On February 27, 2018 the Honourable Bill Morneau, Minister of Finance, presented the 2018 Federal Budget to the House of Commons. While there are various measures proposed there has been no change in the capital gains inclusion rate as was widely speculated.
Personal Income Tax
Canada Workers Benefit
Budget 2018 proposes to rename the Working Income Tax Benefit to the Canada Workers Benefit. The amount of the benefit will be equal to 26% of each dollar of earned income in excess of $3,000 to a maximum benefit of $1,355 for single individuals without dependants and $2,335 for families (couples and single parents). These amounts are increased from the prior maximum amounts of $1,192 and $2,165, respectively.
The Benefit will be reduced by 12% of adjusted net income in excess of $12,820 for single individuals without dependants and $17,025 for families. Previously, the reduction rate was 14%. Each province may arrange variances from these amounts.
Ability to access the Benefit for those that have filed returns, but not claimed the Benefit, will also be improved.
This measure will apply to the 2019 and subsequent taxation years. Indexation of amounts relating to the Canada Workers Benefit will continue to apply after the 2019 taxation year.
Medical Expense Tax Credit – Eligible Expenditures
Budget 2018 proposes to expand the medical expense tax credit to recognize such expenses where they are incurred in respect of an animal specially trained to perform tasks for a patient with a severe mental impairment in order to assist them in coping with their impairment (e.g., a psychiatric service dog trained to assist with post-traumatic stress disorder).
This measure will apply in respect of eligible expenses incurred after 2017.
Business Income Tax
Budget 2018 includes details of the new passive investment tax regime that Finance previously alluded to during its 2017 Tax Proposals for Private Corporations. Budget 2018 proposes two new measures applicable to taxation years that begin after 2018 to limit the deferral advantages corporations have when making passive investments with money earned at corporate tax rates (e.g. a rate tax deferral of up to 37.7%). Firstly, a limit in access to small business deduction for CCPCs generating significant passive income and secondly, a new regime that segregates refundable taxes into two separate streams.
Business Limit Reduction
The first measure proposed by Budget 2018 will reduce access to the small business deduction for CCPCs on a straight-line basis for CCPCs having passive income between $50,001 and $150,000. This results in a corporation’s business limit being reduced by $5 per each dollar of passive investment income over $50,000.
Some CCPCs may already have a reduced business limit due to the existing taxable capital rules. The taxable capital rules will operate in conjunction with the proposed business limit reduction for passive income above $50,000 and a CCPC’s small business limit will be reduced by the greater of the two.
What is Passive Income?
Generally, passive income includes interest, rental income, royalties, dividends from portfolio investments and taxable capital gains. Various exceptions do apply such as, passive income incidental to an active business or income received from an associated corporation that carries on an active business.
Budget 2018 proposes that for the purposes of determining the reduction of the business limit of a CCPC that the passive income be measured using “adjusted aggregate investment income” which will adjust for the following from its calculation:
- Exclude taxable capital gains realized on the disposition of property used principally in an active business carried on in Canada. The active business could be carried on by the owner of the asset, or by a related party. (e.g. gains on sale of the goodwill of an active business and gains on the real estate from which the active business operates);
- Exclude taxable capital gains realized on shares of another CCPC all or substantially all of whose assets are used in an active business carried on in Canada, provided the seller has a significant interest (generally over 10%) in that corporation.
- Exclude net capital losses carried over from prior taxation years;
- Include dividends from non-connected corporations;
- Include income from savings in a life insurance policy that is not an exempt policy; and
- Exclude investment income that is incidental to the active business.
Refundability of Taxes on Passive Investment Income
With the current tax regime a private corporation receives a dividend refund on payment of an eligible or other than eligible dividends. Eligible dividends receive a preferential tax rate through an enhanced dividend tax credit. For year ends that begin after 2018, the Budget proposes that a refund of refundable dividend tax on hand (“RDTOH”) from passive investment income (excluding portfolio dividends) be available only in cases where a private corporation pays a non-eligible dividend, with certain exceptions.
Budget 2018 proposes the concept of two RDTOH accounts one for “eligible RDTOH” resulting from refundable taxes paid under Part IV of the Income Tax Act from eligible portfolio dividends and one for “non-eligible RDTOH” for refundable taxes paid under Part I of the Income Tax Act.
Private corporations will have to recover RDTOH from its non-eligible RDTOH account before recovering RDTOH from its eligible RDTOH account. The government is putting this in place to stop a tax planning strategy referred to as an “RDTOH – GRIP Mixer” which would allow refundable taxes resulting from refundable Part I tax to be recovered using eligible dividends whose general rate income pool balance was generated from an active business in Canada.
