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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.
On February 27, 2018, Finance Minister Bill Morneau tabled the Liberal Government’s 2018 Federal Budget. Read below for full tax highlights proposed or click on one of the Quick Links below.
To download a print-ready-copy (PDF) click here.
|Business Income Tax Measures|
|Personal Income Tax Measures|
|Sales Tax & Excise Tax Measures|
The Budget proposes to introduce measures to reduce perceived tax advantages where a private corporation earns passive income. The announcement that such measures were going to be introduced was first made on July 18, 2017, along with other substantive measures intended to reduce the ability of taxpayers to sprinkle income among family members. The Budget proposals bear little resemblance to the measures initially announced.
The Budget proposes two sets of new provisions. One set is intended to reduce the $500,000 small business limit otherwise available to a Canadian-controlled private corporation (CCPC), together with any associated CCPCs, where a significant amount of passive income is earned. The second set reduces, but does not eliminate, the ability of a corporation to obtain refunds of refundable dividend tax on hand (RDTOH) by paying eligible dividends as compared to non-eligible dividends.
The small business limit of an associated group of CCPCs is currently reduced where the group’s “taxable capital employed in Canada” exceeds $10,000,000.
The proposed provisions will reduce the group’s business limit on a straight-line basis where the group earns “adjusted aggregate investment income” between $50,000 and $150,000. The reduction will be $5 for every $1 of investment income. Consequently, a group’s business limit will be reduced to zero (5 × $100,000 = $500,000) in a particular year if its adjusted aggregate investment income is $150,000 or more.
A group’s “adjusted aggregate investment income” for the year will be based on “aggregate investment income”, as currently defined, and is subject to the following adjustments:
This reduction to the business limit is based on income for the year that ended in the preceding calendar year.
This proposal will apply to taxation years that commence after 2018 with no grandfathering of passive income earned on existing investments. Consequently, all future investment earnings will be included in this annual test, regardless of when the applicable investments were accumulated.
The reduction of a corporation’s business limit for a particular year will be equal to the greater of the reduction under the existing taxable capital rule and the proposed rule.
Anti-avoidance measures will discourage transactions designed to delay or avoid the new rules. One such transaction might otherwise have been the creation of a short taxation year. Another might have been the transfer of property to a related but unassociated corporation.
Currently, a dividend refund is available to a corporation at the rate of 38 1/3 per cent of taxable dividends paid to the extent that there is an available balance of RDTOH at the corporation’s year-end. The taxable dividends paid can be either non-eligible dividends or eligible dividends. There is a personal income tax advantage where eligible dividends are paid to obtain a dividend refund.
The Budget proposes to introduce measures that will generally allow a CCPC to recoup certain RDTOH only on the payment of non-eligible dividends. An exception will apply to RDTOH arising on the payment of Part IV tax on eligible portfolio dividends. Such RDTOH can be recouped on the payment of eligible or non-eligible dividends.
To accomplish this, the Budget proposes to create an “eligible RDTOH” account and a “non-eligible RDTOH” account. As indicated above, eligible RDTOH will include only Part IV tax paid on the receipt of eligible portfolio dividends. All other RDTOH will be included in the non-eligible RDTOH account.
If a corporation pays a non-eligible dividend, it recoups non-eligible RDTOH before it recoups eligible RDTOH. If it pays an eligible dividend, it can recoup only eligible RDTOH.
The existing RDTOH of a CCPC will first be allocated to its eligible RDTOH account to a maximum of 38 1/3 per cent of its general rate income pool (GRIP). The remainder, if any, of its existing RDTOH balance will be allocated to its non-eligible RDTOH account. All of the existing RDTOH of other corporations will be allocated to their eligible RDTOH account.
This measure will apply to taxation years that commence after 2018. An anti-avoidance measure will prevent the deferral of the new measures by creating a short taxation year.
The Budget confirms that Finance will proceed with the implementation of the December 13, 2017 draft proposals that address income sprinkling involving private corporations.
Please refer to our tax update published on December 15, 2017 for additional details in respect of income sprinkling measures. Read full article here →
In response to a recent Federal Court of Appeal decision, the Budget proposes to restrict the allocation of losses to members of a top-tier partnership in tiered partnership structures. The allocable losses of a second-tier partnership will be restricted by the at-risk amount of the top-tier partnership, and unused losses will not be eligible to be carried forward indefinitely. Rather, such unused losses will be added to the adjusted cost base of the top-tier partner’s partnership interest in the second-tier partnership.
This measure will apply for taxation years that end on or after February 27, 2018, including restricting the use of losses carried forward from tax years that ended prior to that date.
Capital cost allowance (CCA) Class 43.2 provides an accelerated 50 per cent CCA rate on a declining-balance basis for investments in specified clean energy generation and conservation equipment. Class 43.2 was introduced in 2005 and is currently available in respect of property acquired before 2020. The Budget proposes to extend eligibility for Class 43.2 by five years to include property acquired before 2025.
A corporation can generally deduct dividends received on a share of a corporation resident in Canada (a “Canadian share”). However, the current “dividend rental arrangement” rules deny this deduction where the main reason for an arrangement is to enable the taxpayer to receive a dividend on a Canadian share, and the risk of loss or opportunity for gain or profit accrues to someone else.
The Government is concerned that certain taxpayers are still engaging in abusive arrangements that are intended to circumvent the dividend rental arrangement rules and result in an artificial tax loss on the arrangement. Consequently, the Budget proposes an amendment which broadens the dividend rental arrangement rules and securities lending arrangement rules to prevent taxpayers from claiming a deduction for inter-corporate dividends received in situations where substantially all of the opportunity for gain or profit or risk of loss in respect of a Canadian share rests with certain persons other than the taxpayer. Similar rules are proposed to clarify situations in which a dividend compensation payment can be deducted.
These proposed rules are generally effective for dividends paid, or dividend compensation payments made, on or after February 27, 2018.
The Budget proposes an amendment to the dividend stop-loss rule to decrease the tax loss on a repurchase of shares held by the taxpayer as mark-to-market property where it receives a tax deductible inter-corporate dividend on the repurchase. This amendment generally reduces the tax loss by the full amount of the deemed dividend.
This proposal will apply to share repurchases occurring on or after February 27, 2018.
An HWT is a trust established by an employer to provide health and welfare benefits to its employees. Since the tax treatment of HWTs is not set out in the Income Tax Act (ITA), the CRA has published an administrative position which sets out the requirements of HWTs and the income tax consequences.
The Budget proposes to discontinue the application of CRA’s administration position after the end of 2020 in order to encourage conversion of such trusts to employee health and life trusts for which there are specific rules in the ITA. The Department of Finance has requested comments on the transitional rules by June 29, 2018.
The Budget did not propose a number of changes that were the subject of speculation prior to the Budget. The capital gains inclusion rate will not increase and remains at 50 per cent. In addition, proposals in respect of “surplus stripping” first introduced in July 2017, and then abandoned, have not been reintroduced.
Personal income tax rates will not increase under the Budget.
The Budget enhances the existing Working Income Tax Benefit and renames it as the Canada Workers Benefit, effective for 2019 and subsequent years.
The CWB will be 26 per cent of “earned income” in excess of $3,000 to a maximum of $1,355 for single taxpayers without dependents and $2,335 for families (couples and single parents). The CWB is reduced where net income exceeds a threshold amount. The CWB disability supplement for individuals certified as eligible for the disability credit will be $700. Amounts will be indexed after 2019.
The Budget also proposes to allow the CRA to determine if a taxpayer is eligible for the CWB even if not claimed on their tax return and assess as if it had been claimed. This measure applies to tax returns for 2019 and subsequent taxation years.
The METC is currently available in respect of expenses incurred for a service animal specially trained to assist an individual in coping with blindness, profound deafness, severe diabetes, severe epilepsy, severe autism or a severe and prolonged impairment that markedly restricts the use of the individual’s arms or legs. The Budget proposes to extend the METC to include expenses for animals specially trained to perform tasks for an individual with a severe mental impairment. An example is a psychiatric service dog trained to assist an individual with post-traumatic stress disorder.
Expenses for animals that provide comfort or emotional support, but are not specially trained, will not qualify. Qualifying expenses include the cost of the animal, costs for care and maintenance such as food and veterinary care, and costs for training the individual in handling the animal. This measure will apply in respect of expenses incurred after 2017.
The plan holder of a RDSP must be the individual’s legal representative where the capacity of the individual to enter into a contract is in doubt, for example where the individual has a cognitive disability. Where the individual does not have a legal representative in place, certain family members (parents, spouses and common-law partners) are allowed to be the RDSP plan holder. This provision was to expire at the end of 2018. The Budget extends it to the end of 2023. If a family member becomes a plan holder before the end of 2023, they will be able to continue as the plan holder after 2023.
Individuals are currently entitled to a non-refundable credit in respect of employee contributions and the “employee” portion of self-employed contributions to the QPP. The QPP is being enhanced, starting in 2019. The Budget proposes that the enhanced part of the contributions be deductible to the individual.
Foreign-born Status Indians who legally reside in Canada but are neither Canadian citizens nor permanent residents are eligible for the Canada Child Benefit (CCB), provided all other eligibility requirements are met. The Budget proposes to make them retroactively eligible, from January 1, 2005 to June 30, 2016, for the Canada Child Tax Benefit, the National Child Benefit supplement and the Universal Child Care Benefit, the predecessors to the current CCB.
The Budget also proposes to provide authority for the federal government to share taxpayer CCB information with the provinces for the purpose of administering their social assistance payment regimes. This measure is effective July 1, 2018.
Eligibility of the Mineral Exploration Tax Credit is proposed to be extended for one year under the Budget. The credit will apply to expenses renounced under flow-through share agreements entered into on or before March 31, 2019.
The Budget proposes extensive new reporting requirements for most family trusts, effective for returns required to be filed for 2021 and subsequent taxation years. These requirements could impose an obligation to file a return where none currently exists, such as where the trust earned no income in the year. The trust will be required to report the identity of all trustees, beneficiaries and settlors of the trust. In addition, the identity of each person who has the ability to exert control, through the trust terms or a related agreement, over trustee decisions in respect of the appointment of income or capital must be disclosed.
The reporting requirements will apply to certain Canadian-resident trusts and to non-resident trusts currently required to file a Canadian return. This would include most personal “family” trusts used in tax planning. The following trusts are excluded from the requirements:
These new reporting requirements are designed to provide better beneficial ownership information.
