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Federal Budget 2017: Less is More... more or less?

Finance Minister, Bill Morneau, delivered the majority Liberal government’s second Federal Budget on March 22, 2017. There were no increases in either personal or corporate tax rates. Like last year, speculation that the capital gains inclusion rate would increase was false.

The Budget focused on closing tax loopholes, cracking down on tax evasion, providing tax relief for the middle class, and eliminating measures that are ineffective, inefficient and that disproportionately benefit the wealthy. But even in these areas, there really wasn’t that much!

Surprisingly, of most interest, may be what is not in the Budget. For example, the Budget signals that a review of tax planning strategies using private corporations is underway and that specific measures may result from this in the future.

Business Tax Measures

Tax Planning Using Private Corporations As part of the 2016 Budget the government committed to do a review of the tax system specifically addressing the ability of high net worth individuals who use private corporations to inappropriately reduce or defer tax. Budget 2017 followed up on the results of this study indicating that the review highlighted a variety of tax reduction strategies that are available to high income individuals using a private corporation that are not available to other Canadians. These strategies include:

  • Sprinkling income using private corporations causing income that would otherwise be realized by an individual taxable at a high personal income tax rate to instead be realized by a family member subject to a lower rate of tax.about potential conflicts of interest,

  • Holding a passive investment portfolio inside a private corporation:since corporate income tax rates are generally lower than personal tax rates, this strategy can facilitate the accumulation of earnings that can be invested.

  • Converting a private corporation’s regular income into capital gains-income that would normally be paid as a salary or dividends to an owner manager being converted into corporate capital gains, that would have a much lower tax rate.

The government is further reviewing the use of these planning strategies and intends to release a paper in the coming months setting out the nature of these issues in more detail as well as proposed policy responses. Time will tell what impact this may have on corporate investment and corporate insurance planning opportunities.

Billed-Basis Accounting Generally, taxpayers are required to include the value of work in progress in calculating their taxable income. However, certain professionals (i.e. accountants, dentists, lawyers, medical doctors, veterinarians, and chiropractors) may elect to exclude their work in progress from income, instead recognizing the income for tax purposes when billed (billed basis accounting). This results in a deferral of tax by allowing the costs associated with the work in progress to be deducted, and the associated income being deferred.

Budget 2017 proposes that private foundations are no longer permitted to receive ecological gifts.

Personal Tax Measures In an effort to make the tax system simpler and fairer for all Canadians Budget 2017 proposes the following tax measures for individuals:

Canada Caregiver Credit The Budget proposes to simplify the current caregiver credit system by replacing the Infirm Dependent Credit, Caregiver Credit and Family Caregiver Tax Credit with a new Canada Caregiver Credit. The new credit is consistent with the amounts that could have been claimed previously and better targets those who need it the most.

Disability Tax Credit The Budget proposes to add nurse practitioners to the list of medical practitioners who can certify eligibility for the credit.

Public Transit Tax Credit The Budget proposes to eliminate the credit effective June 30, 2017.

Tuition Tax Credit The Budget proposes to extend the range of courses eligible for the Tuition Tax Credit. The credit now applies to tuition paid for occupational skills courses that are below the post secondary level at a college or university.

Charitable Giving Budget 2017 proposes the following measures relating to charities:

First-Time Donor’s Tax Credit Confirmation that the first time donor’s tax credit will expire after 2017.

Ecological Gifts The donation of ecological gifts are eligible for enhanced tax treatment. Due to concerns about potential conflicts of interest, Budget 2017 proposes that private foundations are no longer permitted to receive ecological gifts.