The Post-Budget Update

By John Nicola, CFP, CLU, CHFC

Read this update in PDF format.

It has been almost nine months since Bill Morneau conceived his poorly designed tax reform for private corporations. The baby has now arrived and it is early but is much healthier than we expected based on the initial rhetoric of the federal government in July of 2017.

In December 2017, the government released significant modifications to the original July 18, 2017, proposals with respect to the Tax on Split Income rules (TOSI). In the federal budget released February 27, 2018, the government provided clarity to the taxation of passive income in private corporations (CCPCs).



Before we look at how this brave new world of private company taxation will work and impact you it might be helpful to remember what the original proposals from July 2017 were trying to accomplish.

The narrative from the government was that owners of private corporations, including professionals, business owners, and investors, received large tax-deferral benefits from being able to own shares in a private company. The most egregious examples from their perspective included:

  • Being able to distribute income from the profits of a CCPC to other family members and reduce overall income tax by income splitting.
  • Being able to accumulate significant wealth which was initially taxed at the much lower corporate tax rate of between 13% and 26% on active business income.

The initial recommendations included:

  • Taxing all split income at the maximum personal tax rate.
  • Increasing the effective tax rate on passive income earned in a corporation to 71%. Initially, existing assets were to be grandfathered with respect to taxation and after many angry submissions about the proposals, the government modified them, in their October 2017 announcement, so that new assets would not be subject to these rules if the income they earned was less than $50,000 per year. The proposals were incredibly complex and vague. Many Canadians speculated that providing record keeping for the different tax pools would be extraordinarily difficult and expensive.

If you have read any of our previous newsletters on this tax reform you will know that the government chose to ignore certain facts:

  • Self-employed business people and professionals take significant risk in creating their businesses and practices that employees do not.
  • These same people must fund 100% of their health benefits, retirement plans, vacation pay, etc.
  • Government employees and MP’s are entitled to generous indexed pension plans that can accumulate value in excess of $3 million with no tax being paid on the contributions or the income earned while funds are accumulating. Furthermore, they are permitted to income-split these pensions with their spouses when they retire.
  • Public corporations pay tax of 26% on passive income. When that rate was combined with maximum tax rate an individual would have paid in 2017 on dividends, in BC, the total tax rate was 49.67% (50.17% in ON). The new rules proposed a blended tax rate for CCPCs and their shareholders of 71% on the same type of income.

Fortunately, as a result of a great deal of protesting, public submissions, and a deeper analysis performed by the government, the current proposed legislation is quite different.

Income Splitting

This was addressed in December 2017 and the main changes are:

  • Allowing income splitting between a shareholder and their spouse (subject to the spouse being a shareholder directly or through a trust) once the principal shareholder turns 65. Making it easier to transfer the shares of a private business or farm from one generation to the next.
  • Allowing some form of income splitting by salary or dividends with family members subject to a “reasonable level” of involvement with the company.
  • Allowing a reasonable return on capital invested by a family member in the company.

Taxation of Passive Income

  • All passive income in a CCPC to be taxed in the same way.
  • No grandfathering of existing assets.
  • If passive income exceeds $50,000 per year, then access to the small business tax rate (12% in BC/13.5% in ON) will drop by $5 for every $1 of passive income above $50,000. Meaning that a company earning $150,000 of passive income would have no small business tax rate and pay a 27% rate on active business income in BC (26.5% in ON).
  • RDTOH and CDA will continue to be created by passive investments, but if RDTOH is triggered by a taxable dividend being paid, that dividend will be considered ineligible vs. eligible and will attract a high tax rate (about 9.5% higher in BC in 2018 and 7.5% higher in ON). The exception to this will be eligible dividends received from either public or private companies. This means that there will be two RDTOH pools within CCPCs after 2018.

This summary above is not meant to cover all of the details of the budget and the proposals released in December, but rather it outlines those rules that we feel most impact our clients.


Let’s now examine the good and the bad, and then consider what planning strategies would be worth considering.

The Bad

  • Paying dividends to a family trust and allocating them to adult children who are not active in the company will not work.
  • It will be necessary to keep track of two types of RDTOH after the end of 2018 depending on how the passive income was earned.

The Good

  • Business owners and professionals will be allowed to accumulate wealth inside their corporations for retirement and then income split with their spouses once they turn 65.
  • Family members who are active in the company even on a part-time basis will be allowed to receive compensation or dividends or both.
  • The blended tax rate on passive income will drop from 71%, but could still be as high as 51.3% to 54.5% in BC and just over 58% in Ontario based on the higher marginal rate of ineligible dividends (see “Planning” below).


