The use of the corporate tax deferral to hold passive investments inside a corporation. Currently in Alberta, Canadian-controlled private corporation (CCPC) earns less than $500,000 pays tax rate at 12.0%, which is at a lower rate than personal income. This results in a tax deferral of up to 36.0%. This deferral leaves corporations more money to grow and invest. The government perceives is unfair that the retained money is not used to grow the company but to fund passive investments such as stocks, rental properties, etc. compare to unincorporated salaried person.
The February 27, 2018 Federal Budget proposes two measures to reduce deferral tax advantages where a CCPC earns passive investment income.
The first measure, for taxation years commence after 2018, the small business deduction (SBD) limit of a CCPC will be reduced by $5 for every $1 of passive investment income above the $50,000 threshold. The SBD limit will be reduced to zero for passive investment income of $150,000 or more.
For example, 2019 taxation year, A Ltd, based in Alberta, has more than $500,000 of active business income and $50,500 of adjusted aggregate investment income.
A Ltd SBD limit will be reduced by $2,500 (5 * 500), which represents a tax cost of approximately $400 (2,500 * (27% – 11%)).
The second measure, for taxation years commence after 2018, a CCPC will not be entitled to recover refundable dividend tax on hand (RDTOH) while paying eligible dividends (lower-taxed dividends) from active business income taxed at the general corporate rate.
There will be two separate RDTOH accounts to track refundable taxes that can be recovered through the payment of eligible dividends or non-eligible dividends. The eligible RDTOH account will track Part IV tax on eligible portfolio dividends. The non-eligible RDTOH account will track refundable taxes on investment income and Part IV tax on non-eligible portfolio dividends.