Tax Update #5

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Tax Update #5

While we’re still waiting on the federal government to release draft legislation following the series of October announcements on changes to its tax proposals for private corporations, the Ontario government has made some announcements of its own as outlined below:

Ontario – 2017 Fall Economic Statement

On November 14, 2017, the Ontario Ministry of Finance announced tax changes as part of its 2017 Ontario Economic Outlook and Fiscal Review.

Reduction in Small Business Corporate Income Tax Rate

As of January 1, 2018, the effective Ontario corporate income tax rate on a Canadian Controlled Private Corporation’s first $500,000 of active business income will be reduced from 4.5% to 3.5%.

Combined with the federal rate reductions announced on October 16, 2017, the proposed effective small business corporate income tax rate is as follows:

  • 2017 – 15%
  • January 1, 2018 – 13.5%
  • January 1, 2019 – 12.5%

The above rates will be prorated for corporations with a non-calendar year-end.

The combined federal and Ontario corporate tax rates applicable to general and manufacturing & processing income > $500,000 remains unchanged.

Increase in Personal Tax Rate for Non-Eligible Dividends

Unfortunately, the reductions in the small business corporate tax rate come with a personal tax price. In order to preserve corporate and personal tax “integration” following the above small business corporate tax rate reductions, increases to the effective personal income tax rate on non-eligible dividends have been announced federally and by Ontario. Below is the proposed combined federal and Ontario personal tax rate on non-eligible dividends in the top personal tax bracket (>$220,000):

  • 2017 – 45.30%
  • January 1, 2018 – 46.84%
  • January 1, 2019 – 47.78%
It is important to know that these increases will apply regardless of the corporate tax rate that was applicable to the business profits being distributed. Such a timing discrepancy can undermine the intended “integration”, and potentially result in a higher combined corporate and personal rate. For example, a dividend paid and taxed in 2019 (at 47.78%) from small business corporation profits earned and taxed in 2017 (at 15%) will result in a combined corporate and personal tax rate of 55.61%. This compares to a 53.53% personal tax rate if the business income was earned directly by an individual. (All rates in this example assume the top personal tax bracket). For assistance in determining optimal shareholder remuneration specific to your circumstances, please contact your Davis Martindale advisor.

Elimination of Apprenticeship Training Tax Credit
and
Introduction of Graduate Apprenticeship Grant for Employers

Effective November 15, 2017, the Apprenticeship Training Tax Credit program will be replaced by the new Graduate Apprenticeship Grant for Employers program.

Apprenticeship Training Tax Credit

  • For apprentices registered before November 15, 2017.
  • $5,000 per year, per qualified apprentice, for the first 36 months of an apprenticeship program.
Graduate Apprenticeship Grant for Employers

  • For apprentices registered after November 14, 2017.
  • $2,500 upon the apprentice’s completion of level one and again at level two.
  • $3,500 upon the apprentice’s completion of level three and again at level four.
  • $4,700 upon the apprentice’s attainment of certification.
  • $500 bonus at each grant level for apprentices belonging to an under-represented group: women, Indigenous peoples, francophones, people with disabilities, newcomers and visible minorities.
  • In addition to the 125 trades currently eligible under the ATTC program, the following trades are added to the GAGE program: hairstylist, cook, horticulture/landscape technician, baker/patisserie, and appliance service technician.
For more information, please contact your Davis Martindale advisor.

Federal – Update on Private Corporation Tax Proposals

In Tax Update #4 we summarized the changes announced by the federal Minister of Finance during the week of October 16 to 20th regarding the proposed tax measures originally released on July 18th.

“Income Sprinkling” Within Private Corporations

While the revised draft legislation promised for this fall has not yet been released, these measures are still expected to be effective January 1, 2018. Given the small window of time left in the year, private corporation clients should start the process of planning their shareholder remuneration for 2017 (under the old rules). Contact your Davis Martindale advisor for more information and guidance.

Passive Investment Income

In his October 20 announcement, the Minister of Finance confirmed that the federal government would be moving forward with its passive investment income tax proposals, but with certain concessions, including a de minimus rule of $50,000 of investment income annually. He also indicated that the draft legislation for this measure will be released with the 2018 Federal Budget, and applied prospectively to future passive investments made by private corporations . To date, no proposed effective date for these changes has been announced. Davis Martindale will continue to apprise and advise our clients as more information becomes available.