Ocean Mist

13 May 2014

Canada’s Federal 2018

Posted by Tax Consultants

2017 Tax Changes

Announced on July 18, 2017

The Canadian federal Finance Minister, Bill Morneau,  the release of a consultation paper and with a draft legislation which, will have a dramatic impact on the taxation of Canadian private corporations and business structures that Canadian entrepreneurs have had in place for decades if enacted.

The government’s proposals which target (1) income splitting strategies, (2) access to the lifetime capital gains exemption, (3) the tax treatment of passive investment income earned in a private corporation and (4) strategies to convert income into capital gains.

Income splitting

It is common for entrepreneurs who control private Canadian corporations to make use of ownership structures involving multiple family members. This can be achieved by either having family members hold corporation shares directly or through a family trust. Under these structures, family members (or the family trust) often hold different classes of shares which allow for dividends to be paid to the different family members at the discretion of the corporation’s directors or the family trust’s trustees. This share structure permits dividends to be paid to family members who are in a lower tax bracket than the family member who controls the business. This is referred to as “income splitting” or “dividend sprinkling” in order to reduce the overall tax burden of the family.

The proposals to address income splitting strategies with private corporations also expand the application of the TOSI to include (1) income from certain debt obligations, (2) capital gains from the sale of shares the income from which is subject to the TOSI and (3) compound income on property that is the proceeds from income previously subject to the TOSI rules or the income attribution rules. However, this third type of income will only apply to individuals under the age of 25.

The new anti-income splitting rules are to be effective starting in 2018.

Lifetime capital gains exemption

Since 1988, Canadians have been able to shelter capital gains from the disposition of “qualified small business corporation” shares from tax up to a lifetime limit. The government has identified concerns with common ownership structures that allow multiple family members to make use of their capital gains exemption on the sale a of a family-owned business. Under the proposals, the capital gains exemption will be denied in the following circumstances:

  1. individuals under the age of 18 will not be allowed to make use of the capital gains exemption;
  2. beneficiaries of trusts will no longer be permitted to make use of the capital gains exemption with respect to gains on the value of shares that accrue during the period in which the trust holds the shares; and
  3. individuals who are subject to the TOSI with respect to a share will not be able to make use of the capital gains exemption on the sale of such shares.

These new rules are to be effective starting in 2018. However, the proposals include a transitional rule that will allow an election to be made by the end of 2018 to crystallize a capital gain and claim the capital gains exemption so as to increase the adjusted cost base of the “qualified small business corporation” shares. Making such an election will reduce the individual’s capital gain on a subsequent sale of the shares.

Passive investment income

The consultation paper identifies a concern with respect to a potential advantage that arises from earning business income through a corporation rather than individually. Corporations are taxed at a much lower rate than individuals on business income. As a result, more after-tax dollars are available for investment if earned through and retained in a corporation. This is an intentional tax policy decision to encourage reinvestment of business profits to broaden the tax base and increase employment. However, the government has expressed concern that this fact of the Canadian corporate tax system is unfair if the surplus funds are used for passive investment rather than reinvestment in the business.

 Converting income into capital gains

Intended to allow a shareholder to extract retained earnings from a private corporation as a capital gain rather than as a dividend. This is beneficial to the shareholder, as capital gains are taxed at a lower rate than dividends. Amendments are proposed to the anti-surplus stripping rule in section 84.1 of the Income Tax Act to shut down this type of planning. These changes would apply on or after July 18, 2017.

Canada’s Federal 2016 Budget

With Canada’s 2016 federal budget just around the corner, we consider what tax measures our new government might have for us.

Our new Liberal government has already implemented some of the tax measures promised in its platform.

These changes, and others, are in Bill C-2, An Act to amend the Income Tax Act (first reading on December 9, 2015) and are discussed in the following Tax Insights:globes MK & Associates

 

The Finance Minister Bill Morneau commented on the following personal tax changes, which were promised in the Liberal party platform:

  1. personal tax rates – starting January 1, 2016:
    1. A. the tax rate on incomes over $200,000 will increase from 29% to 33%;
    2. B. the second lowest tax rate will drop from 22% to 20.5%, decreasing taxes by up to $671 (based on 2015 tax brackets);
  2. Tax-Free Savings Account (TFSA) contribution limit – will be rolled back from $10,000 to $5,500 and indexing will be reinstated, for contributions made in respect of the 2016 and later years;
  3. income-splitting – the measure that allows some families with children under 18 to reduce their taxes by up to $2,000 will be cancelled, starting 2016;
  4. Universal Child Care Benefit, Canada Child Tax Benefit and National Child Benefit Supplement – will be replaced with a new Canada Child Benefit, for payments starting July 1, 2016; the Liberal party platform had stated that the new benefit would be income-tested and tax-free;mk change

 

The first two measures appeared in a Notice of Ways and Means Motion that was released. The latter two will be in the 2016 federal budget.