This change is effective for taxation years beginning after 2018, and while planning opportunities do exist they will be subject to a specific anti-avoidance rule. This anti-avoidance rule could apply if a corporation transfers investment assets to a second corporation owned by the spouse or child of the first corporation.
Clean Energy Assets
Budget 2018 extends the eligibility for accelerated capital cost allowance (CCA) for clean energy equipment. CCA on property included in Class 43.1 assets, which includes clean energy generation and energy conservation equipment can be claimed on a 30% declining balance basis. Class 43.2 assets, includes property acquired before 2020 that would otherwise be included in Class 43.1 and has a CCA rate of 50% on a declining balance basis. Budget 2018 proposes to extend the eligible for Class 43.2 by five years from 2020 to 2025. Therefore the accelerated CCA rate of 50% can be applied to eligible assets acquired before 2025.
Clarification of Limited Partnership (“LP”) At-Risk Rules
Allocation of losses from a lower-tier limited (LP) will be restricted to the upper-tier LP’s partnership at-risk amount, effective for taxation years that end on or after February 27, 2018. LP losses in excess to a partner’s at-risk amount incurred in a tax year ended before February 27, 2018 will not be available for carry-forward if they were allocated to a limited partner that is a partnership. Instead, such losses will be added to the ACB of the upper-tier LP’s interest in the lower-tier LP.
New Reporting Requirements for Trusts
Budget 2018 proposes that for the 2021 and subsequent taxation years that certain trusts provide the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability to exert control over trustee decisions regarding the income or capital of the trust.
The new reporting requirements will apply to “express trusts” that are resident in Canada. They will also apply to non-resident trusts that are currently required to file a T3 return.
An express trust is generally a trust created with the settlor’s express intent, usually made in writing (as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the provisions of a statute).
Exceptions to the additional reporting requirements are proposed for the following types of trusts:
- mutual fund trusts, segregated funds and master trusts;
- trusts governed by registered plans (i.e., deferred profit sharing plans, pooled registered pension plans, registered disability savings plans, registered education savings plans, registered pension plans, registered retirement income funds, registered retirement savings plans, registered supplementary unemployment benefit plans and tax-free savings accounts);
- lawyers’ general trust accounts;
- graduated rate estates and qualified disability trusts;
- trusts that qualify as non-profit organizations or registered charities; and
- trusts that have been in existence for less than three months or that hold less than $50,000 in assets throughout the taxation year (provided, in the latter case, that their holdings are confined to deposits, government debt obligations and listed securities).
Penalties for non-compliance
Unless one of theses exceptions is met, trusts will now be required to report the additional information. Budget 2018 also proposes new penalties for a failure to file a T3 return (including the additional information proposed to be required starting 2021). The penalty will be equal to $25 for each day of delinquency, with a minimum penalty of $100 and a maximum penalty of $2,500.
If a failure to file the return was made knowingly (or due to gross negligence) and additional penalty will apply. The penalty will be equal to 5% of the maximum fair market value of the trust property held during the relevant tax year, with a minimum penalty of $2,500. These penalties are in addition to the existing failure to file an information return of $10 per day up to a maximum penalty of $1,000 (for 1 to 50 slips).
Employment Insurance (EI)
Parental Sharing Benefit
Budget 2018 proposes an increase to the duration of EI parental leave by up to five weeks in cases where the second parent agrees to take a minimum of five weeks of the maximum combined 40 weeks available using the standard parental option of 55 percent of earnings for 12 months. In other words, as long as each parent takes at least 5 weeks, the couple will qualify for a total of 40 weeks (35 weeks otherwise).
Alternatively, where families have opted for extended parental leave at 33% of earnings for 18 months, the second parent would be able to take up to eight weeks of additional parental leave. In cases where the second parent opts not to take the additional weeks of benefits, standard leave durations (35 weeks and 61 weeks) will apply.
The proposed benefit will be available to eligible two-parent families, including adoptive and same-sex couples, to take at any point following the arrival of their child. The benefit is expected to commence in June of 2019.
Working While on Claim
Budget 2018 proposes to make the current EI Working While on Claim pilot rules permanent. The EI Working While on Claim pilot project allows claimants to keep 50 cents of their EI benefits for every dollar they earn, up to a maximum of 90% of the weekly insurable earnings used to calculate their EI benefit amount. These provisions were previously scheduled to expire in August 2018.