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On March 19, 2019, Finance Minister, Bill Morneau tabled the Liberal Government’s 2019 Federal Budget. The Budget makes no changes to personal or corporate tax rates. Read below for a summary of tax changes:
Canadian-controlled private corporations (CCPCs) are entitled to an enhanced (35% vs 15%) federal tax credit on up to $3,000,000 of current SR&ED expenditures incurred in a taxation year (the “expenditure limit”). The expenditure limit is reduced based on two factors:
The Budget proposes to eliminate the taxable income test for accessing the enhanced credit. Thus, only the TCEC test will be applied in determining the CCPCs expenditure limit for the enhanced SR&ED credit.
This proposal would apply to taxation years that end on or after March 19, 2019.
The Budget proposes to introduce a temporary enhanced first-year capital cost allowance (CCA) rate of 100% for eligible zero-emission vehicles. These vehicles will be classified under one of the two new CCA classes:
This measure will apply to eligible zero-emission vehicles acquired on or after March 19, 2019, and that become available for use before 2028, subject to a phase-out for vehicles that become available for use after 2023. The enhanced CCA can only be claimed for the taxation year in which the vehicle first becomes available for use.
The Budget proposes to amend the GST/HST rules to ensure consistency with these measures, which will generally increase the amount of input tax credit recoverable.
Enacted in 2016, specified corporate income (SCI) prohibits certain income of a CCPC from being taxed at the small business rate. SCI generally encompasses income that the CCPC earns from the provision of services or property to private corporations in which the CCPC or other certain persons hold a direct or indirect interest. However, since the inception of the SCI rules, certain income that a CCPC derives from sales to a farming or fishing cooperative corporation is excluded from the definition of SCI.
Budget 2019 proposes to broaden the above-mentioned exclusion from the SCI rules. In particular, the sale of the farming products or fishing catches would no longer need to be made to a farming or fishing cooperative corporation in order to be excluded from SCI, but merely to an arm’s-length purchaser corporation.
This measure will apply to taxation years beginning after March 21, 2016.
In 2013, legislation was enacted to treat gains from “derivative forward agreements” as fully taxable income rather than favourably taxed capital gains. A “commercial transaction” exception to the derivative forward agreement rules was in place where the economic return was based on the performance of the actual property being purchased or sold in the future. This exception is needed so that normal commercial transactions such as business acquisitions were not caught.
The mutual fund industry has since developed structures that allowed the investor to acquire and sell the reference portfolio on closing. Since the return from the transaction was based on the reference portfolio, and it was the reference portfolio being sold, the gain was not “derived” from another portfolio — the commercial transaction exception applied. The disposition was still treated as a capital gain or loss.
The Budget proposes to deny the commercial transaction exception where it is reasonable to conclude that one of the main purposes of the series of transactions is to convert into a capital gain any income that would have been earned on the security during the period that the security is subject to the forward agreement.
The new rule applies to transactions/agreements entered into on or after March 19, 2019. Starting in 2020, it will also apply to agreements entered into prior to March 19, 2019, including those that extended or renewed the terms of the agreement on or after March 19, 2019, subject to certain transitional rules.
Employee stock options can receive preferential tax treatment where, if certain conditions are met, the employee will be eligible for a deduction of half the benefit, resulting in the benefit being taxed similar to capital gains (i.e., 50% inclusion rate). The Budget indicates the government’s intention to limit this current treatment by proposing a $200,000 annual cap on employee stock option grants (based on the fair market value of the underlying shares) that could receive the preferential treatment. It is intended that these changes would apply to employees of “large, long-established, mature firms,” while employees of start-up and rapidly growing businesses would be exempt from the proposed limit.
Further details are expected to be released before the summer of 2019. The Budget does not include a proposed implementation date but does indicate that any new measures would not apply to options granted before the legislative proposals are announced.
The Budget proposes to increase the maximum withdrawal under the RRSP Home Buyer’s Plan from $25,000 to $35,000 per first-time home buyer, effective for withdrawals made after March 19, 2019.
The Budget also extends access to the RRSP Home Buyer’s Plan to those separate and apart as a result of a breakdown of a marriage or common-law partnership, effective for withdrawals made after 2019.
The Budget introduces the refundable Canada Training Credit (CTC), which is intended to provide financial support for professional development and training for working Canadians age 25 to 64. Starting in 2019, eligible individuals will accumulate $250 each year (to a lifetime maximum of $5,000) in a notional account which can be used to cover eligible training costs starting in 2020.
