On February 27, 2018, federal Minister of Finance Honourable Bill Morneau released the 2018 budget, the third budget released by the current liberal government. The budget is titled “Equality + Growth: A Strong Middle Class” as the government continued its focus on improving gender equality and new funding to support innovation in Canada.
Major highlights of the budget included a projected deficit for 2018-19 of $18.1 billion and the widely anticipated introduction of new rules dealing with the taxation of passive income of private corporations in Canada. Some highlights of tax measures announced in the Budget which may be of interest to our client base include:
Tax on Split Income (TOSI)
On July 18, 2017, the Minister of Finance released a discussion paper outlining proposed changes designed to prevent small business owners from “sprinkling” corporate income with family members who were not directly involved in the business with the objective of reducing the overall family tax burden.
The discussion paper provided for a 75-day consultation period for interested parties to provide input on the proposed changes. There were over 21,000 submissions received during this consultation period. Between October 15 – 17, during “Small Business Week”, Minister Morneau announced several changes, which amended and, in some cases, canceled portions of the original proposals, along with a promise of a further update before the end of 2017.
On December 13, 2017, the government released further modifications to and some clarification of the proposed TOSI changes. The effective date of these changes is January 1, 2018. On the same day, the Senate released a paper stating the changes should be scrapped or at least postponed until more consultation is completed. With nothing announced since December, many tax practitioners were hoping that there would be an update in the 2018 Budget. Disappointingly, there were no updates or postponements announced in the Budget around the TOSI rules, and the government is going forward with the changes announced last year as updated in December.
Passive Income Rules
The Department of Finance's July 18, 2017, announcement also proposed changes to how a corporation's income from passive investment activity would be taxed. Detailed rules were not provided at that time but several alternatives were suggested, with one of the proposals taxing passive investment income at a rate approaching 75% on PEI by the time the income was in the personal hands of the shareholders! In response to significant opposition from Canada’s business community, during "Small Business Week" Minister Morneau announced further details that there would be a threshold of $50,000 of passive investment income, and any investment income below that amount would not be affected. However, many questions remained as there were no details on the implications for passive income above $50,000, including how the limit of $50,000 would be handled within corporate groups, and what types of passive income would be impacted.
The private sector certainly had a collective sigh of relief with the significant step back the government chose to take on the passive income changes. While the preference of the business community was to abandon the proposed changes to this area, the changes were not as large as feared.
Budget 2018 addressed some of the questions left unanswered in the fall update by including two new rules dealing with passive investment income earned by a Canadian Controlled Private Corporation (CCPC).
Small Business Limit
A CCPC (or an associated group of CCPCs) is entitled to a small business deduction annually on its first $500,000 of active business income. The small business deduction reduces taxes on this active business income, resulting in an effective corporate tax rate of 14.5% in PEI for a December 31/18 year end. Any business income above $500,000 is taxed at a rate of 31% in PEI.
Budget 2018 proposes that the $500,000 small business limit will be reduced by $5 for every $1 of passive income realized by the CCPC (or the associated group's) above the $50,000 threshold amount. The small business limit would be reduced to zero for that year when passive investment income reaches $150,000 in any year. This rule is in addition to the existing rule where the small business limit is reduced depending on the amount of taxable capital employed in Canada by associated companies. The CCPC's (or the associated group's) small business limit will be the lower of the limits determined under the two rules.
The new reduction of the small business limit will be based on the new term “adjusted aggregate investment income” which is based on “aggregate investment income”.
"Aggregate Investment Income" includes:
- Interest on investments
- Any dividends that are included in taxable income (dividends received from a taxable Canadian corporation are generally excluded from a corporation's taxable income)
- Capital gains that exceed capital losses
- Income from property that does not qualify as an active asset
The adjustments to arrive at the “adjusted aggregate investment income” include:
- Capital gains will be excluded to the extent they arise from the disposition of active business assets of the corporation or shares of an active connected corporation, subject to certain conditions
- Net capital losses carried over from other taxation years will be excluded
- Dividends from non-connected corporations will be added
- Income from savings in a life insurance policy that is not an exempt policy will be added
The new small business limit reduction is effective for tax years that begin after 2018.
Refundability of Taxes on Investment Income
Under current rules, corporations on PEI pay tax at a rate of 54.67% on aggregate investment income. The 54.67% tax rate includes a 30.67% refundable portion, called Refundable Dividend Tax On Hand (RDTOH) that is refunded to the company upon payment of taxable dividends to it shareholders. RDTOH also includes a 38.33% "Part IV" tax on portfolio dividends that are not included in regular taxable income. Under current rules, corporations can pay eligible or non-eligible dividends to recover RDTOH.