The Budget also introduces penalties for failure to file a trust return, including where the new reporting requirements apply. The penalty will be $25 per day late with a minimum of $100 and a maximum of $2,500. If the failure to file is made knowingly, or as a result of gross negligence, there will be an additional penalty of five per cent of the maximum fair market value of property held during the year with a minimum of $2,500.
Section 212.1 is a provision that is intended to prevent a non-resident (the transferor) from stripping surplus out of a Canadian resident corporation (Canco) as a capital gain, which might be realized free of Canadian tax, rather than as a dividend that would be subject to Canadian withholding tax. In the absence of section 212.1, this could be achieved by the transferor by selling the shares of a Canco with accumulated surplus to another connected non-arm’s-length Canco in return for a promissory note or shares with high paid-up capital (PUC).
A transferor that receives non-share consideration would be deemed by subsection 212.1 to have received a dividend to the extent that the non-share consideration exceeds the PUC of the transferred shares. If the transferor receives high PUC shares, the PUC of the shares received would be ground down to the PUC of the transferred shares.
The Budget proposes to introduce an anti-avoidance measure, effective for transactions on or after February 27, 2018, to prevent section 212.1 from being circumvented by having a partnership or trust own the surplus-laden Canco shares. The transferor would otherwise avoid section 212.1 under the current rules by selling the partnership or trust interest rather than the Canco shares.
In broad terms, foreign accrual property income (FAPI) is passive income earned by a “foreign affiliate” of a Canadian resident. FAPI is taxed on an accrual basis to the Canadian shareholder of a “controlled foreign affiliate.” If earned by a non-controlled foreign affiliate, it is not taxed in Canada on an accrual basis, but is taxable when repatriated to Canada.
Foreign-source income that would otherwise be treated as passive would, in certain circumstances, be considered active where the entity earning the income employs more than five employees (or the equivalent thereof) full-time in the active conduct of the business.
Taxpayers whose foreign operations would not require more than five employees could pool their investments with other taxpayers in a similar position in an entity in which they would hold shares, the return on which would be tracked to their own investments. The pooled entity would require more than five full-time employees, thus converting the income of all the investors to active business income.
The Budget proposes to introduce measures that would prevent the circumvention of the “more than five employees” rule in this fashion. Each of the tracked pools would be treated as a separate business that would need to satisfy the “more than five employees” rule separately.
The Budget also proposes to introduce measures that are intended to prevent the avoidance of controlled foreign affiliate status using tracked pooling arrangements, similar to those described above where the individual Canadian taxpayer does not participate in a controlling interest in the foreign affiliate. Under the tracking arrangement each taxpayer retains control over its contributed assets and any returns from those assets accrue to that taxpayer’s benefit. This proposal would deem a foreign affiliate of a taxpayer in this scenario to be a controlled foreign affiliate.
Regulated foreign financial institutions earning what would otherwise be FAPI are considered to be earning active business income if, among other conditions, they meet certain minimum capital requirements. These minimum requirements have not applied to trading or dealing in indebtedness. The Budget proposes to introduce measures that will apply similar minimum capital requirements to trading or dealing in indebtedness.
These measures will apply to taxation years of foreign affiliates that begin on or after February 27, 2018.
The Budget proposes to extend the normal four-year reassessment period that is generally applicable to income arising from a taxpayer’s foreign affiliate by three years. The extended reassessment period will now coincide with that available to the CRA in connection with transactions between Canadian residents and non-arm’s-length non-residents.
This measure will apply to taxation years that begin on or after February 27, 2018.
Where a taxpayer has transactions with a non-arm’s length non-resident, because the normal reassessment period available to the CRA is extended three years, there are circumstances that can prevent the CRA from reassessing a now statute-barred earlier year to which a taxpayer has carried back a loss.
The Budget proposes to allow the CRA an additional three years to reduce a loss carried back to a prior taxation year to the extent that the reassessment involves the adjustment, in a later year, of the loss carry back.
This measure will apply where the loss is carried back from a taxation year that ends on or after February 27, 2018.
The Budget proposes to shorten the filing deadline for the foreign affiliate information reporting (T1134) from the current 15 months after the taxpayer’s year-end to six months after the year-end.
This proposal applies to taxation years that begin after 2019.
Where a registered charity’s registration is revoked, either at its request or because of non-compliance, a revocation tax of 100 per cent of the net value of the charity’s assets is imposed. This tax can be reduced by making qualifying expenditures, including gifts to “eligible donees,” generally another registered charity where its directors/trustees are arm’s length with those of the revoked charity.
The Budget proposes to allow transfers of property to municipalities to be qualified expenditures for this purpose, subject to case-by-case approval, thus reducing the revocation tax. This measure will apply to transfers made on or after February 27, 2018.
Certain categories of “qualified donees,” including universities outside Canada, are required to register with the CRA and are listed on the CRA website. Foreign universities are also required to be prescribed in the Income Tax Regulations. The Budget proposes to eliminate this duplication in respect of universities by removing the Income Tax Regulation requirement as of February 27, 2018.
The Budget confirms the Federal Government’s intention to proceed with the legislative and regulatory proposals released on September 8, 2017, relating to the application of GST/HST to investment limited partnerships with the following modifications:
The government intends to consult on the application of the “holding corporation rule” that allows a parent corporation to claim input tax credits to recover GST/HST paid on expenses that can reasonably be regarded as relating to the ownership of shares or indebtedness of a related commercial operating corporation.
The consultations will address the limitation of the rule to corporations and not other entities, and the degree of relationship between the parent corporation and the commercial operating corporation.
The government intends on clarifying the expenses of the parent corporation that are in respect of shares or indebtedness of a related commercial operating corporation that qualify for input tax credits under this rule.
The Budget proposes to increase the excise duty on tobacco products on an annual basis rather than to automatically increase it every five years to account for inflation. These inflationary increases will take effect on April 1 of every year, starting in 2019. Effective February 28, 2018, tobacco excise duty rates will be adjusted to account for the inflation since the last adjustment in 2014.
Cigarette inventories held by manufacturers, importers, wholesalers and retailers at the end of Budget Day will be subject to an inventory tax of $0.011468 per cigarette subject to certain exemptions. Taxpayers will have until April 30, 2018, to file returns and pay the cigarette inventory tax.
The Budget proposes a new excise duty framework for cannabis products to be introduced as part of the Excise Act. The duty will generally apply to all products available for legal purchase including fresh and dried cannabis, cannabis oils and seeds and seedlings for home cultivation. Cannabis cultivators and manufacturers (cannabis licensees) will be required to obtain a cannabis licence from the CRA and remit the applicable excise duty.
Excise duties will apply at the higher of a flat rate on the quantity of cannabis contained in the final product and a percentage of the dutiable amount as sold by the producer.
The GST/HST rules for basic groceries will be amended to ensure that any sales of cannabis products will not meet the zero-rating provisions and will be subject to GST/HST in the same way as sales of other cannabis products. In addition, the relieving rules for agriculture products will be changed to ensure sales of cannabis products including seeds or seedlings will also be subject to GST/HST.
If you have any questions or would like further information relating to the 2018 Budget and its impact on you, please contact your Smythe advisor or any member of our Tax Group.
Information is current to February 27, 2018. The information contained in this 2018 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.
On March 22, 2017, Finance Minister Bill Morneau tabled the Liberal Government’s 2017 Federal Budget titled “Building a Strong Middle Class”. The Budget makes no changes to personal or corporate tax rates (nor the capital gains inclusion rate), but the government promises to review tax planning strategies available to private corporations and to propose policy responses in the coming months. Tax Measures included in the Budget are aimed at closing tax loopholes and enhancing fairness in the tax system.
To download a print-ready-copy (PDF) click here.
|Business Income Tax Measures|
|Personal Income Tax Measures|
|Charities and Non-Profit Organizations|
|Sales Tax, Excise Tax and Other Measures|
Budget 2017 outlines only $200 million in net new spending, but also an increase to the deficit of more than $5 billion for 2017–18, partly due to commitments from the previous budget, reduced revenues and increased general expenses.
The projected deficit for 2017–18 is $28.5 billion, declining to $18.8 billion by 2021–22 (including an annual $3 billion contingency fund). However, if the government’s strong growth scenario plays out, we could see a much smaller deficit between $5 and $8 billion by 2021. Instead of planning to eliminate the deficit as previously proposed, the government says it will maintain a balanced net debt-to-GDP ratio of around 31% over the next five years.
There are no changes to corporate or personal income tax rates, or the small business deduction threshold, and no changes to capital gains taxation. In addition, the government did not address in the Budget a number of tax issues it has discussed since Budget 2016, indicating it will release more details on its plans to limit tax-planning strategies later this year. Concerns over potential changes to taxes, trade agreements and regulations in the United States have no doubt caused Canada’s Federal Government to reconsider its own tax strategy.
The Budget proposes to address a range of tax loopholes and inefficiencies, including: eliminating billed-basis accounting for certain professionals, preventing tax avoidance through straddle transactions, eliminating the tax deduction for home relocation loans, applying tax-avoidance rules to Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs), eliminating the additional deduction for gifts of medicine, preventing Canadian life insurers from using foreign branches to avoid tax, repealing the tax exemption for insurers of farming and fishing property, and eliminating the Public Transit Tax Credit.
In order to advance the twin goals of reducing tax evasion and improving compliance, the government plans to give the Canada Revenue Agency an additional $523.9 million over the next five years. The government anticipates a five-fold return on its investment, hoping the CRA will recover $2.5 billion for its efforts.
We can expect to see more substantial proposals for change as the year progresses. The government has clearly signaled that it will be looking for additional ways to prevent tax avoidance.
The Budget makes no changes to corporate tax rates. In addition, no changes are made to eligibility for the small business rate.
The government’s review of federal tax expenditures highlighted issues in respect of tax planning strategies available to owners of private corporations. The government feels that these strategies can result in high-income individuals gaining unfair tax advantages not available to other Canadians. As the Budget papers indicate, measures have been put in place over the years to limit the scope of certain of these arrangements. However, the government is of the opinion that such measures have not always been as effective as desired. Accordingly, the government is further reviewing the use of private corporation tax planning strategies that may reduce the personal tax of high-income earners in a manner considered inappropriate. In particular, the government has identified the following strategies for review:
As part of its review of this area, the government will also examine current legislation that may have inappropriate tax consequences in connection with genuine business transactions between family members, including inter-generational transfers of family businesses. In the coming months, a paper will be released that will review these issues in detail and provide proposed policy responses.