Given this new world of private company taxation, the following are some of the changes or adjustments we would recommend:


For many years we have told our clients who get the small business tax rate that they should take their compensation in the form of dividends, income split where possible, not take any salary unless required, and not save using either RRSPs or IPPs. Much of this was driven by three main factors:

  • Combined corporate and personal tax on dividends was lower than on the same amount paid by way of salary.
  • CPP premiums could be avoided with dividends.
  • Investing in RRSPs and IPPs when your maximum corporate tax rate was 15% or less was less effective than saving in the corporation.

Increases in the taxation of dividends and future possible loss of the small business tax rate require us to reconsider that model.

For most shareholders it will now make sense to do the following:

  • Take sufficient salary to maximize RRSP or IPP contributions (this works out to $145,722 in salary) plus between $26,300 and as much as $40,000 annually for an RRSP/IPP.
  • Pay reasonable salaries to a spouse based on activity.
  • Use prescribed rate loans to lend capital to a spouse or trust so that income can be earned on that capital. This allows the income to be taxed in the hands of the spouse, children, or grandchildren.


There are a couple of planning considerations here.

  • Can we keep passive income (taxable) below $50,000 per year to preserve access to the small business deduction?
  • For those who are above $150,000 per year of active income already or have more than $15 million of capital inside their related companies, there is no small business tax rate and they are paying 27% in BC on active business income. For those in this category, the objective is to design a portfolio to earn lower rates of taxable income without increasing the risk profile of the portfolio.

Below is a simplified summary of our ideas on how this can be done. First, let’s look at the table below to see how different types of assets and their returns
are taxed.

This table becomes important in terms of how one would establish an ideal corporate portfolio earning passive income. Let’s consider two examples.

Real Estate and Rental Income

In 2016, our Canadian real estate fund, SPIRE Real Estate LP*, earned a return of 9.9%; from a taxation point of view the return was:

  • 1.5% rental income
  • 1.2% realized capital gains
  • 4% return of capital (made possible by the use of depreciation)
  • 2.4% appreciation in long-term value of the real estate

Even though the return was 9.1%, only 2.1%% would have been taxed in 2016 and the tax would have been equivalent to 1.1% corporately (that is a current tax rate of about 11% on the total return for the year). Results for 2017 are expected to be quite similar, except the return for 2017 was 10.6%.

*SPIRE Real Estate LP Historical Performance, as of January 31, 2018: 1 year – 10.55%, 3 year – 9.58%, 5 year – 9.46%, 10 year – 9.29%, Since inception, December 31, 2005 – 9.67%,

Life Insurance

Life Insurance cash values are usually 100% guaranteed and earnings on the cash value are tax-free, unless the policy is redeemed for cash. This makes life insurance a very tax-effective way to own safe assets inside a CCPC. Insurance is considered strong collateral by lenders (typically 90% versus 50% to 60% for real estate and equities).

It is possible to build a corporate portfolio that is balanced with a blended tax rate of about 20% or less on a current basis under the new rules.

The government has assumed that $50,000 of passive income would be generated on $1-million of passive capital (a 5% return). We feel that with good design we could reduce that level of passive income so that one could have as much as $2-$3-million of capital before earning more than $50,000 of annual taxable income. That would be a significant benefit for those who are focusing on building capital for retirement and still enjoy the small business tax rate. Many individuals could retire comfortably with that level of corporate savings combined with registered assets.

For those who will lose or have lost the low active business rate, the strategy for passive investments is to lower current taxable income annually without
creating additional levels of risk. This model also accomplishes that.


We have seen noticeable tax increases both federally and provincially. These are likely to continue if the parties in power remain there. Tax planning is only one part of effective wealth building. Portfolio design, compensation models, and insurance with or without leverage are all tools that need to be utilized. It may well make sense after 2018 to have separate entities for passive assets and active ones and to focus debt, philanthropy, and other expenses through the passive entity. As this year unfolds we will be working with your own tax advisors to see if that is a better structure going forward.

These changes emphasize the need for each of our clients to work actively with us and their accounting advisors to build their own model and ensure it
stays relevant and effective. There is no one-size-fits-all approach that will work well. Your plan needs to be customized.


John Nicola, CFP, CLU, CHFC
Chairman & CEO
Nicola Wealth Management


This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. NWM is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities’ commissions.