What a week. It seemed the Trudeau cabinet rolled out daily press conferences trying to offer “tweaks” to the income tax changes that they had proposed July 18th. These most recent changes are more conceptual in nature but are reassuring for the farming community.
The changes that affect the farming community are in four major areas:
- Income splitting will remain for shareholders (dividends) in family farm corporations. However, the government still wants a “reasonability” test on such payments. Details on how this will be implemented are yet to be announced.
- Passive investment income taxation has been clarified. It will only apply to income within the corporation above minimum threshold of $50,000 per year. It suggests there would be no concerns with an investment portfolio of $1M providing a 5% taxable income payout. We suspect that an additional calculation like the Alternative Minimum Tax formula would be required at the higher investment income levels ($50,000+). For example, corporations in Manitoba are currently operating under the rules:
- Converting income to capital gains will continue to be available for retiring farm families who want to pass on the family farm to the next generation.
- If the farm corporation’s yearly taxable farm income is over $450,000, the first $450,000 is taxed at 10.5%. The amount above that limit would have a substantial higher tax rate.
- The passive investment income declared in corporations over the $50,000 threshold will now have an additional tax levied.
- The tax rate on business income, passive investment income, and capital gains will have different tax rates 0% to possibly 90%, depending on the nature of the source of income within corporation and how it’s received by the end shareholder.
- Unincorporated farms in Manitoba currently have a super tax credit which allows for Capital Gain’s on sale of personally owned farm land to be taxed 0% up to a certain threshold. Once passing the threshold, the ‘Alternative Minimum Tax’ calculation would conclude the additional tax applied on this supposedly “tax free” transaction.
As an unexpected bonus, it was announced that the federal small business tax rate will be reduced to 9% by 2019. One journalist speculated that this tax reduction would save small companies roughly $7,500 in taxes per year, for a total savings of $3 billion dollars. The July 18th tax change proposals were expected to generate additional tax revenues of $3-$5 billion dollars. Interesting…
Please call us if you have questions about your specific succession plan structure and potential complications you may face.