The newly elected Liberal government released their first budget on March 22, 2016 projecting $110 billion in accumulated deficits over the next 5 years.
We’ve highlighted some select tax changes proposed that will impact a larger proportion of our clients. Please note the list is not a complete list of budget proposals, hence you are encouraged to read the full budget to determine what other measures may impact your specific situation.
- Guaranteed Income Supplement (GIS) / Old Age Security (OAS) – increases the GIS benefit by up to $947 annually for low-income single seniors. Single seniors with annual income (other
than Old Age Security and Guaranteed Income Supplement benefits) of about $4,600 or less will receive the full increase of $947. Restores the OAS eligibility age to 65 from 67.
- Canada Child Benefit (CTB) – Effective July, 2016, the CTB will replace the existing Universal Child Care Benefit and the Canada Child Tax Benefit. It will provide a tax-free maximum benefit of $6,400 per child under the age of 6, and $5,400 per child aged 6 through 17. The benefit will be phased out at various rates depending on your family income and the number of children you have. An additional amount of $2,730 will be available for children with severe disabilities.
- “Family” Income Splitting Credit – Eliminated effective tax year 2016.
- Northern Residents Deduction – Effective tax year 2016, the existing deductions have been increased.
- Labour-Sponsored Venture Capital Corporations Tax Credit – Effective tax year 2016, the Federal tax credit which was previously slated to be eliminated, has been restored to 15% for share purchases of prescribed provincially registered LSVCC’s.
- Teacher and Early Childhood Educator School Supply Tax Credit – Effective tax year 2016, allows employee’s who are eligible educators to claim a 15% refundable tax credit based on an amount of up to $1,000 in expenditures made by the employee for eligible supplies.
- Mineral Exploration Tax Credit for Flow-Through Share Investors – Extends the tax credit to flow-through share agreements entered into on or before March 31, 2017.
- Education and Textbook Tax Credits – Effective tax year 2017, the existing tax credits will be eliminated. Unclaimed tax credits carrying forward into 2017 will still be eligible for claims in 2017 and beyond.
- Children’s Fitness and Arts Tax Credits – Effective tax year 2016, the maximum eligible amounts will be reduced from $1,000 to $500 for the children’s fitness tax credit and from $500 to $250 for the children’s arts tax credit. For tax year 2017 both credits will be eliminated.
- Personal Service Corporation – Effective January 1, 2016, the federal tax rate for personal service corporations will be increased from 28% to 33%.
- Taxation of “Switch Funds” – Effective for fund “switches” after September 2016, these will now be considered taxable sales as opposed to tax-deferred sale.
- Small Business Tax Rate – Effective January 1, 2017, freeze the small business tax rate at 10.5%, whereas it was previously scheduled to drop to 9% by 2019. Concurrent with this change, to preserve integration between corporate and personal tax rates, the personal dividend tax gross up factor and dividend tax credit will also be frozen at 2016 rates.
- Multiplication of the $500K Small Business Deduction – Partnerships – Certain partners of partnerships have structured their affairs in a manner that allows them to access the full $500K small business deduction where they would otherwise only have had access to a minimal small business deduction. This benefit will be eliminated through changes in legislation effective March 22, 2016.
- Multiplication of the $500K Small Business Deduction – Corporation – Multiplication of the small business deduction can also be accomplished through use of a corporate structure. This benefit will also be eliminated through changes in legislation effective March 22, 2016. More specifically, a corporation’s active business income from providing services (directly or indirectly, in any manner whatever) to a private corporation will be ineligible for the small business deduction where, at any time during the year, the corporation, one of its shareholders or a person who does not deal at arm’s length with such a shareholder has a direct or indirect interest in the private corporation. This rule will not apply if all or substantially all of its active business income is earned from providing services to arm’s length persons other than the private corporation, or where the private corporation “assigns” part of its unused small business limit to the corporation.
- Life Insurance Proceeds and Capital Dividend Account – Effective for deaths after March 22, 2016, the Income Tax Act will be amended to ensure that capital dividend account rules for private corporations, and the adjusted cost base rules for partnership interests, apply as intended.
- Transfers of Life Insurance Policies – For policies transferred after March 22, 2016, the proceeds of disposition of any life insurance policies will include the fair market value of any consideration received by the transferor. For transfers made prior to March 22, 2016, the amount added to the capital dividend account will be limited.
- Eligible Capital Property (ECP) – A new CCA class would replace the existing ECE rules. Expenditures that are currently added to the cumulative eligible capital pool (CEC) at 75% would be included in the new CCA class at 100%. The new class would have a 5% annual declining balance depreciation rate. The existing CCA rules regarding recapture, capital gains, half-year, etc would apply to the new class. The transitional rules are rather complex, however there are some rules for small businesses to simplify the transition but these are also too complex for purposes of this summary.
- Previously announced tax measures – Confirms the Governments intention to proceed with tax measures related to:
- Conversion of capital gains into tax-deductible inter-corporate dividends (section 55)
- The repeated failure to report income penalty
- The sharing of taxpayer information within the CRA to facilitate the collection of certain non-tax debts
- The GST joint venture election
It also confirms the Governments intention to NOT
proceed with exemption from capital gains tax for certain dispositions of private corporation shares or real estate where cash proceeds from the disposition are donated to a registered charity within 30 days.