On October 18, the federal government announced that it will be making revisions to one of its proposed tax changes: the holding of a passive investment portfolio in a private corporation.
(Active business income is the income generated from the core business and/or practice activities of a corporation. If a physician doesn’t utilize all corporate earnings to pay annual practice expenses, the excess can be invested within the corporation, in an investment portfolio. The income generated from this portfolio is called passive income.)
The government has proposed to allow for a $50,000 threshold of annual passive investment income to be earned before an increased tax rate would apply.
Proposed tax changes related to passive investment income: What’s changing and what’s not
1. The government plans to forge ahead with a plan to restrict the ability of business owners to use private corporations to achieve significant tax deferral.
The government remains concerned that owners of private corporations are using excessive passive investments to achieve unfair tax advantages over unincorporated individuals.
2. The government will introduce a new annual passive income threshold of $50,000 for passive investments held in private corporations.
While the government understands that passive investments are used for many different purposes, it wants to encourage that use, but only up to a certain amount. It is limiting the annual passive income to $50,000 before this income gets taxed at proposed higher rates.
The announcement assumed a 5% return on investment, which suggests that the government considers private corporations could maintain passive investments of about $1 million before being subjected to any new tax rules.
3. The government has recommitted to “grandfathering” existing passive investment portfolios held in private corporations from these proposed tax changes.
The government stated that it will ensure that passive investments currently held by private corporations will be “protected” and that any new tax measures will only apply on a “go-forward” basis. However, the government did not clarify the effective date for these proposed changes so it is still not clear what date will be used for a “go-forward” basis.
4. The government plans to introduce draft legislation related to these tax measures in the 2018 Budget.
Until the draft legislation is released, there still remains significant uncertainty as to how these proposed measures will apply and when they will be effective.
What does this mean to incorporated physicians and other professionals?
- Existing passive investment portfolios will be grandfathered from any tax increases. The government has also committed to allowing a level of future earnings that will be exempt from the new rules as well.
- There remains a great deal of uncertainty with regards to how the proposed tax changes would be administered or the effective date.
- You should remain cautious about undertaking any drastic changes in your corporation (i.e., winding it up or selling all passive investments). There is continued uncertainty as to the actual details of the changes.
As we continue to expect more announcements over the coming weeks, MD will continue to closely monitor the situation. We encourage you to remain in touch with your MD Advisor and tax advisor who can help you understand the potential consequences of these changes on your financial plan.
Eileen Maltinsky CPA, CA, CFP is Vice President with the Taxation Services Team at MD Financial Management. She leads the team of tax professionals responsible for providing tax solutions, tax planning and tax compliance for the MD group of companies.