Canadian Tax and
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2017 Federal Budget

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Federal Budget -> 2017 Budget and subsequent legislative proposals

July 18, 2017 Proposed Tax Changes for Private Corporations

The Department of Finance published draft legislation and explanatory notes on July 18, 2017.  The purpose of the proposed legislation relates is to address tax planning strategies utilized by private corporations.  This includes:

    - income/dividend sprinkling,

    - passive investment income, and

    - converting income into capital gains.

See the following Department of Finance information:

    - Legislative proposals relating to the Income Tax Act and the Income Tax Regulations

    - Explanatory notes relating to the Income Tax Act and the Income Tax Regulations

    - Technical briefing: Tax Planning Using Private Corporations

    - News item: Next steps in improving fairness in the tax system by closing loopholes and addressing tax planning strategies

    - Invitation for Comments - Submit your comments no later than October 2, 2017.

Other Resources:

The Video Tax News team has produced a helpful 20 minute video to guide you through the proposed tax changes.  See also their October 2017 video, which sheds more light on the proposed changes.  This should be viewed by every small business owner, whether the business is a corporation or a partnership.

Is a 93% Tax Rate Fair to Canadian Small Business Owners? - from Minden Gross LLP

October 3, 2017 news release after the close of consultations: Next Steps in the Government's Plan for Tax Fairness and a Strong Middle Class.

October 16, 2017 news release re Small Business Tax Rate, Income Sprinkling:

    - The Department of Finance announced that the small business tax rate would be reduced to 10% effective January 1, 2018 , and to 9% effective January 1, 2019.  The news release backgrounder indicated that the dividend tax credit rate for non-eligible dividends would be adjusted to reflect the reduced corporate tax rate, but did not indicate what the rate would be.

    - The government will simplify the proposal to limit the ability of owners of private corporations to lower their personal income taxes by sprinkling their income to family members who do not contribute to the business. The vast majority of private corporations will not be impacted by the proposed income sprinkling measures. Corporations with family members who meaningfully contribute to the business will not be impacted by the proposed measures on income sprinkling. 

    - The government will not be moving forward with proposed measures to limit access to the Lifetime Capital Gains Exemption.

    - Later this fall the Government will release revised draft legislative proposals outlining the proposed changes, which will be effective for the 2018 and subsequent taxation years.

    - See the Video Tax News team's 8 minute video regarding the October 16th news release.

October 18, 2017 news release re Passive Investment Income:

    - All past investments of a Canadian-controlled Private Corporation (CCPC) and the income earned from those investments will be protected.

    - A $50,000 threshold on passive income in a year will be available to provide more flexibility for business owners to hold savings for multiple purposes, including savings that can later be used for personal benefits such as sick-leave, maternity or parental leave, or retirement.

October 20, 2017 news release including Venture Capital and Angel Investment

2017 Federal Budget - March 22, 2017

Although not part of the Budget, on May 18, 2017 a Notice of Ways and Means Motion to Amend the Income Tax Act was issued, with the intention to exempt the military salaries of all Canadian Armed Forces personnel deployed on named international operations from federal income taxes, up to and including the pay level of Lieutenant-Colonel.

See the following on the 2017 Federal Budget website.

bullet2017 Budget News Release - March 22, 2017
bulletNotice of Ways and Means Motions to Implement Certain Provisions of the Budget and Other Measures, and Explanatory Notes - April 7, 2017
bulletBill C-44, Budget Implementation Act, 2017, No. 1 - First Reading April 11, 2017, Royal Assent June 22, 2017.
bulletBackgrounder on Key Measures Included in Budget Implementation Act, 2017, No. 1 - April 11, 2017
bulletBill C-63, Budget Implementation Act, 2017, No. 2 - First Reading October 27, 2017

All budget measures are subject to legislative approval.  Not all budget measures are included below, just the tax measures.  See the Federal Budget website for complete information.

Personal Income Tax Measures

Business Income Tax Measures

Private Corporation Tax Strategies to be Reviewed

Sales and Excise Tax Measures

Personal Income Tax Measures

Disability Tax Credit - addition of nurse practitioners to medical practitioners able to certify impairments, effective March 22, 2017.

Eligible Medical Expenses - clarification so that individuals who require medical intervention in order to conceive a child are eligible to claim the same expenses that would generally be eligible for individuals on account of medical infertility.  This applies to 2017 and subsequent taxation years, but a taxpayer will be entitled to elect in a year for this measure to apply for any of the immediately preceding ten taxation years in their return of income in respect of that year.

Caregiver Tax Credits

Currently there are 3 different caregiver credits - the Caregiver Amount Credit (line 315), the Infirm Dependant Amount Credit (line 306), and the Family Caregiver Amount Credit.

The budget proposes to replace these 3 credits with a new Canada Caregiver Credit, effective for the 2017 and later taxation years.

Public Transit Tax Credit - to be eliminated effective July 1, 2017.  The cost of public transit passes and electronic fare cards for public transit use that occurs after June 2017 will no longer be eligible for the credit.

Home Relocation Loans Deduction - eliminated for benefits arising in the 2018 and later taxation years.

Mineral Exploration Tax Credit for Flow-Through Share Investors - eligibility extended for an additional year, to March 31, 2018.

Electronic Distribution of T4 Information Slips - Budget proposes to allow employers to distribute T4s electronically to current active employees without having to obtain express consent from the employees in advance.  However, sufficient privacy safeguards must be in place before electronic T4s can be sent electronically.  Employers must issue paper copies to employees who request them.

