Finance Minister Bill Morneau introduced the 2019 federal budget (“Budget”) on March 19, 2019. No significant tax changes were introduced and personal and corporate tax rates remained unchanged.
This Budget reflects the government’s intention in boosting corporate innovation, promoting the use of environment-friendly vehicles, promoting training of workers, and making it easier for first-time home buyers in buying their homes.
Some of the notable changes are summarized below.
BUSINESS INCOME TAX MEASURES
Scientific Research & Experimental Development (SR&ED)
Under the current rules, Canadian-controlled private corporations (CCPC’s) are entitled to either 35% or 15% federal tax credit on their eligible SR&ED expenditures. Whether corporations are entitled to 35% or 15% was dependent on taxable income and taxable capital of the corporation (or associated group of corporations) where the full 35% credit is gradually phased out if taxable income exceeded $500,000 or taxable capital exceeded $10 million in the previous year.
The Budget proposes to repeal the use of taxable income as a factor in phasing out the SR&ED expenditures eligible for the full 35% credit. As a result, CCPC’s with taxable capital of less than $10 million will be able to access 35% credit regardless of their taxable income.
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 CCA rate of 100 per cent in respect of eligible zero-emission vehicles. These vehicles will be classified under one of two new CCA classes:
- Class 54 – include zero-emission vehicles that would otherwise be included in Class 10 or 10.1. The amount on which CCA can be claimed is limited to a maximum of $55,000 plus sales taxes, per vehicle.
- Class 55 – include zero-emission vehicles that would otherwise be included in Class 16.
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 taxpayer must claim the enhanced CCA 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.
Support for Canadian Journalism
Effective January 1, 2020, Qualified Canadian Journalism Organizations (QCJO’s) will be allowed to register for tax-exempt status as “qualified donees” that can issue charitable receipts. A QCJO must be a corporation or trust whose activities relate exclusively to journalism, is controlled by arm’s-length persons and satisfies other conditions.
Retroactive to January 1, 2019, certain QCJO’s will be eligible for a 25 per cent refundable tax credit on remuneration paid to eligible newsroom employees. The remuneration eligible for the credit will be capped at $55,000 per year per employee. The QCJO must be a corporation, partnership or trust primarily engaged in the production of original written news content. Corporations must meet additional criteria.
Small Business Deduction — Farming and Fishing
A CCPC is generally entitled to pay federal tax at the small business rate, which is currently 9%, on its first $500,000 of income from an active business carried on in Canada as opposed to 15%. There are number of rules which restrict the access to small business deduction, one of which is specified corporate income (SCI) introduced in 2016. SCI, in general terms, disqualifies certain income earned from closely held group of corporations from accessing the small business deduction.
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. This udget 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, but merely to an arm’s-length corporation.
This measure will apply to taxation years beginning after March 21, 2016.
PERSONAL INCOME TAX MEASURES
Employee Stock Options
Employee stock options can receive preferential tax treatment. The employee has a taxable employment benefit equal to the excess of the fair market value of the shares acquired at the exercise date over the price paid under the option. If certain conditions are met, the employee will be eligible for deduction of half the benefit effectively making the benefit half-taxable.
The Budget indicates the government’s intention to limit this preferential treatment (presumably the deduction for half the benefit). Specifically, the preferential treatment will only be available on shares acquired that fall under a cap for the year of grant. An annual cap of $200,000 has been set based on the fair market value of the shares that are the subject of the option. The Budget is silent on the date that the FMV is determined. It is intended that these changes would apply to employees of “large, long-established, mature firms.” Employees of start-up and rapidly growing businesses would be exempt from these rules.
The Budget indicates that further details would be released before the summer. The Budget papers do not include a proposed implementation date but do indicate that any new measures would not apply to options granted before the announcement of legislative proposals to implement any new regime.
RRSP Home Buyer’s Plan
Under the RRSP Home Buyer’s Plan (HBP), a first-time home buyer can borrow up to $25,000 from their RRSP to help finance the purchase or construction of a home. In order to qualify as a first-time home buyer, neither the individual nor their spouse can have owned a home in the year or any of the four preceding years. The four-year requirement is waived where the purchase is for a more accessible or suitable home that will be occupied by an individual eligible for the disability credit.
The Budget proposes to increase the maximum withdrawal per individual to $35,000 effective for withdrawals made after March 19, 2019.
The Budget also modifies the HBP rules to better accommodate marital breakdowns. The individual must be living separate and apart from their spouse, including a common-law partner, for a period of at least 90 days. The individual will be eligible to make a HBP withdrawal if the spouses live separate and apart at the time of the withdrawal and began to live separate and apart in the year of withdrawal or at any time in the four preceding years. However, if the individual is living in a home owned by a new spouse, they will not be able to use the HBP. This measure is effective after 2019.
Canada Training Credit
The Budget introduces the refundable Canada Training Credit (CTC). It is intended to provide financial support for professional development and training for working Canadians age 25 to 65. Eligible individuals will accumulate $250 per annum in a notional account which can be used to cover eligible training costs. The annual accumulation will start with the 2019 taxation year, with 2020 being the first year the CTC can be claimed.
In order to accumulate the $250 for a year, the individual must:
- be age 25 to 64 at the end of the year;
- 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)
- have net income for tax purposes of no more than the top of the third tax bracket for the year ($147,667 for 2019, indexed annually).
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 individual will be able to claim the tuition credit on the eligible tuition and fees net of the CTC claimed. The individual must be resident in Canada throughout the year to be able to claim the CTC.
