“ If a company has a December 31 year-end ... we would need to be cognizant of the new rules when doing tax planning for 2018 .”
The proposed legislation would reduce the $ 500,000 SBD business limit by the “ adjusted aggregate investment income ” ( AAII ) earned by the CCPC or associated CCPCs in each taxation year ending in the preceding calendar year . ( Note that this is a proposed amendment to the definition of “ business limit reduction ” in Subsection 125 ( 5.1 ) of the ITA , as the reference to the preceding calendar year with respect to AAII is slightly different than the reference to the preceding year for “ taxable capital employed in Canada .” 10 ) The formula would permit a company to earn $ 50,000 in passive investment income without triggering a grind to its SBD business limit . This means that the $ 500,000 SBD business limit would be reduced on a straight-line basis from $ 500,000 to $ 0 if the CCPC and its associated CCPCs earned between $ 50,000 and $ 150,000 AAII in the preceding calendar year . 11 As a formula , this 5-to-1 reduction of the $ 500,000 SBD business limit reflects the government ’ s desire to drastically curtail a private corporation ’ s ability to use the tax savings from the SBD to accumulate passive investment assets .
10
The wording with regard to AAII addresses the possibility of a company having multiple year-ends in the preceding calendar year to reduce the earnings in the last year-end of the prior year , thereby reducing the grind to the SBD business limit . This wording is not needed for the grind to the SBD business limit because “ taxable capital employed in Canada ” is a balance sheet item .
11
The 5-to-1 reduction means that there will be a $ 5 grind in the SBD limit with every $ 1 of passive investment income over $ 50,000 earned by the CCPC .
Critical to understanding the proposed reduction of the $ 500,000 SBD business limit is understanding the calculation of AAII . 12 Under the proposed legislation , AAII is equal to a CCPC ’ s “ aggregate investment income ” ( AII ) 13 for the year , with the following adjustments : > Additions :
• Dividends from non-connected 14 corporations , and
• Income from savings in a life insurance policy that is not an “ exempt policy ” 15 to the extent that it is not included in AII . 16
> Deductions :
• Taxable capital gains ( and losses ) from the disposition of :
• Property used principally in an active business carried on primarily in Canada by the CCPC or by a related CCPC , 17 and
• Shares of a connected CCPC , where all or substantially all of the fair market value of the connected CCPC ’ s assets is attributable directly or indirectly to assets that are used principally in an active business carried on primarily in Canada ; and
• Net capital losses carried over from other taxation years .
The grind to the $ 500,000 SBD business limit would be the greater of the reduction resulting from taxable capital employed in Canada in excess of $ 10 million or the reduction for AAII in excess of $ 50,000 .
Final thoughts Some commentary about the application of the rules for the proposed reduction of the $ 500,000 SBD business limit suggests that the new rules would apply to taxation years commencing after 2018 , but that is not quite correct ! It ’ s true that the reduction of the $ 500,000 SBD business limit would apply for taxation years commencing after December 31 , 2018 . However , if a company has a December 31 year-end , the grind in the $ 500,000 SBD business limit will be based on the AAII of the fiscal period or periods of the company in the 12 months ending December 31 , 2018 — this means we would need to be cognizant of the new rules when doing tax planning for 2018 . If , however , a company has a November 30 year-end , its first fiscal year-end commencing after December 31 , 2018 , will be November 30 , 2020 — this means the tax planning for the grind to the $ 500,000 SBD business limit would not be an issue until the planning occurs for its year-end or year-ends occurring in the 12-month period ending November 30 , 2019 .
12
This is a proposed amendment to Subdivision B , Subsection 125 ( 7 ) of the ITA .
13
ITA , Division F , Subsection 129 ( 4 ). Previously , the definition of aggregate investment income was relevant only for calculating the amount of dividend taxes .
14
Pursuant to ITA , Part IV , Subsection 186 ( 4 ): A payer corporation is connected with a CCPC if it is controlled by the CCPC or if the CCPC owned more than 10 % of the issued share capital , having full voting rights and with a fair market value ( FMV ) of more than 10 % of the FMV of all of the issued share capital of the payer corporation .
15
Defined in ITA Regulation 306 . It is very rare for a life insurance policy in Canada not to be an “ exempt policy .”
16
If a life insurance policy is not an “ exempt policy ,” the income would already be in AII by virtue of the income inclusion rules , pursuant to ITA 12.2 ( 1 ).
17
Note that this does not extend the definition to “ associated ” CCPCs .
42 CPABC in Focus • July / August 2018