This afternoon, Finance Minister Bill Morneau, tabled his last Federal Budget before the October 2019 election (and, hopefully, his last ever).
We all recall Trudeau’s imbecilic remarks that “the Budget will balance itself”. Apparently not. We were promised a balanced budget by 2019. The budget deficit in 2019 will be approximately 18 Billion Dollars.
Clearly the Government is hoping that everyone’s attention will be directed to the Budget and will not focus on the Liberal’s shutting down the SNC Lavalin probe on the same day. Like a good magician, the art is in distraction and sleight of hand.
As is typical in a pre-election budget, regardless of which party is in power, the goodies are timed so that they will come into effect after the election, which makes them dependent upon the Liberals being re-elected. The most common expressions in this Budget are “intends” and “proposes” – as in “the Government intends to…” and “the Government proposes…”. Considerably more intention than action.
What was not in the Budget
There is always speculation that the Budget will increase the inclusion rate for capital gains from its current level of 50%. Again, we can be thankful that there was no change.
There were no tax rate changes.
Unfortunately, there are some important items that were also not included:
Tax professionals and industry groups across the country have been calling for a comprehensive review of our tax system, rather than continuous tinkering and the devastating, but half-assed changes introduced by Finance Minister Morneau in July, 2017
There has been no change to the Tax on Split Income (TOSI) rules or the rules related to passive investment income earned in private corporations. These onerous, expensive and unfair provisions which are a massive tax grab from the small business community, will guarantee work for tax lawyers and accountants for the next 10 or 15 years while leaving the business community in an uncertain environment
There has still been nothing proposed to improve the rules related to inter-generational transfers of businesses. The Government “will continue its outreach to farmers, fishers and other business owners throughout 2019 to develop new proposals to better accommodate intergenerational transfers of businesses while protecting the integrity and fairness of the tax system.” In the meantime, it remains considerably more expensive for a business owner, including farmers and fishers, to transfer his or her business, farm or fishing business to his or her children than it is to sell to an outside party.
National Capital Region
For those living in Ottawa there is to be some improvement in the bridges between Ottawa and Gatineau. Budget 2019 proposes to:
Replace the Alexandra bridge as it is now more than 100 years old and needs to be replaced.
Address the demonstrated need for an additional National Capital Region crossing by refreshing existing studies and developing a long-term integrated interprovincial crossing plan led by the National Capital Commission with both provincial governments and the cities of Gatineau and Ottawa.
Support the rehabilitation and ongoing maintenance of National Capital Region crossings, including the Chaudière and MacDonald-Cartier bridges by providing up to $80.4 million over 10 years.
Personal Tax Measures
First-Time Home Buyers
The Budget introduces the “First Time Home Buyer Incentive”, which will allow first time home buyers, with household income under $120,000, to apply to CMHC for funding of 5 or 10 per cent of the home purchase price. No ongoing monthly payments are required. The buyer would repay the Incentive, for example at re-sale.
Home Buyers Plan
To help with the down payment and costs associated with the purchase of a first home, the Home Buyers’ Plan (HBP) allows first-time home buyers to withdraw up to $25,000 from their Registered Retirement Savings Plan (RRSP) to purchase or build a home, without having to pay tax on the withdrawal.
Unlike regular RRSP withdrawals, HBP withdrawals are not added to a person’s income when withdrawn. Instead, the HBP withdrawals must be repaid over a 15-year period or included in the individual’s income if not repaid.
The HBP maximum withdrawal amount—currently $25,000 – will be increased to $35,000 for withdrawals after March 19th, 2019.
There is one interesting aspect of the HBP changes introduced. To assist those who have experienced a breakdown in their marriage or common-law partnership withdrawals to purchase a new home will qualify even if, as a couple, they had a previous home.
Canada Training Benefit
The Budget proposes to establish a new Canada Training Benefit. This amounts to a non-taxable credit of $250 per year, which will be accumulated over 4 years, giving a total credit of $1,000, to a lifetime maximum of $5,000. Sounds nice, but anyone who has taken training in almost any field knows that you don’t get much training for $1,000.
The Employment Insurance program will provide income support of 55% of a worker’s average weekly earnings for 4 weeks of leave to take part in training.
Students with student loans have a choice to pay a floating rate of interest, currently prime plus 2.5%, or a fixed rate, currently prime plus 5%. Starting in 2019-2020, the floating rate will be reduced to prime and the fixed rate will be reduced to prime plus 2%.
When a student completes his or her education, there are no student loan payments due for the first 6 months, but the interest continues to accrue. The Budget provides that interest will not accrue during this 6 month period.
Benefits for Seniors
The Budget proposes to introduce legislation to enhance the GIS earnings exemption beginning with the July 2020 to July 2021 benefit year. The enhancement would:
Extend eligibility for the earnings exemption to self-employment income.
Provide a full or partial exemption on up to $15,000 of annual employment and self-employment income for each GIS or Allowance recipient as well as their spouse.
The Government proposes to introduce legislation to automatically enroll Canada Pension Plan contributors who are age 70 or older in 2020 but have not yet applied to receive their retirement benefit. Currently it is necessary to apply for CPP benefits.
Funds from certain registered plans can be used to purchase an annuity to provide income in retirement, generally for a fixed term, for the life of the annuitant or for the joint lives of the annuitant and the annuitant’s spouse or common-law partner.
The Budget proposes to permit two new types of annuities under the tax rules for certain registered plans:
advanced life deferred annuities will be permitted under a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), deferred profit sharing plan (DPSP), pooled registered pension plan (PRPP) and defined contribution registered pension plan (RPP); and
variable payment life annuities will be permitted under a PRPP and defined contribution RPP.
The measures will apply to the 2020 and subsequent taxation years.
