The 2015 Federal budget, tabled on April 21st, contained a number of significant tax measures. Below is a brief overview of the proposed tax changes most relevant to private corporations and individuals. Please call our office if you have any questions or would like to arrange a meeting. We would be pleased to discuss how these measures may apply to your situation, assist you with the preparation and filing of your tax returns, and discuss tax planning opportunities.
Corporate Tax Changes
Small-business tax rate
The combined federal income tax rate on the first $500,000 of qualifying active business income for Canadian-controlled private corporations is currently 11%. The budget proposes to reduce this by 0.5% per year for the next four years starting January 1, 2016. If this plan is carried out as proposed the federal tax rate on qualifying income will be reduced to 9% effective January 1, 2019. The combined federal and provincial tax rate in Saskatchewan will be reduced from 13% to 11%.
Corporations with a year-end other than December 31 with enjoy the benefit of this tax reduction on a pro-rated basis in each year.
Manufacturing and processing machinery and equipment
The temporary Class 29 pool, with a 50% straight-line depreciation rate, for eligible manufacturing and processing machinery and equipment has been replaced with a new Class 53 pool for eligible assets acquired after 2015 and before 2026. This will allow more certainty on the tax treatment of capital investment in this sector while maintain the preferential depreciation rate.
Eligible capital property
No additional measures were announced further to the 2014 budget discussion around repealing the eligible capital property rules and implementing a new capital cost allowance class. One impact of this proposal would be to tax any gain on eligible capital property as investment income instead of business income which could result in significantly higher taxes on dispositions of goodwill and other eligible capital property. The budget did indicate the government’s intent to release draft legislation for comment prior to introducing a bill in parliament.
Foreign reporting Form T1135
A revised Form T1135 is being developed that will allow simplified reporting for taxpayers holding specified foreign property with a total cost of less than $250,000 throughout the year. The reporting requirements will remain unchanged for taxpayers holding more than $250,000 of specified foreign at any time during the year.
The new form is intended to be applicable for tax years beginning after 2014.
Personal Tax Changes
Personal income tax rates
Concurrent with the reduction in the small business tax rate (discussed above) the budget proposes to adjust both the gross-up factor and dividend tax credit for dividends paid out of income taxed at the small business rate. The intention is to preserve integration on this income such that an individual taxpayer will receive the same after-tax cash whether the income is earned personally or earned in a corporation and paid to the individual as a dividend (ie: if the corporation pays less tax then the individual should pay more, all else equal).
The resulting top federal marginal tax rate on these dividends will be as follows:
2015 Current 21.22%
2016 Proposed 21.62%
2017 Proposed 22.21%
2018 Proposed 22.61%
2019 Proposed 22.97%
The resulting top combined federal and Saskatchewan marginal tax rate on these dividends will be as follows:
2015 Current 34.91%
2016 Proposed 35.31%
2017 Proposed 35.90%
2018 Proposed 36.30%
2019 Proposed 36.66%
Lifetime capital gains exemption
The budget proposes to increase the capital gains exemption for disposition of qualified farm property after April 20, 2015, to $1 million. The capital gains exemption for qualified small business corporation shares remains unchanged, other than indexation for inflation, and is $813,600 for 2015.
Donations involving private corporation shares or real estate
For donations made in respect of dispositions after 2016, capital gains arising on the disposition of private corporation shares or real estate will be exempt from tax where the monetary proceeds are donated to a qualified done within 30 days after the disposition. The donor and qualified donee must both deal at arm’s length with the purchaser. Certain anti-avoidance rules will apply.
RRIF minimum withdrawal amounts
The calculation of the minimum annual withdrawal amount for RRIF accounts, which starts at age 71, will be reduced beginning with 2015 allowing individuals to keep additional funds invested within their RRIF accounts if the funds are not required for their retirement. Individuals who withdraw more than the minimum in 2015, for example if they took withdrawals prior the budget announcements, will be allow to recontribute the excess by February 29, 2016.
Tax-free savings account contribution limit
Starting in 2015 the annual contribution limit increase for TFSA accounts will be increased from $5,500 to $10,000 and will no longer be indexed for inflation.
Home accessibility tax credit
This credit is applicable to years after 2015 and allows a credit on expenditures up to $10,000 per year to allow an eligible individual to access or move around in the home in which they live. Qualifying individuals must be over 65 or eligible for the disability tax credit. The credit may also be claimed by a spouse or someone who claims the eligible individual as a dependent.
Family tax cut formula revision
The formula for the new family tax cut announced in the fall of 2014 and effective beginning with the 2014 taxation year did not allow the full credit in some instances where spouses transferred tuition, education and textbook tax credits. The formula will be revised and CRA will automatically reassess any 2014 tax returns for any affected taxpayers.
Mineral Exploration Tax Credit
The mineral exploration tax credit is a 15% tax credit on eligible exploration expenditures that may be claimed by individual investors in flow-through shares of mineral exploration companies. This credit will be extended another year to cover the 2015 taxation year. This credit has been extended numerous times in one-year increments.
Penalties for Repeated failure to report income
Currently, where a taxpayer fails to report income in the current year as well as in any one of the three subsequent years, a federal penalty equal to 10% of the unreported income in the subsequent year will apply. The penalties are increased in the case of gross negligence.
The budget revises the penalty such that it will only apply if the taxpayer fails to report income of at least $500 in both the current year and any one of the three subsequent years. The penalty will also be calculated as the lesser of 10% of the unreported income or 50% of the difference between the understatement of tax related to the omission and any tax paid in respect of the unreported income such as tax withheld by an employer.
This change will eliminate anomalies in the current system were a very small amount of missed income in one year could cause a disproportionate penalty in a future year or the situation where a penalty would apply even though all taxes were paid in the instance of a missed T4 slip.
Other Tax Changes
The above are just the highlights from the federal budget. Please call our office and ask to speak with one of our tax partners if you would like to discuss other items in the federal budget that are not outlined above.