For Canadian-Controlled Private Corporations (CCPCs), the 2024 Federal Budget has introduced tax changes that demand careful planning and strategic decision-making. Mew and Company, a firm of Chartered Professional Accountants, have provided detailed insights on how CCPCs can navigate these changes to maximize savings and minimize tax burdens.
Prior to 2016, dividends were the preferred method of remunerating shareholders due to their favorable tax treatment. Dividends did not require Canada Pension Plan (CPP) premiums to be paid by either the employer or the employee, who often were the same person in many CCPCs. However, recent tax rate increases on CCPC dividends have eroded these advantages, making payroll a more tax-efficient method despite higher CPP premiums. By opting for payroll, CCPCs not only pay CPP but also create Registered Retirement Savings Plan (RRSP) room, which can be used as a tax deduction.
Another crucial consideration is the decision between investing in an RRSP versus investing in a CCPC or holding company (Holdco). While RRSPs offer the benefit of tax-deferred growth, capital gains within the account are fully taxable upon withdrawal. In contrast, capital gains in unregistered personal or corporate accounts are only 50% taxable, although they are taxed at the time of asset sale. This makes the choice between RRSPs and corporate investments a long-term strategic decision that depends on individual circumstances and investment success.
The April 2024 budget proposes increasing the capital gains inclusion rate for CCPCs from 50% to 66.67%, effectively raising taxes on capital gains earned within a corporation by 33.33%. Additionally, the Capital Dividend Account (CDA), which currently allows 50% of capital gains to be extracted tax-free, may see its tax-free portion reduced to 33.33%. This significant change could potentially make RRSPs a more attractive investment vehicle compared to CCPCs.
Given Canada's ongoing budget deficit, there is a possibility that the capital gains inclusion rate could rise further to 75% or more. If this scenario materializes, investing in an RRSP would become even more favorable compared to investing funds in a CCPC. Creating RRSP room through payroll remuneration could thus become a more advantageous strategy.
Mew and Company emphasize the importance of consulting with professional accountants to navigate these complex tax landscapes. Their expertise in tax planning can help CCPCs optimize their financial strategies in light of these new regulations.
For more detailed insights on tax planning post-2024 Federal Budget, visit Mew and Company's blog.