In order to accumulate the $250 for a year, the individual must be age 25 to 64 at the end of the year, be a resident in Canada for the entire year, file a tax return for the year, have qualifying “working” income in the year of at least $10,000 (to be indexed annually) and have net income for tax purposes for the year of no more than the top of the third tax bracket for the year ($147,667 for 2019, indexed annually). Qualifying “working” income includes employment income, self-employment income, maternity/parental Employment Insurance benefits, taxable part of scholarship income and similar items. The $250 is still accumulated for years in which the CTC is claimed.
The amount of CTC that can be claimed will be the lesser of one-half of the eligible tuition and fees paid in respect of the year (generally those eligible for the tuition credit except that the educational institution must be in Canada) and the accumulated account balance at the beginning of the year. The CTC amount claimed will offset taxes otherwise payable in the year, with any excess credit being refundable. The individual must be a resident in Canada throughout the year to be able to claim the CTC.
The Budget proposes to eliminate the “national-importance” requirement for a property to qualify for the enhanced tax incentives for donations of a cultural property. This measure will apply to donations made on or after March 19, 2019.
The Budget proposes to relax the registered disability savings plan (RDSP) rules for 2021 and later years. The life of the RDSP will be able to remain open even after a beneficiary becomes ineligible for the disability tax credit (DTC) and without the requirement for medical practitioner certification. A rollover of a deceased individual’s RRSP or RRIF to the RDSP of a financially dependent infirm child or grandchild will be permitted, as long as the rollover occurs by the end of the fourth calendar year following the first full year of DTC ineligibility.
RDSPs will not be required to be collapsed after March 18, 2019, and before 2021 solely because the beneficiary has become ineligible for the DTC.
A taxpayer is deemed to have disposed of a property, or a part thereof, when its use is converted from income-earning to personal use, or vice versa. Under the current rules, the taxpayer may elect to not have the deemed disposition occur; however, in cases where only part of a property is converted, this election is unavailable.
The Budget proposes to extend the above-mentioned election to not apply the deemed disposition rules in situations where only part of a property undergoes a change in use.
This measure will apply to changes in use that occur on or after March 19, 2019.
The Budget proposes to extend the joint and several liability for tax owing on income from carrying on a business in a TFSA to the holder of the TFSA. The joint and several liability of a trustee of a TFSA at any time in respect of business income earned by a TFSA will be limited to the property held in the TFSA at that time plus the amount of all distributions of property from the TFSA on or after the date that the notice of assessment is sent.
This measure will apply to the 2019 and subsequent taxation years.
Foreign Affiliate Dumping rules were announced in 2011 to combat the tax-free extraction of surplus when a corporation resident in Canada (CRIC) that is controlled by a non-resident corporation, invests in a foreign affiliate (similar rules target loans made by a CRIC to non-arm’s-length non-resident members of a corporate group).
Where a foreign affiliate is acquired by a CRIC (or the CRIC makes a loan to a non-arm’s-length non-resident), these rules generally deem the cross-border paid-up capital of the CRIC to be reduced (or a dividend is deemed to have been paid by the CRIC to the foreign parent corporation).
Currently, the rules only apply where the CRIC is controlled by a non-resident corporation (or by a related group of non-resident corporations).
The Budget proposes to extend the rules to CRICs that are controlled by non-resident individuals, non-resident trusts, or a group of non-arm’s length persons made up of any combination of non-resident corporations, non-resident individuals or non-resident trusts. For the purposes of determining if a non-resident trust is “related” and therefore not at arm’s-length with other parties, the trust will be deemed to be a corporation and the beneficiaries will be deemed to be shareholders that own shares pro-rata, relative to the value of their beneficial interests in the trust.
This measure will apply to transactions or events that occur on or after March 19, 2019.
Order of application of transfer-pricing rules
Adjustment to income reported on a transaction may be required under both the transfer-pricing rules and other provisions in the Income Tax Act. In these situations, it was not clear whether transfer-pricing penalties were applicable.
The Budget proposes that the transfer-pricing adjustments shall apply in priority to any other adjustments required under the Act. Presumably, any applicable transfer-pricing penalties will apply in these situations. Current exceptions to the transfer-pricing rules (for example, certain zero or low interest loans made to controlled foreign affiliates) are retained.
This measure applies to taxation years commencing on or after March 19, 2019.
Reassessment period for transfer-pricing “transactions”
The normal reassessment period is generally extended by three-years where a reassessment is made as a consequence of a transaction involving a non-arm’s length non-resident. The Budget proposes to expand the definition of “transaction” used in the transfer-pricing rules to also be used in determining whether that transaction can be reassessed in the extended reassessment period.
