How does the 2017 federal budget impact Canadian private businesses? The better the question. The better the answer.� The better the world works.
Today’s Presenters David Steinberg John Sliskovic Ryan Ball Tax Partner and National Co- Tax Partner Tax Partner leader Private Client Services Private Client Services Private Client Services practice practice practice EY EY EY Page 2
Agenda Business income tax measures: ► Corporate tax rates ► Computation of income for professionals ► Factual control ► Miscellaneous measures ► Personal tax measures: ► Personal tax rates ► Tax credits ► Other ► Principal residence exemption ► Private company tax planning ► What wasn’t in the budget ► Questions ► Page 3
Business income tax measures Corporate Tax ► No changes to corporate tax rates ► See chart and the appendix in the tax alert for summary of personal tax rates Page 4
2017 combined corporate income tax rates (as at 22 March 2017 for Dec. 31 year-ends) Corporate investment income tax Corporate income tax rates for active business income rates Income eligible for Manufacturing and General income small business processing (M&P) Investment Investment not eligible for deduction (SBD) (%) income not eligible for income earned income earned by SBD (%) (non-M&P (generally up to federal SBD (%) by CCPCs (%) non-CCPCs (%) income) $500,000) (greater than $500,000) % % % % % Federal only 10.50 15.00 15.00 38.67 15.00 British Columbia 12.60 26.00 26.00 49.67 26.00 Alberta 12.50 27.00 27.00 50.67 27.00 Saskatchewan 12.50 24.75 26.75 50.42 26.75 10.50 (up to $450K) Manitoba 27.00 27.00 50.67 27.00 22.50 ($450K-$500K) Ontario 15.00 25.00 26.50 50.17 26.50 Quebec 18.50 26.80 26.80 50.47 26.80 New Brunswick 13.62 29.00 29.00 52.67 29.00 13.50 (up to $450K) Nova Scotia 31.00 31.00 54.67 31.00 26.50 ($450K to $500K) Prince Edward Island 15.00 31.00 31.00 54.67 31.00 Newfoundland and Labrador 13.50 30.00 30.00 53.67 30.00 Northwest Territories 14.50 26.50 26.50 50.17 26.50 Nunavut 14.50 27.00 27.00 50.67 27.00 Yukon 12.00/13.50 17.50 30.00 53.67 30.00 Page 5
Business income tax measures contd. Computation of income for professionals ► Accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors are currently allowed to report income when only amounts are actually billed to clients ► The current rules facilitate a deduction of revenue for work in progress (WIP) ► The Budget proposes to phase out the WIP deduction for these professionals over 2 years ► For December 2018 years, only 50% of WIP will be allowed as a deduction and for December 2019 years, no WIP deduction is allowed Page 6
Business income tax measures contd. Factual control The Income Tax Act contains two different definitions of control that apply for ► various purposes. Some provisions rely on legal control while others rely on factual control The most common private company tax provisions that are impacted by control ► are: Canadian Controlled Private Company (CCPC) status, and sharing of tax benefits such as the small business deduction and refundable R&D tax credits A recent Federal Court of Appeal (FCA) decision restricted the scope of the ► factual control test. Budget 2017 proposes to remove this restriction These proposed changes could impact the determination of whether a private ► company with certain foreign shareholders or voting arrangements meets CCPC status tests, or whether preferential tax benefits are to be shared with other associated corporations Page 7
Business income tax measures contd. Miscellaneous measures Oil and Gas sector – changes to the CDE/CEE classification for discovery wells ► (In certain cases could lead to a 30% declining balance deduction instead of 100% deduction) Oil and Gas sector – changes to flow through expenditure rules for small oil and ► gas companies. Could change CEE to CDE for investor Farming business – a public consultation regarding the ability to take advantage ► of a deferral in respect of deferred cash purchase tickets issued for deliveries of certain listed grains Page 8
Personal tax measures: tax rates ► No changes to the federal personal tax rates or tax brackets ► Tax brackets will continue to be indexed for inflation Page 9
