Budget 2018: Highlights
The 2018 Budget came earlier than usual and contains many interesting proposals, including more long-awaited guidance on passive income. Below you’ll find a few highlights. Don’t forget to go to IntelliConnect for full coverage of the budget, and consult your printed Special Report for all the details.
Passive Income Proposals – Private Corporations
Following last year’s focus on private corporation proposals, Canadians have been waiting for more details on how the government proposed to tax passive income earned by private corporations.
Approximately 3% of Canadian-controlled private corporations are anticipated to be affected by the new rules – about 50,000 corporations. Budget 2018 proposes to reduce a corporation’s small business limit where the corporation earns investment income exceeding $50,000. For example, a corporation with $100,000 of passive income will have its small business limit reduced to $250,000. This reduction will operate in tandem with the reduction where taxable capital exceeds $10 million—the greater of these two reductions will apply. A new amount called “Adjusted Aggregative Investment Income” accounts for the corporation’s investment income.
The Budget proposes that two separate refundable dividend tax on hand (“RDTOH”) accounts be maintained going-forward: eligible RDTOH and non-eligible RDTOH. Eligible RDTOH will track Part IV tax paid on eligible dividends, and will be refunded when either an eligible or non-eligible dividend is paid. Non-eligible RDTOH will track Part I refundable taxes and Part IV tax on non-eligible dividends. Only non-eligible dividends will trigger a refund from this account.
At-Risk Rules for Tiered Partnerships
The Budget clarifies that the at-risk rules for limited partnerships apply where a partnership is a limited partner of another partnership. This change was introduced to a response to a recent court decision, which in the government’s view, was inconsistent with the underlying policy of the at-risk rules.
Changes to the Foreign Affiliate Rules
Budget 2018 proposes to make various modifications to the foreign affiliate rules. Proposed amendments relate to income of an investment business, controlled foreign affiliate status, trading or dealing in indebtedness, extending the reassessment period in certain circumstances, and aligning deadlines for a taxpayer’s income tax return and foreign affiliate information return.
Stopping the Clock
Where a CRA compliance order or information requirement is contested, a new rule will “stop the clock” to prevent the tax year from being statute barred. This rule already exists with respect to requirements for foreign-based information, so the government has expanded this rule to apply to requirements for information that is not foreign-based
Non-Resident Surplus Stripping
The Budget proposes to address transactions where taxpayers have attempted to avoid the non-resident surplus stripping rules by transferring an interest in a partnership or trust that hold shares (rather than transferring the shares directly). Effectively, the non-resident surplus stripping rules will be tightened by adding a “look-through” rule for partnerships and trusts.
For more information, see the Wolters Kluwer Federal Budget site.