Currently, an annuity purchased with registered funds must commence payment by the end of the year in which the annuitant attains 71 years of age.
Under the Budget proposals, the commencement of payments under an advanced life deferred annuity (ALDA) which is a form of life annuity, may be deferred until the end of the year in which the annuitant attains 85 years of age. This is potentially a big boost for the insurance industry.
Registered Disability Savings Plan (RDSP)
To open an RDSP, an individual must be eligible for the Disability Tax Credit (DTC). When a beneficiary no longer qualifies for the DTC, the RDSP rules require that the plan be closed, and grants and bonds be repaid to the Government of Canada. The Government proposes to eliminate the requirement to close an RDSP when a beneficiary no longer qualifies for the DTC. Doing so will allow grants and bonds otherwise required to be repaid to the Government to remain in the RDSP. To ensure fairness for DTC-eligible beneficiaries, some restrictions on access to these amounts will apply. This is particularly important for those who suffer with periods of severe, but episodic, disability.
Budget 2019 also proposes to exempt RDSPs from seizure in bankruptcy, with the exception of contributions made in the 12 months before the filing. This is similar to the rules that protect RRSPs.
Health Related Tax Measures
The Budget proposes to expand health-related tax relief under the Goods and Services Tax/Harmonized Sales Tax (GST/HST) system by:
Providing GST/HST relief for Canadians experiencing infertility, as well as single individuals and same-sex couples using assisted reproduction by relieving human ova and in vitro embryos of the GST/HST. At present, human sperm is relieved of the GST/HST, while human ova and in vitro embryos are not.
Expanding the list of GST/HST-exempt health care services to specifically include a multidisciplinary health care service, such as when a physician, occupational therapist and physiotherapist combine their expertise and work together as a team to provide a rehabilitation service.
Reviewing the income tax treatment of fertility-related medical expenses under the Medical Expense Tax Credit
Amounts paid for cannabis products may be eligible for the medical expense tax credit where such products are purchased for a patient for medical purposes.
The Budget proposes rules for the application of GST/HST to various types of cannabis products.
Business Tax Measures
Employee Stock Options
In the 2016 Budget, the Government announced a review of a wide range of tax measures, including employee stock options. Budget 2019 announces the Government’s intent to limit the use of the current employee stock option tax regime.
Employee stock options, which provide employees with the right to acquire shares of their employer at a fixed price, are an alternative compensation method used by businesses to attract qualified employees. Many smaller, growing companies, such as start-ups, do not have significant profits and may have challenges with cash flow, limiting their ability to provide adequate salaries to hire talented employees. Employee stock options can help such companies attract and retain talented employees by allowing them to provide a form of remuneration linked to the future success of the company.
At the risk of over-simplifying the rules, an employee might be given an option to purchase shares in the future at a fixed price of, say, $10. If the employee exercises this option at a time when the shares have a value of $50, the employee realizes a taxable benefit of employment (taxed as ordinary income) of $40 per share. In the proper circumstances, this benefit can be reduced by 50%.
The Government will impose a $200,000 annual cap on employee stock option grants that may receive this tax-preferred treatment for employees of large, long-established, mature firms.
For start-ups and rapidly growing Canadian businesses, employee stock option benefits would remain uncapped.
Further details of this measure will be released before the summer of 2019.
Any changes would apply on a go-forward basis only and would not apply to employee stock options granted prior to the announcement of legislative proposals to implement any new regime.
Scientific Research and Experimental Development (SR&ED) Tax Incentive
For all corporations other than Canadian-controlled private corporations (CCPCs) and for unincorporated businesses, a 15-per-cent non-refundable tax credit is available on all qualifying SR&ED expenditures.
For CCPCs, a fully refundable enhanced tax credit at a rate of 35 per cent is available on up to $3 million of qualifying SR&ED expenditures annually. This expenditure limit for a taxation year is gradually phased out based on two factors, which apply on the basis of an associated group of companies.
The expenditure limit is reduced where taxable income for the previous taxation year is between $500,000 and $800,000.
The expenditure limit is also reduced where taxable capital employed in Canada for the previous taxation year is between $10 million and $50 million.
Qualifying expenditures in excess of a CCPC’s expenditure limit are eligible for the 15-per-cent tax credit. Unused SR&ED credits earned at this rate may be partially refundable depending on the CCPC’s taxable income and taxable capital.
Budget 2019 proposes to repeal the use of taxable income as a factor in determining a CCPC’s annual expenditure limit for the purpose of the enhanced SR&ED tax credit. As a result, small CCPCs with taxable capital of up to $10 million will benefit from full access to the enhanced refundable SR&ED credit regardless of their taxable income. As a CCPC’s taxable capital begins to exceed $10 million, this access will gradually be reduced.
This measure will apply to taxation years that end on or after Budget Day.
Small Business Deduction – Farming and Fishing
Currently, there is a requirement that sales by a farming or fishing business be to a farming or fishing cooperative corporation in order to be excluded from specified corporate income, and thus qualified for the small business rate of tax on the business’ first $500,000 of net business income.
This treatment will now apply to the income of a CCPC from sales of the farming products or fishing catches of its farming or fishing business to any arm’s length purchaser corporation.
This measure will apply retroactively to taxation years that begin after March 21, 2016.
Morneau has made the expected standard pronouncements about improving service at the CRA, and enhancing the CRA’s ability to enforce tax laws, particularly when dealing with international jurisdictions.
Overall, nothing unexpected. The Budget offers goodies to seniors and students, both large blocks of voters. But, of course, these goodies will only materialize if the Liberals are re-elected.
Certainly for businesses considering implementing an employee stock option plan there is some significant planning to be done before the rules are introduced this summer.
I would be happy to discuss any of these matters with you.