Members of designated professions (accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors) may elect to exclude the value of their work in progress (WIP) in computing their income. Where this election is made, a tax deferral is achieved as the costs associated with the WIP are deducted as incurred whereas the revenue is recognized only when the WIP is actually billed to clients.
The Budget proposes to eliminate the WIP exclusion over a two-year period, effective for taxation years beginning after March 21, 2017. For the first affected taxation year, WIP will be valued at 50% of the lesser of its cost and fair market value and must be recognized for tax purposes and not excluded from income. For subsequent years, WIP, valued at the lesser of its cost and fair market value, must be recognized for tax purposes and cannot be excluded from income.
These provisions will require a determination of the cost of the WIP, which may not be readily available.
There are two main definitions of control for tax purposes — de jure or legal control and de facto or factual control. Some provisions rely on de jure control whereas others rely on de facto control.
De facto control is broader than legal control and takes into account influence that, if exercised, would result in control in fact of a corporation. It is particularly relevant for purposes of determining whether corporations are associated and therefore required to share the annual $500,000 small business deduction limit and certain other limits.
Recent jurisprudence essentially restricted control in fact to circumstances where the potential controller has an enforceable right to change the board of directors or its powers or can exercise influence over shareholders who have the right and ability to make such changes. The Budget proposes to effectively override the case law. For taxation years beginning after March 21, 2017, all factors relevant in the particular situation, not just those that meet the criteria set out in the recent jurisprudence, shall be included in assessing whether de facto control is present.
Derivatives are sophisticated financial instruments whose value is derived from the value of an underlying security. The Budget proposes two measures that clarify the timing of the recognition of gains and losses from derivatives held on income account.
In the past, there was uncertainty as to whether taxpayers could mark to market their derivatives held on income account under the general principles of profit computation. A recent Federal Court of Appeal decision allowed the use of the mark-to-market method for a taxpayer that was not a financial institution on the basis that it provided an accurate picture of the taxpayer’s income.
To provide certainty regarding the choice of using the mark-to-market method, the Budget proposes an elective mark-to-market regime for derivatives held on income account so that taxpayers will be allowed to mark to market all of their eligible derivatives for taxation years beginning after March 21, 2017. Once made, the election will remain effective for all subsequent years unless revoked with the consent of the Minister of National Revenue.
A straddle transaction is one in which a taxpayer concurrently enters into two or more positions, often derivative positions, that are expected to generate equal and offsetting gains and losses on account of income. In order to obtain a tax deferral, the position with the accrued loss would be disposed of in one taxation year to realize the loss and the offsetting position with the accrued gain would be disposed of to realize the gain in the following taxation year. In addition, the taxpayer could attempt to indefinitely defer the recognition of the gain by entering into successive straddle transactions.
The Budget proposes to introduce a specific anti-avoidance “stop-loss” rule, which will effectively defer the realization of any loss on the disposition of a position to the extent of any unrealized gain inherent in an offsetting position. This proposal will apply to any loss realized on a position entered into after March 21, 2017.
Mutual funds can be structured as either corporations or trusts. The Income Tax Act (ITA) currently contains provisions that facilitate the merger of mutual funds on a tax-deferred basis. Two mutual fund trusts can be merged into one or a mutual fund corporation can be merged into a mutual fund trust. The current rules do not provide for the reorganization of a mutual fund corporation into multiple mutual fund trusts.
“Switch mutual fund corporations” are structured with multiple classes of shares that are each traced to a pool or fund of assets of the corporation. Investors switch underlying funds by exchanging one class of shares for another. The benefits of such structures were eliminated in the 2016 Budget by deeming the share exchanges to be fair market value dispositions.
The Budget proposes to allow the tax-deferred restructuring of a switch corporation into multiple mutual fund trusts. In order to qualify, in respect of each class of shares of the switch corporation, all or substantially all (generally interpreted as 90% or more) of the assets allocable to that class must be transferred to a mutual fund trust and the shareholders of that class must become unit holders of the trust. This measure will be applicable to qualifying reorganizations occurring on or after March 22, 2017.
Segregated funds are life insurance policies that have many of the characteristics of mutual fund trusts. Unlike mutual fund trusts, segregated funds cannot currently merge on a tax-deferred basis.
The Budget proposes to allow tax-deferred mergers of segregated funds under rules similar to those for mutual fund trusts. The Budget also proposes that non-capital losses in segregated funds arising in taxation years beginning after 2017 will be able to be carried over to apply against income of other years under the normal rules (back 3 years and forward 20 years). Loss application will be restricted after a segregated fund merger.
To give the life insurance industry the opportunity to comment on the proposed new rules, the merger rules will be applicable for mergers carried out after 2017.
Capital cost allowance (CCA) classes 43.1 and 43.2 provide for accelerated CCA on clean energy generation equipment. The Budget expands the assets qualifying for these classes to include geothermal energy equipment used primarily for the purpose of generating heat or a combination of heat and electricity and certain equipment in district energy systems that use geothermal heating as an energy source.
Canadian renewable and conservation expenses may be deducted in the year incurred, carried forward indefinitely for use in future years or transferred to investors through a flow-through share mechanism. The Budget proposes to include expenses incurred to determine the quality and extent of geothermal resources and the cost of geothermal drilling for electricity and heating projects in this category.
The measures are applicable for new property acquired for use and expenses incurred after March 21, 2017.
Expenditures in respect of drilling or completing a discovery well, including building access roads to or preparing the site for such wells, are currently classified as Canadian exploration expenses (CEE, fully deductible in the year incurred). The Budget proposes to classify these expenditures as Canadian development expense (CDE, deductible on a 30% declining-balance basis).
This measure will apply to expenses incurred after 2018, including those incurred in 2019 that could have been deemed incurred in 2018 under the “look-back” rule. Expenses incurred before 2021 pursuant to a written commitment to incur the expenses entered into before March 22, 2017 will still qualify as CEE.
Eligible small oil and gas corporations will no longer be able to treat their first $1 million of CDE as CEE. This measure will apply to expenses incurred after 2018, including those incurred in 2019 that could have been deemed incurred in 2018 under the “look-back” rule. Expenses incurred after 2018 and before April 2019, which are renounced to investors under a flow-through share agreement entered into after 2016 and before March 22, 2017, will be exempt from the new rules.
The Budget eliminates the investment tax credit for child care space expenditures incurred after March 21, 2017. Expenditures incurred before 2020 pursuant to written agreements entered into before March 22, 2017 will still be eligible for the investment tax credit.
The Budget eliminates the tax exemption for farming and fishing property insurers. This exemption is based on the proportion of their gross premium income earned from insuring such property. This measure is effective for taxation years beginning after 2018.
The Budget institutes a consultation on the tax deferral available in respect of deferred cash purchase tickets for deliveries of listed grains by farmers. Interested parties should submit their comments to the government by May 24, 2017.
The Budget did not propose a number of changes that were the subject of heavy speculation. In particular, the capital gains inclusion rate will not increase and remains at 50%. A dollar limit is not imposed on the employee stock option deduction, and thus it will continue to be calculated as half the stock option benefit amount.
Personal income tax rates will not increase under the Budget.
Effective January 1, 2017, the Budget proposes to expand the types of courses that are eligible for the Tuition Tax Credit.
The Tuition Tax Credit can currently be claimed with respect to occupational skills courses taken at a non-post-secondary institution. In contrast, the credit cannot be claimed for similar non-post-secondary level courses taken at a college or university.
The Budget proposes to allow the Tuition Tax Credit to be claimed in the latter instance and, further, to allow the scholarship exemption for bursaries related to such courses, provided that all other conditions for the exemption are met.
The existing Caregiver Credit, Infirm Dependent Credit and Family Caregiver Tax Credit each have different eligibility rules. The Budget proposes to simplify these existing credits by replacing them with a single new, non-refundable credit, the Canada Caregiver Credit. This credit will provide tax relief of up to 15% of $6,883 (in 2017) for expenses for care of dependent relatives with infirmities, and up to 15% of $2,150 (in 2017) for expenses for care of a dependent spouse/common-law partner or minor child with an infirmity. There is no requirement for the dependent to live with the caregiver to claim the credit, however a credit will no longer be available in respect of non-infirm seniors who reside with their adult children.
This new credit will start to be reduced when the dependent’s net income is above $16,163 (in 2017, indexed to inflation for taxation years after 2017).
The Budget proposes to allow nurse practitioners to certify impairments for purposes of the Disability Tax Credit. This measure will be effective for certifications made after March 21, 2017.
For the 2017 taxation year and beyond, the Budget proposes to clarify the types of fertility-related expenses that are eligible for the Medical Expense Tax Credit. In particular, persons who require medical intervention to conceive, even if not infertile, will explicitly be allowed to claim the credit for expenses that would generally be eligible for someone who has an infertility condition.
Eligibility for the Mineral Exploration Tax Credit is proposed to be extended for one year under the Budget. The credit will apply to flow-through share agreements entered into on or before March 31, 2018.
The Public Transit Credit is proposed to be eliminated under the Budget for transit use after June 30, 2017.
The Budget proposes to eliminate the home relocation loans deduction for benefits realized on January 1, 2018 and beyond. Accordingly, an individual who receives a loan from their employer that qualifies as an eligible home relocation loan will no longer be entitled to offset any imputed interest benefit in the 2018 taxation year and beyond.
The anti-avoidance rules that currently exist for Registered Retirement Savings Plans and Tax-Free Savings Accounts are proposed to be extended to RESPs and RDSPs under the Budget. These changes will apply to transactions occurring after March 22, 2017, with the following exceptions.
The advantage rules will not apply to swap transactions occurring on or before June 30, 2017. Further, the proposed changes will not apply to swap transactions undertaken on or before December 31, 2021, where the purpose of the transaction is to ensure that the RESP or RDSP complies with the advantage or prohibited investment rules.
In addition, an RESP or RDSP plan-holder may elect by April 1, 2018 not to pay advantage tax on the distribution of investment income from an investment that was held on March 22, 2017, but instead pay regular personal income tax.
The Budget proposes to include non-accountable allowances paid to certain officials in their income, beginning in the 2019 taxation year.