Finance expressed a concern that the refund of tax paid on passive income and the payment of dividends sourced by passive income needed to be more closely aligned.
In this regard, Budget 2018 proposes to implement two pools of RDTOH;
- One pool for Eligible RDTOH, which will track Part IV tax paid on eligible dividends
- One pool for Non-Eligible RDTOH to track all other refundable taxes paid on non-eligible dividends and investment income
With these new rules, CCPC’s will only receive a refund from the non-eligible RDTOH pool on the payment of non-eligible dividends. Under the new rules, CCPC’s will receive a refund from the eligible RDTOH pool on the payment of either type of dividend. Refunds based on paying a non-eligible dividend must come from the non-eligible RDTOH pool first. These changes will improve the integration of personal and corporate taxes. These rules are effective for tax years that begin after 2018.
Budget 2018 released new reporting requirements for certain Trusts. The goal of the new reporting requirements is to “determine taxpayers’ tax liabilities and to effectively counter aggressive tax avoidance as well as tax evasion, money laundering and other criminal activities”.
In the past, Trusts that did not earn income and did not make distributions to beneficiaries were not required to file an annual tax return. However, even when a Trust was required to file a return, there were no requirements for the Trust to disclose beneficiary information. Budget 2018 will require certain Trusts to file tax returns on an annual basis even if there is no income or distributions. These new filing requirements will apply to returns that are filed for 2021 and subsequent years.
Under the new reporting requirements, trusts will be required to report the identity of:
- All trustees
- All beneficiaries
- All settlors, and
- Each person who has the ability to exert control over the trustee's decision making
Failure to comply with these new rules will result in a $25/day penalty, with a minimum of $100 and a maximum of $2,500. An additional penalty of five percent of the maximum fair market value of property held during the relevant year by the trust will apply if a failure to file the return was made knowingly, or due to gross negligence.
Exceptions to the additional reporting requirements are:
- Mutual fund trusts
- Trusts governed by registered plans
- Lawyers' general trust accounts
- Graduated rate estates and qualified disability trusts
- Trusts that are non-profit organizations or registered charities, and
- Trusts that have been in existence for less than three months, have less than $50,000 in assets, and have no assets other than deposits, government debt obligations and publicly traded
The medical expense tax credit is a 15 percent non-refundable tax credit. The credit is based on the amount paid for eligible medical expenses that exceed the lessor of $2,302 and three percent of an individual’s income. The list of eligible expenses is reviewed and updated regularly.
Currently, the cost to purchase and care for an animal are eligible medical expenses where the animal was specially trained to assist patients with:
- Profound deafness,
- Severe autism,
- Severe diabetes,
- Severe epilepsy, or
- A severe or prolonged impairment that markedly restricts the use of the person's arms or legs
For the expenses to qualify, the animal has to be acquired from a person or organization whose main purpose is to provide special training to the animal.
Budget 2018 proposes to expand the list of eligible expenses to included expenses for a specially trained animal that is used to assist a patient in coping with a severe mental impairment. The example used in a budget paper is a psychiatric service dog used to assist someone with post-traumatic stress disorder.
The expansion of eligible expenses will apply to an expense incurred after 2017.
Extended Reassessment Period for certain circumstances
Canada Revenue Agency (CRA) may reassess taxpayers within a fixed period of time from when they receive their original assessment. The normal reassessment period ends three or four years after the original assessment.
Under current rules, when a taxpayer contests a CRA request for foreign-based information, the reassessment period is frozen while the matter is before the Federal Court, therefore extending the amount of time CRA has to complete its reassessment. This “stop the clock” rule only applies to CRA requests for foreign-based information.
Budget 2018 is amending parts of the Income Tax Act to implement a “stop the clock” rule for reassessment periods whenever any request for information or compliance order is contested. The clock would stop when an application is made to the Federal Court to review a request for information or when a taxpayer confirms opposition to a compliance order. The clock would remain stopped until the final disposition of the matter, including any appeals that may be made. This new rule extends the reassessment period for taxpayers that try to prolong the reassessment process. The CRA believes this will speed up processes and remove backlogs of work.
As a student, there are tax credits and deductions you can claim on your return, and benefit and credit payments you could get when you do your taxes. Even if you have little or no income, you should still do your taxes to get the benefit payments you’re entitled to.
Here are the top tax credits and deductions that students often overlook.
- Tuition tax credit – You may be able to claim the tuition tax credit if you attended certain post‑secondary educational institutions. Under certain conditions, students can now include fees paid to a post-secondary educational institution for occupational skills courses that are not at the post-secondary level.
