Canada: Budget Season 2019: Spending Across The Board With Small Tax Changes

Last Updated: May 27 2019
Article by Joseph Gill

The purpose of this blog post is to provide a high-level review of the key items coming out of both the Federal Budget (released on March 19, 2019), and the Saskatchewan Budget (released on March 20, 2019). This post is not exhaustive of all measures proposed in the Budgets but rather takes a focus from the perspective of a business owner or entrepreneur. As a result, the measures discussed are those likely to have the most impact on the business sector.

No Tax Rate Changes

Neither the Saskatchewan nor the Federal budgets contained any changes in either personal or corporate tax rates.

Employee Stock Options

For "large, long-established, mature [companies]" (term not yet defined) granting in excess of $200,000 of options in a given year to any person, the Federal Budget introduces new changes which remove the tax preference previously given to options. Using an example:

Grant Date Exercise Date Sale Date
CEO is granted options to acquire 100,000 shares of Corp at a price of $50 per share.

CEO exercises all her options at a time when the price per share is $70 (but she only pays $50 per share).

CEO sells all her 100,000 optioned shares for $80 per share.

Tax Implications
No tax implications but total value of "optioned shares" is $5,000,000 (i.e. 100,000 x $50)

CEO incurs taxable benefit of $2,000,000 (i.e. 100,000 shares x $20 benefit). However, benefit is likely eligible for a deduction so only 50% is taxable (i.e. $1,000,000).

If Corp is controlled by Canadians, CEO won't have to pay the tax on the benefit until the Sale Date.

CEO incurs capital gain equal to $1,000,000 (i.e. $80 per share sale price less $70 per share acquisition price from Exercise Date). Only $500,000 of this amount is taxable.

Assuming the CEO was able to defer the taxation of the benefit until the Sale Date, the CEO will also have to pay a taxable benefit equal to $1,000,000.

Tax Implications (Proposed System)
Same as current system.

The 50% deduction is only available on 4,000 of the options (i.e. $200,000 worth of "optioned shares"). This results in a $80,000 taxable benefit.

The remaining 96,000 options will not benefit from the 50% deduction and so will be fully taxable. This means $1,920,000 will be fully taxed as a
benefit (an increase of $920,000 in taxes over the current system).

Proposed system is unclear whether the $1,920,000 benefit would also benefit from the deferral to the Sale Date (as it would with the current system).

Same capital gain result as under current system. Also, same taxable benefit results as under current system (with exception that amount of taxable benefit will be larger).

Further details will be released before the summer of 2019. Thankfully, any changes will apply on a go-forward basis and will not apply to options granted before the legislative proposals.

Greater Access to Scientific Research & Experimental Development (SR&ED)

SR&ED is a federal tax incentive that provides a tax credit to companies based on their research & development spend. Specifically, the SR&ED rules provide a refundable investment tax credit to Canadian-controlled private corporations (CCPCs) at a rate of 35% on qualifying expenditures up to $3 million. The expenditure limit is phased out based on the taxable income and taxable capital employed in Canada of the taxpayer (and members of a commonly-controlled group).

The Federal Budget proposes to remove taxable income as a factor in determining a CCPCs expenditure limit for purposes of SR&ED. As a result, CCPCs with taxable capital of up to $10 million will benefit from unreduced access to SR&ED. CCPCs with taxable capital in excess of $10 million will be entitled to a reduced SR&ED credit, and the credit will be eliminated for CCPCs with taxable capital of $50 million or more.

This measure applies to tax years that end on or after March 19, 2019.

Farmers and Fisherman Small Business Deduction Fix

Under prior rules, farmers and fishermen who sold to cooperatives in which they had an interest (e.g. grain elevator) would be prevented from claiming the federal small business deduction on income generated from that sale. The Federal Budget provides a fix here: retroactive to tax years that begin March 21, 2016, farmers' or fishers' income would be eligible for the small business deduction if their produce is sold to an arm's length corporation.

Changes to Cannabis Taxation

The Federal Budget proposes to subject three new classes of cannabis products (edibles, extracts, and topicals) to excise duties based on the quantity of total tetrahydrocannabinol (THC) contained in the final product. This THC-based duty will be imposed at the time of the packaging of the product and becomes payable when it is delivered to a non-cannabis licensee. The combined federal-provincial-territorial THC-based duty is proposed to be $0.01 per milligram of total THC.

These changes are proposed to come into force on May 1, 2019.

Potash Production Tax Changes

Saskatchewan levies a Crown royalty on potash produced from Crown lands and a Potash Production Tax (PPT) on potash produced from both Crown and freehold lands in the province. The base payment component of the PPT is currently reduced by (a) the amount of Crown and freehold royalties paid, and (b) the amount of the Saskatchewan Resource Credit (equal to 0.75 percent of the value of potash sales).

