On February 27, 2018, the Federal Government released their 2018-2019 Budget which focuses on “Equality and Growth”. The Budget includes tens of billions of dollars in new or increased spending over the next six years, with the goal of further growing government revenues by increasing economic participation among women, visible minority Canadians and persons with disabilities, as well as substantial long-term investments in science and technology.
The government suggests that increasing equality for women and enhancing women’s participation in the workplace (especially in technology and trades) could add $150 billion to the Canadian economy over the next decade.
Highlights of some of the tax measures contained in the budget are noted below.
The most notable announcement is the proposed rules on passive income earned by private corporations because the administration is much different than what was initially proposed on July 18, 2017. While this change includes two new provisions, the end result is welcomed news because tax on secondary passive income will no longer be 73% as initially proposed in July 2017. The changes also eliminate the need for clients to keep track of various sources of funds that were used to purchase passive investments which would have been very burdensome and costly.
A complete copy of the budget can be found here.
BUSINESS INCOME TAX MEASURES
Passive Investment Income Earned by Private Corporations
The Budget proposes to introduce measures to reduce perceived tax advantages where a private corporation earns passive income.
The Budget proposes two new rules. One set is intended to reduce the $500,000 business limit otherwise available to a group of associated Canadian-controlled private corporations (CCPCs) where the group earns a significant amount of passive income. 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.
Small Business Deduction Limit Reduction
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 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 determined in computing the amount of RDTOH, and is subject to further adjustments in order to better align with the types of passive investment income the Finance intends to regulate.
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. This is somewhat of a major departure from their initial announcement where they assured that the existing investments would have been grandfathered. However, since the grind to the RDTOH and effective tax rate of 73% on secondary passive income had been removed altogether, such effect of non-grandfathering would be limited to the reduction of small business limit if their investment income exceeds $50,000 annually.
There will also be some anti-avoidance measures to 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.
Limiting access to refundable taxes
The Budget proposes to introduce measures that will generally allow a CCPC to recoup RDTOH only on the payment of non-eligible dividends. Such rule is designed to prevent a corporation to receive an RDTOH refund upon the payment of an eligible dividend (which entitles an individual receiving the dividend to the enhanced dividend tax credit) in situations where the corporation’s RDTOH was generated from investment income that would need to be paid as a non-eligible dividend. The purpose of the rule is to better align the refund of taxes paid on passive income with the payment of dividends sourced from passive income.
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 dividends.
To accomplish this, the Budget proposes to create two separate RDTOH accounts and will ensure the refund is paid to the corporation only when the types of dividends paid from a corporation align with the source of its passive income.
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.
Income Sprinkling Measures
The Budget confirms that Finance will proceed with the implementation of the December 13, 2017, draft proposals that address income sprinkling involving private corporations. The December 13, 2017, draft legislative proposals represent a major broadening of the old TOSI rules and will become effective as of January 1, 2018. The detailed analysis of this measure was included our previous Tax Update Income Sprinkling Update – Far from Simple.
Tax Support for Clean Energy
Capital cost allowance (CCA) Classes 43.1 and 43.2 provide accelerated CCA rates 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.
At-Risk Rules for Tiered Partnerships
the Budget proposes to restrict the allocation of losses to members of a top-tier partnership in tiered partnership structures for taxation years that end on or after February 27, 2018, including losses incurred in tax years that ended prior to that date. 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. Such unused losses will be added to the adjusted cost base of the partnership interest of the second-tier partnership.
PERSONAL INCOME TAX MEASURES
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.
Canada Workers Benefit (CWB)
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.
Employment Insurance Parental Sharing Benefit
The Budget proposes a new five-week Employment Insurance Parental Sharing Benefit, effective June 2019. This benefit will be available as a top-up in situations where both parents agree to share parental leave. It will be available to eligible two-parent families, including same sex-couples and adoptive parents. This new benefit is intended to provide greater flexibility, particularly for mothers, to return to work sooner.
Apprenticeship Incentive Grant for Women
The Budget proposes a new Apprenticeship Incentive Grant for Women. Under this program, women in male-dominated Red Seal trades will be able to receive $3,000 per year for each of their first two years of training. Nearly 90 per cent of Red Seal trades would be eligible, according to the Budget documents. Presumably this grant would be taxable, but this is not clear from the budget documents.
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 Budget also introduces penalties for failure to file a trust return 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.
The Budget proposes to allow transfers of property to municipalities to be qualified expenditures for the purpose of revocation taxes assess on registration being revoked. This is subject to case-by-case approval, thus reducing the revocation tax. This measure will apply to transfers made on or after February 27, 2018.
GST/HST & EXCISE TAX MEASURES
Investment Limited Partnerships
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. The Budget proposes to apply GST/HST on management and administrative services rendered by the general partner on or after September 8, 2017.
Holding Corporation Rules
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 a new excise duty framework for cannabis products to be introduced as part of the Excise Act, 2001. 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.
Please contact Fazzari + Partners LLP if you have any questions. We can offer the tax advices that best meet your unique circumstances.