On March 19th 2019, Finance Minister Bill Morneau delivered his 4th Federal Budget since the Trudeau Liberal Government took office in 2015. After significant corporate and personal tax changes made over the past three years, Budget 2019 was light on tax changes but big on spending. Budget 2019 projects a deficit of $14.9 billion for fiscal 2019, $19.8 billion for fiscal 2020 and a further $19.7 billion for fiscal 2021.
Budget 2019 does not propose any personal or corporate income tax rate changes, does not change the capital gains inclusion rate nor does it make any announcement on comprehensive tax reform. However, the Budget did include a number of personal, corporate and international tax changes to plug certain technical deficiencies and tax loopholes in the current rules. As well, the Budget focuses on skills training, assistance with home acquisition and introduces a Canada training benefit.
- Personal Tax Changes
Employee Stock Options
The budget proposes a $200,000 cap on the preferential tax treatment of stock option benefits to employees of “large, long-established mature firms” that is based on the fair market value of the underlying shares at the time the option is granted (and interestingly not based on the amount of gains realized on the exercise of the stock options).
The preferential tax treatment arises as a result of a 50% stock option deduction available in most cases that effectively results in only one-half of the gains realized on exercise of the stock options being taxable the same as capital gains. However the proposal is not meant to change the taxation of stock options for startups and emerging Canadian businesses.
Details of the proposal will be released before the summer of 2019 and any changes will apply only on a prospective basis and is not to affect employee stock options granted prior to the announcement of the legislative proposals. As a result if these changes, businesses should analyze how the new rules will impact their employees and consider changes to their stock option policies and vesting requirements once the new rules released. Businesses may also want to review their stock option policies before the proposals are announced.
Canada Training Credit
Budget 2019 also proposes to introduce a refundable Canada Training Credit that allows eligible Canadians to recover up to one half of their eligible tuition and fees paid in respect of Canadian-based post-secondary education and vocational training.
This credit will allow eligible individuals to accumulate $250 each year in a notional account who are between the ages of 25 and 65, if certain conditions are met up to a lifetime maximum limit of $5,000.
The individual can claim the credit equal to the lesser of one half of the eligible tuition and fees paid for a taxation year and the individual’s notional account balance for the year. The credit may be claimed up to the end of the year the individual turns 65.
Home Buyers Plan
Budget 2019 increases the home buyers plan withdrawal limit to $35,000 from $25,000. Thus, a couple may potentially be able to withdraw $70,000 from their RRSPs to purchase a home if they are first-time home buyers.
A new program (administered by the Canadian Mortgage and Housing Corporation) is offering qualified 1st time home buyers a 10% share equity mortgage on new homes or a 5% shared equity mortgage on resale homes repayable when the property is later sold. The applicant must have a household income of less than $120,000 per year and be able to make a 5% down payment. The program also caps out at four times household annual income, meaning it is restricted to properties where the mortgage value plus the CMHC loan does not exceed $480,000.
- Business Tax Changes
Canadian Journalism Support
Budget 2019 introduces measures to support Canadian journalism for “Qualified Canadian Journalism Organizations” or QCJOs. QCJOs are entities which are Canadian-controlled and if a private corporation must be at least 75% owned by Canadian citizens or public corporations, if a Canadian public corporation, is listed on a stock exchange in Canada and not controlled by non-Canadian citizens.
The three measures are:
- qualified donee status allowing such organizations to register as a qualified done for charitable donation purposes,
- refundable labour tax credit providing a 25% refundable tax credit on salaries and wages paid to eligible newsroom employees with a cap of $55,000 on labor costs per employee per year and providing a maximum refundable tax credit of up to $13,750 per employee, and
- a temporary 15% non-refundable tax credit on amounts paid by individuals who subscribe for digital news subscriptions on up to $500 in costs annually and providing a $75 tax credit per year.
Zero Emission Vehicles
Budget 2019 provides for a temporary enhanced first year capital cost allowance write-off of 100% for zero emission vehicles otherwise included in class 10 or 10 .1 to a limit of $55,000 plus sales tax and for zero emission vehicles that would otherwise be included in class 16.
The Budget will also amend the GST rules to align them with the proposed increase in capital cost allowance limits for zero emission vehicles.