The Budget proposes the following measures to protect gifts of ecologically sensitive property made after March 21, 2017:
The additional corporate deduction for gifts of medicine from their inventory is eliminated for such gifts made after March 21, 2017.
The Budget confirms the expiration of the First-Time Donor’s Super Credit, as planned, after 2017.
The ITA contains rules (the FAPI rules) that are intended to tax investment income earned by a “controlled foreign affiliate” of a Canadian taxpayer when it is earned, rather than when it is repatriated to Canada.
The FAPI rules deem certain types of business income to be investment income so that it is taxed in Canada immediately, as if it were investment income. Among these rules is one that deems income earned from the insurance and reinsurance of Canadian-source risks by a foreign affiliate (generally a corporation) of a Canadian-resident taxpayer, to be investment income. However, these rules do not apply to similar types of income earned by a foreign branch of a Canadian life insurer.
The Budget introduces rules similar to the FAPI rules to tax such branch income of Canadian life insurers as it is earned, where it comprises 10% or more of all branch income.
Also, the Budget introduces specific anti-avoidance provisions to prevent the circumvention of both the existing FAPI rules and the new branch provisions.
Lastly, provisions will be introduced to prevent avoiding the rules described above by entering into arrangements that attempt to substitute income from insuring foreign-source risks for income from insuring Canadian-source risks.
The 2016 Budget indicated the government’s desire to prevent the erosion of the Canadian tax base by shifting income offshore. In this regard, the Budget indicates that, in addition to the insurance provisions described above, the government will continue to pursue various initiatives, such as the modification of existing tax treaties to further this end.
When Health Canada began allowing Naloxone to be dispensed without a prescription, the drug’s historical GST/HST exemption was technically lost. The Budget proposes to include Naloxone on the list of GST/HST-free non-prescription drugs to restore its GST/HST-free status.
To ensure that the GST/HST applies consistently to taxi services and ride-sharing services, effective July 1, 2017, the definition of a taxi business will be amended to require providers of ride-sharing services to register for the GST/HST and charge tax on their fares in the same manner as taxi operators.
The GST/HST rebate available to non-resident individuals and tour operators in respect of the accommodation portion of eligible tour packages will be repealed effective March 23, 2017, subject to a transitional exemption in respect of eligible tour packages supplied and paid for prior to January 1, 2018.
Effective March 23, 2017, the Budget proposes to repeal the 10.5% surtax on manufacturers of tobacco products with a coordinated increase to the excise duty rates on tobacco.
Excise duties on alcohol products are proposed to be increased by 2%, effective March 23, 2017, with annual indexing of rates thereafter.
The Budget proposes a number of amendments to the Special Import Measures Act and related regulations that are intended to strengthen Canada’s trade remedy system and ensure that it is aligned with Canada’s obligations under World Trade Organization rules.
If you have any questions or would like further information relating to the 2017 Budget and its impact on you, please contact your Smythe advisor or any member of our Tax Group.
Information is current to March 22, 2017. The information contained in this 2017 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.
This year’s Budget released on March 22, 2016 focused on a number of themes consistent with the principles of the Liberal Government including economic growth, job creation and supporting the middle class.
To download a print-ready-copy (PDF) click here.
|Measures That Were Not Introduced|
|Business Income Tax Measures|
|Personal Tax Measures|
|Sales and Excise Tax Measures|
When the new government said last year that it would return Canada to deficits, few expected the numbers to jump to nearly $30 billion this year and next and add $100 billion in debt over the next 5 years. But lower-than-expected revenues have forced the government’s hand, according to Finance Minister Bill Morneau, requiring increased spending to stimulate the sluggish economy and support the middle class.
In part, the Federal Government hopes to build its way to economic growth, spending $12 billion over 5 years on a range of infrastructure projects, including public transit, affordable housing, water management for First Nations communities, climate change mitigation, early learning and childcare. The government predicts these investments will increase Canada’s GDP by 0.2 per cent this year and 0.4 per cent in 2017.
The Liberals initially proposed $120 billion in infrastructure spending over 10 years. The plan for the remaining funds is expected later this year.
The bulk of the proposed additional program spending in the 2016 budget focuses on families, seniors, veterans, health care, post-secondary education, innovation and clean energy. These measures also aim to encourage growth or restore benefits eliminated by the previous government.
To partially offset its spending initiatives, the government plans to close a number of domestic and international loopholes that permit organizations and individuals to avoid or defer tax, and provide the Canada Revenue Agency (CRA) with $800 million over 5 years for compliance initiatives.
On top of these preliminary measures to limit tax evasion and deferral, the government has proposed a review of the tax system to reduce or eliminate inefficient tax measures.
The small business corporate tax rate will remain at 10.5 per cent. The former government had scheduled regular decreases in the rate over the next few years, but Morneau has put those changes on hold. Business owners will also face stricter rules with regard to using partnerships or corporations to multiply access to the small business deduction (SBD) and avoid tax.
The Eligible Capital Property (ECP) regime will be repealed and ECP will fall under a new Capital Cost Allowance (CCA) class with a 100 per cent inclusion rate and 5 per cent annual depreciation rate. The transition will begin January 2017.
As noted in the government’s December 2015 update, the second marginal income tax rate has decreased from 22 per cent to 20.5 per cent and a new top tax rate of 33 per cent has been added for incomes above $200,000.
The government also returned the Tax-Free Savings Account (TFSA) contribution limit to $5,500 (from $10,000) and promised to index the limit to inflation.
Beginning July 2016, the new Canada Child Benefit (CCB) will provide up to $6,400 for each child under age 6 and up to $5,400 for children aged 6 to 17. Only families with incomes below $30,000 per year will receive the full benefit. The CCB will replace the Canada Child Tax Benefit and Universal Child Care Benefit.
The family tax cut credit for families with at least one child under 18 at home and the children’s fitness and arts tax credits will also be eliminated.
The Budget did not propose a number of measures that were either specifically mentioned in earlier government documents or that were speculated about in the community.
A statement made by the current Liberal government during the fall election campaign indicated that the 50 per cent reduction in the amount included in income in connection with certain stock option benefits would be limited to $100,000 of benefits realized in a particular year. The Budget made no mention of this measure.
There was speculation that the portion of a capital gain that would be taxable would be increased above the present 50 per cent inclusion rate. No such measure was introduced.
There was also speculation that the income earned by certain service corporations (such as professional corporations) would not be eligible for the SBD unless the corporation had a certain minimum number of employees. No such measure was introduced.
The April 2015 Budget proposed an exemption from capital gains tax with respect to certain dispositions of private company shares and real estate where the cash proceeds are donated to a charity within 30 days after the disposition and the private company shares or real estate are sold to a purchaser who deals at arm’s length with both the donor and donee. This proposal has been dropped.
The federal small business reduction will remain at 17.5 per cent for 2016 and subsequent taxation years, which provides for a federal small business tax rate of 10.5 per cent, down from 11.0 per cent in 2015. Of course, the provincial rate must be added to determine the actual rate. The corporate BC small business rate is 2.5 per cent.
The related dividend gross-up of 17 per cent for other than eligible dividends and the dividend tax credit of 21/29 of the gross-up will remain for 2016 and subsequent taxation years. Consequently, the previously announced proposal to further reduce the related small business tax rate for 2017 and subsequent taxation years, along with the consequential changes to the dividend gross-up and dividend tax credit, will not be going ahead.
The current specified partnership income rules are intended to prevent the multiplication of the SBD where a corporate partnership is utilized since each corporate partner is only entitled to an SBD equal to its share of the partnership’s active business income multiplied by $500,000. Structures have been implemented to circumvent these rules through the utilization of a separate Canadian-controlled private corporation (CCPC), which is not a member of the partnership. Such corporations (which would be owned by the shareholder of one of the corporate partners or by a person who is not at arm’s length with the shareholder) would be paid by the partnership for services provided.
The Budget proposes to deem this separate CCPC to be a member of the partnership, which in effect causes the active income earned by this CCPC from services billed to the partnership to still be subject to its prorated share of the annual SBD.
Similar rules will apply where a CCPC provides services or property to certain private corporations rather than to a partnership, as in the above example. The income so earned by the CCPC will be ineligible for the SBD where, at any time during the year, the CCPC, one of its shareholders or a person who does not deal at arm’s length with such a shareholder has a direct or indirect interest in the private corporation.
These proposals generally apply to taxation years that begin on or after Budget Day. In addition, these proposals do not apply to a CCPC all or substantially all of the active income of which is from providing services or property to arm’s length persons other than the partnership.
Currently, certain investment income, such as rent or interest earned by a CCPC from an associated CCPC that deducts the payments from its own active income, is treated as active income rather than investment income. In addition, two CCPCs that are not normally associated with each other are considered to be associated by being associated with the same “third” corporation. Although these two CCPCs can elect not to be associated for SBD purposes, the above rule, which treats certain investment income to be active rather than passive, still applies.
The Budget proposes to retain the character of the investment income in the hands of the recipient as investment income rather than deeming it to be active income where the “third company election” not to be associated is utilized. In addition, where the “third company election” not to be associated is utilized, the third company will continue to be associated with each of the other two CCPCs for purposes of applying the $10 to $15 million taxable capital limit for SBD purposes.
Effective January 1, 2016, the federal tax rate on personal services business income will be increased by 5 per cent (from 28 per cent to 33 per cent) to correspond with the increase in the top federal marginal personal tax rate to 33 per cent on taxable income over $200,000 for 2016 and subsequent years. The rate increase will be prorated for taxation years which straddle January 1, 2016.
The consultation resulting from the 2015 Budget to review the circumstances in which income from property should qualify as active business income was completed in August 2015. The Budget did not introduce any changes to these rules.
The Budget proposes measures to ensure that the addition to the capital dividend account (CDA) for private corporations and the adjusted cost base for partnership interests, on the death of an individual insured under a life insurance policy, is reduced by the adjusted cost basis of the policy. This will be the case whether or not the corporation or partnership that receives the policy benefit is the policyholder and therefore the premium payer. In addition, information reporting requirements will apply where a corporation or partnership is not a policyholder, but is entitled to receive a policy benefit. This measure will apply to policy benefits received as a result of a death that occurs on or after Budget Day.
