February in Review

 

We had a turbulent market in February and stock markets across the world have given back much of the gains.  As the end of February, most of the equities year-to-date performances are in the negative territory. Market jitters is understandable after recent selloff even though we have recovered much of the loss since early February.

 

There were a number of fundamental as well as technical reasoning behind the recent pullback in the market.  While economic fundamentals are strong, many market participants look ahead for signs of recession. From a technical lens, many of the rule based ETFs and passive investment strategies can enhance the effect of any material corrections and create a cascading effect.   

 

As for now, the market is likely to remain range bound over the next three to six months until it sees persuasive signals in either direction. While another pullback is possible, we continue to view them as buying opportunities. We advise clients not to panic over the recent selloff as the likelihood of recession is low.  From a risk-reward perspective, equities are still more favorable than bonds and can provide higher returns over the foreseeable future.

 

 

 2018 Federal Budget’s Tax Measures

 

Federal Minister of Finance, Bill Morneau, delivered the Liberal Government’s budget on February 27, 2018. Many of the budget’s tax measures are aimed at tightening perceived loopholes or inequalities in various aspects of the tax system. I have highlighted the business tax changes that are the most pertinent.

 

Passive Investment Income

In July 2017, the Government announced that it was considering approaches that will improve the fairness and neutrality of the tax system, such that savings held within corporations are taxed in a manner that is equivalent to savings held directly by individuals. The Government sought feedback from the public regarding this issue.

 

Taking into account the feedback received from the July 2017 consultation, the Government proposes two measures to limit the tax deferral advantage associated with earning passive investment income inside private corporations:

 

• Small Business Limit: The tax rate for qualifying active business income of small CCPCs is 10% for 2018 and 9% as of 2019. This preferential tax rate applies on up to $500,000 of qualifying active business income. This $500,000 limit, known as the business limit, is reduced on a straight-line basis for a CCPC and its associated corporations having between $10 million and $15 million of total taxable capital employed in Canada. Any income earned above the business limit is taxed at the general corporate tax rate of 15%.
• The budget proposes to introduce a measure that will reduce the business limit for CCPCs that have significant income from passive investments. Under this measure, the business limit will be reduced on a straight-line basis for CCPCs having between $50,000 and $150,000 of investment income. The new business limit reduction will be calculated as the greater of the reduction based on taxable capital and the reduction based on passive investment income.
• Refundability of Taxes on Investment Income: The current tax regime relating to refundable taxes on investment income of private corporations seeks to tax income from passive investments at a rate that is approximately equal to the top personal income tax rate while that income is retained in the corporation. Some or all of these taxes are added to the corporation’s refundable dividend tax on hand (RDTOH) account and refundable at a rate of $38.33 for every $100 of taxable dividends paid to its shareholders. This refund is available regardless of whether eligible or non-eligible dividends are paid to the shareholder. The budget proposes to provide a refund of RDTOH only in cases where a corporation pays non-eligible dividends. An exception will be provided in respect of RDTOH that arises from eligible dividends received by a corporation, in which case, the corporation will still be able to obtain a refund of the RDTOH upon payment of the eligible dividends.

 

 

 

Rita Li works with high net worth individuals and families to provide a high touch service in holistic wealth management planning. Her team encompasses professionals with in-depth taxation and legal backgrounds, together, they strive to deliver a high standard of service to clients. Rita is a Chartered Financial Analyst CFA® and Certified Financial Planner CFP® with expertise in asset management. Rita obtained her MBA from Richard Ivey School of Business. Contact Rita for a complimentary consultation to determine whether the services she provides can be the right fit for you and your family.