Budget Changes Made Easy
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Budget Focuses on Equality and Growth
On February 27, 2018 the Department of Finance released their 2018 Federal Budget. The theme of this year’s budget is equality and growth. Below we have summarized some of the changes that our taxpayers will be experiencing as a result of this budget.
Canada Workers Benefit
The former “Working Income Tax Benefit” is being renamed to the “Canada Workers Benefit”. In addition to an increase in the calculation of the benefit, if an otherwise eligible taxpayer fails to apply for the benefit, CRA will determine the eligibility of the taxpayer and will issue an assessment with the benefit included.
Starting 2021, many trust returns (including family trusts) will require annual filings even if no taxes are payable and no slips are issued. These filings will also have much broader reporting requirements, including disclosing the identity of all trustees, beneficiaries, and settlors of the trust. As well, the new rules could impose significant penalties if the assets held by the trust are in excess of $50,000 during the year and the required reporting is not done.
Passive Investments Held in Private Corporations
As anticipated, the Department of Finance has provided further information regarding their planned amendments to the treatment of passive investments held in private corporations. There are two measures in these new rules that will impact taxation years that begin after 2018.
1 – Refundable Dividend Tax On Hand (RDTOH) & Dividend Refunds
Under current legislation, a portion of the tax paid on investment income is refunded when the income is paid out of the corporation by way of dividends. The Department of Finance is proposing to restrict the dividend refund available to private corporations based on the type of dividends they pay out. The refundable dividend tax on hand (“RDTOH”) will be split into two pools:
Eligible RDTOH Pool
The Eligible RDTOH pool will be accumulated based on tax paid on eligible dividends received from non-connected corporations, such as a publically traded corporation. A taxable dividend paid out of a private corporation’s general rate income pool (eligible dividend) can only trigger a refund if there is a balance in this pool.
Non-eligible RDTOH Pool
The dividend refund available in this account will be accumulated similar to how it was in the past with the exclusion of the amount allocated to the Eligible RDTOH pool.
The refundable tax that is paid on the dividends received from a connected corporation will now be allocated to the Eligible or Non-eligible pools pending from which pool the payor corporation received the dividend refund if any.
The existing RDTOH pool will be allocated between the Eligible and Non-eligible pools as follows:
2 – Small Business Deduction (SBD) Limit Eligibility Changes
Some private corporations are already quite familiar with the rules in place to “grind” down the SBD when the taxable capital of the corporation starts to exceed $10,000,000. The Department of Finance has introduced an additional component to this calculation that will also grind down the SBD based on the amount of “aggregate investment income”. The aggregate investment income will not include income from the sale of actively engaged assets (such as those assets active in your business or the shares of your operating company).
If your private corporation, or group of associated private corporations have investment income in excess of $50,000, the SBD will be reduced on a straight-line basis and will eventually be eliminated once the corporation’s or group of corporations’ investment income exceeds $150,000. The reduction to the SBD will now be the greater of the reduction under this new measure based on investment income or the reduction calculated under the existing measure based on taxable capital.
Not all the legislation for this change has been drafted yet. Included in what has been announced so far is the formula for the reduction and also a new deemed association rule specific to the new formula. This new deemed association rule will encompass not only corporations that are associated under the traditional rules but also corporations in which the particular corporation is related and has made loans or transfers in order reduce the associated groups aggregate investment income.
Medical Expense Credit – Support Animals
Various costs of having a support animal that has been specially trained to perform tasks for a patient with a severe mental impairment (such as post-traumatic stress disorder) are now eligible for the medical expense credit.
Canada Revenue Agency announced a framework for assessing excise duties for all cannabis products available for legal purchase.
Tax on Split Income
No changes were announced to the draft legislation released on December 13, 2017 regarding the expanded tax on split income measures related to individuals receiving income from related companies.
Contrary to some popular rumors leading up to the Budget, no new legislation was announced regarding “surplus stripping” where Finance had previously attempted to reclassify various amounts received personally as taxable dividends.
International Tax Measures
New rules are proposed to prevent cross-border surplus stripping planning using partnerships and trusts. This will prevent non-resident shareholders from doing transactions to extract a corporation’s surplus in excess of the paid-up capital of the shares on a tax-free basis. The existing rules prevented this type of planning by using corporations, and the new rules extend the restriction to also include planning using partnerships and trust
Various technical changes are proposed relating to the taxation of foreign affiliates. An “investment business” of a foreign affiliate is generally subject to the Foreign Accrual Property Income (“FAPI”) regime that results in immediate taxation to the Canadian shareholder based on the activities of the foreign affiliate. An exception to the investment business definition applies where a particular business of the affiliate employs more than 5 full-time employees. In certain cases, multiple taxpayers have arranged their affairs to essentially group their assets together in a common foreign affiliate, thus artificially satisfying the more than 5 full-time employees test (this is sometimes referred to as a “tracking arrangement”). The definition of “investment business” will be amended so that where a tracking arrangement is utilized, those activities will be deemed to be separate businesses carried on by the affiliate. As a result, each deemed separate business will have to meet the “more than 5 full-time employees test” in the “investment business” definition, to avoid being an “investment business”. Changes are also proposed to prevent tracking arrangements that are used to avoid a “controlled foreign affiliate status” of a taxpayer.
The filing due date for form T1134 “Report of Foreign Affiliates” is revised from fifteen months after the year-end to six months. This will require that Canadian taxpayers with foreign affiliate obtain financial information about the foreign affiliate much earlier than was required previously. This applies to taxation years beginning after January 1, 2019.
The normal reassessment period that Canada Revenue Agency can adjust a return is either 3 or 4 years. There are certain circumstances where the reassessment period is be extended. The proposed rules contain additional situations where an extended reassessment period applies:
The tax professionals at Avail CPA can help you understand how these budget changes affect you and your business, and how proper planning can save you money. Be prepared. Call or visit us today.
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