Currently, where a policyholder disposes of their interest in a life insurance policy to a non-arm’s length person (to a corporation for example), the policyholder’s proceeds are deemed to be equal to the cash surrender value (CSV) of the policy at the time notwithstanding the fact that the fair market value (FMV) of the policy, and therefore the consideration received by the transferor, might be higher. The policyholder would be taxable only to the extent that the CSV exceeds the adjusted cost basis of the policy at the time; any excess of the FMV of the policy over the CSV is not currently taxable. In addition, this excess of FMV over the adjusted cost basis can later be effectively extracted through the corporation’s CDA. Similar concerns arise in the partnership context and where a policy is contributed to a corporation as capital.
The Budget proposes that the policyholder’s proceeds in the above scenario would be the FMV of the policy rather than its CSV. Consequently, any excess of the FMV over the adjusted cost basis would be taxable. This measure will apply to dispositions on or after Budget Day.
The Budget also proposes to amend the CDA rules for private corporations and the adjusted cost basis computation for partnership interests where the interest in the policy was disposed of before Budget Day for consideration in excess of the CSV of the policy. This amendment, which in essence amounts to retroactive taxation, will reduce the addition to the corporation’s CDA or adjusted cost base of an interest in a partnership by the amount of such excess, which will result in tax when the funds are withdrawn from the company. Consequently, additional funds would be required to pay these taxes; a cost not anticipated when the policy was transferred to the company. This measure will apply in respect of policies under which policy benefits are received as a result of deaths occurring on or after Budget Day.
Inventory is generally valued at the end of the year at the lower of its cost and FMV, which provides for a write-down to the extent that the FMV is less than the cost at year-end. However, accrued gains on inventory are not recognized until sold. Although there is generally no concern with conventional types of inventory, the potentially long-term holding period for derivatives is a concern to the Department of Finance. Consequently, the Budget proposes to exclude certain derivatives as inventory to preclude the utilization of the above valuation method to create a current write-down. This measure will apply to derivatives entered into on or after Budget Day.
Where a foreign currency debt is on capital account, any applicable foreign exchange gain is not realized by the debtor until the debt is settled or extinguished. In order to avoid realizing the foreign exchange gain on the repayment of the debt, some taxpayers have entered into debt-parking transactions where a non-arm’s length person would acquire the debt from the lender. The current debt-parking tax rules do not take into account the foreign exchange gain realized on the debt. The Budget proposes to introduce rules so that any accrued foreign exchange gains on foreign currency debt will be realized when the debt becomes a “parked obligation”. This measure will generally apply to a foreign currency debt that becomes a parked obligation on or after Budget Day.
The 2014 federal budget announced that the existing rules relating to both the acquisition and disposition of ECP (such as goodwill) would be reviewed.
At the present time, 75 per cent of the cost of ECP is added to the cumulative eligible capital (CEC) pool which is amortized at the rate of 7 per cent per annum of the declining balance. Generally, 75 per cent of the proceeds received on the disposition of ECP is credited to the CEC pool. If the proceeds exceed the balance in the CEC pool, the previously claimed CEC deductions are recaptured and included in business income. To the extent that the proceeds are in excess of the original cost of additions to the CEC pool, the excess receipt is included in business income at a 50 per cent inclusion rate. Both amounts are subject to tax at either the SBD rate or the general business rate, as applicable.
Each of the provinces imposes its own provincial rate. For example, in British Columbia, the rate applicable to the small business income portion would be 6.50 per cent (50 per cent of 13.0 per cent) and 13.00 per cent (50 per cent of 26.0 per cent) on the non-small business portion; in Ontario, the rate applicable to the small business income portion would be 7.50 per cent (50 per cent of 15.0 per cent) and 13.25 per cent (50 per cent of 26.5 per cent) on the non-small business portion.
Ignoring the lack of a reserve for deferred proceeds on the sale of goodwill this treatment has, initially, been more attractive than the result of treating the gain, as a capital gain which is taxed at 50 per cent of the high corporate rate applicable to investment income resulting in an effective rate of approximately 25 per cent.
The Budget introduces a new regime that will be effective on January 1, 2017.
The new rules will add 100 per cent of the cost of what has heretofore been classified as ECP to a new CCA class, Class 14.1, which will be depreciated at the rate of 5 per cent of the declining balance per annum. 100 per cent of the proceeds of disposition of this type of property will be credited to the pool in accordance with the existing rules applicable to dispositions of depreciable property.
Transitional rules will transfer December 31, 2016 CEC pool balances to Class 14.1. For 10 years, pre-2017 balances will be depreciated at the rate of 7 per cent of the declining balance per annum. Small businesses will benefit from more generous write-offs for minor expenditures. For example, the first $3,000 of the cost of incorporation will be deductible as a current expense.
The Budget proposes to expand CCA Classes 43.1 and 43.2 to include electric vehicle charging stations and electric energy storage equipment acquired on or after Budget Day that would otherwise be included under CCA Class 8. These changes will accelerate CCA claims, as Classes 43.1 and 43.2 provide for CCA at rates of 30 per cent and 50 per cent, respectively, on a declining-balance basis, while Class 8 only provides a declining-balance rate of 20 per cent.
Charging stations that supply less than 90 kilowatts of power would be included in Class 43.1, while stations that supply 90 kilowatts or more would be included in Class 43.2.
Electric energy storage equipment that is part of an electricity generation system that is eligible for Class 43.1 or 43.2 will be included in the same class as the system. Standalone electrical storage equipment may also be eligible for Class 43.1 or 43.2 treatment if certain criteria are met.
Governments may require emitters of regulated substances such as greenhouse gases to remit emission allowances to them. Such allowances can be supplied by the government, purchased in a market, or earned based on emission-reducing activities.
Current tax rules do not specifically address emission allowances. The Budget proposes to provide guidance to treat emission allowances as inventory for taxation years beginning after 2016. Also, these rules would apply to emission allowances acquired in taxation years ending after 2012 if so elected by a taxpayer. Due to the high volatility of such allowances, inventory valuation under the lower of cost and net realizable method would not be permitted.
In the domestic context, section 84.1 is designed to prevent surplus stripping in non-arm’s length situations. The following broad example illustrates this provision.
Assume that individual X, a Canadian resident, owns all of shares of Opco, a corporation resident in Canada, having a FMV of $100,000, an adjusted cost base (ACB) of $20,000 and paid-up capital (PUC) of $1.00. If X was to transfer the shares of Opco to a non-arm’s length Holdco and did not wish to realize a taxable amount, X could receive non-share consideration with a maximum FMV of $20,000, being the greater of the ACB ($20,000) and the PUC ($1.00). This would be true even if the gain on the disposition was sheltered by the capital gains exemption. If X was to receive, say, a note of $100,000, X would be deemed to have received a dividend of $80,000. If X was to receive shares of Holdco with a PUC of $100,000, the PUC would be ground down to $20,000 to prevent the tax-free extraction of surplus.
If X was a non-resident (whether an individual or a corporation (Forco)), section 212.1 would operate in a similar, but not identical fashion.
If X was to receive non-share consideration with a FMV greater than the $1.00 PUC (not the $20,000 ACB), from a Holdco resident in Canada, X would be deemed to have received a dividend equal to the excess. While a capital gain on the disposition would not have been taxed in Canada unless the shares were “taxable Canadian property” (and even then only if the gain was not exempted by a tax treaty), the deemed dividend would be subject to Canadian withholding tax.
If X was to receive shares of Holdco with a FMV greater than the $1.00 PUC (not the $20,000 ACB), the PUC would be ground down to $1.00 to prevent the tax-free extraction of surplus.
Subsection 212.1(4) provides an exception to section 212.1 where a Forco disposes of shares of Opco to a Holdco that controls Forco. The Department of Finance feels that this exception has been abused. As a consequence, with respect to dispositions on or after Budget Day, the exception in subsection 212.1 will not apply where Forco owns, directly or indirectly, shares of Holdco and does not deal at arm’s length with Holdco.
Section 247 contains rules to ensure that cross-border charges among non-arm’s length entities generally reflect prices that would be negotiated by arm’s length parties. In this regard, certain recommendations of an international study, the Base Erosion and Profit Sharing (BEPS) project, are consistent with existing CRA practices and require no Canadian changes at this time.
The Budget proposes country-by-country reporting requirements that would allow inter-company pricing to be monitored more easily. The new rules will apply to taxation years that begin after 2015, but only to groups with consolidated revenues of at least €750 million.
The BEPS project addressed “treaty shopping,” i.e., the abuse of tax treaty networks whereby an international organization establishes a corporation in a second jurisdiction only for the purpose of taking advantage of a tax treaty between that second jurisdiction and a third jurisdiction.
The Budget indicates that future Canadian tax treaties will contain anti-avoidance provisions to counter such abuses.
Subsection 18(6) contains an anti-avoidance measure intended to curtail the avoidance of the “thin capitalization” rules by interposing an ostensibly arm’s length lender between a Canadian borrowing entity and the real non-arm’s length lender. A similar anti-avoidance rule is found in subsection 212(3.1) where an attempt is made to avoid Canadian withholding tax on the payment of interest to a non-arm’s length lender by interposing an ostensibly arm’s length lender between a Canadian borrower and the real non-arm’s length lender.
The Budget indicates that Canada will strengthen existing rules to prevent tax avoidance in connection with back-to-back arrangements. The new rules will apply, for example, where back-to-back arrangements are intended to reduce Canadian withholding tax in connection with rents and royalties, to avoid the “upstream loan” rules (where a Canadian corporation receives a loan from a foreign affiliate to avoid receiving a taxable dividend from that affiliate) and in other more complex circumstances.
The Budget confirms that, commencing in 2016, Canada will begin spontaneously exchanging tax rulings with other jurisdictions that agree to do the same.
The non-taxable Canada Child Benefit (CCB) will replace the Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB) assistance programs effective July 1, 2016.
Akin to the CCTB and UCCB, the new CCB will provide financial assistance in the form of monthly payments to families with children under the age of 18. A maximum benefit of $6,400 will be provided for each child under the age of 6, and $5,400 for children aged 6 to 17. These maximums begin to phase out where the adjusted family net income is between $30,000 and $65,000. The phase-out rates in this threshold range from 7 per cent for a one-child family, up to 23 per cent for a family with 4 or more children. Once adjusted family net income exceeds $65,000, any remaining benefit is phased out at slower rates ranging from 3.2 per cent to 9.5 per cent.
