Small business tax update: Feds looking for ideas on how to handle passive investments in medical corporations

Alan ActonOn Oct. 16, Prime Minister Justin Trudeau and federal Finance Minister Bill Morneau announced the federal government would be lowering the small business tax rate to 9% by 2019, from the current 10.5% rate. This proposal, intended to take effect in 2018 and happen over two years, should result in an approximate $7,500 tax saving on the first $500,000 of income earned in a small business corporation, which includes medicine professional corporations.This proposal is seen as fulfilling a campaign promise by the prime minister to maintain to the lower corporate tax rate passed by the previous government. It seems the Liberal government, reeling from the controversial summer tax proposal titled the “Fair Tax Plan” (FTP), is trying to appease the electorate, and even many of their own MPs.In addition, at a conference on Sept. 25 held by the Canadian Tax Foundation in Ottawa, representatives from the department of finance provided some interesting guidance on the proposals contained in the FTP. One area discussed was the accumulation of passive investments in a medical corporation, a strategy used by many physicians to save for retirement. Representatives from finance restated that any changes to passive corporate investments will apply only on a go-forward basis, and have minimal if any impact on existing corporate investment portfolios. However, it was unclear how this would be done. One remedy suggested would be to allow the establishment of a holding company that would contain accumulated passive investments, so as to ensure grandfathered tax treatment on those holdings. Finance officials stated that further study is required, and welcomed submissions on how to handle this particular situation.Another issue addressed was income sprinkling, or income splitting as it is commonly known, a technique also used by a great number of physicians to lower their overall tax bill. If physicians have family members in a lower tax bracket, under current rules they are able to pay family members dividend income, and have these dividends taxed at a lower rate than their own. Starting January 1, 2018, family members will now have to undergo a “reasonableness test” to qualify for the lower tax rate. The object of this test would be to determine the amount of labour and assets the family member has contributed to the medical corporation. Again, there was not a lot of clarity in this area, with the analysis to rest on the details of each individual case.According to Morneau, there are further particulars to come on exactly how income sprinkling and passive investments are to be treated under the proposed new rules. Hopefully we will see some clarity on these issues in the coming days.Alan Acton is an Ottawa-based portfolio manager with Polaris Wealth, a division of Polaris Financial Inc. He can be reached at alanacton@polariswealth.ca. Conclusions and opinions in this article are his own and do not necessarily represent those of Polaris Financial Inc.

Small business tax update: Feds looking for ideas on how to handle passive investments in medical corporations

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