February 27, 2018

Download Bulletin

On February 20, 2018, B.C. Finance Minister Carol James announced proposed changes to the provincial tax laws in the release of Budget 2018.  While the personal income tax rates and corporate income tax rates were left unchanged from prior announcements, other changes were introduced for:

• Sales Taxes;
• Income Taxes;
• Property Taxes;
• Affordable Child Care;
• Elimination of Medical Services Plan (“MSP”) premiums; and
• A new Employer Health Tax.

Sales Taxes

Provincial Sales Tax

PST rate increase for passenger vehicles – Effective April 1, 2018, passenger vehicles valued at $125,000 or more are subject to a higher PST rate.  From $125,000 to $149,999.99 the rate has been increased from 10% to 15%[1] and from $150,000.00 and above the rate has been increased from 10% to 20%[2].

Income Taxes

Corporate Income Tax Rates

The budget did not announce any changes to B.C.’s corporate income tax rates.  As a result, the B.C. corporate income tax rates remain as follow:

Tax Credits

Tax credits extended – the book publishing tax credit, B.C. mining flow-through share tax credit, farmer’s food donation tax credit and the interactive digital media tax credit have been extended through to the end of 2018[5].

Film incentive B.C. Tax credit – The Film incentive B.C. Tax credit was expanded to include scriptwriting.

Infirm dependent credit and caregiver credits – the infirm dependent credit and caregiver credit have been replaced with a new B.C. caregiver credit to align with the new federal Canada Caregiver Credit.

Property Taxes

Property Transfer Tax 

The property transfer tax rate on residential properties above $3 million has been increased from 3% to 5%.  The property transfer tax rates of 1% on the first $200,000, 2% on the portion between $200,000 and $2,000,000 and 3% on the portion between $2,000,000 and $3,000,000 remain unchanged.

Foreign Buyers Tax 

The additional property transfer tax required to be paid by foreign nationals, foreign corporations or taxable trustees on certain purchases of B.C. residential property has been increased from 15% to 20%.  The area in B.C. in which this additional property transfer tax is levied has been expanded from the Greater Vancouver Regional District (“GVRD”) to include: Fraser Valley, Capital Regional District, Nanaimo and the Central Okanagan Regional Districts.  For residential property purchased in the GVRD there will be no transitional relief.  For purchases entered into in the expanded region before February 21, 2018 there may be some transitional relief.

Speculation Tax

A new annual speculation tax on residential property in B.C. will be introduced in 2018.  This new tax will be effective for 2018 and will apply to the GVRD, Fraser Valley, Capital and Nanaimo Regional Districts, and in the municipalities of Kelowna and West Kelowna.

The speculation tax will target foreign and domestic speculators in B.C. with upfront exemptions available for principal residences, qualifying long-term rental properties and certain special cases.  In the case that the upfront exemptions is not available there is a non-refundable income tax credit to help offset the tax for B.C. residents.

In 2018, the tax rate will be $5 per $1,000 of the property’s assessed value (i.e. 0.05%) increasing to $20 per $1,000 of the property’s assessed value (i.e. 2%) in 2019.  There has been no proposed legislation as of yet and therefore a lack of clarity exists on who this tax will apply too.  A concern is that B.C. residents with secondary recreational properties may be affected.  Presumably, the intention of the B.C. non-refundable tax credit is to lessen this impact for individuals earning income in B.C.

Beneficial Ownership of Real Estate

Corporations will now be responsible in tracking the beneficial ownership information of real estate and developers will be responsible for tracking information concerning the assignment of pre-sale agreements.  These proposed changes are slated to be released July 2019 and are proposed to include a requirement for B.C. corporations to hold accurate and up to date information on the beneficial owners of real property along with other information reporting requirements.

As a result, B.C. corporations with bare trustee relationships for real property need to maintain a register or continuity schedule of beneficial ownership.  The same proposal will require developers to collect and report comprehensive information regarding the assignment of pre-sale purchases.  The information collected will be reported to a designated provincial office and shared with federal tax authorities.

Affordable Child Care Benefit

Budget 2018 has introduced a new affordable child care benefit with expanded eligibility and higher benefit rates than the existing child care subsidy.  The new benefit will be phased in over three years.  The new affordable child care benefit will reduce parent fees for children under age six through a child care fee reduction program.  This benefit will be income tested and the following table illustrates the benefits once the new affordable child care benefit is phased in.

New Affordable Child Care Benefit by Care Type and Income Threshold

Elimination of Medical Services Plan Premiums and the Introduction of an Employer Health Tax

In Budget 2017 the government of B.C. reduced MSP premiums by 50% starting January 1, 2018 and in Budget 2018 will eliminate MSP premiums effective January 1, 2020.

In order to make up the shortfall in revenue Budget 2018 is replacing revenues from MSP premiums with a new employer health tax.

This new payroll tax will come into effect January 1, 2019 with the following rate structure:

• Businesses with a payroll of more than $1.5 million will pay a rate of 1.5% on their total payroll;
• Businesses with a payroll between $500,000 and $1.5 million will pay a reduced rate; and
• Businesses with a payroll under $500,000 will not pay the tax.

The legislation for the Employer Health Tax has not yet been introduced but Budget 2018 mentions that payroll amounts are to be aggregated among associated businesses.

A number of these changes take effect in 2018 with the remaining ones being phased in over the next three years.  If you wish to discuss your situation and how any of the Budget 2018 measures would affect you please contact us for any further information.

Stay tuned for our federal budget commentary after the federal Liberals will deliver their third budget Tuesday February 26, 2018.

Maple Ridge: eprmr@eprcpa.ca
Langley: eprly@eprcpa.ca

[1] 12% for private sales or gifts

[2] 12% for private sales or gifts

[3] Generally, on the first $500,000 of taxable income unless taxable capital > $10M

[4] Includes a refundable tax on payment of dividends

[5] Certain credits have been extended to the end of 2021

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

Passive Income

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.

Other Measures

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.

Affected Trusts

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.