Budget 2018: Highlights for Physicians

February 28, 2018

The 2018 federal budget (Budget 2018) was tabled on Tuesday, February 27, by Finance Minister Bill Morneau. Below are the highlights that are directly relevant to our physician clients.

Tax changes impacting private corporations

Budget 2018 introduces a new gradual phase-out for accessing the small business limit if passive investment income exceeds $50,000, with a full loss of the small business limit when passive investment income reaches $150,000. This proposed tax change is simpler than what was shared in the federal government’s October 2017 announcements.

Current tax system

Canadian-controlled private corporations are currently eligible for the small business tax rate on the first $500,000 of active business income earned annually. The small business tax rate for 2018 is 10% and will be reduced to 9% for 2019 onwards. 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 including salaries, the after-tax excess can be invested within the corporation, in an investment portfolio. The income generated from this portfolio is called passive investment income.

Proposed tax changes

Budget 2018 proposes, starting in 2019, a new annual limitation on access to the small business limit based on the level of passive investment income earned within a private corporation. Under these proposed tax measures, the small business limit will be reduced gradually when passive investment income is between $50,000 and $150,000 a year. For example, a private corporation earning $75,000 in passive investment income a year will have its small business limit reduced to $375,000 from $500,000. Once the $150,000 threshold is met, all active business income will be taxed at the general corporate tax rate. This is an annual calculation.  

Proposed Small Business Limit Reduction

 

The federal small business limit of $500,000 will be reduced by $5 for every $1 of passive investment income in excess of $50,000.1

 

Passive Investment Income

Federal Small Business Limit

$0 to $50,000

$500,000

$60,000

$450,000

$70,000

$400,000

$80,000

$350,000

$90,000

$300,000

$100,000

$250,000

$110,000

$200,000

$120,000

$150,000

$130,000

$100,000

$140,000

$50,000

$150,000+

$0

Impact on physicians

If you are considering whether to incorporate or not, incorporation continues to be a viable tax and financial planning strategy as it still offers tax deferral opportunities. For physicians who are currently incorporated and have accumulated investments within their corporation, these proposals will not change how passive investment income is taxed (contrary to what had been anticipated). Going forward, however, the amount of passive investment income earned in the corporation could impact the corporation’s access to the small business tax rate and ultimately the amount of tax paid on active business income.

Physicians nearing retirement, who have accumulated significant wealth in their professional corporations, may lose access to the small business tax rate, so it may be necessary to adjust compensation and/or savings strategies in order to mitigate the impact.

Additional measures that impact private corporations include changes to the refundable tax system. The budget proposes to restrict the situations in which a corporation can claim a refund of the balance in its refundable dividend tax on hand (RDTOH) account. We expect this to have a limited impact on our physicians and their corporations.

Other notable highlights from Budget 2018, and the resulting impact on Canadian physicians and their families, include:

  • Employment Insurance Parental Sharing Benefit: The government has proposed changes that could result in an additional five weeks of parental leave in some cases.

  • Income sprinkling: The government recommitted to advancing final legislation related to the income splitting proposals introduced in December 2017 and effective for 2018.

  • Quebec Pension Plan contributions: Similar to the federal tax measures for enhanced CPP contributions, employee contributions (as well as the “employee” share of contributions made by self-employed persons) to the enhanced portion of the Quebec Pension Plan will be deductible.

  • Health and Welfare Trust (HWT): The Department of Finance is proceeding with a consultation period to seek feedback on administrative and legislative matters related to the transition of the HWT regime towards the Employee Life and Health Trust rules outlined in the Income Tax Act (Canada).

  • Donations to universities outside of Canada: The budget proposes to remove the requirement that universities outside of Canada be prescribed in the Income Tax Regulations, making donations to foreign universities that are registered with the CRA eligible for a charitable donation tax credit, effective February 27, 2018.

  • Registered Disability Savings Plan (RDSP) holders: Extension to the year 2023 of the temporary program whereby a qualifying family member can be a plan holder of an adult individual’s RDSP when capacity to enter into a contract is of concern.

MD will continue to monitor any new developments with respect to the changes proposed in the 2018 federal budget. If you have questions about how you or your individual financial plan may be affected, please contact your MD Advisor for more information.

1Adjusted aggregate investment income

Previous Article
Q1 2018 Message from the President and CEO

The first quarter of 2018 was a tale of two markets. January brought more of the same steady equity market ...

Next Article
Q4 Global Investment Viewpoint

Equity markets ended 2017 on a high note as most major stock indices posted strong returns. As we enter 201...