While much of the budget had been floated and/or proposed during the election and confirmed in part on December 7th (the middle-class tax cut and 4% increase in tax rates for high income earners) by Mr. Morneau, there were some still some surprises.
In January, I wrote a blog post on how the "Top 1%, are not Happy Campers". I would suggest they are still not (see my CBC National News interview on this topic here and the story of this high earner leaving Canada). Yet, I think between all the trial balloons and rumours, from raising the small business tax rate to 26.5%, to a possible increase in the capital gains rate from 50% to 75%, many of the "Top 1%" felt they escaped tax Armageddon to some extent. However, if you are a small business owner or professional, there were many under the radar changes that may significantly impact your future tax planning and depending upon your fact situation, potentially result in even more income taxes. If planned, it was an excellent job of misdirection from the government in respect of high income earners.
The "middle-class"are the winners here. However, I still want to reserve judgment as to how big a win certain people had. The "middle-class" has lost the family tax cut worth $2,000 to some people. In addition, much of the "middle-class" gain revolves around children, so if you are single or do not have children or only say one child, your benefit is not quite as large. Finally, the new Canada Child Benefit ("CCB") starts to phase out on adjusted family income in excess of $30,000, so many families will have a reduction in their child tax benefit. So while most people will be net winners, some middle-class people may not benefit as much as they anticipate. This Toronto Star article
presents some interesting numbers on how the federal budget affects everyday Canadian families.
The budget contains several proposals that will close down many popular tax planning techniques used by high income earners. These include:
a) The transfer of personal life insurance policies to private corporations that allow the shareholder to extract tax-free funds. New measures will reduce or eliminate these transfers effective March 22, 2016. For those who transferred policies prior to the budget date and took back tax-free shareholder loans, essentially the new proposal will cause the tax-free capital dividend received by the corporation upon your death, to be reduced by the tax-free loans you took from your company while alive.
b) Many partnerships created structures whereby the partners had corporations that provided services to the partnership allowing them to potentially access the $500,000 small business exemption. For taxation years that begin after March 21, 2016, the budget will change the rules to catch this type of service income. I am surprised it took this long to eliminate this type of planning.
c) It is somewhat common for the spouse of a high income earner to incorporate a company that provides services to their spouse's corporation. This planning can often allow both spouses corporations to access the $500k small business deduction. Also applicable on or after March 22, 2016, the budget will deem the service income to not be eligible for the SBD where the shareholders or a person does not deal at arm's length (such as spouses). Thus, combined, the two related corporations can only claim $500k SBD in total.
Other Business Changes
- The small business tax rate reductions legislated by the Conservative government will be frozen at 10.5% for 2016 and beyond.
- The Eligible Capital Property regime (such as goodwill, customer lists and licences) will now be replaced with a new capital cost allowance class (Class 14.1) with a 5% declining balance. The CEC balances will be transferred effective January 1, 2017. This is very complex, but will be less beneficial than the current regime in many cases as active income is now being turned into investment/property income.
- There will be significant changes to transfer pricing and anti-surplus stripping and various foreign transactions which are beyond the scope of this post (meaning, way too complicated for me and you need a non-resident specialist).
Miscellaneous Personal Changes
2. The family tax cut will be eliminated for 2016 and subsequent years.
3. The child tax benefit and universal child benefit will be combined into one non-taxable Canada Child Benefit ("CCB"). The CCB will provide annual benefits of up to $6,400 per child under six years old and up to $5,400 per child six through seventeen. On the portion of adjusted family net income between $30,000 and $65,000, the benefit will be phased out at a rate of 7 per cent for a one-child family, 13.5 per cent for a two child family, 19 per cent for a three-child family and 23 per cent for larger families. Where adjusted family net income exceeds $65,000, remaining benefits will be phased out at rates of 3.2 per cent for a one-child family, 5.7 per cent for a two-child family, 8 per cent for a three-child family and 9.5 per cent for larger families, on the portion of income above $65,000.
The budget proposes to provide an additional amount of up to $2,730 per child eligible for the disability tax credit.
4. The retirement age for Old Age Security will be rolled back to age 65.
5. Many mutual funds have been structured to allow "switches" among the funds (known as corporate class funds) to avoid triggering tax. The budget proposes that for dispositions after September 2016, a taxable disposition will occur when you switch among mutual funds with the exception of switches between series of shares within a class (i.e.: the shares within the class are essentially the same funds).
6. There was no budget proposals in respect of stock options, a pleasant surprise, given the Liberals had discussed restrictions being implemented.
7. The Conservative governments proposal to allow the donation of real estate or private corporation shares will not proceed.
The budget contained multiple proposals, but I have only touched on a few. For many of the proposals, the devil will be in the details.
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