The 2016 Federal budget, tabled on March 22, 2016, contained a large 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.
Personal Tax Changes
Canada Child Benefit
The Canada Child Benefit will replace the Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB) as of July 2016. The Canada Child Benefit will provide a 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 depending on the number of children and the level of income. The phase-out will begin at family income of $30,000, with a higher phase-out rate applying on income from $30,000 to $65,000.
Family Tax Cut
The family tax cut credit (income splitting for families with minor children) will be eliminated after 2015.
Education and Textbook Tax Credits
The education and textbook tax credits will be eliminated after 2016; however, the tuition tax credit has not been changed.
Children’s Fitness and Arts Credits
Both of these credits will be phased out by reducing the maximum amount in 2016 to $500 and $250 respectively and eliminating these credits after 2016.
Teacher and Early Childhood Educated School Supply Tax Credit
This is a new, refundable, credit for 2016 equal to 15% of eligible expenditures up to $1,000 made by an “eligible educator” employee on “eligible supplies”. Certification by employers will be required.
Mineral Exploration Tax Credit
This credit has been extended for one year, to flow-through share agreements entered into on or before March 31, 2017.
Labour-Sponsored Venture Capital Corporations (LSVCCs)
The phase-out of credits for investment in LSVCCs will be reversed, reinstating the full 15% credit for 2016 and subsequent years. However, this will only apply to provincially registered LSVCCs, and new LSVCCs will be required to be created under provincial legislation in a province which provides a similar credit of at least 15%.
Northern Residents Deduction
The maximum residency deduction that each member of a household may claim will increase from $8.25 to $11.00 per day and, where no other member of the household claims the residency deduction, the maximum residency deduction will increase from $16.50 to $22.00 per day, beginning with the 2016 taxation year. Residents of an Intermediate Zone will be entitled to deduct half of these increased amounts.
Changes related to the Increased Top Personal Tax Rate
There were a number of proposed changes related to the increase in the top personal tax rate from 29% to 33%. These include a 33% charitable donation tax credit (on donations above $200) to trusts that are subject to the 33% rate on all of their taxable income, application of the new 33% top rate to excess employee profit sharing plan contributions, increasing the Federal tax rate on personal services business income from 28% to 33%, and amending the recovery tax rule for qualified disability trusts to incorporate the new 33% top rate.
Corporate Tax Changes
Small-business Tax Rate
The small business tax rate is proposed to remain at 10.5% after 2016 (previously scheduled to be reduced by 0.5% annually, down to 9.0% in 2019 under the former Conservative government). The current gross-up factor and dividend tax credit rate applicable to non-eligible dividends will also be maintained at the 2017 level.
Multiplication of the Small Business Deduction
Certain measures were proposed to prevent business owners from multiplying access to the $500,000 small business deduction limit using “complex partnership and corporate structures”. These include provisions aimed at directing payments related to partnerships through non-partner corporations owned by partners and/or related parties, designed to ensure a single small business deduction limit is shared by all partners. Payments received by a CCPC from a private corporation in which the recipient, any of its shareholders, or anyone related to those shareholders, holds any ownership interest in the payor, will also generally be ineligible for the small business deduction. Among other situations, this broadly-phrased provision will apply to many structures which pay intercorporate management fees. Structures which use the election under Subsection 256(2) to either avoid the erosion of the business limit due to taxable capital levels, or allow multiple corporations to independently access the small business deduction on property income deemed to be active business income (Subsection 129(6)), are also targeted for small business deduction reductions. These new provisions will apply to tax years commencing on or after March 22, 2016, and additional disclosure and reporting requirements will also apply.
Eligible Capital Property (ECP)
Following consultations announced in Budget 2014 and reiterated in Budget 2015, Budget 2016 proposed to replace the ECP regime with a new capital cost allowance (CCA) class (Class 14.1) available to businesses. Transitional and transfer rules for moving existing cumulative eligible capital (CEC) pools to the new CCA class are also proposed. This measure will apply as of January 1, 2017.
Life Insurance Policies
A number of complex changes are proposed to the rules surrounding taxation of life insurance policies, generally targeting strategies perceived as abusive.
Corporate Class Mutual Funds
Effective October 1, 2016, exchanges of shares of mutual fund corporations that result in an investor switching between funds (commonly referred to as “switch funds” or “corporate-class funds”) result in fair market value dispositions, rather than a rollover at Adjusted Cost Base under Section 51.
Old Age Security (OAS)
Individuals will be eligible to commence receiving OAS at age 65, reversing legislation enacted under the former Conservative government that would have increased the age of eligibility to 67. The Guaranteed lncome Supplement for low income seniors will also be enhanced, with the lowest-income seniors receiving an additional $947 annually.