Do you do the limbo? As you probably already know, how low you can go reflects how flexible you can be. With the government’s recent corporate tax proposals sliding their way through the system, your most malleable, “on your toes” mad skills will also come in handy as you step through next year’s tax planning initiatives, and beyond.

In particular, on October 18, 2017, the government announced that its proposed tax measures would not apply to the first $50,000 of annual passive investment income earned within a corporation. So, if you can keep your earnings “bar” under that level moving forward (current corporate passive investments are expected to be grandfathered in), you should be in the clear. For example, if you earn under 5% annual interest on your $1 million passive investment portfolio, there should be no impact on your bottom line.

To date, I’ve not seen any additional details, which leaves plenty o’ unanswered questions. You, me and your accountant will likely receive little clarification until the government announces its 2018 federal budget, generally around February or March. In the meantime, I can only show you how I think the new rules might play out, and how they might create even more of an administrative dance-around for corporate investors. “Jack be limbo, Jack be quick” …

Under the limbo stick

For our illustration, I’ve used actual tax breakdown figures from the 2016 tax year (courtesy of CDS Innovation Inc.’s Tax Breakdown Service). I’ve assumed that my corporation has purchased a taxable $1 million balanced model ETF portfolio at the beginning of the year (using net asset value per-share figures from 2016). I’ve also assumed that only the 50% taxable portion of capital gains is included as income, rather than the total amount of capital gains realized. All other interest, eligible dividends and foreign dividends are considered to be passive investment income.

The income amounts received during the year are shown in the chart below. As we can see, there is $7,660 of interest, $5,547 of eligible dividends, $8,707 of foreign dividends and $359 of taxable capital gains, for a total income of $22,273. This total income figure is well below the proposed, $50,000 annual threshold (and may come as a bit of a surprise to most readers). If this were the portfolio’s only source of income, your corporation could probably invest over $2 million in passive investments and still pass under that $50,000 limbo stick without even breaking a sweat.


Example: Annual income earned on a $1 million balanced ETF portfolio

SecurityMarket Value
(Beginning of the year)
Interest Eligible DividendsForeign DividendsTaxable Capital Gains
BMO Discount Bond Index ETF (ZDB)$400,000$7,648--$64
Vanguard FTSE Canada All Cap Index ETF (VCN)$200,000$12$5,547--
iShares Core S&P U.S. Total Market Index ETF (XUU)$200,000--$3,860-
iShares Core MSCI EAFE IMI Index ETF (XEF)$150,000--$3,798$295
iShares Core MSCI Emerging Markets IMI Index ETF (XEC)$50,000--$1,050-
Total Income$1,000,000$7,660$5,547$8,707$359

Sources: CDS Tax Breakdown Service (2016), BMO ETFs, Vanguard Canada, BlackRock Canada


Be a limbo star

Although the income from our $1 million portfolio in the example above was nowhere near the $50,000 threshold, a significant portion of a portfolio’s income is also expected to come from realizing capital gains. At least we hope your investments grow over time!

Continuing from our example (once again, using 2016 net asset value figures), we find that three of the ETFs have year-end, unrealized gains (VCN, XUU and XEC), while two have unrealized losses (ZDB and XEF), as shown in the table below. If we sold the winning ETFs at year-end and left the losers untouched, we would realize capital gains of about $53,990 ($36,828 + $15,143 + $2,019). The taxable portion would be $26,995 ($53,990 × 50%).

If we add our original $22,273 of income to the $26,995 taxable capital gains, we end up with total passive investment income of $49,268, just squeaking under our maximum threshold limit.

Are you hip to the beat? By realizing some or all of your available capital gains each year, you can avoid building up deferred (unrealized) capital gains that could kick you over the limit in the future. For example, suppose your $1 million grows to $2.5 million after 20 years, and you haven’t realized any of the gains or stepped up the basis. Eventually, the annual dividends and interest will start to exceed the $50,000 threshold. When you finally realize your capital gains, they will be subject to the new, less favourable tax treatment (you could have mitigated this additional tax drag by realizing gains and stepping up your basis along the way). There may also be additional tax deferral benefits from the tax gain harvesting strategy I discussed in a prior blog.

Pretty nimble, eh? In short, keeping your tax-planning pencil sharpened throughout your investment experience could save you a tidy sum over the long haul. (One caveat: It is unclear if the government will still allow you to route the non-taxable portion of capital gains to your corporate capital dividend account, even if the total passive investment income remains below the $50,000 threshold.)


Example: Annual unrealized capital gains (losses) on a balanced ETF portfolio

SecurityMarket Value
(Beginning of Year)
Market Value
(End of Year)
Unrealized Capital
Gain (Loss)
BMO Discount Bond Index ETF (ZDB)$400,000$397,817($2,183)
Vanguard FTSE Canada All Cap Index ETF (VCN)$200,000$236,828$36,828
iShares Core S&P U.S. Total Market Index ETF (XUU)$200,000$215,143$15,143
iShares Core MSCI EAFE IMI Index ETF (XEF)$150,000$142,795($7,205)
iShares Core MSCI Emerging Markets IMI Index ETF (XEC)$50,000$52,019$2,019

Sources: Tax Breakdown Service (2016), BMO ETFs, Vanguard Canada, BlackRock Canada


No pain, no gain

Now for the tough love. Although the numbers in the examples above worked out perfectly, that was mostly dumb luck. In real life, it’s probably going to be a stretch to estimate how many capital gains you should realize each year to make best use of the proposed threshold. Here are four potential hurdles:

  • CDS Tax Breakdown Service report timing: CDS updates its Tax Breakdown Service annually – but in February, after year-end. Even if your corporation has a December 31st year-end, you won’t know your exact income before the December 31st cut-off point for realizing capital gains.
  • Foreign dividend income calculations: For Canadian-listed foreign equity ETFs, the distributions are net of withholding taxes. For tax reporting purposes, gross foreign dividend income figures are required. These would need to be estimated by grossing up the net figures.
  • Return of Capital (ROC) adjustments: The ROC portion of ETF distributions might not count as income. If that’s the case, you might have to manually back out ROC from the income figures you’ll find on your monthly brokerage statements.
  • Phantom or reinvested distribution surprises: As their ghostly name suggests, reinvested distributions don’t show up on your monthly statements, but the income is still taxable. If a significant phantom distribution occurs, you may realize more capital gains than expected.


Again, the ink is scarcely dry on this most recent revision to the proposed corporate tax revisions. Additional capital gains may have to be realized, and estimated income figures may have to be calculated to ensure that the combination of both does not exceed the $50,000 threshold. And that’s assuming the threshold itself doesn’t change before everything’s been said and done.

When more information is released, I’ll be sure to keep you up to date. Until then … you guessed it. We remain in limbo.

PS: If you’ve now got your favorite Chubby Checker “Limbo Rock” song worming its way through your brain, consider this a parting gift, from me to you.