On Wednesday, March 22, 2017, the Liberal government tabled their second budget. Unlike the 2016 federal budget, this budget did not introduce sweeping reforms of well established tax principals. For starters, let’s review what the budget did not change:
- Capital gains inclusion rate – In Canada, 50% of a capital gain is taxable and the other 50% is tax free. There was speculation within the tax community that the inclusion rate would increase to 66% or 75%, causing an increase in tax on capital gains. However, the budget did not change the inclusion rate and for now, it remains at 50%;
- Corporate tax rate – In Ontario, active business income eligible for the small business deduction will continue to be taxed at a rate of 15%. Active business income, in excess of the small business limit of $500,000, continues to face a 26.5% tax rate. Finally, passive income will continue to be taxed at a rate of 50.17%; and
- Personal tax rate – In Ontario, the highest personal tax rate on income in excess of $220,000 will remain unchanged at 53.53%.
Tax Planning with Private Corporations
Although no changes were made, the government made it clear that certain tax strategies are under review. The government will release papers in the coming months on policy changes that will impact these strategies. Specifically, the government is concerned with strategies that convert regular income into capital gains (as noted above, only 50% of a capital gain is taxable). Also of concern is family income splitting plans where income is diverted to family members who are in lower marginal tax rates. We will continue to monitor these developments for our clients.
Control in Fact
The changes in these rules are best explained with an example. Assume Husband owns H Co and Wife owns W Co. These companies would not normally be considered “associated” for tax purposes and each company would have its own small business limit, meaning that each company would be entitled to the low corporate tax rate of 15% on its first $500,000 of income. However, the Income Tax Act contains rules such that if Wife could indirectly control H Co, then the companies can become associated (de facto control). Prior to the Budget, Wife wouldn’t be considered to have such power unless she could change the board of directors of H Co or exercise influence over Husband’s ability to change the board of directors.
Budget 2017 proposes to extend the factors to determine de facto control beyond just the ability to change the board of directors and will require all factors that are relevant to be considered. Therefore, corporate structures where one mind may be directing two or more otherwise unassociated companies will need to be reviewed.
WIP Deduction Eliminated
Certain professionals (medical doctors, dentists, lawyers, accountants, veterinarians and chiropractors) currently have the ability to recognize income when the work has been billed. In other words, they have been allowed a deduction for their work in progress (WIP) at year-end. Budget 2017 proposes to restrict the so called WIP deduction. As a transitional measure, for the first year that begins after March 22, 2017, the WIP deduction will be 50%. For subsequent years, no WIP deduction will be allowed. For a calendar year corporation, the 2017 year-end will be allowed the WIP deduction, the 2018 year-end will be 50% and the 2019 year-end will contain no WIP deduction.
Other Miscellaneous Items
- Nurse practitioners will be eligible to certify an individual’s impairment and complete T2201 – Disability Tax Credit Certificate;
- Costs of medical intervention to conceive a child will be eligible medical expenses for purposes of the Medical Expense Tax Credit;
- Consolidation of infirm dependent credit, caregiver credit and family caregiver credit into one new non-refundable Family Caregiver Credit;
- Employers will be allowed to distribute T4 slips to employees by electronic means; and
- Elimination of the Public Transit Tax Credit.
At the time of writing this release, the 2017 Ontario Budget has not yet been tabled. DJB will be reviewing the 2017 Ontario Budget for its impact on clients once released.
If you have any questions about the 2017 Federal Budget and how it may impact you, please contact one of our qualified advisors.
Article written by: Jeremy Doan, Macc, CPA, CA