My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, March 5, 2018

2018 Federal Budget

The Daily Telegraph, a national British newspaper, once commented on a Federal Budget by saying that; a “budget is like going to the dentist, there has to be pain now or the future health of the economy is at risk”. While I may want to debate that assertion another time, I took their comment literally. Last Monday I started off the week with a root canal on my bottom left tooth and was supposed to have an extraction on Friday for another tooth on the top left of my mouth. Unfortunately, or fortunately, I am not sure which, the Friday appointment was re-scheduled until the middle of tax season. Thus, I was not in a good frame of mind to write my usual detailed review of the federal budget, presented last Tuesday, February 27th.

Setting aside my tooth pain, the budget contained surprisingly few new proposals (which you can read about in this excellent BDO LLP budget summary) other than the introduction of new rules relating to the taxation of passive investment income (generally made-up of interest, dividends, capital gains and rental income) in private corporations. Today I will briefly discuss these new rules.

Passive Investment Income Taxation

The initial proposals set forth by the Liberal government in July and October of 2017, in relation to the passive income rules were very complicated and would have been an administrative headache for small business owners and accountants. There was also some concern that the proposals could result in a tax rate approximating 73%.

In issuing the new rules in last week's budget, the government clearly listened to the various comments made by small business owners and their advisors. The new rules are simple and clear and target those taxpayers the government seemed to be offended by in the first place, professionals and other service providers who were accessing the small business deduction.

While the aforementioned taxpayers who have accumulated significant passive assets for retirement based on the old rules will not be happy, there are many other small business owners and professionals, who let out a collective sigh of relief. Corporations (including professional corporations, typically partners in large professional firms) already subject to the general tax rate of 26.5% or so (depending upon your province) and investment companies that hold only passive investment assets, will continue under the current regime without any new restrictions.

Under the new rules, which are applicable for taxation years beginning after 2018 (so for companies with non-December year-ends, the rules may not apply until 2020) the Small Business Deduction (“SBD”) is phased out once passive income exceeds $50,000 at the rate of $5 for every $1 of passive income, or $50,000 for every $10,000 of passive income.

It is important to note that the test is for a corporation and its associated corporations. Therefore, if your operating company has no passive income, but your Holdco has $75,000 of passive income, you must combine the two and your operating company will have a reduced SBD.

The chart below illustrates how this will work.

Passive Income
Small Business
Deduction Available

Somewhat lost in the discussion is that the SBD is just a tax deferral, not an absolute tax savings. For example, if you flow through a $100,000 taxed at the small biz rate and a $100,000 taxed at the general rate to a shareholder, there is likely only a net after-tax difference of a $1,000-$2,000 dollars, depending upon the province. So to be clear, you are not paying more tax, just paying it earlier.

Private corporations subject to the new rules will lose a tax deferral from $1 to around $65,000 or so (depending upon your province and assuming the provinces follow suit. If not, the amount will be lower) if the full $500k SBD is clawed back. In simple terms, at the maximum reduction, you will have to pay $65k (could be less depending upon the province) in tax earlier than under the current tax rules and you lose the ability to grow your retirement assets by the return on that yearly $65k.

Double Your RDTOH Pleasure

Part and parcel of the above changes to the SBD, the government has also proposed to create a second refundable dividend tax on hand ("RDTOH") account for eligible dividends, called, not unexpectedly, the “Eligible RDTOH”.

Under the current rules, where a private company earns investment income, the corporation is taxed at a high rate, typically 50%, of which 30% or so is refundable and 20% is a hard tax. Where the company also earns low rate small business income, the dividend refund can be caused in part from this lower rate tax and the shareholder can benefit from both a corporate dividend refund and a low rate eligible dividend designation.

To prevent this from happening in the future, the new rules essentially create two RDTOH accounts, non-eligible and eligible and upon the payment of a non-eligible dividend, the company must first access its non-eligible RDTOH before it can access its eligible RDTOH. I am sure this is clear as mud.