The Budget broadens the definition of an eligible individual for purposes of the CCB to include an Indian within the meaning of the Indian Act provided that all other criteria under the definition are met.
Also beginning July 1, 2016, the children’s special allowance is proposed to be increased to the same level as the CCB so that families with children in child protection agencies are treated consistently.
For the 2016 taxation year and beyond, the Budget proposes to eliminate the Family Tax Cut Credit that currently permits limited income splitting for couples with at least one child under the age of 18.
This credit allows a higher-income earning spouse or common-law partner to notionally transfer up to $50,000 of taxable income to their spouse or common-law partner in order to reduce the couple’s combined tax liability by a maximum of $2,000.
The government proposes to halve the maximum eligible expenditures on which the 15 per cent refundable Children’s Fitness and Art Tax Credits can be claimed in the 2016 taxation year, and will eliminate the credits in 2017.
In particular, the Budget proposes to reduce the Children’s Fitness Credit maximum eligible amount from $1,000 to $500 in 2016 and eliminate it in 2017. The maximum eligible amount for the Children’s Arts Tax Credit would be reduced from $500 to $250 in 2016, and again, eliminated in 2017.
Effective January 1, 2017, the Budget proposes to eliminate the 15 per cent non-refundable Education and Textbook Tax Credits. Unused education and text book credits carried forward from prior to 2017 will remain available to be claimed in 2017 and subsequent years.
The Budget proposes to introduce the new Teacher and Early Childhood Educator School Supply Tax Credit, a 15 per cent refundable credit based on the amount of expenditures, up to a maximum of $1,000, made for eligible supplies purchased on or after January 1, 2016.
The credit is available to eligible educators who are teachers or early childhood educators that hold a valid certificate recognized by the province or territory in which they are employed. The credit cannot be claimed on expenditures claimed under any other provision of the Income Tax Act.
On December 7, 2015, the government announced that it will reduce the personal income tax rate in the second bracket from 22 per cent to 20.5 per cent in the 2016 taxation year. A new top tax bracket of 33 per cent on taxable income over $200,000 will be introduced as well.
The Budget proposes consequential amendments further to those already included in Bill C-2, which was tabled on December 9, 2015. These include the following:
The above amendments are proposed to take effect in the 2016 taxation year.
This program, which took effect on January 1, 2016, provides relief to low-income households for the cost of electricity via a monthly credit on a taxpayer’s electricity bill. The Budget proposes to exclude such credits from a taxpayer’s income so that other benefits subject to income threshold tests are not adversely impacted.
The Budget proposes to increase the maximum Northern Resident Deduction from $8.25 to $11 per day for each member of a household that resides in a Northern Zone for at least six consecutive months beginning or ending in a particular taxation year. In cases where only one member of a household claims the deduction, it will be increased from $16.50 to $22 per day.
Taxpayers resident in an Intermediate Zone can only deduct half of the specified amounts.
Eligibility for the Mineral Exploration Tax Credit is proposed to be extended for one year under the Budget. As a result, the credit will apply to flow-through share agreements entered into on or before March 31, 2017.
The Budget proposes to re-establish the 15 per cent tax credit for a purchase of shares of a provincially registered LSVCC for the 2016 taxation year and beyond. However, the Budget does not re-establish the tax credit for a federally registered LSVCC; the credit will remain at 5 per cent in 2016 and will be eliminated in 2017.
In general terms, a mutual fund corporation that is a “switch fund” allows its shareholders to exchange their shares for another class of shares in order to change their economic exposure to a different fund of the corporation. The provisions of the Income Tax Act currently deem such an exchange to not be a disposition.
The Budget proposes to treat such an exchange after September 2016 as a FMV disposition.
A linked note is a debt obligation that provides its holder with a return based on the performance of an index or reference asset. The underlying index or reference asset is normally unrelated to the business activities of the linked note issuer.
Investors that hold linked notes as capital property have used a strategy whereby they sell their linked notes in advance of their maturity in order to get capital gains treatment on any appreciation as opposed to fully taxable deemed interest. The logic behind this strategy is that there is no deemed interest accrual rules that govern prescribed debt obligations because the maximum amount of interest is not determinable at the time of the sale. That is, interest can only be accrued and included in income when the amount becomes determinable, which is usually very near to maturity.
The Budget proposes to amend the prescribed debt obligation provisions to deem any gain on the sale of linked notes after September 2016 to be interest income.
The Budget proposes a number of GST/HST amendments, including the following.
De minimis financial institutions — Under section 149 of the Excise Tax Act (ETA), a person whose revenues from financial activities exceed a minimum threshold may be considered a financial institution for GST/HST purposes. More specifically, a person earning more than $1 million in interest income from bank deposits in a taxation year is generally considered to be a financial institution for the following taxation year.
To allow a person to engage in basic deposit-making activity without incurring such consequences, the Budget proposes to exclude from the determination of the $1 million threshold, interest earned from demand deposits, term deposits, and GICs with a maturity period of less than one year.
This measure applies to a person’s taxation years commencing on or after Budget Day. For the purposes of determining whether a person is required to file Form RC7291 (the Financial Institution GST/HST Annual Information Return), this measure applies to a person’s fiscal year that straddles that date.
Application of GST/HST to cross-border reinsurance — The ETA requires financial institutions with a branch or subsidiary outside Canada to self-assess and remit GST/HST for certain expenses incurred outside Canada that relate to its Canadian activities.
Amendments to the ETA would clarify that the following components of imported reinsurance services would not form part of the tax base that is subject to these self-assessment provisions:
In addition, the Budget proposes to set out specific conditions under which the special rules for financial institutions do not impose GST/HST on reinsurance premiums charged by a reinsurer to a primary insurer.
These measures will apply retroactively to any specified year of a financial institution that ends after November 16, 2005.
Transitional rules would allow a financial institution to request a reassessment to determine its tax owing under the GST/HST imported supply rules for a past specified year, but only for the purpose of taking this measure into account. A financial institution will have one year after the date the enacting legislation receives Royal Assent to request a reassessment.
Closely related test — The ETA allows closely related corporations to make group relief elections under certain circumstances to treat supplies between them as if they were made for no consideration. To ensure that the closely related test applies only when nearly complete voting control exists, an additional requirement has been proposed — a corporation or partnership must hold and control 90 per cent or more of the votes in respect of every corporate matter of the subsidiary corporation (with limited expectations).
Generally, this measure will take effect one year after the Budget Day. However, this measure applies as of March 23, 2016, for determining whether the requirements for the closely related test requirements are met for elections under subsection 150(1) and subsection 156(2) of the ETA, where such elections are filed after Budget Day and take effect after that date.
GST/HST on donations to charities — Under current GST/HST rules, if a person makes a donation and receives property or services in return, GST/HST generally applies on the full value of the donation. In contrast, the Income Tax Act allows for “split-receipting.” This allows a charity to provide a donation receipt for the donation amount less any the value of any property or service received by the donor.
The Budget proposes to introduce similar split-receipting rules for the ETA. Specifically, if a charity provides property or services and an income tax receipt may be issued for a portion of the donation, GST/HST applies only to the value of the property or services supplied to the donor.
This measure applies to supplies made after Budget Day. However, transitional relief is available for charities that did not collect GST/HST on the full value of donations for supplies made after December 20, 2002, and on or before Budget Day.
Eligible capital property — As noted above (see Business Income Tax Measures — Eligible capital property), the Budget proposes to repeal the ECP regime and replace it with a new CCA class (Class 14.1), effective January 1, 2017. As a result, all ECP will become capital property under the Income Tax Act.
To ensure the application of GST/HST in this area is not affected, the Budget proposes to amend the definition of capital property under the ETA to exclude property in new Class 14.1. Therefore, property that was ECP under the Income Tax Act will continue to be excluded from capital property for GST/HST purposes. The Budget also makes consequential amendments to the Streamlined Accounting (GST/HST) Regulations.
These amendments will take effect January 1, 2017.
Health Measures — The Budget proposes to add the following medical and assistive devices to the list of zero-rated medical devices:
Zero-rating applies to any supplies of insulin pens and insulin pen needles made after Budget Day. In addition, zero-rating applies to any such supplies made on or before the Budget Day, unless the supplier charged, collected, or remitted GST/HST for that supply on or before that date.
Zero-rating applies to any supply of an intermittent urinary catheter made after Budget Day.
In addition to the above-listed measures, the Budget amends the ETA to clarify that GST/HST applies to supplies of purely cosmetic procedures provided by all suppliers, including registered charities. This amendment applies to supplies made after Budget Day.
Exported call centre services — Zero-rating will apply to certain exported supplies of call centre services. Specifically, zero-rating will apply to a supply of providing technical or customer support to individuals by means of telecommunications if:
This measure applies to supplies of such call centre services made after Budget Day. In addition, zero-rating applies to any such supplies made on or before Budget Day, unless the supplier charged, collected, or remitted GST/HST for that supply on or before that date.
Zero-rating does not apply to supplies of advisory, consulting, or professional services, or a supply of a service of acting as an agent of the non-resident person.
Reporting of grandparented housing sales — Currently, builders are subject to special reporting requirements for housing sales that were “grandparented” for HST purposes. The Budget proposes to limit such reporting requirements to sales of $450,000 or more. In addition, a builder would be entitled to make an election to report all past grandparented housing sales for which the consideration was $450,000 or more, thereby allowing a builder to correct any past misreporting and avoid potential penalties.
The Budget contains several amendments relating to excise tax levied under the ETA.
Heating oil — Currently, an excise tax exemption applies in respect of diesel fuel that is consumed to produce heat for any purpose, including industrial processes. The Budget proposes to limit relief to diesel oil consumed exclusively to provide heat to a home, building, or similar structure. This measure will generally apply to fuel delivered or imported after June 2016.
Electricity generation — While excise tax generally applies to diesel fuel consumed for motive purposes, an exemption applies for diesel fuel used in or by a vehicle to generate electricity, if certain conditions are met. The Budget proposes to eliminate this exemption. Excise tax will therefore apply to diesel fuel used to produce electricity in any vehicle, regardless of purpose. This measure will generally apply to fuel delivered or imported after June 2016.
The Budget proposes to enhance certain security and collection provisions in the Excise Act, 2001.
