In a recent blog, I explained why a CCPC shareholder is better off holding real estate investment or any passive investment in a CCPC versus personally.
Those who are familiar with recent changes to CCPC tax laws will note that there is a $ 50,000 investment income ceiling, after which for every $ 1 additional investment income dollar will claw back the SBD by $ 5. Hence, once investment income reaches $ 150,000, the entire SBD will be eliminated. In other words, there is no income that qualifies for the 11% tax rate and all corporate profit will be taxed at the 27% corporate tax rate.
The new rules governing passive income are complex is only came into effect in 2019. We will not go into details right now. But here are my tax planning tips to minimize the SBD claw back:
- Salaries can be issued to the active shareholders instead of dividends. Given the increased tax rates that are applied to ineligible dividends in the past few years, receiving salaries may be the equally good if not better option going forward. Salaries will create RRSP room which allows for tax free growth of investment outside of the corporate tax rules.
- Remember that investment counselling fees should be netted off against investment income on the tax return. This ensures proper allocation of expenses to active income and passive income and hence, staying below the $ 50,000 investment income limit. Similar idea applies to any fees paid for professional services that relate to a short-term rental business.
- Real estate investments in generally do not create large passive income due to management, financing and ownership costs. This is particularly true in Vancouver.
- Lastly, Individual pension plans and exempt life insurance products by their nature will not produce “investment income” that falls under the new rules. However, these products are complex and involve long term commitment and up front “set up fees” even if not termed as such. Buying these products just to avoid the new investment rules for CCPC is not advised.
Again, real estate investment in a CCPC makes sense only if there are corporate retained earnings somewhere. Above are suggestions to limit the SBD reduction under the new passive income rules.