This measure applies to taxation years for which the normal reassessment period ends on or after March 19, 2019, meaning it applies to most transactions that have occurred in the last three to four years.
The Act currently contains rules to address certain securities lending arrangements (SLAs).
For example, a Canadian resident may borrow public company shares from a non-resident lender. The Canadian would be required to make compensatory payments to the lender equal to any dividends paid on the borrowed shares and might be required to post collateral to secure the return of identical shares to the lender. If the borrowing is “fully” collateralized (at least 95% of the value of the borrowed security is collateralized with money or government debt obligations) the compensatory payment is considered a dividend and is subject to the normal dividend withholding taxes. When not fully collateralized, the compensatory payment is treated as a payment of interest, which is not subject to withholding tax if paid to arm’s-length parties.
The SLA rules are intended to ensure the lender is in the same tax position as if the securities had not been lent, including with regards to Canadian withholding taxes on compensatory payments.
Where the borrowed security is a share of a Canadian corporation, the Budget proposes to treat all compensatory payments as dividends (regardless of whether fully collateralized). Thus, the dividend withholding rules will apply.
Under these proposed rules, the “lender” is deemed to be the recipient of the dividend, the security issuer is deemed to be the payer of the dividend, and the lender is deemed to own less than 10% of the votes and value of shares of the issuer. As a result, the lower 5% withholding rate in many treaties will not be available and a higher (often 15%) withholding rate will apply.
The Budget also expands the application of these rules to “specified securities lending arrangements,” a concept introduced in 2018 to prevent the creation of artificial losses.
These new rules apply to compensation payments made on or after March 19, 2019. However, for securities loans in place before March 19, 2019, the amendments apply to compensatory payments made after September 2019.
Where the borrowed security is a share of a non-resident issuer (a foreign corporation), the current rules require withholding tax on the compensatory dividend payment. However, the non-resident lender would not have been subject to Canadian withholding tax on receipt of a dividend from the non-resident issuer corporation. As a relieving provision, the Budget proposes to expand the exemption for withholding to any dividend compensatory payment paid by a Canadian resident borrower to a non-resident lender under a SLA where the arrangement is fully (95%) collateralized.
These new rules apply to compensation payments made on or after March 19, 2019.
Individual Pension Plans (IPPs) are defined-benefit pension plans that are intended to be an alternative to an RRSP for providing retirement benefits to the owner-manager. When an individual terminates membership in a defined-benefit pension plan, such as on termination of employment, the commuted value of the member’s pension benefits may be transferred on a tax-deferred basis:
In order to circumvent the prescribed transfer limit, the terminated individual may incorporate a new private corporation to establish a new IPP. 100% of the commuted value may then be transferred to the newly established IPP on a tax-deferred basis.
The 2019 Budget proposes to prohibit IPPs from providing retirement benefits in respect of past years of service under a defined-benefit plan of an employer, other than the IPP’s participating employer (or its predecessor employer). Any assets transferred from a former employer’s defined benefit plan to an IPP that relate to such prohibited service will be considered a non-qualifying transfer and will be required to be included in the income of the plan member.
These measures are to apply to pensionable service credited under an IPP on or after March 19, 2019.
Permitting additional types of annuities under registered plans
The Budget proposes to permit two new types of annuities to be purchased under certain registered plans, subject to specified conditions.
These measures will apply to the 2020 taxation year and beyond.
Specified Multi-Employer Plans (SMEP)
The Budget proposes to prohibit contributions to a SMEP in respect of a plan member after the year in which that member turns 71. A similar prohibition is proposed for contributions to a defined-benefit provision of the SMEP after the member has begun to receive a pension from the plan.
These changes will bring SMEPs in line with the rules for other registered pension plans.
The new rules will apply to contributions payable in respect of collective bargaining agreements concluded after 2019.
The Budget proposes the following indirect tax measures for supplies made after March 19, 2019:
Starting in 2020, the Budget proposes to allow the CRA to serve notices requiring production for information electronically to a bank or credit union that has provided consent to receive such notices electronically.
The Budget confirms that the government will continue its initiative to develop new proposals to ensure that intergenerational transfers of businesses are better accommodated under the tax system.
If you have any questions or would like further information relating to the 2019 Budget and its impact on you, please contact your Smythe advisor or any member of our Tax Group.
Information is current to March 19, 2019. The information contained in this 2019 Federal Budget Highlights is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact your Smythe tax advisor.