2016 Federal Budget Highlights
The highly anticipated first Federal Budget of Prime Minister Justin Trudeauâs government was delivered on March 22, 2016. While there were a few major tax changes contained in the budget, several rumoured amendments, such as changes to the small business, personal, and capital gains exemption rate were unfounded.
Some of the proposed changes that will be of more relevance to our clients have been highlighted below.
Personal Tax Changes
Personal tax rates will remain relatively similar, with the exception of the reduction in rate from22% to20.5% for individuals in the income bracket in between$45,283 to $90,563. The new budget does, however propose significant changes to some of the tax credits available to Canadian taxpayers in the past.
Significantly, the new budget introduces a new Canada Child Benefit to replace the existing Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB). The new benefit provides a maximum annual benefit ofup to $6,400 per child under the age of six, and up to $5,400 per child for those aged six through 17. Families with less than $30,000 in net income will receive the maximum benefit, with the credit phasing out beyond this threshold. The CCTB and UCCB will be eliminated for months after June 2016.
The budget has also proposed toremove the income splitting tax credit for couples with children under the age of 18 for the 2016 tax year and beyond. It should be noted that pension splitting will not be affected by this change. Furthermore, the budget proposes tophase out the Fitness and Arts Tax Credits by 2017. In the past, a 15% refundable tax credit on up to $1,000 of eligible fitness expenses for children under 16 years old was in place; this credit will be reduced to a maximum of $500 in eligible amounts in 2016, and will be eliminated in 2017.
Also eliminated in the proposed budget is the Education and Textbook Tax Credit. The Tuition Tax Credit remains intact. The new budget, however, does provide for expanded support for students in the form of loans, grants, and standard tuition payments. Students with household income under $25,000 are not required to pay back loans.
The budget further proposesa 15% Teacher and Early Childhood Educator School Supply Tax Credit, that is effective in the 2016 tax year. The credit is refundable and applies on up to $1,000 of eligible supplies incurred by the teachers.
Additionally, the Guaranteed Income Supplement top-up benefit for the most vulnerable single seniors has been proposed to be increased to $947 starting in July 2016.
Small Business Tax Changes
Although the small business deduction rate was expect to decrease annually until hitting its target of 9% in 2019,the rate remains unchanged at 10.5%. The gross-up rate on non-eligible dividends will be maintained at 17% and the dividend tax credit rate will be 21/29 of the gross-up amount.
The budget does, however, propose changes that prevent certain business owners from multiplying access to the $500,000 small business deduction using complex partnerships and corporations. The rules pertaining to association are complex and beyond the scope of this newsletter; the proposed changes are technical and look to clear up any potential loopholes in the verbiage of the rules.
Though the 2015 budget announced a review of the circumstances in which income is deemed active or investment business, no modifications have been proposed to the rules in the 2016 budget.
With respect to intangible assets owned by a corporation, the budget proposesto repeal the eligible capital property (ECP) regime and create a new capital cost allowance (CCA) class. Goodwill acquired will fall into this new CCA class, 14.1. As a consequence of these changes, the disposition of assets in this class will give rise to recapture and capital gains, resulting in a significant increase in income taxes paid by many CCPCs in many circumstances. Eligible capital expenditure (ECE), such as the cost of goodwill, customer lists, licenses, etc. will be included in Class 14.1 at a 100% inclusion rate, compared to the previous 75% inclusion rate. The annual depreciation rate of this class will be 5% compared to the prior 7% rate on ECE.
The budget also addresses life insurance proceeds and the transfer of life insurance policies to corporations. Life insurance proceeds are generally not subject to income tax, however, in the past, corporations were able to add the amount of the policy benefit to its capital dividend account and pay tax-free dividends to shareholders.The proposed amendment is in place to ensure that the âinsurance benefit limitâ is properly adhered to.
The 2016 budget proposes to introduce rules so that any accrued foreign exchange gains on a foreign currency dbet will be realized the debt becomes a parked obligation. This is to combat the complex âdebt-parkingâ transactions used to avoid foreign exchange gains on the repayment of foreign currency debts. This debt-parking will no longer be possible under the proposed changes.
We hope you have found this information useful, and please do not hesitate to contact us with any questions or concerns about how you will be affected.