Another federal budget has come and gone. If you blinked you might've missed it! Compared to last year's changes to the small business deduction eligibility, among others, there weren't many significant changes from a tax perspective in Budget 2017. When it comes to corporate tax changes, is the Canadian government waiting to see what changes come out of the U.S.? Time will tell, but for now, here's what emerged (and didn't) from Budget 2017.
Much ado about nothing?
A few areas that drew some concern prior to the release of the budget was a potential increase to the capital gains inclusion rate, changes to small business deduction eligibility and changes to stock options. We expect there were many sighs of relief heard around the country when Budget 2017 revealed none of these changes. However, with an eye on tax fairness, the government is currently reviewing corporate tax-planning strategies that it considers to provide unfair advantages to high-income earners. Strategies such as sprinkling of income among family members who may be subject to tax at lower rates, holding passive investment portfolios inside a private company and converting regular income into capital gains were highlighted as areas that will be addressed in a paper to be released by the federal government in the coming months. These will certainly be areas to watch.
No more counting on billed-basis accounting
Taxpayers who earn income from certain professional practices (i.e., lawyers, medical doctors, dentists, accountants, veterinarians and chiropractors) could be impacted by the proposed changes on the recognition of income for work-in-progress ("WIP"). Current rules allow for professional practices to opt for the deferral of the recognition of income from WIP to when the work is billed rather than when the WIP is created. Under a new proposal, the deferral of WIP would be eliminated for taxation years that begin on or after March 22, 2017. The proposed changes provide for a transitional rule for taxpayers who no longer qualify for the deferred income inclusion, allowing for 50 per cent of the unbilled WIP to be included in income in the first taxation year, with the entire unbilled WIP amount taxed in the following taxation year. These designated professionals should be careful if undertaking a transaction during a transitional year as it may accelerate the WIP income inclusion if there is a deemed year-end for tax purposes.
More factors in factual control assessment
Budget 2017 proposes changes to broaden the factors to consider in determining whether factual control of a corporation exists to ensure taxpayers do not inappropriately access certain tax preferences. Corporate structures implemented to avoid association through common de facto control should be re-examined.
Change in motion
Budget 2017 did not change corporate or personal tax rates, but it did propose some measures that may affect your pocketbook. Among these are a halt to the 15 per cent Public Transit Tax Credit, a two per cent increase in alcohol excise duty rates and a change to the term "taxi business," whereby forcing ride-sharing businesses such as Uber to charge GST/HST.
Additionally, Employment Insurance benefits are proposed to become more flexible. For instance, parental benefits may be collected for up to 18 months at a lower rate of 33 per cent (the existing rate is 55 per cent up to 12 months). Similarly, a proposal would enable women to access maternity benefits four weeks sooner than the current model (from eight weeks before their due date to 12). Moreover, when it comes to the delivery of benefits including EI, as well as other programs such as Old Age Security and CPP, the government has earmarked a $12.1-million boost.
Resource expenditures reclassified
Budget 2017 proposes that expenditures related to drilling or completing a discovery well generally be classified as Canadian Development Expenses (CDE) deductible at 30 per cent per year on a declining balance basis instead of Canadian Exploration Expenses (CEE) offering a full deduction. Certain exceptions, including where a well is abandoned, will continue to allow CEE treatment. This measure will generally apply to expenses incurred after 2018, subject to certain exceptions.
Budget 2017 also proposes to no longer permit eligible small oil and gas corporations to treat the first $1 million of CDE as CEE when issuing flow through shares, effective for expenses incurred after 2018, subject to transitional provisions for 2016 agreements in place before budget day.
Budget 2017 may not have rocked the boat, but speak with your tax advisor to ensure you are charting the right course with your business or personal finances.
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.
