On March 19, 2019, the Department of Finance (Canada) tabled a budget (the “Budget”) in anticipation of its upcoming fall election. Given the substantial tax changes proposed (and enacted) in the last few federal budgets under the Minister of Finance, Bill Morneau, this budget is a sigh of relief. The Budget contained few major tax changes. The highlights of the Budget include:
- Proposed changes to the taxation of stock option granted to employees
- Beneficial ownership of shares in a corporation – enhanced reporting and sharing of information with tax authorities and law enforcement
- Scientific Research and Experimental Development (“SR&ED”) – elimination of income threshold for refundable tax credits
- Carrying on a business in a Tax Free Savings Account (“TFSA”) – joint and several liability of TFSA holders for penalty taxes if carrying on a business in a TFSA
- Advanced Life Deferred Annuities – ability to defer withdrawal of certain amounts in registered plans until age 85
- Home Buyers Plan – a person may draw $35,000 (increased from $25,000) from his/her registered retirement savings plan. The Home Buyers Plan will also apply on a breakdown of marriage (even if not first home)
The following is a brief discussion of the highlights in the Budget that may be relevant to Canadian business owners and high net worth individuals.
Personal Tax Measures
Annuities Allowed under Registered Plans
The Budget proposes to expand the scope of annuities permitted under certain registered plans. New “advanced life deferred annuities” (“ALDAs”) will be permitted under registered retirement savings plans, registered retirement income funds (“RRSPs”), deferred profit sharing plans, pooled registered pension plans and defined contribution registered pension plans, and new “variable payment life annuities” (“VPLAs”) will be permitted under pooled registered pension plans and defined contribution registered pension plans. Currently, an annuity purchased through a registered plan must begin after the annuitant turns the age of 71. The Budget allows an annuitant to purchase ALDAs and VPLAs in a registered plan and defer the commencement of the annuity until after the annuitant turns 85. This means that ALDAs and VPLAs would reduce the amount that an annuitant is forced to withdraw annually from a registered plan until much later.
Carrying on Business through a TFSA
Currently, the trustee of a TFSA is the only person liable for any tax payable by the TFSA (i.e., jointly with the TFSA). The Budget extends joint and several liability to the holder of a TFSA for tax payable by a TFSA that carries on a business or that holds non-qualified investments. In this way, the TFSA holder could be liable if the assets in the TFSA are insufficient to pay the tax. The Budget will also limit the trustee’s liability to the amount of property remaining in the TFSA plus distributions made on or after the date that a notice of assessment of tax is sent to the TFSA.
Home Buyer’s Plan
Currently, first-time home buyers can withdraw up to $25,000 from their RRSPs tax-free to purchase or build a home. These withdrawals must be repaid over a 15-year period or included in the individual’s income if not repaid. The Budget proposes to increase the withdrawal limit to $35,000 for individuals ($70,000 for a couple). It also proposes to extend access to the Home Buyer’s Plan to individuals who experience a breakdown of a marriage or common-law partnership, even if they are not purchasing a first home.
Corporate Tax Measures
Scientific Research and Experimental Development Tax Credits
The SR&ED tax incentive program provides a 35% refundable tax credit to certain Canadian-controlled private corporations (“CCPCs”) that meet certain income and asset limits. Currently, the refundable SR&ED credit is gradually phased out when taxable income in the prior year exceeds $500,000. This income threshold will be eliminated for taxation years that end after March 18, 2019. The phase out of the enhanced credit will still apply to large CCPCs with taxable capital over $10 million.
Other Measures to Watch for in 2019
The Budget signaled the government’s intention to limit the availability of the employee stock option deduction for high-income employees or employees of large, established corporations. The Budget proposes to apply a $200,000 annual cap on employee stock option grants, based on the fair market value of the underlying shares at the time of the grant. For start-ups and rapidly growing Canadian businesses, employee stock option benefits would remain uncapped. The $200,000 limit is intended to align Canada’s stock option treatment with that of the U.S. There are no specific proposals at this time. Further details of this measure will be released before the summer of 2019.
Beneficial Ownership Transparency
The Canada Business Corporations Act (“CBCA”) was amended in December 2018 to require federally incorporated corporations to maintain beneficial ownership information. The Budget proposes to amend the CBCA to allow the sharing of such information with tax authorities and law enforcement. It indicates that the federal government will collaborate with the provinces and territories to improve corporate ownership transparency.
Enhanced Real Estate Audit Enforcement
The Budget proposes to set aside $50 million over five years for the creation of four new dedicated real estate audit teams (in British Columbia and Ontario) to ensure that: taxpayers report sales of their principal residence; capital gains from the sale of other real estate is properly reported; money made on real estate flipping is reported as income; commissions earned are reported as taxable income; and GST/HST is properly remitted by builders of new residential properties. As part of this endeavour, CRA intends to work with provincial levels of government to monitor purchases of Canadian real estate.
Intergenerational Business Transfers
The federal government will continue to assess and develop new proposals to accommodate intergenerational transfers of businesses.
Excise duties will apply to edible cannabis, cannabis extracts (e.g., oils) and cannabis topicals at a flat rate based on the THC levels contained in the final product.
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