To be eligible, the vehicle must be a motor vehicle that is either a fully electric vehicle, a plug-in hybrid vehicle with a battery capacity of at least 15 kWhs or a fully powered hydrogen vehicle that have not been used or acquired for use for any purpose before it is acquired by the taxpayer.
Scientific Research and Experimental Development (“SRED”)
A Canadian-controlled private Corporation (“CCPC”) is entitled to enhanced SRED tax credit benefits on eligible expenditures up to the “expenditure limit”. The expenditure limit is currently $3,000,000 per annum and is reduced to the extent the corporation and associated corporation’s taxable income in the preceding year exceeds $500,000. These enhanced benefits include a SRED tax credit rate of 35% and allows the tax credits to be refundable even if the CCPC is not otherwise taxable.
Budget 2019 repeals the use of taxable income as a factor in determining a CCPC’s annual expenditure limit for purposes of the enhanced SRED benefits.
- International Tax Changes
Foreign Affiliate Dumping
Budget 2019 expands the foreign affiliate dumping rules to not only apply in respect of a corporation resident in Canada (“CRIC”) that is controlled by a non-resident corporation but now also to include a CRIC that is controlled by non-resident individuals, non-resident trusts or groups of persons that do not deal with each other at arm’s length.
These rules are intended to prevent the erosion of the Canadian tax base that may occur when a CRIC that is controlled by foreign corporations, individuals, trusts and groups of persons uses its borrowed or surplus funds to invest in a foreign affiliate.
When the foreign affiliate dumping rules apply, this could result in the reduction of the paid-up capital of the shares of the CRIC created because of the investment in the foreign affiliate and / or could result in the payment of a deemed dividend by the CRIC to the controlling non-resident which would trigger Canadian withholding tax on the deemed dividend.
Cross-border Securities Lending Arrangements.
Budget 2019 expands the cross-border securities lending arrangements provisions which deem dividend compensation payments made by a Canadian borrower of a Canadian security from a non-resident to be deemed to be a dividend payment for Canadian withholding tax purposes to not only fully collateralized security lending arrangements but also to “Specified Securities Lending Arrangements”.
These rules will have the effect of deeming more dividend compensation payments to be the payment of a dividend which will be subject to Canadian withholding taxes. These rules have been clarified to not apply in respect of securities lending arrangements involving shares of a foreign corporation.
- Other Changes
Other changes include an Employment Insurance (EI) small business premium rebate and an increase in the exemption limit for the guaranteed income supplement (GIS) for pensioners. There were no measures announced in respect of changing the rules for intergenerational transfer of businesses, farms and fishing properties; although the government did reiterate their commitment to develop new proposals in this area.
Highlights of the Budget include:
- A new, non-taxable Canada Training Credit for eligible workers aged 25 to 64
- A new Employment Insurance Training Support Benefit
- Increasing the RRSP withdrawal limit under the First-Time Home Buyers’ Plan
- Preferred capital gains tax treatment for owners of multi-unit residential properties
- Increased access to the enhanced 35 per cent scientific research and experimental development tax credit
- Limits on the employee stock option deduction for large, long-established, mature companies
- Broadening the tax rules for certain registered plans to allow new types of annuities
- Changing the rules for Registered Disability Savings Plans to better protect the long-term savings of persons with disabilities
- Making zero-emission vehicles eligible for a 100 per cent capital cost allowance rate in the year they are put in use
- Reallocating the CRA’s resources to improve digital services, provide more timely resolution to taxpayers’ objections, and adding CRA auditors to help new unincorporated businesses understand their tax obligations and extending the program to incorporated businesses
- Making a permanent dedicated CRA telephone support line for technical questions from tax practitioners
- Increasing CRA staff to reduce the time it takes to process T1 post-filing adjustments
- New CRA audit teams to detect and pursue complex real estate transactions where parties have not paid the required taxes
- Making Tax-Free Savings Account holders jointly and severally liable with their financial institutions for tax owing when using those accounts to carry on business
To continue reading the Federal Budget Commentary 2019, click here.
If you require any assistance in regards to how the 2019 Federal Budget affects you or your business, please contact your DMCL advisor.