Tuesday, April 21, 2015

Reduction in Tax Rate on Active Business Income

A Canadian-controlled private corporation (CCPC) pays a reduced tax rate on its first $500,000 in annual income from a qualifying active business. The 2015 federal budget announced a 2% reduction in the federal portion of this rate over the next four years. This is a decline of 0.5% per year starting on January 1, 2016.

For a CCPC that carries on an active business solely in British Columbia, the combined income tax rate on the first $500,000 of active business income will decline from the current 13.5% to the following rates (assuming no change in provincial income tax rates).

January 1, 2016: 13%
January 1, 2017: 12.5%
January 1, 2018: 12%
January 1, 2019: 11.5%

As long as the after-tax income is kept in corporate form, the lower rate leads to a significant deferral of income tax.

Disadvantages can arise if the income is kept inside the business corporation. For example, shares of the business corporation can cease to qualify for the capital gains exemption if the business corporation holds too many investment assets. These disadvantages can be avoided by having the business corporation pay all its surplus after-tax cash to a properly-structured holding corporation. The payment would be in the form of a tax-free inter-corporate dividend. The surplus after-tax cash (as of 2019, 88.5 cents per dollar of business profit) can then be invested inside the holding corporation without impairing a shareholder’s ability to claim the capital gains exemption on a future sale of shares of the business corporation.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.