Tuition Tax Credit - eligibility criteria for the tuition tax credit to fees for an individual's tuition paid to a university, college or other post-secondary institution in Canada for occupational skill courses that are not at the post-secondary level.  The credit would only be available in these circumstances if the course is taken for the purpose o providing the individual with skills (or improving the individual's skills) in an occupation and the individual has attained the age of 16 before the end of the year.  This measure applies to eligible tuition fees for courses taken after 2016.

Ecological Gifts Program - Donations of "ecogifts" are eligible for a charitable donation tax credit (deduction for corporations), and capital gains associated with the donation of ecogifts are exempt from tax. The ecogift program is primarily administered by Environment and Climate Change Canada (ECCC).  The Income Tax Act imposes a tax of 50 per cent of the fair market value of the land upon a recipient who, without the consent of ECCC, changes the use of the property or disposes of it.  If an ecogift is transferred or disposed of by the donee organization, the protection offered by the 50% tax may be inappropriately lost.  The budget proposes the the transferee of the property in such a situation be subject to the 50% tax if the transferee changes the use of the property or disposes of it without the consent of ECCC.  The budget also proposes that the requirement to approve recipients of ecogifts be extended to municipalities and municipal and public bodies performing a function of government.  The budget also proposes that private foundations no longer be permitted to receive ecogifts.  These measures will apply for transactions or events that occur on or after March 22, 2017.

Allowances for Members of Legislative Assemblies and Certain Municipal Officers - certain officials receive non-accountable allowances for work expenses that are not included in taxable income.  The excluded amount is limited to half of the official's salary or other remuneration received in that capacity in the year.  The budget proposes that these amounts be included in income, for the 2019 and subsequent taxation years.

Registered Education Savings Plan (RESP) and Registered Disability Savings Plan (RDSP) Anti-Avoidance Rules

To be consistent with the rules for other registered plans such as Tax-Free Savings Accounts (TFSAs), Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs), the budget proposes to extend anti-avoidance rules used for these plans to RESPs and RDSPs.  These anti-avoidance rules are:

    - the advantage rules, which help prevent the exploitation of the tax attributes of a registered plan (e.g., by shifting returns from a taxable investment to a registered plan) - "swap transactions";
    - the prohibited investment rules, which generally ensure that investments held by a registered plan are arm's length "portfolio" investments - see CRA Income Tax Folio S3-F10-C2, Prohibited Investments - RRSPs, RRIFs and TFSAs; and
    - the non-qualified investment rules, which restrict the classes of investments that may be held by a registered plan - see CRA Income Tax Folio S3-F10-C1, Qualified Investments - RRSPs, RESPs, RRIFs, RDSPs and TFSAs.

Business Income Tax Measures

We won't go into the detail of all business income tax measures, which include:

    - Investment tax credit for child care spaces - eliminated for expenditures on or after budget day, except those incurred before 2020 pursuant to a written agreement entered into before budget day.  Apparently it has had very low take-up and has not been effective in increasing the number of child care spaces provided by employers.  The budge also proposes to invest an additional $7 billion over 10 years, starting in 2018-19, to support and create more high-quality, affordable child care spaces across the country.
    - Billed-basis accounting for designated professionals - eliminated for taxation years that begin on or after budget day, transitional measures will be in place to mitigate the effect on taxpayers.
    - Investment fund mergers of switch corporations into mutual fund trusts, segregated fund mergers
    - Clean energy generation equipment: geothermal energy
    - Canadian exploration expense: oil and gas discovery wells
    - Reclassification of expenses renounced to flow-through share investors
    - Meaning of factual control
    - Timing of recognition of gains and losses on derivatives - elective use of mark-to-market method, straddle transactions
    - Additional deduction for gifts of medicine - eliminated for gifts of medicine made on or after budget day
    - Insurers of farming and fishing property - tax exemption eliminated for taxation years that begin after 2018
    - Consultation on cash purchase tickets (farmers) - consultation launched re income tax deferral available.

Private Corporation Tax Strategies to be Reviewed

The government is reviewing the use of the following tax planning strategies involving private corporations that theyfeel inappropriately reduce personal taxes of high-income earners, and will release a paper in the coming months:

    - Sprinkling income using private corporations - splitting income via dividends or capital gains to lower income family members

    - Holding a passive investment portfolio inside a private corporation

    - Converting a private corporation's regular income into capital gains

More information on the above can be found on page 201 of the 2017 Budget Plan (pdf).

Sales and Excise Tax Measures

Taxi and Ride-Sharing Services - the budget proposes to amend the definition of a taxi business 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, who do not qualify as "small suppliers" for GST/HST. This will be effective July 1, 2017.

GST/HST Rebate to Non-Residents for Tour Package Accommodations - to be repealed.

Tobacco Taxation - the budget proposes that the current surtax on profits from the manufacture of tobacco or tobacco products in Canada will be eliminated, and replaced by increasing the excise duty rate on cigarettes, effective March 23, 2017.  It is also proposed that inventories of cigarettes held by manufacturers, importers, wholesalers and retailers at the end of March 22, 2017 be subject to a tax of $0.0265 per cigarette (subject to certain exemptions).  Taxpayers will have until May 31, 2017 to file returns and pay the inventory tax.

Alcohol Taxation - the Budget proposes to increase excise duty rates on alcohol products by 2% effective March 23, 2017, in respect of duty that becomes payable after that date.  No special inventory tax will apply to alcohol products on which duty has been paid.  It is also proposed that the rates be automatically adjusted by the Consumer Price Index on April 1 of every year, starting in 2018.

Other items mentioned in the Tax Measures Supplementary Information document include:

    - Sales and excise tax measures re opioid overdose treatment drug - Naloxone
    - Aboriginal tax policy
    - Customs tariff and special import measures

For information on all tax measures, see the Tax Measures Supplementary Information (pdf) on the Budget website.

Revised: November 28, 2017

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