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Passive Income Tax Changes Relaxed

In the summer of 2017, the federal government proposed changes to the taxation of passive investment income of private corporations in Canada. Following angry feedback to the original proposals, the government introduced adjustments in their spring budget. The new measures they introduced will be applicable to company’s tax years beginning after 2018. In both sets of proposals, if a company earned over $50,000 of passive investment income, they would have been subject to new taxation rules. The first proposal would have resulted in an increase to the tax rate on investment income. In their revised proposal, rather than increasing the tax on investment income, the budget proposed to reduce the amount of small business deduction that would be available to a company that earned over $50,000 of passive investment income.

The small business deduction allows a private company to earn up to $500,000 at the lowest federal corporate tax rate. If a business earns passive investment income over the $50,000 threshold, their available small business deduction limit will be reduced. If this
income is greater than $150,000, the small business deduction will be eliminated.

One of the main concerns with the original proposal was that one time capital gains could push a company’s passive income over the threshold.

In response, the government has excluded capital gains on assets used in an active business by a company or a connected company; however, no adjustment has been made for gains on sales of passive investments.

Furthermore, capital losses from prior years are excluded, so taxpayers are unable to offset current gains with previous losses to reduce their income below this threshold.

Tax Planning: Care Home Fees

8As each year passes, many seniors face rising health expenses, especially when it comes to nursing home fees. Personal care homes equipped with government-subsidized beds charge fees based on each resident’s personal tax return. Therefore, in years of medical need, the greater the income you report on your tax return, the greater the fees you will pay at your nursing home residence.

In essence, the government will charge you 80% of your after -tax income for residential care home fees. This amount is determined using your net income (line 236 of your tax return), less your Registered Disability Savings Plan income, Universal Child Care Benefit income, and any income taxes paid.

For example, if your net income was $30,000, and you paid $3,000 in income tax, your after-tax income would be $27,000. Eighty per cent of this amount would be $21,600. Dividing this total by 12 would result in a monthly personal care home charge of $1,800.

There are allowances for lower income individuals who have an after-tax income less than $19,500. If you were in this situation, you would deduct $3,900 from your after-tax income to determine your monthly fee. The final fee would be subject to a minimum monthly amount that is set each year. This year, British Columbia’s minimum monthly public personal care home fee has been set at $958.90.

There are several strategies you may wish to consider in order to keep your residential care home costs down. One of the most important strategies would be to split your pension with your spouse. Ordinarily, the higher income spouse would want to split their pension with the lower income spouse, allowing for lower income tax rates. However, the nursing home fees are essentially an 80% tax, compared to a maximum 43.70% income tax rate. Therefore, it may make more sense for the lower income spouse to split their pension with the higher income spouse, if the lower income spouse is living in a nursing home.

In other tax-planning situations, pension-splitting percentages could allocate a maximum income to the lower-income spouse/resident which would still result in the minimum monthly fees.

In addition, if you are planning on transferring investments to your adult children in the future, it may make sense to transfer them now. This step could reduce the amount of investment income realized on your personal return, potentially allowing for a reduction in residential care home fees.

If this applies to you or your family, contact your Kemp Harvey Group professional.

Share Losses Deductible

Many people are unaware that losses they incur from the sale of shares are deductible as a capital loss. This includes investments of shares in companies which have gone defunct and are now worthless. You may claim one half of the loss from the sale of those shares as a deduction against gains that you have earned on sales of other investments, or against any of your income in the year you pass away. If you forgot to report these amounts on your tax return in a prior year, you can still report them in the current year.

You can also re-file a previous year tax return, if it helps to reduce your income tax for that year.

File Taxes On Time

If you have children, you and your spouse most both file your personal tax returns in order to receive the full amount of the Canada Child Tax Benefit (CCTB). In order to ensure there is no delay in receiving your CCTB, you must file your return by the appropriate due date. Even if you are delayed and do not forward your tax returns until the end of the year, the government will still back-date any payments which were owed to you.

This is similar to many other government programs. If you are eligible for a GST refund, or the Guaranteed Income Supplement, your returns must be filed by April 30th in order to ensure your payment will not be delayed.

The payment you receive in July for these programs is based on your personal tax return from the previous year. In short, if the government owes you money, the sooner you get your tax return to their office, the sooner you will receive your funds.