2017 maximum combined personal marginal income tax rates (as at 22 March 2017) Ordinary income 2017 Ordinary 2016 2017 Increase (decrease) Eligible dividends Capital gains dividends % % % % % % Federal only 33.00 33.00 0.00 24.81 26.30 16.50 BC 47.70 47.70 0.00 31.30 40.95 23.85 Alberta* 48.00 48.00 0.00 31.71 41.24 24.00 Saskatchewan 48.00 47.75 (0.25) 30.33 39.62 23.88 Manitoba 50.40 50.40 0.00 37.78 45.74 25.20 Ontario 53.53 53.53 0.00 39.34 45.30 26.76 Quebec 53.31 53.31 0.00 39.83 43.84 26.65 NB 53.30 53.30 0.00 33.51 45.96 26.65 NS 54.00 54.00 0.00 41.58 46.97 27.00 PEI 51.37 51.37 0.00 34.22 43.87 25.69 NL 49.80 51.30 1.50 42.61 43.62 25.65 NWT 47.05 47.05 0.00 28.33 35.72 23.53 Nunavut 44.50 44.50 0.00 33.08 36.35 22.25 Yukon 48.00 48.00 0.00 24.81 40.17 24.00 Page 10
Personal tax measures – Canada caregiver credit ► A new 15% non-refundable caregiver credit replaces the infirm dependent tax credit, the caregiver tax credit and the family caregiver credit for 2017 ► Credit amount of $6,883 or $2,150 will be reduced dollar for dollar by the dependent's net income above $16,163 ► The lower credit amount applies if also claiming the spousal amount, the eligible dependent amount or if an infirm child under 18 ► The dependent is not required to live with the caregiver ► Not available for non-infirm seniors residing with their adult children Page 11
Personal tax measures – tax credits ► Amounts paid for tuition to a post-secondary institution for occupational skills courses that are not at the post-secondary level now eligible for the tuition tax credit ► Public transit tax credit eliminated for transit use after June 2017 ► Budget 2016 previously eliminated the education and textbook tax deduction for 2017 and subsequent years ► Budget 2016 previously eliminated the children's fitness and arts tax credits for 2017 and subsequent years ► Mineral exploration credit extended to 31 March, 2018 Page 12
Personal tax measures – other ► Anti avoidance rules including advantage tax rules, the prohibited investment rules and non-qualified investment rules extended to apply to RESPs and RDSPs (Previously only applied to TFSAs, RRSPs and RRIFs) ► Taxable benefit for a home relocation loan can no longer be reduced by the benefit relating to $25,000 of the loan ► Non-accountable allowances paid to members of legislative assemblies and certain municipal offices will be taxable ► Stop-loss rule for straddle transactions Page 13
Personal tax measures - principal residence exemption (pending legislation) ► Requirement to report the sale of a principal residence in 2016 and subsequent years ► Extended reassessment period if the disposition is not reported ► Revised calculation of the exemption for nonresidents ► Certain trusts no longer qualify to designate a property as a principal residence Page 14
Private company tax planning ► Budget 2017 confirmed the government’s intent to review tax planning strategies involving private corporations ► Budget 2017 identified 3 strategies that are perceived to give high income taxpayers an “unfair advantage” ► Government will release a paper in the coming months identifying these and perhaps other arrangements that are perceived to be advantageous and unfair Page 15
Private company tax planning Budget example 1 - “sprinkling income” Children beneficiary Mr. A Mrs. A Dividend Trust 60% 20% 20% Dividend Opco Examples: ► Paying dividends to low income earners (ie. spouse and/or children (>18)) ► Possible use of tax free capital gains exemption ($836,000) for multiple shareholders Page 16
Private company tax planning Budget example 1 - “sprinkling income” What might the government propose? ► Possibly extend ‘kiddie tax’ to taxpayers over 18 ► Possibly deny multiple capital gains exemption if not ‘active’ in the business Page 17
Private company tax planning Budget example 2 - “accumulated earnings” Mrs. A Active Business Income $2,000,000 100% Corporate tax (high rate – <530,000> Ontario Holdco 1 After tax Accumulated $1,470,000 Earnings 100% Opco Example: ► Opco invests $1,470,000 into a passive investment portfolio or perhaps dividends $1,470,000 to Holdco which invests in passive portfolio Page 18
Private company tax planning Budget example 2 - “accumulated earnings” What might the government propose? ► Possibly tax ‘accumulated earnings’ that are invested in ‘passive’ portfolio with an extra 25% refundable tax ► Results in overall tax rate of approximately 51% Page 19
Private company tax planning Budget example 3 – “converting regular income into capital gains” (Surplus Strip) Mr. A 100% Opco Examples: ► Mr. A can take dividend from Opco at a rate of 40/45% ► Planning can be done to create a capital gain inside Opco and allow for distribution at effective integrated rate of 27% Page 20
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