Federal Budget: Professional services firms to revisit structure
For business and professional services, the Minister of Finance delivered draft legislation in the 2018 Federal Budget to implement the passive income proposals. There were no further announcements in Budget on income sprinkling rules, which came into effect on January 1, 2018.
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The budget proposes to reduce access to the small business tax rate for private corporations based on the amount of passive investment income reported in a given year. The small business limit, that is the reduced rate of tax on the first $500,000 of active income in a corporate group, will be reduced for each dollar of investment income over $50,000 and eliminated when the investment income reaches $150,000 in a fiscal year. It is important to note that investment income for purposes of this claw back will exclude income incidental to the active business and gains from the sale of shares in companies that earn active business income.
The passive income rules are to take effect in tax years that begin after 2018.
Professionals and services businesses were holding out hope to see a softening of these rules with the release of the budget. Originally part of the private company proposals last June, these measures were significantly revised in December last year but provided no relief for professional services businesses. The budget release confirmed the government’s intent to move forward with the proposals.
Professionals and professional services businesses should be revisiting their ownership structures with their advisors to determine the extent of the impact, and options for moving forward given the passive income and income sprinkling rules.