The Minister of Finance, Bill Morneau, announced that the government’s federal budget will be tabled on March 22, 2017. Last year’s Canadian federal budget came in with a whopping $29.4-billion deficit and notable tax changes in the area of the small business deduction eligibility, among others. There were a number of items promised by the Liberal government during its campaign that were not announced in last year’s budget. Will the Liberal government hold true on those promises in the 2017 budget? How will those potential tax changes impact business owners and individuals? Some areas to watch are outlined below.
Capital gains crunch
There is speculation that there could be an increase in the taxation of capital gains. Current tax rules provide that only 50 per cent of a capital gain is included in a taxpayer’s income. This is a change we were surprised was not in last year’s budget, so keep an eye on a potential increase to the capital gains inclusion rate in this year’s announcement. A rate jump to 75 per cent or 2/3 (which it has been historically) could be forthcoming.
Whether it’s investment (such as real estate or equity investments) through a corporation or your own individual portfolio, potential changes could affect your after-tax proceeds. If you are contemplating selling capital property (such as real estate, equity investments, etc.) in the near future, consider implementing a tax plan before the budget date to maximize your after-tax proceeds.
Small business deduction smack down?
Budget 2016 took aim at those seeking to multiply access to the small business deduction and proposed to eliminate access to the lower small business tax rate for certain members of a partnership providing services through a Canadian-Controlled Private Corporation (CCPC).
The government could choose to build on this in the upcoming budget by further curtailing access to the small business deduction (which provides a lower preferential tax rate on a CCPC’s first $500,000 of active business income) to corporations that meet certain criteria. An example of this could be a new eligibility requirement for the number of employees, which would be particularly problematic for professional corporations, given their inherently smaller staff sizes.
A stop to generous stock benefits?
There has been concern from industry over the government potentially limiting the deduction for employee stock options. Under the current taxation model, the deduction allows certain stock option holders to qualify for capital gains-like treatment on any employment benefit received on the exercise of stock options. A move to limit the deduction could reduce or eliminate this favourable treatment by taxing more of these benefits as employment income.
The Liberals ultimately abandoned a proposal of this kind last year, but it would not be surprising if this measure is introduced in Budget 2017. It is worth noting, however, that the government has previously expressed that existing options could be grandfathered. If you are considering exercising/granting stock options, implementing a proper tax plan before the budget date could lower the tax cost of exercising your options.
From income-splitting to splitting up with credits
Given the Liberals’ commitment to find $3 billion in tax dollars through a review of tax expenditures by the 2019-2020 fiscal year, this year’s budget could propose changes to existing tax credits and deductions, which would affect a broader range of Canadians. Numerous credits, including the public transit pass credit, the age credit and the Canada employment credit have been questioned as to their effectiveness from a policy perspective and their cost to the government in foregone tax revenue. In particular, boutique tax credits of the former Conservative government may end up on the chopping block. Consider how Budget 2016 phased out certain child-related tax credits in favour of its amalgamated Canada Child Benefit plan.
Another area to watch is potential changes to the rules around the use of a corporation for income-splitting. Current measures prevent taxpayers from splitting income with children under 18 years of age, but Budget 2017 could propose to extend these restrictions.
How to prepare
Budget 2017 is just around the corner. While we can only speculate on what it will contain at this stage, it would be prudent to examine your personal and business circumstances in light of these potential changes. Speak with your tax advisor at your earliest opportunity to avoid potentially unfavourable tax implications stemming from the budget and to assist you in developing an effective tax plan that meets your objectives.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