The Notice of Ways and Means Motion also increases:

  1. the Canadian-controlled private corporation (CCPC) investment income surtax from 6 2/3% to 10 2/3%, which therefore raises the overall tax on investment earned in a CCPC by 4%;
  2. the Part IV Tax rate from 33 1/3% to 38 1/3%;
  3. the dividend refund rate on taxable dividends paid by a corporation from 33 1/3% to 38 1/3%;

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Canada’s Federal 2014-2015 Budget

Canada’s federal Finance Minister, Jim Flaherty, delivered his 2014 Federal budget.MK & Associates

 

Personal

 

Medical Expense Tax Credit

 

The budget proposes to make certain amounts paid for the design of an individualized therapy plan eligible for the Medical Expense Tax Credit. The amounts would be eligible where the cost of the therapy itself would be eligible for the medical credit and certain conditions are met, including that:

 

  • An individualized therapy plan is required to access public funding for specialized therapy, or a medical doctor or an occupational therapist prescribes an individualized therapy plan
  • The plan is designed for an individual with a severe and prolonged mental or physical impairment who is, because of the impairment, eligible for the Disability Tax Credit.

 

The budget also proposes to add expenses for service animals specially trained to assist an individual in managing their severe diabetes to the list of expenditures eligible under the medical credit.

 

Mineral Exploration Tax Credit

 

The budget extends the eligibility for the Mineral Exploration Tax Credit for flow-through share investors for one year to flow-through share agreements entered into on or before March 31, 2015.

 

Adoption Expense Tax Credit

 

The budget proposes to increase the maximum amount of eligible expenses for the 15% Adoption Expense Tax Credit to $15,000 per child for 2014 (up from $11,774). This amount will be indexed to inflation for taxation years after 2014.

 

Pension transfer limits

 

The amount of a lump-sum commutation payment from a defined benefit registered pension plan (RPP), received by a plan member who is leaving the RPP that may be transferred to a RRSP, RRIF, certain registered pension plans or a pooled registered pension plan on a tax-free basis is generally reduced if the RPP is underfunded, subject to certain exceptions. The portion of the commutation payment that exceeds the transferable amount must be included in the taxpayer’s income for the year in which it is received.

 

The budget proposes to extend the circumstances in which the maximum transferable amount, for a plan member leaving an underfunded defined benefit registered pension plan will be the same as if the plan were fully funded. In particular, the benefit reduction will be disregarded in the computation of the transferable amount if either:

 

  • Where the plan is an RPP other than an individual pension plan, the reduction in the estimated pension benefit that results in the reduced commutation payment is approved pursuant to the applicable pension benefits standards legislation, or
  • Where the plan is an individual pension plan, the commutation payment to the plan member is the last payment made from the plan (i.e., the plan is wound up).

 

The application of this rule must be approved by the CRA, and will apply in respect of commutation payments made after 2012.

 

GST/HST Credit

 

The budget proposes to allow the CRA to automatically determine if an individual is eligible to receive the GST/HST Credit. Each individual who is eligible for the GST/HST Credit will receive a notice of determination rather than having to apply for the credit. This measure will apply for 2014 income tax returns and for subsequent taxation years.

 

Search and Rescue Volunteers Tax Credit

 

The budget proposes a Search and Rescue Volunteers Tax Credit to allow eligible ground, air and marine search and rescue volunteers to claim a 15% non-refundable tax credit based on an amount of $3,000. This measure will apply to the 2014 and subsequent taxation years.

 

Business and rental income of trusts and partnerships

 

The budget proposes to apply the tax on split income where a minor is allocated income from a partnership or trust that is derived from business or rental activities conducted with third parties. Specifically, the budget proposes to amend the definition of “split income” to include income that is, directly or indirectly, paid or allocated to a minor from a trust or partnership where the income is derived from a business or a rental property, and a person related to the minor is either:

 

  • Actively engaged on a regular basis in the activities of the trust or partnership to earn income from any business or rental property, or
  • In the case of a partnership, has an interest in the partnership (whether held directly or through another partnership).

 

This measure will apply to the 2014 and subsequent taxation years

 

 

Here are 10 highlights from the 2014 federal budget:

 

  • $1.5 billion over 10 years to support research and innovation at post-secondary institutions in areas that “create long-term economic advantages for Canada.”
  • $305 million over five years to expand and upgrade broadband service in rural and northern areas. The investment is expected to bring better service to 280,000 households.

Related:

 

  • Budget grab bag has relief for consumers, higher taxes for smokers
  • $323.4 million over two years to continue to improve First Nations water and wastewater.
  • $25 million over five years to continue efforts to reduce violence against aboriginal woman and girls.
  • boosting the adoption expense tax credit to $15,000 to recognize the costs of adopting a child. The new limit, up from $11,774, would apply to adoptions finalized after 2013.
  • A tax credit for search and rescue volunteers who perform at least 200 hours of service a year.
  • After a year that saw major floods in Alberta and the Greater Toronto area, Ottawa is pledging to explore options for residential flood insurance. “Canada is the only G8 country without residential flood insurance coverage,” the budget said.
  • A hike in the excise duty on tobacco products will add at least $4 to a carton of 200 cigarettes. The higher tax will pump $685 million into the federal coffers in 2014-15. As well, Ottawa has earmarked $91.7 million over five years to enhance the RCMP’s ability to combat contraband tobacco.
  • $11.4 million over four years to expand vocational training for people with autism spectrum disorders.
  • $44.9 million over five years to combat prescription drug abuse, including a campaign to educate Canadians on the safe use, storage and disposal of prescription drugs.

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