CORPORATE/BUSINESS:

 Good news:

  • Small business tax rate is decreasing. For a Canadian Controlled Private Corporation (CCPC) such as Dentistry Professional Corporations (DPC) and Hygiene/ Technical Service Corporations (H/TSC) in Ontario, this means a combined federal + Ontario tax rate of 13.5% and 12.5% for 2018 and 2019.
  • Tax rate on passive income is not changing. Previously suggested rate of up to 73% tax on passive income will not be implemented.

Bad news:

  • No changes to the restrictions on income splitting with family members. See flow chart (2018 Federal Budget Appendix A) for how these rules (effective January 1, 2018) impact you and your family.
  • Reduction of small business deduction limit. Effective 2019, passive income over $50,000 per year (including associated companies) reduces your small business deduction limit, which is currently $500,000. Every $1 of investment income over $50,000 reduces your small business deduction limit by $5. If your CCPC has passive income in excess of $150,000, your CCPC will be paying tax on active business income at a rate of 26.5% instead of 12.5% (for 2019 and subsequent years).

Capital gains on sale of assets used in active business or shares of a qualified small business corporation are specifically excluded from this threshold.

Impact of passive income on 2019 corporate tax rates

Passive income Small business deduction available What is my corporate tax rate? *
50,000 $500,000 12.5%
75,000 $375,000 12.5% on first $375,000, 26.5% thereafter
100,000 $250,000 12.5% on first $250,000, 26.5% thereafter
125,000 $125,000 12.5% on first $125,000, 26.5% thereafter
150,000 or more $0 26.5%

* Tax rate on active business income

  • Existing investments not being grandfathered. The above $50,000 threshold applies to all corporate investments, even those that existed prior to the changes.

What will your corporate tax bill be?

Taxable Income $ 2018 Combined Federal & Ontario Tax Rate (%) 2019 Combined Federal & Ontario Tax Rate (%)
0 – 500,000 13.50% Between 12.50% to 26.5%*
500,001+ 26.50% 26.50%

* Subject to reduction of small business deduction based on passive income earned.

Applies to active business income of a CCPC (i.e. DPC/H/TSC). Investment income of a corporation would be taxed at 50.17% tax rate.

PERSONAL:

  • No significant tax changes for dentists

What will my personal tax bill be for 2018?

PERSONAL TAX TABLE

Self employed Taxable Income

($000’s)

 

Estimated Taxes

Including Ontario Health Premium ($000’s)

 

20 2
30 4
40 6
50 8
60 11
70 14
80 17
90 20
100 24
150 46
200 70
250 96
300 123
400 176
500 230
1,000 498

*In addition to the above, add CPP (maximum $5,187.60) if you are self-employed.


Key Tax Rates and Figures:

2018 Basic personal exemption (i.e. income that can be earned virtually tax-free): $11,809

 

Ordinary Income

 

 

Marginal Tax Rate

$0 – $42,960 20.05%
$42,961 – $46,605 24.15%
$46,606 -$75,657 29.65%
$75,658 – $85,923 31.48%
$85,924 – $89,131 33.89%
$89,132 – $93,208 37.91%
$93,209 – $144,489 43.41%
$144,490 – $150,000 46.41%
$150,001 – $205,842 47.97%
$205,843 – $220,000 51.97%
$220,001 and up 53.53%

The following chart compares how much a top-bracket investor needs to receive as interest, capital gains, or dividends in order to be left with the same after-tax return.

Equivalent Personal After-Tax Investment Yields for Individual with Top-Bracket Taxable Income1

 

2018

 

Interest or Ordinary Income

 

 

Capital Gains

 

 

Canadian Eligible

Dividends2

 

Canadian

Non-Eligible Dividends3

$ Received 100.00 63.45 76.60 87.42
Taxes 53.53 16.98 30.13 40.95
Net Return 46.47 46.47 46.47 46.47

Taxable income above $220,000 in 2018 (Top tax bracket starts at $220,001)
2 Assumes dividends from CCPCs paying income tax over the small business rate or dividends received by CCPC from   public companies and paid out as dividends
3 Assumes dividends from CCPCs paying income tax only at the small business rate

Hence, those individuals in the top tax bracket would net the same amount after tax in 2018 if they received $100 in interest, $63.45 in capital gains or $76.60/$87.42 in Canadian dividends. Capital gains are taxed at the lowest rate. Dividends are taxed at a lower rate than regular income including interest, but at a higher rate than capital gains. Canadian dividends from CCPC paying income tax over the small business rate of 13.5% (i.e. income which was taxed in CCPC’s hands at 26.5%) or from public companies are taxed at the lower rate.

 

This summary was prepared by DCY Professional Corporation Chartered Professional Accountants who have been advising dentists/doctors for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca, basil@dcy.ca, eugene@dcy.ca, louise@dcy.ca.  Visit our website at: www.dcy.ca. This article is intended to present tax saving and planning ideas and is not intended to replace professional advice.