There wasn’t a lot to get excited about in today’s release of the 2018 Federal Budget, but there were a few items of note that will be of interest to individual investors and more specifically incorporated business owners.
Looking back to July 2017, the Federal Department of Finance announced significant changes to private corporations and how certain strategies were taxed. Specifically, they were looking to tackle three strategies utilized by business owners to reduce the amount of tax they pay. They were as follows:
- income sprinkling to other family members (particularly ones with income low enough that they don’t pay any tax, or they pay it at a very low rate),
- passive investment income earned within a corporation, and
- the converting of regular income from the corporation into capital gains.
After significant upheaval, and numerous discussions with stakeholders and their representatives, the government has finalized their positions on all three of these strategies.
The latter issue relating to converting income into capital gains was withdrawn in October, 2017.
With respect to income sprinkling, the Government made detailed revisions in December, 2017. As a refresher, in July 2017, the government looked to expand anti-avoidance “kiddie tax” rules on dividends to children under the age of 18 to encompass more types of income and also certain adults. The revisions to those recommendations in December recognized that children over the age of 17 who are actively involved in the business and who work significant hours for the company shouldn’t be penalized. Secondly, if a child is over 24, and is a shareholder who owns at least 10% voting rights and market value, they too should not be penalized on income received. Other aspects of the legislation discuss paying people a reasonable amount when compared to others who do similar work in the business, and finally, there are exceptions relating to retirement and capital gains.
These new income sprinkling rules with their proposed exceptions from December were confirmed in today’s budget and apply for the 2018 tax year.
The third issue from the July, 2017 announcement was the issue of Passive Income, and it was addressed specifically in today’s budget. The proposal of the government is as follows: If you maintain retained earnings within your private corporation, and invest it passively (mutual funds, stocks, bonds, ETFs, GICs, etc.); when you earn more than $50,000 in passive income in any given year, the amount of small business deduction begins to be reduced. This reduction will be reduced by $5 for every $1 of investment income above $50,000. This means that at $150,000 in passive investment income, the small-business deduction limit would be zero. Considering this, when designing your investment portfolio within a corporation, it will make sense to look at investment strategies that could potentially reduce income or defer it (i.e. a buy and hold strategy with growth oriented investments).
In addition, the budget has also proposed that private corporations will no longer get refunds on taxes that they paid on investment income when they distribute dividends from income that was taxed at the general corporate rate.
The Bigger Picture:
Many Canadians have concerns about the tax proposals coming out of the US and their effect on the Canadian economy. Today’s budget didn’t address this issue directly; however, the government did say that “over the coming months, the Department of Finance Canada will conduct detailed analysis of the U.S. federal tax reforms to assess any potential impacts on Canada.”
As expected the budged focused heavily on helping working women and women entrepreneurs. The Business Development Bank will provide $1.4 billion over 3 years to provide financing to women entrepreneurs, while Export Development Canada will provide $250 million in financing and insurance over the next three years to women owned and led businesses.
There’s also a new proposal for a new employment insurance parental sharing benefit, which is designed to encourage women to re-enter the workforce.
The government expects to run an $18.1 billion dollar deficit for 2018-19 which will reduce to 12.3 billion in 2022-23.
Reporting Requirements for Trusts: The government has become concerned that because trusts are not required to file a T3 return when they don’t have any income, and that they aren’t obligated to report the identity of all of their beneficiaries, that there is risk that they don’t have enough information to determine taxpayers’ tax liabilities. They are also concerned that they may be missing information that would allow them to combat aggressive tax avoidance as well as tax evasion, money laundering and other criminal activities
This has resulted in the following 2018 budgetary measure: Trusts will be required to provide a T3 return regardless of whether there is income or not. The return will be required to identify all of the trustees, beneficiaries and trust settlors in addition to the “identity of each person who has the ability to exert control over trustee decisions regarding the appointment of income or capital of the trust.” This change will come into effect in 2021.
Canada Workers Benefit: The goal of the Working Income Tax Benefit was to provide “a refundable tax credit that supplements the earnings of low-income workers and improves work incentives for low-income Canadians.”
The budget has proposed to rename the program the Canada Workers Benefit and the amount of the benefit for 2019 will be equal to 26% of each dollar of earned income in excess of $3,000 to a maximum benefit of $1,355 for single individuals without dependants and $2,335 for families (couples and single parents).
For those who are eligible for the Disability Tax Credit, there will also be an increase to the Canada Workers Benefit disability supplement.
The CWB is begins to be reduced at incomes of $12,820 for single individuals and $17,025 for families, and is phased out completely at earnings of earnings of $24,111 for and $36,483 respectively.
Medical Expense Tax Credit: This non-refundable tax credit is available in 2018 for qualifying medical expenses “in excess of the lesser of $2,303 and three percent of the of the individual’s net income.” The budget has proposed to expand the METC for people with severe mental impairment, who require service animals. Comfort or emotional support animals do not apply.
Registered Disability Savings Plan – Qualifying Plan Holders: The budget is making some changes to the RDSP when a disabled person lacks capacity and must be looked after by a “legal representative”. The goal in the budget is to give family members time to ensure they’ve become that “legal representative”.
Mineral Exploration Tax Credit for Flow-Through Share Investors: This credit which is “equal to 15% of specified mineral exploration expenses incurred in Canada” has been renounced to flow-through share investors; however, the budget has agreed to extend it for share agreements that have been entered into before April 1, 2019.
Sales and Excise Tax Measures: With respect to limited partnerships, the government has proposed that GST/HST must be charged to management and administrative services rendered by the general partner on or after September 8, 2017.
In addition, increases on Tobacco excise taxes were announced as was a framework on Cannabis taxation.
Business Income and International Tax Matters
With respect to business, accelerated capital cost allowance rates for investment in clean energy generation has been expanded to include geothermal equipment. In addition the budget dealt with more complex corporate issues such as Artificial Losses Using Equity-Based Financial Arrangements, Stop-Loss Rules on Share Repurchase Transactions, At-Risk Rules for Tiered Partnerships, and Health and Welfare Trusts.
There were also international tax measures announced with topics including Cross-Border Surplus Stripping Using Partnerships and Trusts, Foreign Affiliates, Reassessment Periods (for Information and Compliance Orders, and for Non-Resident Non-Arm’s Length Persons), and Sharing Information on Criminal Matters.
Should you have any questions about the 2018 Federal Budget we urge you to call us at 780 426 2400 or e-mail us at firstname.lastname@example.org.