Canada: What Tax Measures Could We See In The 2016 Federal Budget?

The 2016 federal budget is scheduled to be tabled on March 22. So, what tax measures can we expect to see in this year's federal budget?

Following the Liberal party's win in the October federal election, the government acted quickly to implement a number of the tax measures that were included in their election platform, as well as some new measures, specifically:

  • a 4% increase in the top federal rate of tax (from 29% to 33%) for taxable income over $200,000;
  • a reduction in the second federal tax bracket rate from 22% to 20.5%;
  • a reduction in the annual Tax-Free Savings Account (TFSA) contribution limit from $10,000 to $5,500; and
  • some unexpected changes to several tax measures affecting Canadian-controlled private corporations (CCPCs) and other private corporations.

You can read more about these changes in our recent releases titled New Liberal government announces tax measures and Liberal government implements measures impacting the taxation of CCPCs.

As part of its campaign, the Liberal government commented that it would conduct a wide-ranging review of the tax expenditures that now exist, with the objective of looking for opportunities to reduce tax benefits that help individuals with income of more than $200,000 per year. Although not an expenditure, the first bullet point above is clearly targeted at this group. It's not clear what additional measures, if any, might be proposed in this year's budget.

Nevertheless, it is expected that the 2016-17 federal budget will fulfil a number of other promises that were included in the Liberal election platform. Some of these tax changes are very likely, as it has already been announced that these changes will be forthcoming. For example, the Liberals have indicated that they intend to eliminate the family tax cut for the 2016 taxation year and replace the Universal Child Care Benefit (UCCB) with a new income-tested Canada Child Benefit.1 Changes to the stock option rules are also expected. It remains to be seen how many of the other measures will be introduced.

One area we will be watching closely is how the government intends to respond to its statement that it will "ensure that CCPC status is not used to reduce personal income tax obligations for high-income earners, rather than supporting small businesses". Our release 2015 election results: What the Liberal tax platform could mean for you and your business provides more details on how the government could address this issue.

As with any budget, there's no telling what types of changes the government will include.2 However, since proposed measures often take effect on budget day, the best course of action is to address all tax-sensitive transactions before that day. For example, there is some conjecture that there may be an increase in the capital gains inclusion rate (possibly from 50% to 66 2/3% or 75%). Although we can't comment on any likelihood that this rate will increase, certain pre-budget planning opportunities should be considered where a significant capital asset sale is contemplated post-budget date.

There are also a number of outstanding measures announced by the previous government in last year's federal budget. These measures include

  • amendments to subsection 55(2) to potentially increase the number of situations where a tax-free inter-corporate dividend could be re-characterized as a capital gain;
  • an exception to the Regulation 102 employee withholding tax rules when certain conditions are met (although these rules have not yet received Royal Assent, the CRA has started to administer this change);
  • proposals to exempt from tax capital gains realized on the disposition of shares of private corporations or real estate where the cash proceeds of disposition are donated to a qualified donee within 30 days after the disposition (applicable to donations made in respect of dispositions occurring after 2016);
  • amendments to allow a registered charity to hold an interest in certain limited partnerships; and
  • a tightening of the anti-avoidance rules for captive insurance companies.

It will be interesting to see if this budget includes any additional commentary on any of the above tax measures.

The following chart summarizes the possible tax measures that could be included in the upcoming federal budget.

Please contact one of our tax practitioners if you would like to discuss these possible tax changes and the implications they could have on you or your business.

To continue reading this article, please click here

Footnotes

1 This change will be effective July 1, 2016.

2 The House of Commons Standing Committee on Finance is conducting its pre-budget hearings February 16th – 19th. Their report is expected soon after.

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.

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