Corporate tax changes take a new turn By John Dickie, President, CFAA
As noted in an earlier report, 80 business and professional groups came together, in the Coalition for Small Business Tax Fairness, to oppose the corporate tax changes first proposed in July 2017. CFAA is an active member of the Coalition. Due to intense opposition from the Coalition and other business people and professionals, the government
The proposed federal corporate tax changes only apply to people who receive income as dividends derived from Canadian-controlled private corporations (CCPCs), or who hold real estate through such corporations. That includes many landlords and rental housing suppliers.
Business owners can employ family members and pay them wages or salaries which are reasonable for the work they do. If a family member is paid more than is reasonable, then Canada Revenue Agency can assess the business owner for taxes as if the excess amount of salary or wages were the company’s income, or in some cases, the business owner’s income. Until the current changes, a business owner who operated through a corporation which was set up correctly could pay dividends to family members without risking the attribution of that income to him. That was a form of income splitting. The government still intends to prevent much of that income splitting by testing the reasonableness of the
has backed down on two of its four reform proposals, and has watered down the remaining two. However, Finance Minister Morneau is proceeding with revised versions of two of the proposals, as laid out in December and in Budget 2018, released on February 27. The new regime has not yet been enacted.
There are no plans to affect people who hold real estate in their own name (or with their spouse), or public companies or REITs. Investors who currently pay tax at the top personal rate on passive income should also not be affected.
payouts compared to the capital and work contributed to the business. Thanks to the opposition of CFAA and the Coalition, the government has made it clear that past contributions will justify current dividends, and has provided “bright line tests” to make it easier to know that a business and a person qualify to split income. Corporate owners will be able to split income with these people: •
The business owner's spouse, provided that the business owner meaningfully contributed to the business, and is aged 65 or over.
Adults aged 25 or over who own 10 per cent or more of a corporation that is not a professional corporation, and earns less than 90 per cent of its income from the provision of services.
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NATIONAL OUTLOOK •
Adults aged 18 or over who have made a substantial labour contribution (generally an average of at least 20 hours per week) to the business during the year, or during any five previous years. Individuals who receive capital gains from qualified small business corporation shares, if they would not be subject to the highest marginal tax rate on the gains under existing rules.
Along with many members of the Coalition, CFAA is still opposing the restrictions on income splitting. In particular, we are seeking the exemption of all spouses from the new rules, and for the new rules to begin for the 2019 tax year, rather than in 2018. Recently the Parliamentary Budget Office released a report that suggests that the increase in taxes due to the income splitting changes will be two to three times as large as the Finance Department projection.
Taxing passive income earned within a corporation Compared to income earned by individuals with a good income, active business income earned by all corporations is taxed at a low rate (and small business income is taxed at a very low rate), and that differential will continue. The government believes that differential gives business owners an advantage over other people who pay tax on their incomes at the standard rates. Until February 27, 2018, the government proposed to increase the tax rates on such “second generation” income above normal rates, potentially to 73%. The government proposed a system to track corporate income according to what tax rate has been paid on it (which would have been an accounting nightmare.) CFAA and the Coalition
strongly opposed that approach and those high tax rates. In Budget 2018, the government announced a new approach. CCPCs with less than $50,000 of investment income in a year will continue to be largely unaffected. The budget proposes to reduce the small business limit on a straight line basis for CCPCs that have between $50,000 and $150,000 of investment income. The budget reduces the small business deduction by $5 for every $1 of investment income above the $50,000 threshold. The business limit would be zero at $150,000 of investment income. See the examples in Table 1. Table 1: Sample impacts of the latest passive income plan Investment earnings
Limit of corporate income eligible for the small business tax rate
0 – $50,000
Currently, the small business limit is reduced when the corporation has taxable capital employed in Canada between $10 million and $15 million. The reduction in a corporation’s business limit will be the greater of the reduction under the new measure and under the existing taxable capital reduction provisions. The new approach to passive income is certainly a simpler approach than the original proposal, and is positive on balance.
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CFAA and most members of the Coalition are seeking an amendment to grandfather income on investments owned as of 2017. The government had promised grandfathering in October 2017, but went back on that in moving to the new approach in February 2018.
The steps to implement the increase in the Working Income Tax Benefit.
CFAA’s reaction and action While we would have preferred the government to scrap its changes to the taxation of CCPCs entirely, the government’s changes since July have reduced the impact of the reform. CFAA invites input from landlords who will be affected if the proposed changes are enacted. Member associations and landlords are invited to check CFAA’s website for CFAA’s submissions and the latest information, and are invited to email firstname.lastname@example.org with their issues and concerns. Please also send us any letter or submission you sent or send to the government on the tax issue.