Security — The Excise Act, 2001 requires manufacturers of tobacco products to hold a license. It also requires stamping for all tobacco products destined for duty-paid entry into Canada, thus indicating that duty has been paid. In order to be issued a license or duty-paid stamps, tobacco manufacturers and other persons that import tobacco products must post security with the Canada Revenue Agency (CRA). Currently, the maximum amount of security required
is $2 million.
The Budget proposes to increase the maximum amount of security from $2 million to $5 million. This measure will take effect on the later of:
Collection — Currently, if a person objects to or appeals an assessment of excise duty payable, the CRA may not take collection actions while a decision or judgment is pending. The Budget introduces amendments that would allow the minister to require a person to post security for assessed amounts and penalties exceeding $10 million, to the extent the amount remains uncollected. If the person fails to post security, the minister may take collection action to recover an amount equal to the amount of required security.
These measures apply to amounts assessed and penalties imposed after the day on which the enacting legislation receives Royal Assent.
If you have any questions or would like further information relating to the Budget and its impact on you, please contact your Smythe advisor or any member of our Tax Group.
Information is current to March 22, 2016. The information contained in this 2016 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.
This year’s Budget released on April 21, 2015 focused on a number of themes consistent with the principles of the Conservative Government including strong leadership, a balanced budget, low-tax plan for jobs, growth and security.
To download a print-ready-copy (PDF) click here.
Business Income Tax Measures
Personal Tax Measures
Anti-Avoidance – Section 55
Charities & Non-Profit Organizations
Sales and Excise Tax Measures
The Federal Government presented its 2015 Budget on Tuesday, April 21. In order to offer targeted tax reductions for small businesses, seniors, and families with children; to increase spending for the military, public and national security, public transit, and for the Canada Revenue Agency (CRA) to address tax avoidance and evasion; and to eke out a $1.4 billion surplus in 2015–16 and small increases over the following years, the Federal Government will reduce its $3 billion contingency fund to $1 billion over the next three years.
Finance Minister Joe Oliver previously predicted surpluses of $6.4 billion for 2015–16, and $10.3 billion by 2018–19, but those hopes sank with plunging oil prices. Oliver’s modest updated surplus projections are $1.7 billion in 2016–17, $2.6 billion in 2017–18, $2.6 billion in 2018–19, and $4.8 billion in 2019–20. For 2014–15, Oliver will mark a deficit of $2 billion in the Federal Government’s books.
Many businesses should benefit from the Government’s promises, but small and medium businesses in particular have reasons to be happy. Besides lowering their taxes, the Budget promises to reduce bureaucracy and penalties. For instance:
Money for women and young entrepreneurs, and research and innovation, should also promote small business and the economy.
Seniors will benefit from various commitments, such as reducing the mandatory minimum withdrawals from Registered Retirement Income Funds (RRIFs) at the age of 71, introducing the Home Accessibility Tax Credit for $10,000 of eligible home improvements, extending Employment Insurance benefits for employees on caregiver leave to six months, and increasing TFSA contributions to $10,000 per year. These measures should have broad appeal and application for elder Canadians.
For families, the proposed measures seem positive, but critics argue that they favour those with medium and high incomes. The Universal Child Care Benefit will increase by $60 per month for children under 18. The Family Tax Cut will allow couples with children under 18 to split their incomes for a tax credit of up to $2,000. The Child Care Expense Deduction and Children’s Fitness Tax Credit maximums will increase.
The Government’s commitment from last year to consult the public every two years for ideas on improving services and reducing bureaucracy for small businesses will be a small step toward the goal of tax efficiency.
Currently, Canadian-controlled private corporations with less than $15 million of taxable capital benefit from a federal small business tax rate of 11% on active income earned in Canada up to $500,000 per year, versus 15% on any excess. The Budget proposes to reduce the low tax rate to 9% by 2019, phased in as follows:
The reduction is prorated for companies with off-calendar year-ends. This measure could save small business up to $10,000 a year in federal corporate tax. Adjustments have been made to the dividend tax credit regime for the purpose of maintaining the same level of combined corporate and personal tax rate, as indicated below.
The Budget proposes to change the gross-up percentage and dividend tax credit rate on non-eligible dividends annually starting in 2016, with the changes to be fully phased in by 2019. When looking at the integration of the proposed small business tax rate and the changes to the DTC regime, the after-tax cash retained when receiving non-eligible dividends will be about the same, year over year, as highlighted below.
|2015||2016||2017||2018||2019 and onward|
|Federal DTC rate||11.017%||10.522%||10.021%||9.512%||9.030%|
|Top marginal federal tax rate on non-eligible dividends||21.220%||21.620%||22.206%||22.606%||22.965%|
|Effective federal tax rate||29.886%||29.850%||29.985%||29.958%||29.899%|
New employers are required to withhold and remit source deductions on a monthly basis for at least their first year of operations. If the new employer has a perfect remittance record after the first year, and has total average monthly withholdings of less than $3,000, the employer may be eligible to remit quarterly.
The Budget proposes that for 2016 onward, new employers with total average monthly withholdings of less than $1,000 can automatically remit quarterly. The typical employer that would benefit from this measure would be one that has annual salary expenditures of about $43,500 or less (depending on the employer’s province of residence) in the year. This measure could benefit start-up companies and new employers of caregivers.
In the 2014 budget, the Government first announced its intent to “reform” the eligible capital property regime by repealing the current regime and folding it into the capital cost allowance system. The Government continues to hear from stakeholders and has yet to issue legislation.
The Budget announced the Government’s plans to first release detailed draft legislation for stakeholder comments prior to its inclusion in a bill. This is welcome news for businesses that are contemplating the sale of business assets, including goodwill, as some have speculated that the new measures would not be as favourable to Canadian-controlled private corporations as the current rules. However, one cannot be certain what the final legislation will look like.
To benefit from the lower corporate tax rate for income under $500,000, Canadian-controlled private corporations would need to generate income from an active business in Canada. The definition of active business excludes businesses that derive their income from a “specified investment business”. Generally a specified investment business is a business that derives its income from property and does not employ more than five full-time employees in the business.
The Government has commenced a consultation period to determine whether to amend the definition of a specified investment business. The Budget used the example of self-storage facilities and campgrounds as businesses that might qualify for the lower corporate tax rate under an amended definition, without employing more than five full-time employees. Comments can be emailed to the Government at business‑email@example.com, until August 31, 2015.
The Budget proposes that certain equipment purchased after 2015 and before 2026, primarily for use in Canada for the manufacturing and processing of goods for sale or lease, would be included in a new capital cost allowance (CCA) class. New class 53 will be subject to a CCA rate of 50% declining-balance, subject to the half-year rule.
The current regime, announced in Budget 2005, which was to apply until the end of 2016 has been extended to the end of 2021. The regime allows members of eligible agricultural cooperatives that receive patronage dividends in the form of eligible shares of the cooperative to defer the tax on the patronage dividend until disposition of the shares.
Subsection 112(2.3) of the Income Tax Act (ITA) can deny an inter-corporate dividend deduction where a dividend is received as part of a “dividend rental arrangement.” Such arrangements are typically designed to transfer otherwise taxable amounts to tax-exempt Canadian entities or non-residents that have the real opportunities of gain or the risk of loss.
The Budget proposes to tighten up these rules for dividends that are paid or payable after October 2015.
The current annual contribution limit of $5,500 is being increased to $10,000 effective January 1, 2015. However, the annual contribution limit will no longer be indexed to inflation.
The Budget proposes a new Home Accessibility Tax Credit which can provide tax relief on a non-refundable basis of 15% on up to $10,000 of eligible expenditures each calendar year, per qualifying individual per eligible dwelling. This tax credit would apply to 2016 and subsequent years.
A qualifying individual is a person who is 65 or older by the end of the year or is eligible for the disability tax credit in the particular year. An eligible individual can also claim this new tax credit in respect of a qualifying individual if he or she claims the spouse or common-law partner amount, the eligible dependant amount, the caregiver amount or infirm dependant amount for the qualifying individual. Consequently, an eligible individual can include a spouse or common-law partner of the qualifying individual or a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the qualifying individual or of the qualifying individual’s spouse or common-law partner.
An eligible dwelling must be the principal residence of the qualifying individual. Eligible expenditures are required to either allow the qualifying individual to gain access to or be more mobile or functional within the dwelling, or to reduce the risk of harm to the qualifying individual within the dwelling. The improvements must be of an enduring nature and be integral to the eligible dwelling. For example, eligible expenditures would include wheelchair ramps, walk-in bathtubs, wheel-in showers and grab bars. Expenditures which would not qualify include those whose primary purpose is to improve or maintain the value of the dwelling; routine repairs, maintenance, gardening, housekeeping or security; or costs of financing the renovation.
Since this new tax credit will not be reduced by any other tax credits or grants, an eligible individual will be able to claim both the Home Accessibility Tax Credit and the Medical Expense Tax Credit, in respect of the same expenditure.
For 2015 and subsequent years, the Budget proposes to reduce the minimum amount required to be withdrawn from a RRIF each year for persons aged 71 to 94. This reduction would result from reducing the nominal rate of return assumption from 7% to 5% and from increasing the inflation index from 1% to 2%. For example, at age 72, the withdrawal amount would drop for that year from 7.48% to 5.4%. Consequently, RRIF holders would have greater flexibility to leave more funds in their RRIF for a longer period of time before these funds must be withdrawn.
To ensure that the proposal applies to all of 2015, RRIF holders who withdraw more than the reduced 2015 minimum amount during 2015 will be able to deduct, in 2015, the re-contribution of the excess made by February 29, 2016.
The Budget proposes to increase the lifetime capital gains exemption for qualified farming or fishing property from the current indexed amount of $813,600 in 2015 to $1 million. This proposal applies to dispositions of qualified farming or fishing property on or after Budget Day. In addition, for future years, the exemption will be the greater of $1 million and the indexed exemption available on capital gains from the disposition of “qualified small business corporation shares”.
The Business Taxation section of this Budget commentary provides the details of the proposed changes to the personal taxation of non-eligible dividends from private Canadian companies that will be made in conjunction with the proposed reductions to the corporate tax rate on small business income.
Budget 2012 introduced a temporary measure, until the end of 2016, to allow a qualifying family member (parents, spouses and common-law partners) to become the plan holder of a RDSP for an adult individual who lacks the capacity to enter into a contract. Since some of the provinces and territories require additional time to deal with this legal issue, the Budget proposes to extend this temporary measure until the end of 2018.
