in the example $100k is active business income with the small business deduction and $100k is investment type gains. It specifically says that if too much gains are from investments on a regular basis, the small business deduction would be disallowed - in theory. In practice, I have never heard this happen.
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Re: Investment income in a CCPC

Post by t705cda »

Thanks scorpionman.

I ran some numbers with your linked example.

Hopefully I have this right but it seems the sample calculation does not transfer the tax free capital gains properly. Half the capital gains should flow through tax free through the CDA but in the example it is included in the dividend paid and a 35% tax applied to this.

By treating half the cap gains as tax free the after tax income should be about $6,000 greater in the last column.

Would appreciate if anyone can confirm.
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Re: Investment income in a CCPC

Post by peter »

Is there any size of non-registered portfolio where it would be interesting to look at a holdco? Assuming vanilla investments only, not a professional career? I have the impression some people here converted professional corporations to pure holding companies, even if that might not be a formal change. Is that to continue to shelter/control money made as professional, or is there an investment benefit?
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