For many, the recent 2018 budget provided welcomed relief to what could have been much worse for business owners and professionals. The severe backlash experienced after the July tax proposals gave the government good reason to fine tune their final proposals and scrap some other rules all together.
Income Splitting
As clarified in December, paying dividends to a family trust or to adult children who are not active in the business will no longer be effective. However, family members who are involved in the business (at least on a part-time basis) will be eligible to receive dividends.
Passive Income
Passive income earned within a corporation in excess of $50,000 per year will gradually reduce access to the Small Business rate (12% in BC) on the first $500,000 of active business income. The small business rate will be completely eliminated once a corporation has $150,000 of passive income, resulting in 27% tax on all active business income.
Planning Opportunities
Most accountants that we talk to are increasingly in favour of paying sufficient salary ($145,722) to active business owners in order to maximize RRSP ($26,230) or IPP (~$40,000) contributions with any excess paid as a dividend. We agree with this strategy and believe that Individual Pension Plans (IPPs) are particularly attractive for those with established businesses/revenues. Not only will an IPP provide predictable retirement income that is protected from the business, but it can also provide an effective pipeline to shelter passive investments within the corporation, thereby reducing the impact of passive income on the small business limit.
Even still, many accountants remain only vaguely familiar with the planning opportunities that exist with Individual Pension Plans (IPPs). For good reason, you’re accountant has to know and keep up with a lot of information. That’s why we’re here to help. If you are interested in exploring a pension plan for your corporation, then we would be pleased to review this opportunity with your accountant to determine if such a plan would work well for your situation.