It’s nice
to be asked for your opinion.
The federal
government is asking for comments about the criteria used to distinguish
between active business income and investment income earned by corporations.
The
distinction is important. The first
$500,000 of annual income from an active business qualifies for a special low
corporate tax rate. Income in excess of
that threshold is taxed at a higher rate (but one that is still below the rate
that applies to investment income). The
lower rate provides the corporation with more after-tax income that can be
invested back into the business operations or passed up to a special purpose
holding entity for other investment uses.
In contrast, investment income is taxed at full rates with a partial
refund of some of that tax when the corporation pays a taxable dividend (the
refund is approximately equal to the tax that the dividend recipient will pay).
If the
principal purpose of a business is to derive income from property (such as
rental income from the use of real estate), the income generated by the
business is considered investment income unless the business employs more than
five full-time employees throughout the year.
Concern has
been expressed about how this distinction applies in the case of self-storage
facilities and campgrounds. While not
specifically mentioned in the budget materials, this issue also applies in the
case of many roadside motels and mobile home parks. Usually, smaller-scale operations of these
types do not employ more than five full-time employees throughout the
year. For example, campgrounds and
roadside motels are often seasonal operations.
However, the business is more akin to a business that requires active
management than a passive form of investment.
The
government has invited interested persons to submit comments no later than
August 31, 2015. Comments should be sent
to by email to business-entreprise@fin.gc.ca.
If you send
in a submission, please indicate whether you consent to having the submission
posted on the Department of Finance website.
If you consent, indicate the name (your name or the name of your
organization) that should be identified on the website as having made the submission. Submissions should be provided
electronically in PDF format or in plain text. The Department will not post submissions that
do not clearly indicate consent to posting.
I suggest
that you clearly consent to having the submission posted on the Department of
Finance website. If your submission is
posted, there is a better chance that others might support your ideas. Your submissions will have the chance to go tax-world
viral.
Visit the Dwyer Tax Law web site
for information about our services and lawyers' profiles.
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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.