Change in Use Rules for Multi-Unit Residential Properties
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 current rules, where the use of an entire property is converted to income-earning, or an income-earning property becomes a taxpayer’s principal residence, the taxpayer may elect to not have the deemed disposition occur in order to defer the taxation of any accrued capital gain until the time that the property is sold. In cases where only part of a property is converted, this election is unavailable.
The Budget proposes to extend the above-mentioned election to situations where only part of a property undergoes a change in use. For example, where a taxpayer owns a multi-unit residential property such as a triplex, if the taxpayer begins to live in one of the units previously rented, or vice versa, he or she can elect to not have the deemed disposition occur to that unit.
This measure will apply to changes in use that occur on or after March 19, 2019.
Medical Expense Tax Credit
Amounts paid for cannabis products may be eligible for the medical expense tax credit where such products are purchased for a patient for medical purposes in accordance with the regulations under the Controlled Drugs and Substances Act. As of October 17, 2018, cannabis is no longer regulated under this Act, but rather is subject to the Cannabis Regulations under the Cannabis Act.
The Budget proposes to amend the Income Tax Act to reflect the current regulations for accessing cannabis for medical purposes. This measure will apply to expenses incurred on or after October 17, 2018.
Carrying on Business in a Tax-Free Savings Account
A Tax-Free Savings Account (TFSA) is liable to pay tax under Part I of the Income Tax Act (at the top personal rate) on income from a business carried on by the TFSA or from non-qualified investments. Under the current rules, the trustee of the TFSA (i.e., a financial institution) is jointly and severally liable with the TFSA for Part I tax.
The Budget proposes to extend the joint and several liability for that 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.
SALES TAX AND EXCISE TAX MEASURES
Foot-Care Devices Supplied by Order of a Podiatrist or Chiropodist
Certain foot care devices, such as orthopedic devices and anti-embolic stockings, are zero-rated and relieved from GST/HST when supplied on the written order of a physician, nurse, physiotherapist or occupational therapist. The Budget proposes to add licensed podiatrists and chiropodists to the list of practitioners on whose order supplies of foot-care devices are zero-rated.
This measure will apply to supplies of foot-care devices made after March 19, 2019.
Multidisciplinary Health-Care Services
Health-care services may be provided by a multidisciplinary health team of licensed health-care professionals consisting of a physician, an occupational therapist and a physiotherapist. When supplied separately, the services rendered by these health-care professionals would generally be exempt from GST/HST. Currently, there is no GST/HST provision that explicitly relieves the service of a multidisciplinary team that combines elements of the various practices.
The Budget proposes to exempt from the GST/HST, the supply of a service rendered by a team of health professionals, such as doctors, physiotherapists and occupational therapists, whose services are GST/HST-exempt when supplied separately. The exemption will apply where all or substantially all of the service is rendered by such health professionals acting within the scope of their profession.
This measure applies to supplies of multidisciplinary health services made after March 19, 2019.
Later this year, edible cannabis, cannabis extracts and cannabis topicals will be permitted for legal sale under the Cannabis Act. The Budget proposes to impose excise duties on these products (including cannabis oils) based on the quantity of tetrahydrocannabinol (THC) contained in the final product. The THC-based duty will be imposed at the time of packaging of a product and become payable when it is delivered to a non-cannabis licensee such as a provincial wholesaler, retailer or individual consumer.
The combined federal-provincial territorial THC-based excise duty rate for cannabis edibles, cannabis extracts (including cannabis oils) and cannabis topicals is proposed to be $0.01 per milligram of total THC.
This measure will come into effect on May 1, 2019, subject to certain transitional rules.
Electronic Demands for Information by CRA
Both the Income Tax Act and Excise Tax Act provide CRA the power to serve notice on taxpayers and non-residents that carry on business in Canada, requiring production of information, including foreign-based information. The CRA may also demand third-party information from institutions such as financial institutions.
The current rules generally require the Minister to personally serve or to send by registered mail the notice demanding the information.
The Budget proposes to permit the CRA to serve such notice electronically to a bank or credit union that has provided consent to receive such notices electronically.
These measures are applicable to both the Income Tax and Excise Tax Acts and come into force January 1, 2020.
PREVIOUSLY ANNOUNCED INCOME TAX MEASURES
The Budget confirms the government’s intention to proceed with previously announced income tax measures. Some of the key measures are summarized below.
Accelerated Investment Incentive
The Accelerated Investment Incentive was introduced to allow businesses in Canada that acquire capital property on or after November 21, 2018, but before 2028, to be eligible for an enhanced first-year CCA deduction.
Full expensing for manufacturing and processing equipment
Canadian businesses will be able to deduct 100 per cent of the cost of machinery and equipment acquired on or after November 21, 2018, that is used to manufacture and process goods in Canada.
Full expensing for clean energy equipment
Specified clean energy equipment acquired on or after November 21, 2018, will be eligible for a 100 per cent deduction in the year that the asset becomes available for use in a business.
Extension of mineral exploration tax credit
The 15 per cent Mineral Exploration Tax Credit is extended from March 31, 2019, to March 31, 2024. This credit applies to specified mineral exploration expenses incurred in Canada and renounced by a corporation to individual flow-through share investors.
Trusts — Reporting Requirements
The 2018 budget proposed extensive new reporting requirement for most family trusts, effective for returns required to be filed for 2021 taxation years.
Intergenerational Business Transfers
The government will continue its initiative to develop new proposals to ensure that intergenerational transfers of businesses are better accommodated under the tax system. The Budget specifically mentions Canadian farmers and fishers, but adds that this initiative also applies to other types of business owners.