Currently, a federal penalty is imposed where a taxpayer fails to report all of their income in their tax return for a taxation year and had also failed to report an amount of income in any of their prior three taxation years. This penalty is currently 10% of the income not reported. In addition, there can be a provincial penalty calculated in a similar manner.
The Budget proposes, for 2015 and subsequent years, to reduce this penalty since the penalty can be disproportionate to the actual associated tax liability, particularly for lower-income individuals. The penalty would only apply if the unreported income was at least $500 in the year. In addition, the amount of the penalty would be the lesser of 10% of the unreported amount and an amount equal to 50% of the difference between the understatement of tax related to the omission and the amount of any tax paid, for example, by way of withholding tax.
The Budget proposes to amend the ITA to clarify that the CRA and the courts may increase or adjust an amount included in an assessment that is under objection or appeal at any time, provided that the total amount of the assessment does not increase. This measure will apply in respect of appeals instituted after Royal Assent.
The Budget proposes to amend the ITA, Part IX of the Excise Tax Act (ETA), in relation to the GST/HST, and the Excise Act, 2001, in relation to excise duties on tobacco and alcohol products, to permit the sharing of taxpayer information within the Agency in respect of non-tax debts under certain federal and provincial government programs. This measure will apply on Royal Assent.
The previously announced Family Tax Cut rules prevent transferred education credits from being included in the Family Tax Cut calculation. Consequently, the value of the Family Tax Cut could be reduced for couples who transfer education credits between themselves. The Budget proposes to revise the Family Tax Cut for 2014 and subsequent years to ensure that these couples receive the appropriate value of the Family Tax Cut. The CRA will automatically reassess affected taxpayers for 2014, once the enacting legislation receives Royal Assent, to ensure that they receive any additional benefits to which they are entitled under the Family Tax Cut.
To reduce the compliance burden on taxpayers the Budget proposes to increase the threshold for the detailed foreign reporting required by the current form T1135 from $100,000 of cost to $250,000. The details with respect to this proposal are provided in the International section of this Budget commentary.
Subsection 55(2) of the ITA is an anti-avoidance provision that is intended to convert tax-free intercorporate dividends into capital gains where the dividend was paid or deemed paid to reduce what should have been a capital gain.
In such circumstances, the dividend would not meet the exceptions to subsection 55(2) for dividends out of “safe income”, dividends subject to Part IV tax or dividends received in the course of a non-arm’s length “butterfly”. Therefore, subsection 55(2) would convert the otherwise tax-free intercorporate dividend into a capital gain.
There is no current specific provision similar to subsection 55(2) that ignores the creation of an artificial capital loss. Prior to the Budget, the CRA had to rely on the general anti-avoidance rule (GAAR) to deny artificial capital losses. Triad Gestco, 2012 DTC 5156 (FCA), is an example of such a case. In order to increase the tax value of common shares, an individual subscribed for common shares of a corporation, for cash. In order to reduce the fair market value (FMV) of the common shares, he then received a stock dividend in the form of preferred shares with a redemption value equal to the FMV of the common shares. He was taxed on a dividend equal to only the nominal paid-up capital (PUC) of the preferred shares so received. He then sold the common shares to a captive entity for their nominal FMV and incurred a capital loss. The court held that the GAAR denied the loss.
The Budget legislates the loss denial in circumstances such as those in Triad Gestco and also prevents similar abuses where dividends are received on or after Budget Day. Subsection 55(2) will apply where a dividend (or deemed dividend under subsection 84(3)) significantly reduces the FMV of any share as was the case in Triad Gestco. Subsection 55(2) will also apply where the dividend or deemed dividend significantly increases the cost of property owned by the dividend recipient unless the dividend is paid out of the “safe income” of the payer corporation.
Paragraph 55(3)(a) currently exempts from the operation of subsection 55(2), intercorporate dividends received in many related-party transactions. Where such dividends are received on or after Budget Day, paragraph 55(3)(a) will no longer exempt actual dividends; only dividends deemed received under subsection 84(3) on a share redemption will be exempted. This brings paragraph 55(3)(a) into line with a similar rule in the non-arm’s length “butterfly” rules of paragraph 55(3)(b) and related provisions.
The Government is concerned about the ability of multinationals to shift income from high-tax jurisdictions where business activity actually takes place, to low-tax jurisdictions. In the 2014 budget, the Government asked for input from interested parties in this regard, with a view “to ensure tax fairness and better protect the Canadian tax base while maintaining an internationally competitive tax system”. The Government is still considering what steps to take.
In November 2014, Canada and the other G-20 countries endorsed a new common reporting standard for automatic information exchange. Canada proposes to implement the common reporting standard on July 1, 2017, allowing a first exchange of information in 2018. At that time, financial institutions will be required to have procedures in place to identify accounts held by non-residents and to report the required information to the CRA. Information will be exchanged reciprocally with other jurisdictions when appropriate safeguards are in place and exchange agreements have been formalized.
Canada taxes the employment income of non-residents that is earned in Canada. Most tax treaties contain provisions that may exempt such income from Canadian tax in prescribed circumstances. Current Canadian law requires that non-resident employers must withhold source deductions even if the employment income is expected to be exempt from Canadian tax pursuant to a treaty. It has been possible for non-residents to obtain waivers in such circumstances, but the system has generally been inefficient.
The Budget proposes to provide an exemption from withholding where a qualifying non-resident employer remunerates a qualifying non-resident employee after 2015.
A qualifying non-resident employer:
Employers that are partnerships must satisfy the additional condition that at least 90% of the partnership’s income for the fiscal period that includes the time of the payment must be allocated to residents of a treaty country.
Qualifying non-resident employers will continue to be responsible for Canadian reporting obligations in connection with amounts paid to its employees and for withholding tax where a non-resident employee is found to not have met the conditions described below. However, the employer will not be penalized for its failure to withhold if, after exercising due diligence, it had no reason to believe that, at the time of the payment, the employee did not meet the requisite conditions.
A qualifying non-resident employee:
Canadian resident individuals, corporations and trusts, and certain partnerships must currently file form T1135 to report “specified foreign property” with a total cost of at least $100,000 at any time in the year.
The CRA is developing a simplified form, for use in 2015 and beyond, where the total cost of the specified foreign property throughout the year is less than $250,000. The current reporting requirements will continue to apply where the total cost of the specified foreign property is $250,000 or more at any time in the year.
“Foreign accrual property income” (FAPI) earned outside of Canada is taxed, in Canada, on the accrual basis even if it is not repatriated to Canada. Such rules include measures that are intended to prevent Canadian taxpayers from shifting income from the insurance of Canadian risks to low or no tax jurisdictions.
For taxation years that begin on or after Budget Day, the anti-avoidance rules imbedded in the FAPI rules will be strengthened to ensure that income from insuring Canadian risks remains taxable in Canada.
The Budget proposes to provide an exemption from capital gains tax with respect to certain dispositions of private company shares and real estate where the cash proceeds from the disposition are donated to a charity within 30 days after their disposition and the private company shares or real estate are sold to a purchaser who deals at arm’s length with both the donor and the donee. In broad terms, anti-avoidance provisions can deny the exemption if the donor reacquires the property within five years of the disposition. This proposal is to be effective for dispositions after 2016.
Currently charitable organizations and public foundations are permitted to engage in business if the activities qualify as a related business. Private foundations are not permitted to engage in any business activities. Partners, including limited partners, are considered to be carrying on the business carried on by the partnership. Consequently, since many limited partnerships do not carry on a business that would be related to the activities of a particular charity or public foundation, few charitable organizations and public foundations and no private foundations can hold an interest in a limited partnership.
Since limited partnerships can provide a wider range of investment opportunities, the Budget proposes to amend the ITA to generally allow a registered charity to invest in a limited partnership by providing that a registered charity will not be considered to be carrying on a business solely because it invests in a limited partnership. However, the registered charity will be required to own 20% or less of the limited partnership and the charity must deal at arm’s length with each general partner of the limited partnership. This measure applies in respect of investments in limited partnerships that are made on or after Budget Day.
The Budget proposes to allow foreign charitable foundations to be registered as qualified donees in Canada if they receive a gift from the Government and are pursuing disaster relief, urgent humanitarian aid, or are carrying on activities in the national interest of Canada. This measure will apply on Royal Assent.
The Budget does not contain any significant GST/HST or excise duty measures. However, the Budget proposes administrative amendments to the ITA concerning assessments and the sharing of confidential taxpayer information, which would be paralleled by similar amendments to the ETA and the Excise Act, 2001.
The Budget proposes to amend the ITA, Part IX of the ETA, and the Excise Act, 2001 to clarify that the Minister may, with respect to an assessment that is under objection or appeal, increase or adjust an amount after the normal reassessment period has expired, as long as the total amount of the assessment does not increase.
These amendments will apply to appeals instituted after the day the implementing legislation receives Royal Assent.
While the CRA collects debts under tax and non-tax programs, it is currently prohibited from using confidential taxpayer information to collect debts under non-tax programs. In an effort to simplify administration, the Budget proposes to allow officials within the CRA to share taxpayer information obtained under the ETA and the Excise Act, 2001, where such information would be used for the sole purpose of administering and enforcing non-tax debts under certain federal and provincial programs, such as amounts owing under the Canada Student Loans Act, the Apprentice Loans Act, or a provincial law granting financial assistance to post-secondary students. In addition, the sharing of taxpayer information under the ETA and the Excise Act, 2001 would be extended to certain programs where such information-sharing is already permitted under the ITA.
These amendments will take effect on the day the implementing legislation receives Royal Assent.
The 2014 Budget contained proposals to make the joint venture election provisions under section 273 of the ETA available to any joint venture, provided the joint venture’s activities are exclusively commercial and the participants engage exclusively in commercial activities. This election simplifies GST/HST compliance by allowing the participants to designate an operator who is responsible for accounting for GST/HST on supplies made by and acquired by the joint venture. Currently, the election is available only to joint ventures engaged in mining or prescribed activities such as real property construction.
The 2015 Budget confirms the Government’s intention to introduce draft legislation in relation to these proposals.
The Budget does not contain any proposed amendments to the Customs Act or the Customs Tariff.
If you have any questions or would like further information relating to the Budget and its impact on you, please contact your Smythe CPA advisor or any member of our Tax Group.
Information is current to April 22, 2015. The information contained in this 2015 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 CPA tax advisor.