Canada: Tax Letters: 2016 Canadian Federal Budget – Personal Tax Measures


Canada Child Benefit

The non-taxable Canada Child Benefit (CCB) will replace the Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB) assistance programs effective July 1, 2016.

Akin to the CCTB and UCCB, the new CCB will provide financial assistance in the form of monthly payments to families with children under the age of 18. A maximum benefit of $6,400 will be provided for each child under the age of 6 and $5,400 for children aged 6 to 17. These maximums begin to phase out where the adjusted family net income is between $30,000 and $65,000. The phase-out rates in this threshold range from 7 per cent for a one-child family up to 23 per cent for a family with 4 or more children. Once adjusted family net income exceeds $65,000, any remaining benefit is phased out at slower rates ranging from 3.2 per cent to 9.5 per cent.

The Budget broadens the definition of an eligible individual for purposes of the CCB to include an Indian within the meaning of the Indian Act provided that all other criteria under the definition are met.

Also beginning July 1, 2016, the children's special allowance is proposed to be increased to the same level as the CCB so that families with children in child protection agencies are treated consistently.

Family Tax Cut Credit

For the 2016 taxation year and beyond, the Budget proposes to eliminate the Family Tax Cut Credit that currently permits limited income splitting for couples with at least one child under the age of 18.

This credit allows a higher-income earning spouse or common-law partner to notionally transfer up to $50,000 of taxable income to their spouse or common-law partner in order to reduce the couple's combined tax liability by a maximum of $2,000.

Children's Fitness and Arts Tax Credits

The government proposes to halve the maximum eligible expenditures on which the 15 per cent refundable Children's Fitness and Art Tax Credits can be claimed in the 2016 taxation year, and will eliminate the credits in 2017.

In particular, the Budget proposes to reduce the Children's Fitness Credit maximum eligible amount from $1,000 to $500 in 2016 and eliminate it in 2017. The maximum eligible amount for the Children's Arts Tax Credit would be reduced from $500 to $250 in 2016 and, again, eliminated in 2017.

Education and Textbook Tax Credit

Effective January 1, 2017, the Budget proposes to eliminate the 15 per cent non-refundable Education and Textbook Tax Credits. Unused education and text book credits carried forward from prior to 2017, will remain available to be claimed in 2017 and subsequent years.

Teacher and Early Childhood Educator School Supply Tax Credit

The Budget proposes to introduce the new Teacher and Early Childhood Educator School Supply Tax Credit, a 15 per cent refundable credit based on the amount of expenditures, up to a maximum of $1,000, made for eligible supplies purchased on or after January 1, 2016. The credit is available to eligible educators who are teachers or early childhood educators that hold a valid certificate recognized by the province or territory in which they are employed. The credit cannot be claimed on expenditures claimed under any other provision of the Income Tax Act.

Top Marginal Tax Rate — Further Consequential Amendments

On December 7, 2015, the government announced that it will reduce the personal income tax rate in the second bracket from 22 per cent to 20.5 per cent in the 2016 taxation year. A new top tax bracket of 33 per cent on taxable income over $200,000 will be introduced as well.

The Budget proposes consequential amendments further to those already included in Bill C-2 which was tabled on December 9, 2015. These include the following:

  • Personal services business income earned by corporations will be subject to a 33 per cent tax rate, up from the previous rate of 28 per cent;
  • A reduction of the "relevant tax factor" under the foreign affiliate rules from 2.2 to 1.9;
  • On donations in excess of $200, a 33 per cent donation tax credit will be available to trusts that are subject to the 33 per cent rate on all their taxable income;
  • Excess contributions to employee profit sharing plans will be subject to the 33 per cent tax rate.

The above amendments are proposed to take effect in the 2016 taxation year.

Ontario Electricity Support Program

This program, which took effect on January 1, 2016, provides relief to low-income households for the cost of electricity via a monthly credit on a taxpayer's electricity bill. The Budget proposes to exclude such credits from a taxpayer's income so that other benefits subject to income threshold tests are not adversely impacted.

Northern Residents Deductions

The Budget proposes to increase the maximum Northern Resident Deduction from $8.25 to $11 per day for each member of a household that resides in a Northern Zone for at least six consecutive months beginning or ending in a particular taxation year. In cases where only one member of a household claims the deduction, the increase is proposed to be from $16.50 to $22 per day.  Taxpayers resident in an Intermediate Zone can only deduct half of the aforementioned amounts.

Mineral Exploration Tax Credit

Eligibility for the Mineral Exploration Tax Credit is proposed to be extended for one year under the Budget. That is, the credit will apply to flow-through share agreements entered into on or before March 31, 2017.

Labour-Sponsored Venture Capital Corporation (LSVCC) Tax Credit

The Budget proposes to reestablish the 15 per cent tax credit for a purchase of shares of a provincially registered LSVCC for the 2016 taxation year and beyond. However, the Budget does not reestablish the tax credit for a federally registered LSVCC; the credit will remain at 5 per cent in 2016 and will be eliminated in 2017.

Taxation of Switch Fund Shares

In general terms, a mutual fund corporation that is a "switch fund" allows its shareholders to exchange their shares for another class of shares in order to change their economic exposure to a different fund of the corporation. The provisions of the Income Tax Act currently deem such an exchange to not be a disposition. The Budget proposes to treat such an exchange after September 2016 as an FMV disposition.

Sale of Linked Notes

A linked note is a debt obligation that provides its holder with a return based on the performance of an index or reference asset. The underlying index or reference asset is normally unrelated to the business activities of the linked note issuer.

Investors that hold link notes as capital property have used a strategy whereby they sell their linked notes in advance of their maturity in order to get capital gains treatment on any appreciation as opposed to fully taxable deemed interest. The logic behind this strategy is that there is no deemed interest accrual rules that govern prescribed debt obligations because the maximum amount of interest is not determinable at the time of the sale. That is, interest can only be accrued and included in income when the amount becomes determinable, which is usually very near to maturity.

The Budget proposes to amend the prescribed debt obligation provisions to deem any gain on the sale of linked notes after September 2016 to be interest income.

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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