Canada: Tax Letters: 2016 Canadian Federal Budget Introduction

ECONOMIC GROWTH, JOB CREATION, STRONG MIDDLE CLASS

When the new government said last year that it would return Canada to deficits, few expected the numbers to jump to nearly $30 billion this year and next and add $100 billion in debt over the next five years. But lower-than-expected revenues have forced the government's hand, according to Finance Minister Bill Morneau, requiring increased spending to stimulate the sluggish economy and support the middle class.

Despite failing to make good on "key election promises relating to fiscal management," there are enough positive indicators in the budget that CPA Canada is taking a wait-and-see approach, calling it a "down payment on a long-term fiscal plan that charts a course to strengthen the Canadian economy." Among the positive signs are efforts to close tax loopholes, reduce tax evasion and increase tax compliance.

Building — and Spending — for Growth

In part, the Federal Government hopes to build its way to economic growth, spending $12 billion over five years on a range of infrastructure projects including public transit, affordable housing, water management for First Nations communities, climate change mitigation, early learning and childcare. The government predicts these investments will increase Canada's GDP by 0.2 per cent this year and 0.4 per cent in 2017.

The Liberals initially proposed $120 billion in infrastructure spending over 10 years. The plan for the remaining funds is expected later this year.

The bulk of the proposed additional program spending in the 2016 budget focuses on families, seniors, veterans, health care, post-secondary education, innovation and clean energy. These measures also aim to encourage growth or restore benefits eliminated by the previous government.

To balance all this spending, the government plans to close a number of domestic and international loopholes that permit organizations and individuals to avoid or defer tax, and provide the Canada Revenue Agency with $800 million over five years for compliance initiatives.

On top of these preliminary measures to limit tax evasion and deferral, the government has proposed a review of the tax system to reduce or eliminate inefficient tax measures.

Key Budget Measures for Business

The small business tax rate will remain at 10.5 per cent. The former government had scheduled regular decreases in the rate over the next few years, but Morneau has put those changes on hold. Business owners will also face stricter rules with regard to using partnerships or corporations to multiply access to the small business deduction and avoid tax.

The Eligible Capital Property (ECP) regime will be repealed and ECP will fall under a new Capital Cost Allowance class with a 100 per cent inclusion rate and 5 per cent annual depreciation rate. The transition will begin January 2017.

Key Personal Measures

As noted in the government's December 2015 update, the second marginal income tax rate has decreased from 22 per cent to 20.5 per cent and a new top tax rate of 33 per cent has been added for incomes above $200,000.
The government also returned the TFSA contribution limit to $5,500 (from $10,000) and promised to index the limit to inflation.

Beginning July 2016, the new Canada Child Benefit (CCB) will provide up to $6,400 for each child under age 6 and up to $5,400 for children aged 6–17. Only families with incomes below $30,000 per year will receive the full benefit. The CCB will replace the Canada Child Tax Benefit and Universal Child Care Benefit.

The family tax cut credit for families with at least one child under 18 at home and the children's fitness and arts tax credits will also be eliminated.

MEASURES THAT WERE NOT INTRODUCED

The Budget did not propose a number of measures that were either specifically mentioned in earlier government documents or that were speculated about in the community.

A statement made by the current Liberal government during the fall election campaign indicated that the 50 per cent reduction in the amount included in income in connection with certain stock option benefits would be limited to $100,000 of benefits realized in a particular year. The Budget made no mention of this measure.

There was speculation that the portion of a capital gain that would be taxable would be increased above the present 50 per cent inclusion rate. No such measure was introduced.

There was also speculation that the income earned by certain service corporations (such as professional corporations) would not be eligible for the small business deduction (SBD) unless the corporation had a certain minimum number of employees. No such measure was introduced.

The April 2015 Budget proposed an exemption from capital gains tax with respect to certain dispositions of private company shares and real estate where the cash proceeds are donated to a charity within 30 days after the disposition and the private company shares or real estate are sold to a purchaser who deals at arms-length with both the donor and donee. This proposal has been dropped.

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