Canada: Federal Budget 2017 Tax Highlights

Last Updated: March 27 2017
Article by Crowe Soberman's Tax Group

On March 22, 2017, Finance Minister Bill Morneau tabled the second federal budget ("Budget 2017") of the Justin Trudeau-lead Liberals. Budget 2017 focuses again on the empowerment of the middle class by providing additional skills training and life-long learning initiatives, supporting a new National Housing Strategy, and creating additional affordable child care spaces. It further aims to close tax loopholes, eliminate perceived abuses of the income tax system, and allocate resources to combat income tax evasion and avoidance.

Canada's deficit for 2016-2017 is expected to be $23.0 billion, growing to $28.5 billion in 2017-2018, and gradually decreasing thereafter. These estimates decrease the possibility of Canada returning to a balanced budget in the near future.

Details of the significant tax measures proposed in Budget 2017 are outlined below or download the full Budget Commentary here.

Please contact us for additional information on any of these measures.

Business Tax Measures

Tax Planning Using Private Corporations

  • While Budget 2017 does not address any specific measures that impact the current taxation of private corporations and their shareholders, it does include a mandate to review and provide future tax changes to curtail certain tax planning strategies that provide tax advantages to high income earners which are not available to other Canadians.
  • The Department of Finance will be looking to reduce the income inequality in the current tax system that comes from income tax relief strategies which disproportionately benefit the "wealthy".
  • Specifically, Budget 2017 identifies the following strategies used by private corporations that are perceived to reduce the personal taxes of high income earners:

    • Income splitting arrangements using private corporations – such strategies include shifting income that would otherwise be taxed in the hands of a high income earner to a family member who is subject to lower personal income tax rates or who may not be taxable at all.
    • Holding a passive investment portfolio inside a private corporation – with corporate tax rates generally lower than personal income tax rates, private corporations can more easily facilitate the accumulation of earnings that can be invested in passive assets.
    • Converting salary and/or dividend income into capital gains – capital gains are subject to a lower tax rate compared to salary and dividends. If a private corporation is able to distribute funds to a shareholder as a capital gain, such funds will be subject to a much lower tax rate than they otherwise would be if they were distributed as salary or dividends.
  • The specific planning arrangements that are considered by the Department of Finance to be offensive are currently unknown. Budget 2017 only provides the above noted examples of the type of strategies that reduce the personal taxes of high income earners and do not achieve tax fairness.
  • A report will be released in the coming months that will address these issues in further detail with proposed policy responses.

Taxation of Professionals

  • Budget 2017 proposes to eliminate the election by designated professionals (accountants, dentists, lawyers, medical doctors, veterinarians, and chiropractors) to use billed-basis accounting. A transitional period is provided to phase-in the inclusion of work in process into income. For the first taxation year that begins on or after March 22, 2017, 50% of the lesser of the cost and the fair market value of the professional's work in process will be taken into account in determining the value of inventory held by the business. For the second, and each successive, taxation year that begins on or after March 22, 2017, the full amount of the lesser of the cost and the fair market value of the work in process will be taken into account in valuing inventory.

Meaning of Factual Control

  • Budget 2017 proposes amendments to income tax legislation to clarify that, in determining whether factual control of a corporation exists, factors may be considered that are not limited to those that have "a legally enforceable right and ability to effect a change to the board of directors or its powers, or to exercise influence over the shareholder(s) who have that right and ability".
  • The concept of control of a corporation is generally used to restrict access to specific tax advantages within a corporate group. There are two forms of control of a corporation that exist under the Income Tax Act – de jure (legal) control and de facto (factual) control. De jure control is typically determined based on the right to elect the majority of the board of directors. De facto control has a much broader test than that of de jure control, and is determined to exist where a person has influence that, if exercised, would result in control, in fact, of the corporation.
  • De facto control is often relevant in determining whether two or more Canadian-controlled private corporations are "associated". Association may impact whether those corporations can benefit from certain corporate tax benefits such as the $500,000 Small Business Deduction Limit, and enhanced Scientific Research and Experimental Development tax credits.
  • Budget 2017 proposes to clarify that for tax years beginning on or after the Budget date, in determining whether de facto control of a corporation exists, factors that may be considered are not limited to those that have "a legally enforceable right and ability to effect a change to the board of directors or its powers, or to exercise influence over the shareholder(s) who have that right and ability". Under the proposed measures, de facto control may exist notwithstanding the fact that a person does not have a legally enforceable right and ability to effect a change to the board of directors or its powers, or the ability to exercise influence over the shareholder(s) who have that right and ability.

