3) When dividends are paid to shareholders, the corporation would deduct the amount paid from the appropriate pool.
4) The end-of-the-year balance of each pool would be equal to the sum of (1) the prior-year balance, (2) the active
business income earned in the year and taxed at the small business rate / the active business income earned in the
year and taxed at the general rate / or tax-paid amounts contributed by the shareholder (depending on which pool is at
issue), and ( 3) the net passive income apportioned in the year, minus any payment of dividends from that pool.
In practice, this approach would add complexity to the current tax system. However, the Apportionment Method would allow for the
tax treatment of passive income to adapt to changes in the active business, passive investment, or other sources of income
earned through a corporation.
Under the Elective Method, private corporations would be subject to a default tax treatment, unless they elect otherwise. The
choice between the default or elective tax treatments would determine whether passive income is treated as eligible or non-eligible
dividends on distribution. Unlike the Apportionment Method, the Elective Method would not require types of corporate income to be
Under the default tax treatment, passive income earned in a Canadian-controlled private corporation (CCPC) would be subject to
non-refundable taxes (at rates equivalent to the top marginal personal tax rates) and dividends distributed from such income would
be treated as non-eligible dividends. It would implicitly be assumed the passive income was funded using earnings taxed at the
small business rate (even though the company may have earned income taxed at the general rate).
Alternatively, corporations could elect for a tax treatment that would apply additional non-refundable taxes on its passive income,
and the lower eligible dividend tax rate would apply to dividends paid from the passive income. This election would remove the
corporation’s access to the small business tax rate that may otherwise be available. This election would likely be desirable for
corporations where all or a significant portion of their income is taxed at the general rate.
The Elective Method is expected to result in a corporate owner with a portfolio that is worth the same as that of an individual who
invested funds personally.
4. Impact to You and Your Business
If you currently earn passive investment income through a private corporation, the proposed changes may result in a higher rate of
tax on future distributions of this income and potentially more detailed record-keeping requirements at the corporate level. A MNP
Tax Advisor can keep you up to date and provide insight on developments beyond the government’s consultation period to help
assess how these changes may impact you.
5. Consultation with Government
MNP will be preparing a written submission to the Department of Finance on the technical aspects of the proposed legislation and
other changes. The consultation period ends on October 2, 2017. Following the consultation period, the government is expected to
table proposed legislation on this topic.
6. What do you need to do?
Contact your local MNP Advisor to understand how these changes may affect your interests. Although the government is still in
consultation phase, it is best to understand the effect these proposed changes could have on your business as well as your
options to minimize the effect if legislation is drafted and moves forward.
When it comes to tax, it’s all about the details. Knowing the rules and regulations, what qualifies, what doesn’t and how to structure
your business and claims most effectively. Our specialized teams are focussed on every facet of tax. We have the in-depth
knowledge and experience that will allow you to capitalize on all the opportunities available. We know what to look for, right down
to the smallest details. And it’s the small details that can add up to make a big difference.
Click here to find an MNP Professional