Impact of Budget 2016 on Your Financial Planning
Finance Minister, Bill Morneau, presented the first federal budget of prime minister, Justin Trudeau’s Liberal government on March 22, 2016.
Budget 2016 included a big emphasis on infrastructure spending, eliminated certain tax credits and advantages and tried to eliminate tax structures that abused the system. Other significant changes introduced in this budget included the introduction of a new method of depreciation of eligible capital property and reduction of the eligibility age for Old Age Security and Guaranteed Income Supplement from 69 to 65.
According to the new budget, a deficit of $5.4 billion is expected for Canada in 2015-2016, which will grow to $29.4 billion in 2016-2017 and will gradually decrease after that with no indication of when Canada will have a balanced budget again.
A detailed explanation of the significant tax measures proposed in Budget 2016 that would have an impact on your personal financial planning follows below.
PERSONAL TAX MEASURES
New Canada Child Benefit
In an effort to provide more benefits to lower-and-middle income families, Budget 2016 proposed to replace the current Canada Child Tax Benefit (CCTB) and the Universal Child Care Benefit (UCCB) with a new Canada Child Benefit (CCB).
The Canada Child Benefit provides greater benefits for families at lower income levels and is tax-free. It will start on July 1, 2016 and will provide a non-taxable maximum benefit of $6,400 per child under the age of six and $5,400 per child for children who are age six through 17. If a child is eligible for the disability tax credit, the CCB maximum is increased by an additional $2,730. The CCB maximum benefit levels will be reduced based on family income and the number of children in the family.
According to the government the new Canada Child Benefit will help nine out of 10 families save an estimated $2,300 a year. It would therefore be prudent for families with children who are 17 and under to funnel their tax savings into a Registered Education Savings Plan (RESP) to save for their children’s higher education and take advantage of the 20% Canada Education Savings Grant (CESG) that the government will pay on up to $2500 of annual savings in an RESP.
Elimination of Family Tax Cut
The Conservative government of Stephen Harper had enacted the family tax cut that allowed income splitting between spouses. This would allow a higher-income spouse with at least one child under 18 to notionally transfer up to $50,000 of taxable income to his/her spouse or common-law partner, in order to reduce the couple’s total income tax liability by up to $2,000.
Budget 2016 proposed to eliminate the family tax cut effective for 2016 and future taxation years.
Elimination of Education and Textbook Tax Credits
According to Budget 2016, starting in 2017, the education and textbook tax credits will be eliminated. However, any unused education and textbook tax credits carried forward from years before 2017 will remain available to be claimed in 2017 and subsequent years.
Elimination of Children’s Fitness and Arts Tax Credits
Budget 2016 proposed to phase out the Children’s Fitness and Arts Tax Credits by reducing the maximum eligible amount for 2016 (to $500 for Children’s Fitness Tax Credit and $250 for Children’s Art Tax Credit) and to eliminate both tax credits for 2017 and subsequent taxation years.
Taxation of Fund Switches in Corporate Class Mutual Funds
Currently, switching funds in a mutual fund corporation (commonly referred to as Corporate Class Mutual Funds) will not trigger any taxes and the Income Tax Act does not deem the exchanges to be dispositions for income tax purposes.
Budget 2016 surprised the investment community by proposing to amend the Income Tax Act so that starting September 2016 an exchange between different classes of funds in mutual fund corporations will be deemed to be a disposition at fair market value.
If the shares that are exchanged only differ in respect of management fees or expenses borne by the investor, and otherwise drive their value from the same fund or portfolio within the mutual fund corporation, then the proposed changes will not apply.
Taxation of Linked Notes
An equity linked note is a debt instrument whose return is determined by the performance of a single equity security or stock, a basket of stocks, or an equity index.
It has been a common practice for investors in linked notes to sell the notes prior to maturity. By doing so they were able to convert the tax treatment of the return from interest income to capital gains. Based on Budget 2016, for linked notes offered after September 2016, the return on a linked note will be treated as interest income whether it is earned at maturity or through a sale on a secondary market before maturity.
Return of the Labour-Sponsored Venture Capital Corporations (LSVCC) Tax Credit
The federal Labour-Sponsored Venture Capital Corporations (LSVCC) tax credit was introduced in the 1980s when access to venture capital for small and medium-sized businesses was limited. However, the economic environment and the structure of the venture capital market have changed significantly since that time.
