Joe Oliver presented the "Economic Action Plan 2015" on April 21, his first budget as Finance Minister and three weeks into the fiscal year. In this election year, this budget ("Budget 2015") brings the books back into the black and includes highlighted measures that the Government says will benefit various groups of Canadians including seniors, families and small businesses.
A few highlights of Budget 2015 include:
- Canada will have a $1.4 billion surplus this year.
- The Tax Free Savings Account annual limit has been raised to $10,000 from $5,500.
- The small business tax rate will be cut to 9% from 11% by 2019.
- Seniors at age 71 will be subject to lower mandatory withdrawal limits from their Registered Retirement Income Funds.
- There is a new Home Accessibility Tax Credit for seniors and people with disabilities.
Details of the significant tax measures proposed in Budget 2015 are outlined below.
BUSINESS TAX MEASURES
Reduction to the Small Business Tax Rate
- The small business deduction currently reduces the federal income tax rate from 15% to 11% on the first $500,000 of active business income earned by a Canadian-controlled private corporation.
- Budget 2015 proposes to reduce the
federal small business tax rate from 11% to 9% over a four-year
period commencing in 2016, as follows:
Business Tax Rate
Combined Federal and
Ontario Small Business
2015 11.0% 15.5% 2016 10.5% 15.0% 2017 10.0% 14.5% 2018 9.5% 14.0% 2019 9.0% 13.5%
- The reduction in the small business rate will be pro-rated for corporations with non-calendar taxation years.
Accelerated Capital Cost Allowance for Manufacturing and Processing Equipment
- Budget 2015 proposes to replace the temporary Capital Cost Allowance (CCA) class 29 (which is calculated at 50% on a straight-line basis) for manufacturing and processing equipment with a new CCA class 53 (50% declining-balance rate) for eligible manufacturing and processing equipment purchased after 2015 and before 2026. The "half year rule" will continue to apply in the taxation year when the equipment is first available for use. Eligible assets acquired in 2026 and subsequent years will qualify for the 30% declining balance rate under class 43.
Quarterly Remitter Category for New Employers
- Currently, an employer qualifies to remit source deductions (i.e. income tax, Canada Pension Plan contributions, and Employment Insurance premiums) to the Government on a quarterly basis if it has an average monthly withholding amount of less than $3,000 and has a perfect compliance record over the previous 12 months.
- Budget 2015 proposes that new employers who have monthly withholding amounts of less than $1,000 will be eligible to remit on a quarterly basis. Employers will remain eligible for quarterly remitting so long as a perfect compliance record is maintained and their required monthly withholding amounts remain under $1,000. If either of the two conditions is no longer met, the Canada Revenue Agency ("CRA") will modify the employer's remittance frequency requirement in accordance with the existing rules.
Consultation on Eligible Capital Property
- Budget 2014 announced a public consultation on the proposal to repeal the eligible capital property regime and replace it with a new CCA class.
- The Government has heard from various stakeholders and continues to receive submissions. All representations will be considered in the development of the rules relating to the new CCA class as well as transitional rules.
Consultation on Active Versus Investment Business
- The Government will entertain comments from stakeholders that are concerned with the application of the "more than five full time employees" test in determining whether certain business activities, which derive income from property (such as self-storage facilities and campgrounds), are considered active businesses eligible for the low corporate tax rate.
Tax Avoidance of Corporate Capital Gains
- There are specific anti-avoidance provisions in the Income Tax Act intended to prevent a corporate shareholder from converting what would otherwise be a capital gain on the disposition of shares into a tax-free inter-corporate dividend. Subject to certain exceptions, the rules apply if the purpose of the tax-free inter-corporate dividend was to decrease the fair market value of the shares sold. The dividend is then treated as proceeds of disposition in respect of the shares, or as a gain from the disposition of capital property.
- Currently, the provisions do not apply to the payment of tax-free inter-corporate dividends that create or increase an unrealized capital loss. In certain situations, a taxpayer could use the unrealized loss triggered from the inter-corporate dividend to shelter accrued capital gains in respect of other properties.
