Overview
2017 Federal Budget Highlights
On March 22, 2017, the federal government delivered its 2017 budget.
For business owners, a lot of the items coming out of the budget could be described as 'more talk, less action'. Many advisors (myself included) were concerned about rumoured changes, including a potential increase in the capital gains inclusion rate. In the end, the advisors themselves took a hit in how their 'work in progress' (WIP) will be taxed going forward. The budget also targeted items such as ride sharing, alcohol and tobacco.
While the federal government did not end up implementing the various speculated measures, they did promise to review certain planning that the government believes unfairly benefits wealthy Canadians. Specifically, using private corporations to split income amongst family members who are subject to lower tax rates, to hold passive investments or to convert the corporation's income into capital gains. We will see in the coming months the result of their review and their proposed changes, if any.
Below are highlights (but not all) of the changes announced related tax purposes:
Personal Tax Changes
Public Transit Tax Credit
Unfortunately for those taxpayers that use public transit, this credit is being eliminated as of July 1, 2017. As a user of the TTC, I can personally attest to the fact that the elimination of this credit makes the purchase of a monthly 'Metropass' even less cost effective for those of us who typically use the TTC twice a day, five days a week (i.e. to and from work).
Home Relocation Loans Deduction
The budget eliminates this deduction, starting in 2018.
Registered Plans
Anti-avoidance rules, which already exist for Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Funds (RRIFs) and Tax-Free Savings Accounts (TFSAs), were extended to Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs).
They include: the 'advantage rules', which prevent abusing the tax attributes of these plans (e.g. shifting investments into a registered plan); the 'prohibited investment rules', which ensure that investments are 'arm's length', and the 'non-qualified investment rules', which restrict the classes of investments that be held in a registered plan.
The advantage rules will not apply to swap transactions before July 1, 2017, and swap transactions that are completed to comply with the new rules will be permitted until the end of 2021. A plan holder may elect by April 1, 2018 to pay Part I tax (i.e. 'regular' tax on income), as opposed to the advantage tax, on distributions of investment income from investments held as of March 22, 2017 that became prohibited investments as a result of the new rules (subject to certain conditions).
Canada Caregiver Tax Credit
This credit replaces various existing credits, including the previous Caregiver Credit, the Infirm Dependant Credit and the family Caregiver Credit, and will be for up to $6,883 for certain dependants, which is consistent with the current credits. It will be reduced 'dollar-for-dollar' by a dependant's income above $16,163. There will be no obligation that the dependant live with his or her caregiver.
Medical Expense Tax Credit
For the 2017 and subsequent years, the government has clarified that the medical expense tax credit, so that individuals requiring medical intervention to conceive a child are eligible to claim the same expenses that would be eligible for individuals on account of medical infertility. More significantly, the taxpayer will be able to elect to apply these credits for any of the immediately preceding ten taxation years.
Tuition Tax Credit
The 15% tuition tax credit, for courses taken after 2016, will be extended to fees for an individual’s tuition paid to a university, college or other post-secondary institution in Canada for occupational skills courses. The tuition tax credit will be available only if the course is taken for the purpose of providing the individual with skills in an occupation (or improve the individual’s skills) and the individual has attained the age of 16 before the end of the year.
Indirect Tax Changes
Taxi and Ride-Sharing Services
For those who use Uber and other ride-sharing services, please note that effective July 1, 2017, the definition of a taxi business will be amended; ride-sharing providers will need to register for GST/HST and charge tax on their fares (i.e. they are being treated in a manner similar to taxis).
Alcohol
Excise duty rates on alcohol products will increase by 2% effective March 23, 2017, and the rates will be indexed to inflation.
Tobacco
The 10.5% tobacco manufacturers’ surtax will be eliminated as of March 23, 2017. Tobacco excise duty rates on cigarettes and other tobacco products will increase.
Inventories of cigarettes will be subject to a tax of $0.01325 per every five cigarettes. Taxpayers will have until May 31, 2017 to file returns and pay the inventory tax.
Business Tax Changes
Billed-basis accounting
Here is the proposed change in the budget which negatively impacts advisors such as myself. Currently, certain professions, including accountants, lawyers, dentists, doctors and other health professionals, etc. can elect to only be taxed on the work they have completed as it is billed, i.e. their WIP is not included in their income until they bill their client or patient.
For taxation years beginning on or after March 22, 2017, it has been proposed that this deferral will be eliminated, although they have allowed a transition period. For the first taxation year, 50% of the lesser of the cost and the fair market value of the WIP will be allowed to be deducted. For the second taxation year and subsequent years, the lesser of the cost and fair market value of WIP will need to be included in the income of the professional.
Factual Control
Generally, the determination of the control of a corporation will consider either de jure (legal) control or de facto (factual) control.
Pursuant to the Income Tax Act (Canada) (the Act), factual control includes where a person "has any direct or indirect influence that, if exercised, would result in control in fact of the corporation".
It was noted in the budget that, pursuant to a recent Federal Court of Appeal decision, in order for a factor to be considered in determining whether factual control exists, it must include "a legally enforceable right and ability to effect a change to the board of directors or its powers, or to exercise influence over the shareholder or shareholders who have that right and ability".
For taxation years beginning after March 21, 2017, it was proposed that the Act be amended to clarify that, in determining whether factual control of a corporation exists, factors may be considered that are not limited to the requirement set out in the decision.
Derivatives
The budget proposes two measures to clarify the timing of the recognition of gains and losses on derivatives held on income account.
Elective use of the mark-to-market method
For taxation years beginning on or after March 22, 2017, taxpayers can elect to mark to market all of their eligible derivatives held on income account. An eligible derivative will be any derivative held on income account that meets certain conditions. It will have to be valued in accordance with accounting principles at its fair value in a taxpayer’s audited financial statements or otherwise has a readily ascertainable fair market value. For derivatives that were previously subject to tax on a realization basis that are eligible, the recognition of any accrued gain or loss at the beginning of the first election year will be deferred until the derivative is disposed of.
Straddle transactions
The budget introduces a new anti-avoidance rule with respect to 'straddle transactions' entered into on or after March 22, 2017. A straddle is a transaction in which a taxpayer concurrently enters into two or more positions that are expected to generate offsetting gains and losses on account of income, which may then allow the taxpayer to defer recognition of income on the gain portion. The stop-loss rule will defer the realization of any loss on the disposition of a position, to the extent that there is an unrealized gain on an offsetting position, subject to certain exceptions.
T4 Slips
For 2017 and subsequent taxation years, employers will no longer have any obligation to obtain consent from their employees before issuing T4 slips electronically. The employer will be required to have certain privacy safeguards in place, and are required to issue a paper copy of the T4 to an employee if requested.