To further muddy the waters, there will ordering and transition rules, which are described in detail in the BDO tax memo I link to above.

As result of these new rules, which are also applicable for taxation years beginning after 2018, you will want to discuss with your accountant whether it makes sense to pay a large dividend prior to the application of the rules to clear out your current RDTOH.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.


  1. I'm not surprised and hesitant to say relieved that they went for a plan that excludes those starting to build capital. This is similar to the approach on income splitting to avoid applying changes to retired folks because after all the 65+ crowd votes and has tons of influence. This approach also conveniently doesn't affect those no longer running an active small business but have passive income streams in their corporations. (Morneau & Trudeau come to mind)

    This approach if I understand actually works against the stated goals of growing small business or fairness in many applications. In my situation due to related companies holding the real estate we operate from and a holdco with portfolio investments I expect the operating company, the only one that is a small business venture, will lose access to the small business exemption if not immediately at some point in the future. This ultimately impacts the smaller shareholders who are definitely not "fat cats" and don't have passive corporate income simply because a controlling party does through associated company tests. This may also impact some families with multiple businesses as the associated company tests are quite broad.

    This ends up increasing the tax bill for a small business by what 294% (9% to 26.5% I think) if the whole exemption is lost?

    1. Hi Anon

      In Ontario the rate is 15% and would go to 26.5%, not quite as dramatic as you make it, however, as someone who went from 15% to 25.5% when I merged with a large National firm, I feel your pain.

  2. Hi Mark:

    If you exceed the amount, does the excess part gets taxed at 26.5% or all? Do you keep your SBD next year if you exceed it this year?

    1. Hi Anon:

      My understanding is it is a year by year test

      In Ontario for example, if you lose the entire SBD and Ont follows the Fed rules, you would pay 26.5% on all the net income, which is the general rate

  3. I just had a couple of extractions myself (sadly front teeth) so I feel your pain, Mark. I really appreciate you posting despite the dental struggles. The table is very helpful - really drives home the point. It would be interesting to know how much public pensions grow (tax free) per year after an employee has contributed for a couple of decades (with matching amounts). I feel that growth would be the fair comparison above which an SMB should see these clawbacks.

    1. Hi CSB: Sorry to hear about your teeth issues, at least mine is at the back. You made me laugh with your comparison, especially since in the original proposals, the government compared a small business owner to their employee living next door vis a vie tax fairness.

  4. Is the Ontario rate 13.50% (Ontario 3.50% + Federal under proposals 10%)?

    1. Hi Anon

      Yes for 2018 and proposed as 12.5% for 2019 when the passive rules will kick in.

  5. Hi Mark
    I have had a large RDTOH balance in our holdco for many years.
    Has the RDTOH changed in this budget

    1. Hi Andres:

      The RDTOH will still exist, it will just be split into two components beginning in 2019.

      The reality is that you will get the same corporate dividend refund of your RDTOH.

      Besides greater administration, the key difference is that when you trigger the RDTOH refund with a dividend, it must first come from the non-eligible dividend bucket and then once that is exhausted from the eligible dividend bucket. All this really means is you may pay 5% or so more on the non-eligible dividend before you can access the lower taxed eligible dividend. Speak to your accountant about your specific situation and possible dividend planning for 2018

  6. Hi Mark - I love your site and even reading through the comments and answers, find so much clarification - very helpful. I haven't been able to find anything regarding whether or not the AAII calculation (Adjusted Aggregate Investment Income) allows a reduction for investment management fees against the investment income? It would seem reasonable and obvious but not listed in any of the descriptions I have found for AAII. Do you know?

    1. Hi Anon:

      As per the BDO link above, it says

      "In order to apply this new measure, a new concept of “adjusted aggregate investment income” (AAII) is being introduced and will
      be based on “aggregate investment income” (a definition that is currently used in computing refundable taxes in respect of a CCPC’s investment income) with certain adjustments".

      The definition for RDTOH is below

      Thus, although I cant provide a definitive answer at this time, based on the current RDTOH definition, it would appear you would likely apply the investment fees.