A low prescribed rate can provide plenty of tax-saving opportunities for you and your family. With the Canada Revenue Agency (CRA)’s prescribed rate currently at a historical low of 1% per annum and the expected increase of the prescribed rate to 2% starting July 1, 2022, now is an excellent time to take advantage of the prescribed rate loan family trust strategy.
With the holidays around the corner everyone is in a giving mood. Before you go out and donate to your favourite registered charity, did you know that not all donations are equal?
When transferring a business to the next generation, the most commonly used tax strategy is to implement an estate freeze. An estate freeze will allow the business owner to transfer the business without triggering income taxes. Alternatively, business owners may choose to sell their business to their children or other family members to utilize their lifetime capital gains exemption (“LCGE”) – approximately $892K in tax-free capital gains. Care must be taken in selling a business to family members as the Income Tax Act contains “surplus stripping” rules which prevents the selling parties from extracting cash on such sales.
In response to the rapidly evolving threat of the COVID-19 pandemic, the Federal Government of Canada and the Government of Ontario have introduced a number of tax and economic measures intended to benefit individuals and businesses alike.
In this Tax Update, we provide a summary of the following major tax and financial measures announced to date:
In 2018, the federal government passed new tax legislation for Canadian-controlled private corporations (CCPCs), including incorporated professionals. Effective for taxation years starting in 2019, the small business limit ($500,000 federally and in most provinces) will be reduced by $5 for every $1 of investment income above $50,000. Under the rules, a new definition of adjusted aggregate investment income (AAII) is used to determine the amount of investment income that will grind down the small business deduction, which is effectively eliminated when investment income reaches $150,000 in a given taxation year. Just as associated corporations must share the small business limit, investment income in associated corporations must be aggregated to determine if the $50,000 threshold has been surpassed and to determine the amount of the small business limit that will be clawed back. The reduced small business limit is then what must be shared within an associated group of companies.
For Canadian-controlled private corporations (“CCPCs”) claiming the small business deduction, the net federal tax rate is being reduced from 10.5% to 10% and the net Ontario tax rate is being reduced from 4.5% to 3.5%. As a result, the combined tax rate for CCPCs in Ontario on the first $500,000 of active business income is decreasing from 15% to 13.5%. These measures are meant to offset other changes such as increases to the investment tax rate and limitations being introduced on income sprinkling.
Effective from January 1, 2018 and subsequent taxation years, Finance is moving forward on restricting income sprinkling for private corporations as part of its commitment to tax fairness. Prior to the introduction of these rules,business owners could potentially redirect their income to family members that pay a lower rate of income taxes. As a result of these changes, new rules have been introduced to determine whether a family member is significantly involved in business, and thus is excluded from potentially being taxed at the highest marginal tax rate (known as the tax on split income or TOSI). The changes include a new set of tests to determine whether recipients of such income will be subject to the TOSI rules. For more information on these rules or to determine if you will be impacted as a result of these changes, feel free to contact us.