The Saskatchewan Budget proposes that (a) Crown and freehold royalties will no longer be deductible in determining the base payment or the profit tax, and (b) the Saskatchewan Resource Credit is eliminated for potash production.

This measure is effective April 1, 2019.

Zero Emissions Vehicles

The Federal Budget proposes that zero-emission vehicles be eligible for a full tax write-off in the year they are put in use. Qualifying vehicles will include (a) electric battery, (b) plug-in hybrid (with a battery capacity of at least 15 kWh), or (c) hydrogen fuel cell vehicles, including light-, medium- and heavy-duty vehicles.

Immediate expensing will apply to eligible vehicles purchased on or after March 19, 2019 and before January 1, 2024. Capital costs for eligible zero-emission passenger vehicles will be deductible up to a limit of $55,000 plus sales tax (with the limit to be reviewed annually to ensure it is appropriate as market prices change).

Entrepreneurial Funding

The Federal Budget proposes providing funds to the following programs:

  • Coding Skills – $60M over 2 years (starting in 2019-20) to support the CanCode Program overseen by Innovation, Science and Economic Development Canada. This program supports opportunities for K-12 students to learn digital skills including coding, data analysis, and digital content development.
  • Business Partnerships – $150M over 2 years (starting in 2020-21) to augment the existing Canada Student Work Placement Program with funding to create partnerships with innovation businesses to create approximately 20,000 work-integrated learning opportunities.
  • Global Talent Stream – Proposal to make the Global Talent Stream Programpermanent by investing $35.2M over 2 years (starting in 2019-20) with $7.4M per year ongoing. The program allows Canadian employers to hire highly-skilled foreign workers in an efficient manner.
  • Futurpreneur Canada – Funding of $38M over 5 years (starting in 2019-20). Futurpreneur provides entrepreneurs with mentorship, learning resources and start-up financing. $3M of this funding will be specifically targeted to Indigenous entrepreneurs.
  • Tourism Funding – Funding of $58.5M over 2 years (starting in 2019-20) to the Regional Development Agencies for the creation of a Canadian Experiences Fund. That fund would support Canadian businesses and organizations seeking to create, improve or expand tourism-related infrastructure—such as accommodations or local attractions—or new tourism products or experiences. The investments would focus on five categories: (1) tourism in rural and remote communities, (2) Indigenous tourism, (3) winter tourism, (4) inclusiveness, specifically for the LGBTQ2 community, and (5) farm-to-table tourism, which is also known as culinary tourism.

There is also funding of $5M set aside for Destination Canada for a tourism marketing campaign that will help Canadians to discover lesser-known areas, hidden national gems and new experiences across the country

  • Indigenous Business Development – Several measures are proposed here:
    • Funding of $78.9M over 5 years (starting in 2019-20) and $15.8M per year ongoing, to support Indigenous entrepreneurs and economic development through the<<a rel="noreferrer noopener" aria-label=" (opens in a new tab)" href="" target="_blank">Community Opportunity Readiness Program. This program assists with building business plans, expanding existing Indigenous led-businesses, and launching new Indigenous-led start-ups.
    • Funding of $50M over 5 years (starting in 2019-20) to establish Métis Capital Corporations, which will support the start-up and expansion of small and medium-sized Métis businesses.
    • Funding of up to $100M to the Social Finance Fund and the Business Development Bank of Canada to support the Indigenous Growth Fund. The fund provides capital to Indigenous entrepreneurs.
    • Funding of $17M over 3 years (starting in 2020-21) to expand the Aboriginal Entrepreneurship Program. This program provides a range of services and supports to Indigenous businesses in Canada.
  • Musical Entrepreneurs – Funding of $20M over 2 years (starting in 2019-20) to the Canada Music Fund so that the fund can enhance its support for the production, promotion and distribution of Canadian music.
  • Performing Arts Entrepreneurs – Funding of $16M over 2 years (starting in 2019-20) to the Canada Arts Presentation Fund. The fund supports not-for-profit professional performing arts organizations—including festivals and performing arts series—in all regions of the country.
  • Cyber Security – Funding of $80M over 4 years (starting in 2020-21) to support multiple Canadian cyber security networks across Canada that are affiliated with post-secondary institutions. The networks—to be selected through a competitive process—will expand research, development and commercialization partnerships between academia and the private sector, and expand the pipeline of cyber security talent in Canada.

Tax Enforcement Funding

The federal Budget proposes $65.8M over 5 years to update Canada Revenue Agency's (CRA) IT systems. There is an additional $50M of funding over 5 years to create four new dedicated residential and commercial real estate audit teams in high-risk regions to ensure tax compliance.

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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