- Effective after April 20, 2015, Budget 2015 proposes new rules to ensure that the anti-avoidance provisions apply where one of the purposes of a dividend is to effect a significant reduction in the fair market value of any share or a significant increase in the total cost of the dividend recipient's properties.
- New measures will also ensure that stock dividends cannot be used to circumvent the anti-avoidance provisions discussed above.
Synthetic Equity Arrangements
- The Income Tax Act currently contains measures, commonly referred to as "dividend rental arrangement rules", which prevent corporate taxpayers from receiving inter-corporate dividends on a tax-free basis where the taxpayer has effectively transferred the economic exposure (i.e. risk of loss or opportunity for a gain) on the underlying shares to a third party. Where the economic exposure has been transferred to a third party through the means of an equity derivative ("synthetic equity arrangement"), and the taxpayer realizes a loss by paying the economic benefit of the tax-free dividend through a "dividend equivalent payment" to that third party, some taxpayers take the position that the "dividend rental arrangement rules" are not applicable. Effective November 2015, Budget 2015 proposes new provisions to amend the "dividend rental arrangement rules" and deny the tax-free nature of inter-corporate dividends received in connection with these arrangements.
- Certain exemptions will apply to these new rules, including, agreements that are traded on recognized derivative exchanges where one party does not know the counterparty to the agreement, and situations where a taxpayer can establish that a tax-indifferent counterparty has not gained all or substantially all of the economic exposure related to the shares.
- Budget 2015 proposes a broader alternative "synthetic equity arrangement" regime where the tax status of the counterparty would not be relevant. The alternative regime would be less complex than the one proposed above. The Government has invited stakeholders to submit comments by August 31, 2015 concerning whether the broader measure should be adopted.
PERSONAL TAX MEASURES
Tax-Free Savings Account Annual Contribution Limit Increased
- Budget 2015 proposes to increase the annual Tax-Free Savings Account (TFSA) contribution limit from the current level of $5,500 to $10,000 beginning in 2015. The contribution limit will remain at $10,000 for subsequent years and will no longer be indexed to inflation.
Home Accessibility Tax Credit
- Effective for 2016, a new non-refundable tax credit will be available for qualifying individuals who incur costs in an effort to make their homes safer and more accessible.
- The credit will provide tax relief of 15% on up to a maximum of $10,000 of eligible expenditures related to an eligible dwelling.
- Qualifying individuals will include those who are 65 years of age or older at the end of a particular year, and persons with disabilities if they are eligible for the Disability Tax Credit at any time in a particular year.
- Eligible individuals may also claim the credit if they have claimed the spouse or common law partner amount, eligible dependent amount, caregiver amount or infirm dependent amount in respect of a qualifying individual for the year.
- An eligible dwelling must be the principal residence of the qualifying individual at any time in the year. If the qualifying individual does not have a principal residence in the year, an eligible dwelling will include a principal residence of an eligible individual if the qualifying individual lives there with him or her.
- Eligible expenditures will include renovations and alterations that allow greater access to or mobility and functionality within the dwelling, or reduce the risk of harm to the qualifying individual such as wheelchair ramps, walk-in bathtubs, wheel-in showers and grab bars. These expenditures will include the cost of labour and professional services, building materials, fixtures, equipment rentals and permits.
Changes to Minimum Withdrawal Factors for Registered Retirement Income Funds
- Budget 2015 proposes to reduce the minimum withdrawal amount required from a Registered Retirement Income Fund (RRIF) for 2015 and subsequent years. The change is intended to permit seniors to withdraw less from their RRIF in their earlier years, and have access to additional income in later years. This change will also facilitate a more accurate reflection of long-term inflation and interest rates, while allowing seniors to continue to enjoy the tax deferral benefit provided by a RRIF.
- The new RRIF withdrawal factors begin at 5.28% (previously 7.38%), at age 71, and increase annually to a maximum of 20%, which is now attained at age 95 (previously attained at age 94). There are no proposed changes to the withdrawal factors that apply to those aged 70 and under.