Electronic Distribution of T4 Information Slips

  • For the 2017 year, employers with sufficient privacy policy protocols will be able to electronically distribute T4s to employees without their prior expressed consent.

Timing of Gains and Losses on Derivatives

  • The budget introduces a measure which will permit taxpayers to elect to recognize their gains and losses from derivatives held on income account using a mark-to-market method. The election will be available for taxation years that begin on or after March 22, 2017 and once made, will remain effective until it is revoked but only with the consent of the Minister of National Revenue.
  • Budget 2017 proposes to target "straddle" transactions through the introduction of a stop-loss measure. A "straddle" transaction is one where a taxpayer enters into two or more positions which are expected to generate equal gains and losses. The loss position is realized before the end of a taxation year and is used to offset other income. The gain position is realized in a subsequent taxation year and the taxes thereon are deferred, sometimes indefinitely, if successive loss positions are realized continuously. A stop-loss rule will be introduced to defer the realization of any loss in these situations to the extent of any unrealized gains in any offsetting position.

Investment Fund Mergers

  • Budget 2017 proposes to extend the mutual fund merger rules to allow the reorganization of a switch corporation into multiple mutual fund trusts on a tax-deferred basis.
  • Starting after 2017, segregated funds will be permitted to merge on a tax-deferred basis, similar to the existing rules for mutual fund mergers.

Other Business Tax Measures

  • The investment tax credit for child care spaces will be eliminated for expenditures incurred after March 21, 2017.
  • Class 43.1 (30%) and Class 43.2 (50%) will be expanded to include geothermal energy equipment used primarily for the purpose of generating heat and electricity, as well as certain geothermal heating district energy systems equipment.
  • Expenditures in connection with drilling and completing a discovery well, which are incurred after 2018 will be considered a Canadian Development Expense (CDE) eligible for a 30% deduction on a declining-balance basis, rather than a Canadian Exploration Expense (CEE) eligible for a 100% deduction in the year incurred. In addition, starting in 2019, small oil and gas corporations will no longer be permitted to classify the first $1 million of CDE as CEE.
  • Corporations that donate medicine from their inventory to a charity after March 21, 2017 will no longer be eligible for the additional deduction for gifts of medicine which was equal to the lesser of the cost of the medicine or 50% of the fair market value of the medicine donated in excess of its cost.

International Tax Measures

Extending the Base Erosion Rules to Foreign Branches of Life Insurers

  • Currently, the foreign business income earned through a foreign branch of a Canadian life insurance corporation is not subject to tax in Canada. To ensure that income from the insurance of Canadian risks does not escape taxation in Canada, Budget 2017 proposes to fix this loophole by introducing a provision similar to the foreign accrual property income specific anti-avoidance rule that exists for foreign affiliate corporations of Canadian life insurers.

Personal Tax Measures

Public Transit Tax Credit

  • Budget 2017 proposes to eliminate the public transit tax credit effective as of July 1, 2017.

Home Relocation Loans Deduction

  • Budget 2017 proposes to eliminate the deduction of a benefit in respect of eligible home relocation loans.

Medical Expense Tax Credit for Reproductive Expenses

  • Budget 2017 proposes to clarify the application of the medical expense tax credit for costs related to the use of reproductive technologies (e.g., in-vitro fertilization procedures and associated expenses, and prescribed fertility medication) to individuals who require medical intervention in order to conceive a child, such as single parents and same-sex couples.
  • This measure will apply to the 2017 and subsequent taxation years. However, a taxpayer will be able to elect, in his/her tax return, for this measure to apply to any of the immediately preceding 10 taxation years.

