Canada: Finance Forecast: 6 Areas To Watch In Budget 2018

Last Updated: February 27 2018
Article by John Oakey

Minister of Finance Bill Morneau has announced the 2018 federal budget will be tabled Feb. 27, 2018. Last year's budget was delivered with a projected deficit of $28.5 billion and focused on several key areas, including skills development, innovation and middle-class jobs, among others. While the government is usually tight-lipped on the precise content of the budget, this year's pre-budget report prepared by the House of Commons Standing Committee on Finance provides some indication on the government's considerations.

Here are 6 areas to watch:

Active proposals on passive investment?

The Department of Finance announced Dec. 13, 2017 the government will move forward with measures to limit the deferral of tax benefits for passive investments within private corporations. Details of this plan are expected to be included in Budget 2018; however, new measures will apply on a go-forward basis and ensure future income from current passive investments will be protected from additional taxes.

Tax proposals on passive investments within private corporations were originally introduced in July of 2017 with the Department of Finance's consultation paper on private corporations, Tax Planning Using Private Corporations. This paper introduced taxation methodologies; however, we are expecting draft legislation in the 2018 budget. The good news is this will provide the details desired by private company owners to understand the impact to their business and retirement plans. The bad news is we are expecting the draft legislation to be extremely complex.

Splitting hairs or splitting income? TOSI rules

There is speculation the government might alter the rules for tax on split income (TOSI), also known as dividend or income-sprinkling. Originally tabled in July, the rules for TOSI were fraught with complications and ambiguities. In response to considerable feedback, draft legislation was re-introduced in December; however, significant concerns remained. The Department of Finance stated, "The revised income sprinkling measures are proposed to be effective for the 2018 and subsequent taxation years. The measures will be legislated as part of the Budget process."1 We will be watching to see if there are any tweaks to the current draft legislation, or if they will be formally introduced into the 2018 budget as-is.

An educated guess: scientific research

There is good reason to expect an allocation of government funding into programs related to scientific and technological innovation. Morneau has stated the government "will reward curiosity and foster the kind of creativity that will allow us to innovate and maintain our competitive edge in the fast-paced and increasingly global economy."2 With that in mind, the budget could look towards future initiatives to support scientific and technological innovation. We are not aware of any potential changes to the scientific research and experimental development program administered by the Canada Revenue Agency, but we do expect the government will increase funding to various federal grants to bolster technological initiatives.

On the radar

Consistent with past Liberal government initiatives, the budget could contain initiatives or incentives to promote equality in the workplace. As such, it's reasonable to expect a line item detailing the allocation of funds promoting gender parity and pay equity in the workplace.

The Capital Gains Inclusion Rate is a regular topic item come budget time. Currently, taxpayers only pay tax on 50 per cent of capital gains, resulting in a capped tax rate ranging from 24 to 27 per cent across Canada. The rate differential between capital gains and other sources of income leads us to believe the government might increase the inclusion rate in the 2018 budget. Of course, with the U.S. tax rate on long-term capital gains capped at 20 per cent, any significant increase in the Canadian capital gains tax rate could be detrimental to Canada's competitiveness with the U.S. It will be interesting to see how the government balances this situation.

U.S. Tax reform has been a very hot topic with significant pressure being placed on the government to respond appropriately in the 2018 budget, especially with regard to corporate tax rates. Morneau has indicated there will be no "impulsive" measures to pre-empt U.S. reform; 3 however, expect mention of this looming issue to make an appearance on budget day. 

What to do?

It would be wise to examine your personal and business portfolios to fully appreciate the impending implications of Budget 2018. Our team of tax professionals will be analyzing Budget 2018 and providing comprehensive budget analysis. Stay tuned for details.

Footnotes

1 Government of Canada, "Backgrounder on Simplified Measures to Address Income Sprinkling", Department of Finance. Updated December 12, 2017, accessed February 21, 2018. https://www.fin.gc.ca/n17/data/17-124_1-eng.asp

2 Government of Canada, "Minister Morneau Sets Budget 2018 Date for February 27, 2018", Department of Finance. Published February 13, 2018, accessed February 15, 2018.  https://fin.gc.ca/n18/18-006-eng.asp

3 Ligaya, Armina. "Canada won't act in 'impulsive way' in response to U.S. tax cuts: Morneau." Financial Post, February 16, 2018, http://business.financialpost.com/pmn/business-pmn/morneau-talks-tax-cuts-small-biz-changes-with-private-sector-economists. Accessed February 21, 2018.

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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