- An individual who has withdrawn more than the minimum amount from a RRIF in 2015 will be permitted to re-contribute the excess withdrawals to his or her RRIF. Re-contributions will be permitted until February 29, 2016, and those contributions will be deductible in the 2015 taxation year.
- These proposed rules will also apply to payments from a defined contribution Registered Pension Plan (RPP) or a Pooled Registered Pension Plan (PRPP).
Dividend Tax Credit Adjustment for Non-Eligible Dividends
- In conjunction with the proposed
reduction in the small business tax rate, Budget 2015 proposes to
adjust the gross-up factor and dividend tax credit that applies to
Top Federal Marginal Tax Rate
on Non-Eligible Dividends
2015 21.2% 2016 21.6% 2017 22.2% 2018 22.6% 2019 23.0%
- The combined federal and provincial tax rate will be dependent on the province in which the individual resides.
Transfer of Education Credits – Effect on the Family Tax Cut
- The previously announced Family Tax Cut rules reduce the value of the Family Tax Cut for couples who transfer education amounts between themselves.
- Budget 2015 proposes to revise the Family Tax Cut rules to ensure that spouses transferring education related amounts (Tuition, Education and Textbook Tax Credits) between themselves receive the full amount of the intended benefit from the Family Tax Cut.
- The CRA will automatically reassess affected taxpayers for the 2014 taxation year to ensure they receive any additional benefits to which they should be entitled under this change.
- Increase in Lifetime Capital Gains Exemption for Qualified Farm or Fishing Property
- For dispositions of qualified farm or
fishing property occurring on or after April 21, 2015, Budget 2015
increases the Lifetime Capital Gains Exemption to $1 million
(previously $813,600). The exemption will be the greater of:
- the inflation indexed Lifetime Capital Gains Exemption applicable to the capital gains realized on the disposition of qualified small business corporation shares; and
INTERNATIONAL TAX MEASURES
Withholding Taxes for Non-Resident Employees
- In an effort to reduce the administrative burden associated with obtaining a waiver not to withhold taxes from certain non-resident employees, Budget 2015 provides that no withholdings will be required on payments made after 2015 by a "qualifying non-resident employer" to a "qualifying non-resident employee". A "qualifying non-resident employee" is an employee who is exempt from Canadian income tax by virtue of a tax treaty and who is not present in Canada for longer than 90 days in any 12 month period which includes the payment. A "qualifying non-resident employer" is an employer who is resident in a country that has a tax treaty with Canada, must not carry on business through a Canadian permanent establishment and is certified by the Minister of National Revenue.
- The current Foreign Accrual Property Income (FAPI) rules will be expanded to address certain sophisticated arrangements designed to circumvent the anti-avoidance provisions involving insurance swap transactions. For taxation years beginning on or after April 21, 2015, the FAPI of a foreign affiliate will include income in respect of ceding Canadian insurance risks. In addition, if a foreign affiliate receives a portfolio of insured foreign risks in exchange for the ceding of its insured Canadian risks, the affiliate's FAPI will be equal to the difference between the fair market value of the Canadian risks ceded and the affiliate's costs of acquiring those Canadian risks.
CHARITIES AND NON-PROFIT ORGANIZATIONS
Donations Involving Private Corporation Shares or Real Estate
- Currently, any gains stemming from donations of publicly-listed securities, ecologically-sensitive land and certified cultural property to qualified donees are exempt from tax. However, realized gains on the donation of private corporation shares or other types of real estate are subject to tax.
- Budget 2015 proposes to provide
taxpayers with an exemption from tax on capital gains on
dispositions of private corporation shares and real estate. The
exemption will be available under the following conditions:
- cash proceeds from the disposition of the private corporation shares or real estate are donated to a qualified donee within 30 days after the disposition; and
- the private corporation shares or real estate are sold to a particular purchaser that is dealing at arm's length with both the donor and the qualified donee that received the cash proceeds.
- The exempt portion of the capital gain will be computed as the total cash proceeds donated divided by the total proceeds from the disposition of the shares or real estate.