While the federal tax credit for federally registered LSVCCs will remain at 5% for the 2016 taxation year and will be eliminated for the 2017 and subsequent tax years, Budget 2016 proposed to restore this tax credit to 15% for share purchases of provincially registered LSVCCs for 2016 and subsequent taxation years.
Ontario Electricity Support Program
The Ontario Electricity Support Program (OESP) will provide assistance to low-income households in Ontario for the cost of electricity effective January 1, 2016. The OESP, which is based on household income and the number of people living in the household, will provide a non-taxable monthly credit on a tax payer’s electricity bill.
Mineral Exploration Tax Credit for Flow-Through Shares Investors
According to Budget 2016, the eligibility for the mineral exploration tax credit will be extended for one year, to flow-through share agreements entered into, on or before March 31, 2017.
This tax credit provides investors in mining flow-through shares with a credit equal to 15 per cent of specified mineral exploration expenses incurred in Canada.
Retirement Income Improvements
Budget 2016 included a number of welcome improvements to retirement income provisions for Canadians including the following:
– Guaranteed Income Supplement (GIS) for low-income single seniors will be increased.
– The Canada Pension Plan (CPP) will be enhanced and the government’s goal is to make a collective decision in this regard with the provinces and territories before the end of 2016.
– Old Age Security benefit will start at 65 years old instead of at 67.
– Benefits will be increased for senior couples who live apart for health or other reasons in recognition of the fact that they face higher expenses.
Increase in Canada Student Grant
Budget 2016 proposed to increase Canada Student Grant amounts by 50 per cent, from $2,000 to $3,000 a year for low-income families; from $800 to $1200 per year for middle-income families; and from $1,200 to $1,800 for part-time students.
Setback for Charitable Donations
While the measure announced in Budget 2015 that provided an exemption from capital gains for certain dispositions of private corporation shares or real estate where the cash proceeds from the disposition are donated to a registered charity within 30 days drew cheers from the charitable sector, Budget 2016 announced the government’s intention not to proceed with this measure.
Therefore, if you had done any estate planning based on this tax measure you would need to revise your planning based on the new changes proposed in Budget 2016.
Increase in Top Tax Rate on Personal Service Business Income
As a result of the new top marginal personal income tax rate being increased to 33% effective January 1, 2016, a federal tax rate increase form 28% to 33% on personal service business income earned by a corporation is proposed to be introduced to the Income Tax Act. Therefore, the combined corporate income tax rate in Ontario will increase to 44.5% on personal service business income.
BUSINESS TAX MEASURES
Small Business Tax Rate
Based on previous budgets the federal small business tax rate applicable on the first $500,000 of business income earned by a Canadian-controlled private corporation (CCPC) had been legislated to reduce to 9%. However, despite an election promise to reduce the small business tax rate over the next three years, Budget 2016 not only did not include any reductions to the small business tax rate but instead proposed to cancel these previously legislated reductions and to keep the small business tax rate at 10.5% after 2016.
Multiplication of Small Business Deduction
For years, skilled and experienced accountants had helped their small business owner clients multiply their $500,000 small business deduction through creative and complicated tax planning. Budget 2016 put an end to this type of planning and proposed to prevent business owners from multiplying access to the $500,000 small business deduction through the use of complex partnerships and corporate structures effective March 22, 2016.
Life Insurance Policies
Going forward, the government is planning to close loopholes that allow private corporations to use a life insurance policy to distribute amounts tax-free that would otherwise be taxable.
Transfer of an interest in a life insurance policy to a corporation will be affected by this change in rules. Budget 2016 proposed to amend the Income Tax Act to ensure that when a disposition of an interest in a life insurance policy happens, the amounts are not received tax-free by a policyholder. While in the past proceeds of disposition of the policy were equal to the policy’s cash surrender value, after March 22, 2016 the fair market value of any consideration received in exchange for an interest in a life insurance policy will be included in the policyholder’s proceeds of disposition.
Back-to-Back Shareholder Loan Rules
Budget 2016 proposed that in situations where the interposition of a third party between the corporation and the shareholder prevents the shareholder loan rules to be applied, new legislation will make it possible to look through the third party and have the shareholder loan rules apply so that if a debt owing to a shareholder from a corporation is outstanding for more than a year, either the loan or a prescribed rate imputed interest benefit is included in the shareholder’s income.
Tina Tehranchian, MA, CFP, CLU, CHFC, is a branch manager and senior financial planner at Assante Capital Management Ltd. in Richmond Hill, Ontario. She can be reached at 905-707-5220 or through her website at www.tinatehranchian.com to discuss your particular circumstances prior to acting on the information above.