Canada: Tax Letters: 2017 Federal Budget Highlights

On March 22, 2017, Finance Minister Bill Morneau tabled the 2017 Federal Budget. As in prior years, there was much anticipation leading up to the announcement as many speculated on the tax measures that would be announced. Among these speculated measures were changes to the taxation of capital gains and the stock option deduction, the latter of which was mentioned in the Liberal Party's Tax Platform leading up to the 2015 federal election. However, these particular items were not mentioned in the Budget. Our highlights of this year's Federal Budget are summarized below.

Private Corporation Tax Planning

The government plans on reviewing certain tax planning strategies involving high-income individuals and private corporations, which the government believes may result in these individuals receiving unfair tax advantages. The Budget specifically referred to the following three tax planning strategies:

  • Sprinkling income using private corporations. Sprinkling income among more than one individual can lead to tax advantages as the income that would otherwise be realized by an individual who is subject to a high personal tax rate can instead be realized by a family member who is subject to a lower personal tax rate (or who may not be taxable at all).
  • Holding a passive investment portfolio inside a private corporation. Investing through a corporation may yield advantages compared to otherwise similar investors. This is because lower corporate tax rates can facilitate the accumulation of earnings that can be used for investing.
  • Converting regular income into capital gains. Reporting personal income as capital gains is usually more beneficial than reporting income as salaries or dividends as one-half of capital gains are included in income.

At a later date, the government will release a paper that will discuss the nature of the issues surrounding these tax planning strategies and set out proposed policy responses.

Employment Insurance ("EI") Parental and Maternity Benefits

The Budget proposes changes to EI parental benefits that will allow parents to choose to receive the benefits over a longer period of up to 18 months at a lower benefit rate of 33 per cent of average weekly earnings. Such benefits will continue to be available at the existing rate of 55 per cent over a period of up to 12 months. Furthermore, the Budget proposes to expand the period during which women can claim EI maternity benefits from up to 12 weeks before their due date (currently the period is up to 8 weeks before the due date).

Personal tax measures

The government has proposed some changes for personal tax credits in the 2017 Budget. Some notable items implemented for 2017 are as follows:

  • Canada Caregiver Credit – This new tax credit is a consolidation of the three credits currently available being, the infirm dependent credit, the caregiver credit, and the family caregiver credit. This will simplify claiming credits for caregivers and the amount will be consistent with the three credits previously available.
  • Public Transit Credit – Effective July 1, 2017. The Federal government has eliminated the public transit credit. Taxpayers will no longer be able to claim amounts paid for public transit costs incurred after June 30, 2017.
  • Tuition Tax Credit – The eligibility criteria for the tuition tax credit has been expanded to include programs at a post-secondary institution in Canada that are occupational skills courses that are not at a post-secondary level.

Elimination of the WIP deferral for professional corporations

Work in progress of a designated professional (i.e. accountants, lawyers, dentists, medical doctors, vets and chiropractors) is generally reported as revenue when the work is billed to the client. This concept is known as "billed-basis accounting". Budget 2017 provides that "billed-basis accounting" is no longer an option for designated professionals in tax years commencing after Budget Day 2017, March 22, 2017.

Finance has granted a transitional period for the affected designated professionals. For tax years that commence on or after March 22, 2017 (i.e. April 1, 2017 for a March 31, 2018 year-end), the professional practice will be eligible to deduct 50% of the lessor of cost and fair market value of the unbilled work in progress. Then, in all subsequent years, no deduction on unbilled work-in-progress is available.

Since the majority of professional practices affected have a calendar tax year (December 31), the 50% deduction will be available in 2018 and then starting in 2019, no deduction for work-in-progress will be allowed. Those professional practices with off-calendar year-ends will be required to track their costs of these work-in-progress balances sooner.

Resource Measures

Expenditures relating to drilling or completing a discovery well are considered Canadian exploration expenses ("CEE") and fully deductible in the year incurred. The Budget proposes to classify such expenditures that are incurred after 2018 as Canadian development expenses ("CDE"), which are deductible on a 30% declining-balance basis. Expenditures incurred in 2019 that could have been deemed to be incurred in 2018 due to the "look-back" rule will be subject to this measure, but expenses incurred before 2021 pursuant to a written commitment to incur those expenses entered into before March 22, 2017 will not be subject to this measure.

In addition, Budget 2017 proposes to no longer permit eligible small oil and gas companies (i.e. with taxable capital employed in Canada of not more than $15 million) to treat the first $1 million of CDE as CEE when renounced to shareholders under a flow-through share agreement. This measure will apply in respect of expenses incurred after 2018 (including expenses incurred in 2019 that could have been deemed to be incurred in 2018 because of the "look back" rule), with the exception of expenses incurred after 2018 and before April 2019 that are renounced under a flow-through share agreement entered into after 2016 and before March 22, 2017.

For further details on these and other proposals in the Budget, please follow the link below for a full commentary.

Federal Budget Commentary 2017_FINAL

Looking for more information on specific sections? We have provided some quick links for you:

2017 Federal Budget Introduction

2017 Federal Budget – Business Income Tax Measures

2017 Federal Budget – Personal Income Tax Measures

2017 Federal Budget – Charities and Non-Profit Organizations

2017 Federal Budget – International

2017 Federal Budget – Sales Tax, Excise Tax and Other Measures

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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