Navigating the Evolving Landscape of Corporate Taxation

Introduction: Since the 2018 federal budget, traditional tax planning for businesses utilizing the small business deduction (SBD) has encountered new complexities, especially when it comes to holding investments within a corporation. However, savvy strategies remain available to navigate these changes effectively.

Understanding Dividend Taxation in Alberta:

Small Business Deduction (SBD) Impact: For small businesses eligible for the SBD in Alberta, the corporate tax rate on the first $500,000 of active business income is 11%. Dividends paid out from these earnings to individuals fall under the category of “other-than-eligible dividends” and were subject to a tax rate ranging between 15.86% and 42.31% in 2023. It’s crucial to stay updated on the current rates for 2024, as these can impact your tax planning.

Implications of the 2018 Federal Budget: The budget introduced limitations for corporations generating significant passive income (like rents, royalties, dividends, and interest) while utilizing the SBD. Essentially, earning more than $50,000 in passive income begins to reduce your access to the SBD. For instance, a corporation earning $150,000 in passive income loses the SBD entirely, defaulting to the general corporate tax rate.

Strategizing with Passive Income:

The $50,000 Threshold: The first $50,000 of passive income does not affect your SBD eligibility. It’s only beyond this threshold that the SBD starts to get reduced.

Annual Calculations for SBD Utilization: If your corporation isn’t fully utilizing the $500,000 SBD limit, an annual calculation is essential to understand your tax position and plan accordingly.

Tax Rates for Corporations Outside SBD:

General Corporate Tax Rate: Corporations not qualifying for the SBD in Alberta are subject to a 23% general corporate tax rate. Dividends from these corporations, categorized as “eligible dividends,” were taxed between 2.57% and 34.31% for individuals in 2023. Again, staying abreast of the rates for 2024 is key for accurate planning.

Integration and Variances in Taxation:

Diverse Impact Across Tax Brackets: The integration of these tax rates varies significantly across different personal tax brackets. For instance, the tax impact for an individual in the highest tax bracket can differ markedly from someone in a marginal bracket, especially if this is their sole income source. It’s essential to understand how these variances can affect your overall tax burden.

Example

The traditional strategy resulted in active business income being retained in the corporation to earn passive income via large-cap stock or rental investments that earned passive income.  As those investments were subject to a high rate of tax – the dividend once distributed at the personal level would be an eligible dividend and result in an overall tax savings with an incentive to save within the corporation.  This strategy continues to be relevant with the first $50,000 in passive income earned within the active business or up to the clawed-back SBD limit being utilized by that business.

Where additional passive income is anticipated, the utilization of a whole-life policy with high cash surrender values should be considered.  These somewhat sophisticated plans may also be beneficial where the $50,000 in passive income has not yet been achieved.

Conclusion: In the ever-evolving world of corporate taxation, staying informed and adapting your strategies is crucial. Whether it’s optimizing the use of the SBD, understanding the implications of passive income, or navigating dividend taxation, it’s important to consider these factors in your financial planning. At Shajani CPA, we’re here to help you understand these complexities and tailor a tax strategy that aligns with your business objectives. Let’s work together to turn these tax updates into opportunities for your business in 2024 and beyond.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning services.