Changes to Caregiver Credits

  • Budget 2017 proposes to eliminate the infirm dependant, the caregiver, and the family caregiver tax credits. Budget 2017 proposes to replace these credits with a new Canada Caregiver Credit. The new Canada Caregiver Credit amount will be:

    • $6,883 in respect of infirm dependants that are parents/grandparents, brothers/sisters, aunts/uncles, nieces/nephews, or adult children of the claimant or of the claimant's spouse or common law partner.
    • $2,150 in respect of infirm dependants that are the claimant's spouse or infirm minor child.
  • The new Canada Caregiver Credit will be reduced dollar-for-dollar by the dependant's net income above $16,163 (for 2017). The dependant will not be required to live with the caregiver in order to claim the new Canada Caregiver Credit.

Tuition Tax Credit for Occupational Skills Courses

  • Budget 2017 proposes to extend the eligibility criteria for the tuition tax credit to fees for an individual's tuition paid to a university, college, or other post-secondary institution in Canada for occupational skills courses that are not at the post-secondary level.

Anti-Avoidance Rules for Registered Plans

  • The anti-avoidance rules, including the advantage rules, the prohibited investment rules and the non-qualified investment rules, will be extended to Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs). Swap transactions undertaken to ensure that an RESP or RDSP complies with the new rules will be permitted until the end of 2021. Plan holders may elect by April 1, 2018 to pay Part I tax, rather than the advantage tax, on distributed investment income generated from an investment that will be considered a prohibited investment as a result of the Budget 2017 measures.

Other Personal Tax Measures

  • Effective March 22, 2017, nurse practitioners will be permitted to certify an individual's disability for purposes of Form T2201 – Disability Tax Credit Certificate.
  • The Mineral Exploration Tax Credit for flow-through share investors will be extended for one more year to March 31, 2018.

Sales and Excise Tax Measures

Taxi and Ride-Sharing Services

  • To ensure that the GST/HST applies consistently to taxi services and ride-sharing services (e.g., Uber), the Budget proposes to amend the definition of a taxi business to require providers of ride-sharing services to register for the GST/HST and charge the tax on their fares in the same manner as taxi operators. The amendment will be effective as of July 1, 2017.

Opioid Overdose Treatment Drug – Naloxone

  • The Budget proposes to add the drug, Naloxone (and its salts), to the list of GST/HST-free non-prescription drugs when used to treat life-threatening conditions. This measure will not apply to purchases or importations before March 23, 2017 for which GST/HST was charged, collected, remitted or paid.

GST/HST Rebate to Non-Residents for Tour Package Accommodations

  • The Budget proposes to repeal the GST/HST rebate that is currently available to non-residents for the GST/HST paid in respect of the Canadian accommodation portion of eligible tour packages.

Tobacco and Alcohol Tax

  • Effective March 23, 2017, the 10.5% tobacco manufacturers' surtax will be eliminated. At the same time, tobacco excise duty rates will increase.
  • All cigarettes held as inventory by manufacturers, wholesalers and retailers on March 22, 2017 will be subject to an inventory tax of $0.00265 per cigarette (subject to certain exemptions). Taxpayers will have until May 31, 2017 to file these returns and pay the inventory tax.
  • Budget 2017 proposes to increase the excise duty rate on alcohol products by 2%.

Other Measures

Tax Evasion and Avoidance

  • Budget 2017 will invest almost $524 million in the next five years to:

    • Increase verification activities;
    • Hire additional tax auditors and specialists to focus on the underground economy;
    • Target high-risk and abusive tax avoidance cases; and
    • Improve the quality of investigative work targeting criminal tax evaders.

Expanding Employment Insurance Benefits

  • Budget 2017 proposes to provide new caregiving benefits of up to 15 weeks. As well, parental benefits will become more flexible, permitting parents to receive their benefits over 18 months at a lower benefit rate.

Ecological Gifts Program

  • The Budget proposes several measures to protect gifts of ecologically sensitive property. The proposals will apply to transactions taking place after March 22, 2017.
  • Where these gifts are transferred between organizations for consideration, the recipient of the property will be subject to a 50% tax to the extent it either changes the use of the property, or disposes of the property without the consent of Environment and Climate Change Canada. The 50% tax currently applies to donated land.
  • The Budget also proposes that private foundations are no longer allowed to receive ecologically sensitive property gifts.

Download Crowe Soberman's full Budget Commentary here.

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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Crowe Soberman's Tax Group
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