01 Mar 2018
2018 Federal Budget Summary - Key Tax Measures Proposed
The 2018 Federal Budget was tabled on February 27, 2018. The budget focused on strengthening Canada's middle class through tax fairness, providing gender equality, parental leave and many other areas of focus in line with the promises made by the Liberal government.
The 2018 Federal Budget summary below highlights some of the tax measures proposed.
Passive Investment Income
Grind to Small Business Deduction
The changes that were discussed in the July 18 2017 white paper did not come to fruition. Instead, the 2018 Federal budget proposes decreasing the small business deduction available for an associated group earning more than $50,000 per year of Adjusted Aggregate Investment Income (“AAII”). The small business deduction will be completely eliminated once an associated group earns $150,000 or more in passive income.
AAII excludes: income incidental to an active business; capital gains or losses from property used in an active business or from shares of another CCPC with direct or indirect assets used principally in an active business carried on primarily in Canada; and net capital losses carried over from prior taxation years. AAII includes dividends from non-connected corporations and income from a non-exempt life insurance policy.
The grandfathering that was promised is not reflected in the proposed legislation or the 2018 Federal budget commentary.
These budget changes are effective for taxation years that begin after 2018.
Dividend Refund on Eligible Dividends
A Canadian Controlled Private Corporation (“CCPC”) pays refundable taxes on the aggregate investment income earned each taxation year. The refundable taxes are pooled into an account referred to as RDTOH (refundable dividend tax on hand) and are refunded back to the company at a rate of 38.33% on every dollar of taxable dividend paid to shareholders by the CCPC (referred to as the “dividend refund”). Currently, the payment of both eligible dividends and non-eligible dividends to shareholders will generate this refund of corporate taxes.
A company can pay an eligible dividend if it has received an eligible dividend or if a portion of its taxable income is not subject to the small business deduction (i.e. taxed at the general tax rate). Currently the general tax rate in British Columbia is 27%, with income subject to the small business deduction taxed at 12%.The tax rate for an individual on eligible dividends is significantly less than the tax rate on non-eligible dividends (approximately 9.5% for BC residents at the top rate) which takes into account the increased corporate taxes paid on this income.
The federal budget provides that, for taxation years that begin after 2018, the dividend refund will only be generated by CCPCs paying non-eligible dividends. There is an exception in respect of RDTOH that arises on receipt of eligible portfolio dividends received from another corporation, in which case the CCPC can still receive a dividend refund on the payment of eligible dividends.
Moving forward there will be two (“RDTOH”) accounts to track the available pools of refundable taxes that can be recovered via the payment of eligible dividends vs non-eligible dividends. The eligible RDTOH account will only include the refundable tax paid on portfolio dividends and previously eligible RDTOH that arose prior to the implementation date. The non-eligible RDTOH account will include refundable taxes arising from anything other than the refundable taxes paid on portfolio dividends. There will be tracking that will apply to dividends received from other connected CCPCs to ensure the pools are not impacted. There is an adjustment to allocate the 2018 ending RDTOH balance to allocate the balance to the eligible and non-eligible pools.
These budget changes are effective for taxation years that begin after 2018.
Canada Workers Benefit (previously Working Income Tax Benefit)
The 2018 Federal budget proposes to enhance the refundable tax benefit by increasing the amount available. The CWB will be 26% of earned income in excess of $3,000 to a maximum of $1,355 for single taxpayers without dependents and $2,335 for families (couples and single parents). The benefit for individuals with no dependants is maximized when the individual’s net income reaches $12,820 and is eliminated when net income reaches $24,000.
Medical Expense Tax Credit
The non-refundable tax credit is available for 2018 for qualifying medical expenses in excess of the lesser of $2,302 or 3% of the individual’s net income. The non-refundable credit is equal to 15% of that excess.
Qualifying expenses have been expanded to include costs of animals that provide support for a patient with a severe mental impairment.
Mineral Exploration Tax Credit
The mineral exploration tax credit has been extended to flow-through share agreements entered into on or before March 31, 2019. Note that this credit has been extended each year for approximately 10 years.
In September 2017, draft legislation was released to apply GST/HST on management and investment services provided to limited partnerships by the general partner that are otherwise paid by an allocation of partnership income. The GST/HST will apply to an imputed value of these services. The 2018 Federal budget proposes to have these rules apply only for services provided after September 8, 2017.
The Budget amended anti-surplus stripping rules to add “look-through” rules with respect to partnerships and other entities transferring shares of Canadian companies to other Canadian companies to extract the paid-up capital in a manner that is not permitted in the Income Tax Act. This will apply to transactions that occur on or after February 27, 2018.
Changes have been made to the exceptions from foreign accrual property income (“FAPI”) where investment income would have been FAPI but have been excluded as the foreign affiliate employs 5 or more full-time employees. The amendment applies to taxpayers who seek to meet the 5 or more employees test by combining their business with other investors in one investment vehicle. These investment vehicles implement tracking mechanisms whereby each investor return tracks to the asset they have contributed (a tracking arrangement). Where these tracking arrangements exist, the new rules will deem each investor to have a separate business for purposes of evaluating the 5 or more full-time employee exclusion. This rule will apply to a foreign affiliate’s taxation year that begins on or after February 27, 2018.
