2018 Federal Budget Insights

Finance Minister Bill Morneau tabled Budget 2018 Equality & Growth: a Strong Middle Class on Tuesday February 27th, 2018.  Highlights of the Canadian 2018 Budget include:

• Investing and taking steps to address the gender wage gap, support equal-parenting and introducing a new entrepreneurship strategy for women with the goal of increasing economic participation among women, visible minorities and persons with disabilities
• Substantial long-term investment in science and technology by providing funding to increase opportunities for young researchers and to provide them the the equipment they need to succeed and to strengthen support for entrepreneurs to innovate, scale up and reach global markets
• Supporting the health and wellness of Canadians by partnering with the provinces to address the opioid crisis and taking action on National Pharmacare
• Putting more money into the pockets of those who need it most by improving access to the Canada Child Benefit and introducing the new Canada Workers Benefit which is enhanced and more accessible than the existing Working Income Tax Benefit

Budget 2018 expects a deficit of $19.4 billion for fiscal 2017/2018, a deficit of $18.1 billion for fiscal 2018/2019 and a deficit of $17.5 billion for fiscal 2019/2020 with the net debt-to-GDP ratio declining over this period from 31% today to 28.4% by fiscal 2022/2023.

As was expected, the Budget introduced a new tax regime for investment income earned by a private corporation which is a lot simpler and more targeted then the proposals that were set out in the government’s discussion papers released in July of 2017.   These measures address the perceived tax deferral advantages arising from accumulating business earnings in a private corporation and address these perceived abuses using 2 new tax measures that apply for taxation years beginning after 2018.

1. Business limit reduction

The Budget proposes to reduce the $500,000 small business limit available to Canadian-controlled private corporations (CCPCs) and their associated corporations on a straight-line basis where such companies earn between $50,000 and $150,000 of adjusted aggregate investment income by reducing the small business limit by $5 for every $1 of investment income over $50,000.

This is in addition to the current rules that limit the small business deduction to CCPCs and associated corporations that have taxable paid-up capital of between $10 to $15 million.

2. Limiting access to refundable taxes

Refundable taxes arise to a private corporation when it earns investment income such as interest on bonds, taxable capital gains on investments, and the receipt of dividends from connected corporations.  Earnings paid out of these sources of income are paid out as non-eligible dividends to shareholders who are subject to a higher income tax rate than eligible dividends.

Under current rules, refundable taxes are refundable to a private corporation at the rate of $0.3833 for every $1.000 of dividends paid by the corporation (whether eligible or non-eligible dividends are paid).

Budget 2018 proposes to allow a refund of these refundable taxes only where a private corporation pays non-eligible dividends to shareholders who will be subject to a higher income tax rate on such dividends than eligible dividends.  However, refundable taxes arising from the receipt of eligible dividends from portfolio investments in Canadian public companies may also be refunded on the payment of eligible dividends.

Highlights of other significant tax changes include the following:

• Reducing the small business tax rate to 10 per cent effective January 1, 2018 and 9 per cent as of January 1, 2019
• Additional reporting requirements for trusts (effective 2021 tax year)
• Extending eligibility for accelerated capital cost allowance for certain clean energy equipment
• Annual indexation of the Canada Child Benefit (starting July 1, 2018)
• “Use it or lose it” EI parental benefits (expected availability June 2019)
• Legislates that the at-risk rules apply to a partnership that is itself a limited partner of another partnership
• Tightens certain synthetic equity arrangements and securities lending arrangements
• Expands the stop-loss rules on certain share repurchase transactions
• Reduces the ability of on-resident shareholders to enter into transactions to extract Canadian corporate surplus in excess of the paid-up capital of its shares
• Applying GST/HST to management and administrative services provided to an investment limited partnership by the general partner (after September 8, 2017)
• Additional new measures to prevent tax avoidance
• Adjusting tobacco excise duty rates annually (starting April 1, 2019)
• Grants and funds to attract women to “Red Seal” trades and construction (starting 2018–19)
• Pre-apprenticeship assistance for underrepresented groups (starting 2018–19)

If you have any questions with respect to these proposals, please contact your DMCL advisor.