Don’t Let the Tail Wag the Dog

Tuesday, June 19, 2018
by Russ MacKay

Recently we co-hosted a special event – Minimizing Tax & Maximizing Opportunities for clients and guests who may be impacted by the new tax legislation surrounding Canadian Controlled Private Corporations – CCPCs (holding companies, professional corporations, and operating companies).  

Robert (Bob) Hagerman, LLB, CPA of Gowling WLG co-presented with our own Kevin Dehod, President & CEO, as they used a series of case studies to better inform the audience on this topic that has conjured up feelings of confusion, frustration, and even anger over the past year. The three main topics they discussed included;

Lack of integration between personal and corporate tax

When it comes to looking at the tax impact of various types of passive income being generated in a CCPC (Canadian Controlled Private Corporation, be it a Holdco or Professional Corporation), eligible dividends can be passed through the CPCC to the owner personally and are integrated without tax consequences. However, if the CCPC generates passive income through interest, foreign dividends, net realized capital gains, or rental income, then those will lead to additional tax, and are not integrated. The difference in additional tax is 5.3% in Alberta (or as much as 7.65% in some provinces).

For example, on $100,000 of passive income in a CCPC, you could be subject to an additional $5,300 of taxes due to the lack of integration.  Considerations to reduce this additional tax can be addressed by;

  • Considering holding different investments in your CCPC and personal  accounts
  • Defer realizing capital gains
  • Consider liquidating investments in the CPCC and repaying shareholder loans
  • Consider paying interest on shareholder loans

Effect on the small business deduction

If you have an Operating Company associated to a Holding Company, then passive income earned by the Holding Company may impact your small business deduction resulting in higher taxes overall.  In the diagram below we illustrate the impact of passive income on your small business deduction. Passive income earned includes all Adjusted Aggregate Investment Income (AAII). When passive income exceeds $50,000 it begins to reduce the small business deduction, and after $150,000 of passive income, the small business deduction is completely eliminated.

Source: www.looniedoctor.ca

Looking for opportunities to reduce the passive income earned in the CCPC may include;

  • Considering holding different investments in your CCPC and personal  accounts
  • Defer realizing capital gains
  • Consider liquidating investments in the CPCC and repaying shareholder loans
  • Consider paying interest on shareholder loans

Optimizing your portfolios

Most individuals who have a CPCC also have other investment accounts including personal portfolios, RRSPs/RRIFs and TFSAs – to name a few.  If you strictly focus on trying to minimize the tax impact of your passive investments in your CCPC, you may find yourself “unbalanced” in your overall investment strategy.

In the chart below* we illustrated the results of a case study where an individual with $3,000,000 invested personally, and $3,000,000 invested passively in their CCPC would have earned a total of $715,740 or $979,020 on their portfolio over three years, before optimizing.  Healthy returns, none the less.  However, we demonstrated how an optimized portfolio from an investment perspective (which may not be the “perfect tax efficient” portfolio) resulted in significantly better performance, 48% to 52% better performance!


Source: Bloomberg, CIBC Melon May 1, 2015 – April 30, 2018 Gross of Fees
*Please note this chart was created for illustrative purposes only and returns are not guaranteed.

  • Consider increasing your exposure to US & International equities to improve your overall risk/reward  situation
  • Consider holding US stocks through a Canadian investment pool to help avoid US estate taxes (and Canadian tax reporting)
  • Consider including Canadian preferred shares in your portfolio strategy

Taxes are an important consideration when you are looking at your overall planning. Although, the investment mix you have within each of your various portfolios and understanding how “optimized” your overall mix is equally (if not more) important. 

As Bob Hagerman concluded in the presentation, the best strategy for you will really depend on your own unique circumstances. Consult with both your tax advisor and your investment advisor to help create the optimum plan for you.

To receive a copy of the presentation, click here.



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