By Christie Roberts, CPA, CGA, Senior Tax Analyst at Davis Martindale, a DFK Canada Affiliate
As first published in the Spring 2018 DFK Newsletter.
When you change the use of an asset, from income producing to personal use, or vice versa, there is a deemed disposition on the date that the change of use occurred. This will result in a capital gain or loss on the property realized from the date of purchase until the date of the deemed disposition. This deemed disposition applies if you choose to convert a property from your principal residence to a rental property, or vice versa. When converting from a principal residence to a rental property, the deemed disposition may not have an effect on your tax situation if you are able to claim the principal residence exemption. However, when converting a rental property to a principal residence, the capital gain could result in significant taxes owing with no funds generated to pay those taxes.
Luckily, there are elections available under subsections 45(2) and 45(3) of the Income Tax Act that allow a deferral of the capital gain until the year in which the property is actually sold. These elections also allow a four-year extension to the period for which the principal residence exemption can apply to the property. The election to defer the gain on a rental property converted to a principal residence has to be filed with your income tax return for the year in which the property is ultimately sold. The election cannot be made if any capital cost allowance was claimed in any year against the rental income.
The election to defer the gain on a principal residence converted to a rental property has to be filed with your income tax return for the year in which the change of use occurs. Once the election has been made, no capital cost allowance may be claimed on the property. If a claim for capital cost allowance is made in a future year, the election will be automatically rescinded. If your return will be electronically filed, you can file the election by writing a letter indicating your intention to use the election and sending it to the Tax Centre that processes your income tax return. This letter should be sent prior to the due date of your income tax return for the year.
Regardless of the above elections that extend the period for the eligibility of the principal residence exemption, remember that only one property can be claimed under the exemption for each taxation year. Therefore, while you may able to claim the principal residence exemption for one of the years that the property was a rental property, you will lose the ability to use the exemption on any other properties for that year. The extension of time to claim the principal residence exemption is exceptionally beneficial if you rented your home, or lived in a retirement or nursing home, while the property was rented.
The Small Business Investment Grant helps Prince Edward Island’s small businesses improve efficiency and innovation by way of a non-repayable financial contribution toward eligible capital asset costs.
The P.E.I. government introduced the Small Business Investment Grant in its 2018 budget. This new 15% rebate on up to $25,000 of qualifying capital investments in the improvement of a business will save an eligible business up to $3,750.
Eligible capital assets must be purchased between April 6, 2018, and March 31, 2019 from an arm’s length supplier. An application can include the purchase of multiple qualifying assets up to the $25,000 threshold. If a business receives non-repayable support from any other program for the purchase of an eligible asset, then that asset will not qualify for the grant.
The grant is available to unincorporated and incorporated businesses operating on P.E.I. The business must be registered federally or provincially. The business must have at least one employee (minimum of 560 hours) or it must be the primary source of income for the applicant. A person who owns or controls multiple qualifying businesses can only receive a grant for one business per year. A business that is eligible for this grant and for Innovation PEI’s Capital Acquisition program may only apply to one program per year.
The following types of business are not eligible for the grant; fishers, farmers, not-for-profit organizations, banks and financial companies, realty businesses (including landlords and developers), professional services business, and consulting services business.
Subject to approval by Innovation P.E.I., the reasonable and proper costs of a capital asset will be eligible for the grant. The following costs are specifically excluded.
- allocated cost or value of goodwill;
- any portion of the cost of an asset that, in the opinion of Innovation PEI, exceeds the fair market value of the asset;
- HST or any other federal or provincial tax which may be eligible to be fully or partially refunded;
- intangible assets;
- development costs;
- speculative land acquisitions;
- vehicle acquisitions; and
- capitalized carrying costs.
The application for the grant must be submitted to Innovation P.E.I. through their on-line application system at https://cloud.garago.net/?siteid=innovationpei The complete terms and conditions of the grant are available at https://cloud.garago.net/terms.cfm Innovation P.E.I. staff are available to assist with the application process.
There is a limited budget for the grant. Applications for the grant will be processed on a first come first served basis. An application for the grant will not be considered received until all required information is submitted.
P.E.I. 2018 Budget
On April 6, 2018, Honourable Heath MacDonald, Minister of Finance presented the Prince Edward Island budget for 2018-19. The budget includes reductions to personal income tax and corporate income tax, a sales tax rebate, an increase in bursaries for Island post-secondary students, and additional help repaying student loans for students who reside on P.E.I. after they graduate.
Personal Income Tax
The Basic Personal Amount is the amount that Islanders do not have to pay P.E.I. income tax on. The Basic Personal Amount is increasing by $500 for 2018, and for 2019. The new Basic Personal Amount will be $8,560 for 2018 and $9,160 for 2019. This change will save Islanders $49 in 2018 and $98 in 2019 compared to their 2017 income tax.
The Spouse/Common Law Spouse tax credit and Eligible Dependent/Equivalent to Spouse tax credit give a tax savings to Islanders whose spouse or eligible dependent has no income or low income. The base used to calculate these P.E.I. tax credits is also increasing for 2018 and 2019. The increase will be proportionate to the increase in the Basic Personal Amount.
Corporate Income Tax
The P.E.I. corporate tax rate for income eligible for the small business deduction will be reduced by 0.5% from 4.5% to 4.0% for this fiscal year. The reduction will be prorated if a company's taxation year straddles the effective date of the change. A company whose taxation year starts on or after the effective date will be able to save up to $2,500. A further unspecified reduction in the small business tax rate was promised for the future.
In the budget address, the Minister said: "The dividend tax credit will also be adjusted to preserve the integration between the corporate and personal income tax systems." This means that the personal income tax rate on dividend income will be increased so that the total corporate and personal income tax collected on income earned through a company remains roughly the same as it was before the reduction in the small business tax rate.
Beginning on May 1, 2018, eligible Island businesses will be able to apply for the new Small Business Investment Grant. This new 15% rebate on up to $25,000 of qualifying investments in the improvement of a business will save an eligible business up to $3,750. Details of who will be eligible and what types of expenditures will qualify are expected to be released soon. You can find additional information about the grant on the Province's website as it becomes available.
A new Clean Energy Price Incentive will begin on July 1, 2018. It will be a point of sale rebate equivalent to the provincial portion of the HST. It will apply to the first block of residential electricity (the first 2,000 kwh consumed per month), firewood, wood pellets, and propane. The Province estimates average annual savings on residential electricity of $120 per household. Households with high electricity consumption (e.g. homes with heat pumps) could save up to $25 per month.
Support for Island Students
Island students earning their first degree at UPEI or Maritime Christian College, or their first diploma at Holland College or Collège de l’Île will be eligible for the new Island Advantage Bursary. Students completing a four-year degree will receive up to $3,600 during their studies. Students completing a two-year diploma will receive up to $1,200. This is in addition to the amounts they are eligible to receive under the existing George Coles Bursary, Island Student Award, Island Skills Award, and George Coles Graduate Bursary.
Additional support will be available to Island students who have a greater financial need. A student attending a P.E.I. publicly-funded post-secondary institution who meets the income requirements for the Canada Student Grant will be eligible for an additional Island Advantage bursary.
Island students are eligible for a grant of up to $2,000 per year of study towards the repayment of their P.E.I. student loans under P.E.I.'s existing Debt Reduction Grant Program. Beginning with the 2018-19 academic year, Island students who reside in P.E.I. within three years of graduation will be eligible for up to $1,500 per year of study of additional grants.
The Province continues to negotiate with the Federal government on a framework for the taxation of cannabis, and a carbon plan to deal with the Federal government's intention to implement carbon taxes in all provinces and territories.