- Several anti-avoidance measures will
be introduced to disallow the exemption if, within five years after
the disposition, the donor (or a person not dealing at arm's
length with the donor):
- reacquires (directly or indirectly) the property that was sold;
- acquires shares substituted for the shares that had been sold; or
- where shares were sold, said shares are subsequently redeemed and the donor does not deal at arm's length with the corporation at the time of the redemption.
- These new measures will apply to donations made in respect of dispositions occurring after 2016.
Investments by Registered Charities in Limited Partnerships
- Generally, charitable organizations and public foundations are not permitted to engage in business activities that are outside of their purpose. Private foundations are not permitted to engage in any business activities.
- A person holding a partnership interest is generally, under provincial law, considered to be carrying on the business of the partnership. Given the restrictions on the carrying on of business, charitable organizations and private/public foundations are not permitted to hold an interest in a partnership for investment purposes. Since partnerships are commonly used structures to invest in the private market, charities are missing out on potentially good investment opportunities.
- Budget 2015 proposes to amend the Income Tax Act to provide that a registered charity will not be considered to be carrying on a business solely because it acquires or holds an interest in a limited partnership.
- The following conditions must be met
for the new measures to apply:
- the charity, together with all non-arm's length entities, holds 20% or less of the limited partnership; and
- the charity deals at arm's length with each general partner of the limited partnership.
- The current rules relating to excess corporate holdings by a charity or foundation will be amended to "look through" limited partnerships. The non-qualifying security rules and the loanback rules that apply to donations of shares will also apply to donations of interests in limited partnerships.
- These new measures will apply to investments in limited partnerships made after April 21, 2015.
Gifts to Foreign Charitable Foundations
- Canadian registered charities are "qualified donees" under the Income Tax Act and donations made to them by Canadian taxpayers are eligible for the donation tax credit or deduction (for corporations). In addition, Canadian charities are permitted to make gifts to other qualified donees.
- Budget 2015 proposes to amend the Income Tax Act to allow foreign charitable foundations to be registered qualified donees if they receive a gift from the Government of Canada and if they are pursuing activities related to disaster relief or urgent humanitarian aid or are carrying on activities in the interest of Canada.
- This measure will apply on Royal Assent to the enacting legislation.
OTHER TAX MEASURES AND POLICY CHANGES
Repeated Failure to File Penalty
- Where a taxpayer fails to report income in a taxation year and has also failed to report income in any one of the three preceding taxation years, a penalty equal to 10% of the omitted income is incurred. This penalty is often disproportionate to the corresponding tax liability of the unreported income.
- Budget 2015 proposes to amend the
repeated failure to report income penalty to apply only when the
amount of income omitted is at least $500. The penalty will be
equal to the lesser of:
- 10% of the amount of income not reported; and
- 50% of the difference between the understatement of tax (or the overstatement of tax credits) related to the unreported income and any amount of tax paid in respect of the unreported income (e.g. tax withheld by an employer).
T1135 Form and Reporting Requirements for Foreign Assets
- Budget 2015 proposes to ease the compliance measures in respect of reporting foreign assets. The CRA is currently developing a new simplified foreign asset reporting system that will be used when the cost of a taxpayer's specified foreign property is less than $250,000 in a reporting period. The T1135 Form in its existing format will continue to apply when the cost of a taxpayer's specified foreign property is in excess of $250,000 in a reporting period.
Adjustments to Assessed Amounts Under Appeal
- A recent Federal Court of Appeal decision (Geoffrey Last v. The Queen) held that each source of income is to be considered in isolation and the assessed amount of each source cannot be increased after the reassessment period has expired. This is contrary to the CRA's position and interpretation.
- As a result, Budget 2015 proposes to amend the Income Tax Act to clarify that the CRA or a court can increase or adjust an amount included in an assessment that is under objection or appeal at any time, as long as the total amount of the assessment does not change.
Employment Insurance Premium Reduction
- Budget 2015 proposes to reduce the Employment Insurance (EI) premiums in 2017. The EI premium rate is expected to decrease from $1.88 to $1.49.
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.