Previously, due to the use of a joint investment vehicle and tracking arrangements, a significant number of investors diluted their ownership percentage enough whereby what would otherwise be a foreign affiliate is not considered a controlled foreign affiliate. The budget proposes to treat the affiliate as a controlled foreign affiliate if the income from the foreign affiliate would otherwise have been treated as FAPI if the tracking arrangement were not put into place. This rule will apply to a foreign affiliate’s taxation year that begins on or after February 27, 2018.
The budget proposes to extend the reassessment period by three years in respect of income arising in connection with a foreign affiliate of a taxpayer. This extended reassessment period will apply to the taxpayer’s taxation year-end commencing on or after budget day.
Reporting Requirements for Trusts
The 2018 Federal budget is looking to improve the collection of data with respect to trusts including more information on the beneficial ownership of the trust property. For returns filed for 2021 and subsequent taxation years, there will be new reporting requirements including details with regard to the settlor of the trust, the trustees of the trust, and all the beneficiaries of the trust. Certain trusts are exempt from this reporting including graduated rate estates, qualified disability trusts, mutual fund trusts, trusts governed by registered plans and trusts that qualify as NPO’s or registered charities. In addition, the exemption applies to trusts that have been in existence for less than 3 months or that hold less than $50,000 in assets, provided that the trust’s holdings are restricted to deposits, government debt obligations and securities listed on stock exchanges.
To implement these changes and to improve the audit and administration of trusts the Canada Revenue Agency has received additional funding in budget 2018 of $79 million over five years and $15 million per year on an ongoing basis.
T1134 Filing Deadline
The 2018 Federal budget proposes to reduce the filing deadline on the reporting related to foreign affiliates from 15 months to 6 months after the taxation year of the taxpayer. As such the filing of T1134 forms for corporate taxpayers who report a foreign affiliate will now be due at the same time as the corporate tax return is due. This will apply to taxation years that commence after 2019.
If a charity’s status is revoked there is a 100% revocation tax based on the value of the charity’s net assets. The charity can make a qualifying gift to eligible donees to reduce the revocation tax. Budget 2018 will now allow gifts to municipalities to be considered as a qualifying gift to reduce the revocation tax.
Clean Energy Support
Currently, qualifying clean energy equipment purchased before 2020 is subject to a capital cost allowance at a 50% declining balance rate. The budget extends the acquisition period for these additions by 5 years. As such, qualifying clean energy equipment acquired before 2025 can qualify for this accelerated capital cost allowance rate.
Health and Welfare Trusts
Health and Welfare Trusts are funded by employers to provide health and welfare benefits to their employees. The taxation of a Health and Welfare Trust is not outlined in the Income Tax Act but rather is based on the Canada Revenue Agency’s administrative positions. The Income Tax Act has rules related to Employee Life and Health Trusts which are funded by employers to provide certain benefits to employees. For purposes of consistency and simplicity, the budget outlines that CRA will no longer apply these administrative positions to Health and Welfare Trusts after the end of 2020. As such, a Health and Welfare Trust should convert to an Employee Life and Health Trust. The CRA will provide administrative guidance on this transition. Any Health and Welfare Trusts not transitioned will be subject to the “normal income tax rules” applicable to trusts.
Tiered Limited Partnerships Losses and At-Risk Amounts
The 2018 Federal budget proposes to limit losses allocated by a partnership in excess of that partner’s at-risk amount in a tiered partnership structure. This proposal was in response to a Federal Court of Appeal case where the judge allowed a tiered partnership structure which had losses in excess of its at-risk amount. These losses were allocated to the partners of the top tier partnership without the same restrictions that would have otherwise applied without a tiered structure. Budget 2018 proposes to limit this allocation of losses in a tiered partnership structure to provide consistency with the at-risk rules between simple limited partnership structures and tiered partnership structures.
The 2018 Federal budget proposes a new excise duty framework for cannabis products to be introduced as part of the Excise Act. The duty will generally apply to all products available for legal purchase including fresh and dried cannabis, cannabis oils and seeds and seedlings for home cultivation. Cannabis cultivators and manufacturers (cannabis licensees) will be required to obtain a cannabis license from the CRA and remit the applicable excise duty.
The GST/HST rules for basic groceries will be amended to ensure that any sales of cannabis products will not meet the zero-rating provisions and will be subject to GST/HST in the same way as sales of other cannabis products. In addition, the relieving rules for agriculture products will be changed to ensure that sales of cannabis products including seeds or seedlings will also be subject to GST/HST.
The above content is believed to be accurate as of the date of posting. Tax laws are complex and are subject to frequent changes. Professional advice should be sought before implementing any tax planning. Manning Elliott LLP cannot accept any liability for the tax consequences that may result from acting based on the information contained therein.