Depending on how much tax you owe, you may need to use all of the credit, or just some of it. If you did not need to use all of the credit, you can either transfer it or carry it forward. Unused amounts can be transferred to your spouse or common-law partner, a parent, grandparent, or the parent or grandparent of your spouse or common-law partner to reduce their taxable income. You can also carry forward and claim in a future year the part of your 2017 tuition amount you cannot use (and do not transfer) for the year, and your unused tuition, education, and textbook amounts from 2016 and previous years. However, if you carry forward an amount, you will not be able to transfer it to anyone.
If you are a qualifying student, you may be able to claim the scholarship exemption for scholarship, fellowship and bursary income.
- Education and textbook amounts – Even though these amounts can no longer be claimed, you can still carry forward any amounts you didn’t claim in previous years.
- Interest paid on your student loans – You may be able to claim an amount for the interest paid in 2017 on your student loan for post-secondary education. You can also claim interest paid over the past five years if you haven’t already claimed it. It must be interest paid on a loan received under the Canada Student Loans Act, the Canada Student Financial Assistance Act, the Canada Apprentice Loans Act, or a similar provincial or territorial law.
- Public transit amount – After June 30, 2017, the public transit amount is no longer available. However, you may be able to claim the public transit amount on your 2017 return for the cost of eligible transit passes that were used for public transit services for the period January 1 to June 30, 2017.
- Eligible moving expenses – If you moved for your post-secondary studies and are a full-time student, you may be able to claim moving expenses. You can deduct these expenses only from the part of your scholarships, fellowships, bursaries, certain prizes, research grants, and artists’ project grants that you have to include in your income. If you moved to work, including for a summer job or to run a business, you may also be able to claim your moving expenses. However, you can deduct these expenses only from the income you earned at the new work location. To be eligible, your new place of residence must be at least 40 kilometres closer to your new school or work. You cannot claim these expenses if they were paid by your employer.
- Child care expenses – If you pay someone to look after your child while you go to school, earn income, or conduct research, you may be able to deduct child care expenses.
- Goods and services tax/harmonized sales tax (GST/HST) credit – If you are turning 19 before April 1, 2019, you may be eligible for the GST/HST credit and any related provincial payments. The CRA will see if you are eligible when you do your taxes and will send you a notice if you are.
- Canada child benefit (CCB) – If you have a child, you may be eligible for the Canada child benefit (CCB), a tax-free monthly payment made to eligible families to help them with the cost of raising children under the age of 18. To get this benefit, you only need to apply once and do your taxes every year to keep getting your CCB payments.
- Working income tax benefit (WITB) – If you are a student with a dependant and have a modest working income, you may be eligible for the working income tax benefit. You may be able to apply for advance payments.
If you're a student and have questions this tax season, contact one of our trusted advisors today at (902) 368-2643 or drop by one of our three Prince Edward Island office locations in Summerside, Charlottetown, or O'Leary.
This information was made available at https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-filin...
This tax-filing season, many important changes and improvements were made to services, benefits, and credits for Canadians. Here's what you need to know:
New and improved credits
- Canada caregiver credit – This non-refundable tax credit replaces the family caregiver credit, the credit for infirm dependants age 18 or older, and the caregiver credit. It gives tax relief to eligible individuals who have a spouse or common-law partner, or a dependant, with an impairment in physical or mental functions.
- Disability tax credit (DTC) certification – Nurse practitioners across Canada can now certify the application form for the DTC.
- Medical expense tax credit – If you need medical intervention to conceive a child, you may be eligible to claim certain expenses even if you do not have a medical condition. These expenses are the same as those that would generally be allowable for individuals who have a medical condition. If you had fertility-related expenses for any of the 10 previous calendar years and you have not claimed them, you can request a change to your income tax and benefit return(s) to include these eligible expenses.
- Mailing a paper income tax and benefit return to your home - Starting this year, the CRA will mail a 2017 income tax and benefits guide and forms book to paper filers. These individuals won’t have to go to Canada Post, Caisse populaire Desjardins, or Service Canada locations to get their printed tax products. Those who want to file on paper and haven’t received a guide and forms book by February 26, 2018, from the CRA can find what they need online or order a paper copy from the CRA. An order limit of nine packages per individual will ensure all Canadians have access to what they need this filing season.
- File your taxes over the phone with File My Return – This new service lets eligible Canadians with simple tax situations file their return by answering a few questions over the telephone through an automated service.
- View transactions and pay balances with CRA BizApp – The CRA has released a new mobile web app called CRA BizApp. This app lets small businesses and sole proprietors view their business account balances and make payments by pre-authorized debit to their corporation, goods and services tax / harmonized sales tax (GST/HST), payroll, and excise duty accounts.
- Don’t wait for your notice of assessment; get an Express NOA – This service delivers a notice of assessment (NOA) directly into your certified tax software shortly after you file your return electronically. To use the service, you must be registered for online mail in My Account and file your return electronically using a certified tax software.