Positive measures in Budget 2018
Besides welcoming the changes to the corporate tax reforms, CFAA applauds other measures in Budget 2018, and has the following comments on them.
The increase in funding for the Rental Construction Financing Initiative, which provides direct CMHC loans for energy efficient, mixed income communities, including some to be built by for-profit developers. The steps to address the housing shortfalls in Indigenous communities.
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That is a difficult problem to solve, especially with the limitations on financing imposed by the reserve system which involves common ownership, and prevents ready access to financing.
CFAA and the landlord community approve of measures to provide low-income people with the incomes they need, especially measures that reward work and offer a path to greater self-sufficiency.
CFAA Rental Housing Awards 2018
CFAA’s Rental Housing Awards winners will be announced at the CFAA Awards Dinner on Tuesday, May 15. The deadline for applications is April 9. The categories open to many landlords include: • • • • •
Renovation of the Year Rental Development of the Year Off-site Employee of the Year Property Manager of the Year On-site Employee of the Year.
To learn how to enter the awards competition, to judge, or to sponsor, please email email@example.com. For more information about the conference, please visit www.CFAA-RHC.ca, or email me or firstname.lastname@example.org. All net proceeds of CFAA-Rental Housing Conferences go to support CFAA’s federal lobbying efforts on behalf of the rental housing industry! Please register now to join us there!
CFAA Rental Housing Conference
May 14 to 16, 2018 The Canadian Federation of Apartment Associations (CFAA), invites you to join us at Canadaâ€™s Rental Housing conference at the Coast Coal Harbour Hotel in Vancouver, BC. www.CFAA-RHC.ca Thanks to Principal Sponsor:
With special thanks to:
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MARCH 2018 Building Innovations Tour
In 2017, Hollyburn Properties won Rental Housing Development of the Year for their stunning “Bridgewater” development in North Vancouver. The building is the synthesis of Hollyburn’s four decades of property management experience. CFAA’s judges praised it for its modern, community oriented design and environmental practice. This year, attendees on the Building Innovations Tour will have a chance to see first-hand what made the Bridgewater stand out among the competition in 2017. The tour will also feature “The Duke” by Edgar Development, a 14-storey, 201 units mixed-use development in Mount Pleasant, Vancouver. With its LEED Gold certification, European inspired design, and public art installation, The Duke is also worthy of a national showcase. Visit www.CFAA-RHC.ca for more information about Rental Housing Conference 2018 in Vancouver.
Top: Bridgewater, North Vancouver Bottom: The Duke, Mount Pleasant, Vancouver
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CFAA Rental Housing Conference 2018 by Jeremy Newman, CFAA Director of External Relations CFAA will be holding Rental Housing Conference 2018 on May 14, 15 and 16 in Vancouver, British Columbia. The Building Innovations Tour will take place in the afternoon of Monday, May 14. That will be followed by the Welcome Reception. The education sessions will take place over May 15 and 16.
The theme is the Future of Rental Housing in Canada. Sessions will cover key aspects of rental housing that apply to landlords in BC and across Canada. Choose among these topics:
• Economic Update – by keynote speaker Benjamin Tal, Deputy Chief Economist of CIBC World Markets.
• Executive Roundtable - including Todd Cook, President & CEO of Northview REIT, Brian McCauley, President & CEO of Concert Properties, and Anthony Lanni, SVP, Residential of QuadReal.
NATIONAL OUTLOOK • Employment law developments in BC and Canada. • Marijuana rules in BC and Canada.
• “Building a State-of-the-Art operations system”. QuadReal, Canada’s newest Top Ten landlord, will present a panel on creating its new State-of- the-Art integrated operations system, including details of QuadReal’s mobile maintenance system, which makes use of both on-line information exchange and a call centre; and their automated “Procure to Pay” procurement system, which eliminates paper-based POs, invoices and cheques.
• “Rental Development issues across Canada”, a panel discussion including planners and developers that will propose solutions and strategies to mitigate roadblocks in new rental development.
• Cynthia Jagger and Sandra Cawley on BC Building Sales. • Many other sessions on operations, investing, technology, and political and legislative updates.
For more information, or to register, go to www.CFAA-RHC.ca.
• Protecting your on-line reputation. • CMHC’s assistance for mixed income rental developments – the Rental Construction Financing Initiative. • The impacts of the new corporate tax regime, restricting income splitting and restricting access to the small business tax rate.
• British Columbia Roundtable, including David Hutniak of LandlordBC, Jason Fawcett of Kelson Group and David Sander of Hollyburn. Learn the commonalities and differences in issues faced by landlords in BC and the rest of Canada.
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