- ReFILE lets you adjust your return using your tax software – The ReFILE service now lets you change your return using your preferred certified filing software. Make sure you receive your notice of assessment before sending a change through ReFILE.
- Get Online mail directly in My Account – The CRA is adding more mail for individuals to receive directly in My Account. This tax season, online mail provides correspondence about tax free savings accounts, notices of assessment, benefit notices and slips, and more, including correspondence from some of the CRA’s review programs (e.g. requests for receipts).
- Pay taxes in person – You can now pay your individual tax, benefits and credits repayments, and other select payments to the CRA in person with cash or a debit card at any Canada Post outlet across the country. To pay in person, you must first create a personalized payment barcode online.
- Protect your account with Account Alerts – For added security, when a representative is added, deleted, or changed on your account, the CRA will send you an email notifying you of the recent activity on your account.
- Automatically fill in parts of your return with Auto-fill my return - The service lets you or your authorized representatives automatically fill in parts of your 2015, 2016, and 2017 income tax and benefit returns with information the CRA has available at the time of filing the return.
Changed credits and amounts
- Tuition, education, and textbook credits – As of January 1, 2017, the federal education and textbook credits were eliminated. However, you can still carry forward unused amounts from previous years. Also, with certain conditions, you may now be able to claim the tuition amount for fees you paid to a post-secondary educational institution for occupational skills courses, even if they are not at a post-secondary level.
- Children’s credits – As of January 1, 2017, the children’s arts tax credit and children’s fitness tax credit were eliminated.
- Public transit tax credit – As of July 1, 2017, this credit was eliminated. For this tax year, you can claim the cost of eligible public transit expenses only for travel taken from January 1 to June 30, 2017.
For more information contact any member of our tax team.
Below is commentary from MRSB Tax Partner, Terry Soloman on some initial thoughts on the federal government's most recent tax consultation announcement.
On Monday, October 16, 2017, the federal government provided some initial feedback on the actions they are considering resulting from the consultation period of the July 18, 2017 tax proposals. I have had numerous clients and others from my local business community ask me for my opinion on what today’s announcements mean for them. There is not enough information to make a definitive statement yet but here is a summary of what we know (or do not know):
1) A reinstatement of a previously announced plan to reduce the corporate tax rate on active business income, to be phased in by a one half of one percent decrease in 2018 followed by a further one percent decrease in 2019. This will reduce corporate tax rates on active income eligible for the small business deduction on PEI to 14.5% in 2018 and down to 13.5% in 2019.
While I will never complain about tax decreases on business income, wasn’t the difference between corporate rates and personal rates on business profits one of the reasons provided by government as to why the proposals issued this summer were required? All this change does is make the spread greater. However, any reduction to the corporate rate is a deferral of tax only due to Canada’s fully integrated tax system.
The reduction in the corporate tax rate on business profit does not deal with the much larger issue of applying TOSI rules to the distribution of this profit from the corporation as a dividend to family members, especially spouses, who contribute indirectly to the business success. This tax rate reduction (deferral) is minor and is really a distraction from the real issues at hand.
2) It appears, based on today’s update, that a reasonableness test is still part of the proposals but maybe the test will be less rigorous than initially suggested. I had hoped to see spouses excluded from TOSI rules and maybe limit the TOSI to adults up to age 24. This bright line test would have eliminated the need for the ridiculous amount of red tape and uncertainly a reasonableness test will create.
3) There were some comments that the proposals to limit the availability of the capital gains exemption have been abandoned. Does this mean TOSI will not apply to arms length capital gains? Will minors and non active adults be subject to a reasonableness test and still be restricted from claiming capital gains exemption on share sales? Will family trusts allocating capital gains still be targeted? Again, no details provided.
4) There was complete silence with respect to any update on the taxation of passive income, which in my view is the largest issue of all, effecting both business decisions of the private sector in the short and medium term as well as creating uncertainty over retirement strategies of Canada’s business sector. The business sector deserves better and need certainty in the rules they operate under. Unfortunately there was no update on this issue or on timelines for more clarity on any matters.
Frankly, with the consultation period having been closed only 14 days ago, and in excess of 21,000 submissions provided by Canadians to the Department of Finance, it is surprising that Finance officials would even have had the time to read and properly consider the volume and quality of submissions in such a short time frame, considering some submissions exceeded 150 pages of arguments. As always, the “devil is in the details” and we have not been provided with the details. It was interesting today that Prime Minister Trudeau was intent on answering all questions from the media and for the most part was not allowing the media to directly question Minister Morneau.
The government has committed to further updates and clarifications in the coming days, which many in the tax and business community will be closely watching with interest very closely.