Highlights from budget 2018

From this year’s federal budget, your business owner clients will most want to know about clarified rules for passive investment income, which are effective for 2019 (read about that here).

Combined with the changes to income sprinkling, the changes to passive investment income rules are expected to save the government $925 million a year by 2022-23, reveals the budget.

Read: Tax questions for business owners in 2018

And, while the budget offered no direct response to the competition from a stateside corporate tax cut, it did say that “over the coming months, the Department of Finance Canada will conduct detailed analysis of the U.S. federal tax reforms to assess any potential impacts on Canada.”

A main theme in the budget was help for working women and women in business. The government says it will make $1.4 billion available over three years in new financing for women entrepreneurs through the Business Development Bank, as well as $250 million over three years through Export Development Canada for financing and insurance for women-owned and women-led businesses.

The government will also spend $1.2 billion over five years and $344.7 million a year afterward for a new employment insurance parental sharing benefit that would provide additional “use-it-or-lose-it” benefits for non-birthing parents of eligible two-parent families, mainly to encourage women to re-enter the workforce.

Read: All about the Liberals’ EI Parental Sharing Benefit

The government’s projected deficits are roughly in line with October projections. The new outlook shows a $18.1-billion shortfall for 2018-19 that’s expected to gradually shrink to $12.3 billion in 2022-23, including annual $3-billion cushions to offset risks.

Highlights

Courtesy of an EY tax alert and PwC analysis, here are other budget highlights to share with clients:

• Proposed new reporting requirements for trusts. Effective 2021, trusts must report the identity of all trustees, beneficiaries and trust settlors. Read more.
• Medical expense tax credit. This credit will be enhanced to include eligible expenses incurred after 2017, relating to psychiatric service animals. “Expenses will not be eligible if they relate to an animal that provides only comfort or emotional support,” notes PwC.
• Mineral exploration tax credit. The credit, equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors, will be extended to flow-through share agreements entered into before Apr. 1, 2019. The credit was scheduled to expire on Mar. 31, 2018.
• Canada workers benefit (CWB) to replace working income tax benefit (WITB). The budget proposes to strengthen the WITB by introducing the CWB, a refundable tax credit, effective 2019. The maximum benefit will be $1,355 for single people without dependants (an increase of $170 in 2019) and $2,335 for families. In addition, the disability supplement will be increased to $700 in 2019.

EY notes the CWB will be reduced for single individuals with income in excess of $12,820, and families with income of more than $17,025. The credit will be fully eliminated for those with incomes in excess of $24,111, and families with incomes in excess of $36,483.

Access to the CWB will also be improved: the budget proposes to allow CRA to determine a person’s eligibility for the benefit even when not specifically claimed, effective 2019 and later years.

EY also points out who’s not eligible for the CWB. That includes people with no dependants who are enrolled as full-time students at certain institutions for more than 13 weeks in a tax year.

Further, says EY, “Budget 2018 proposes that designated educational instructions be required to report to the CRA prescribed information regarding students’ enrolment after 2018.”

Read: Tax credits and benefits for students

• Contributions to enhanced portion of Quebec pension plan (QPP). Quebec’s government recently announced that the QPP would be enhanced in a manner similar to the CPP enhancement announced in 2016. To provide consistent treatment of CPP and QPP contributions, the budget proposes to amend the Income Tax Act to provide a deduction for employee contributions to the enhanced portion of the QPP. This measure will apply to the 2019 and subsequent taxation years.

Says EY: “For individuals who are employees, a tax credit will continue to apply to the employee share of the contributions to the base (i.e., existing) QPP. For self-employed individuals, this measure will ensure the individual is able to deduct both the employee and employer share of contributions to the enhanced portion of the QPP.”

Read: Shedding light on the CPP survivor benefit

• RDSP permitted plan holders. The Income Tax Act includes a temporary measure for certain family members to be plan holders of a registered disability savings plan (RDSP) for adults who might not be able to enter into contracts, due to doubts about the capacity of such adult individuals. The measure is set to expire at the end of 2018, so the budget proposes to extend it by five years to the end of 2023.

Adds EY: “If a qualifying family member becomes a plan holder of an RDSP before the end of 2023, they can remain as the plan holder after 2023.”

Read: Which tax tools require DTC eligibility?

Other budget measures to note

• To help crack down on tax cheats, the government will spend $90.6 million over five years to address cases that have been identified both domestically and internationally.
• Ottawa is moving to improve tax rules to prevent what it said was typically Canadian banks and other financial institutions from gaining a tax advantage by creating artificial losses through sophisticated financial instruments. The move is expected to generate roughly $2.5 billion for the government over five years.
• The government says it will clarify the application of at-risk rules for limited partnerships to prevent unintended tax advantages.
• A total of $155.2 million over five years will be allocated for a new Canadian Centre for Cyber Security, while another $116 million over five years is allocated for the RCMP to create a National Cybercrime Co-ordination Unit.
• Spending of $75 million over five years, with $11.8 million a year afterward, aims to bolster Canada’s trade ties with China and Asia.

The budget says it will obtain feedback form pensioners, workers and companies affected by insolvencies that involve substantial unfunded pension liabilities.

The budget also confirmed it will proceed with previously announced measures, including income sprinkling rules, which were clarified in December 2017, and the lowering of the small business tax rate to 10% on Jan. 1, 2018 (from 10.5%) and to 9% on Jan. 1, 2019.

Other measures going ahead are the indexation of the Canada child benefit starting July 1, 2018, and the reduction in the gross-up factor for non-eligible dividends to 16% (from 17%) for 2018 and to 15% for 2019 and subsequent years.

Says EY: “The effective dividend tax credit (expressed as a percentage of the grossed-up amount of a non-eligible dividend) will be reduced from 10.5% to 10% for 2018 and 9% for 2019 and subsequent years.”

Changes to funny money

The budget includes an initiative to seek authority to remove legal tender status from Canadian bank notes. This authority would match the authority the government already has for coins issued by the Royal Canadian Mint.

“The Bank of Canada supports this initiative because it can help [us] ensure that bank notes used by Canadians are current, in good condition, easy to use and difficult to counterfeit,” says the central bank in a release.

Affected notes are the $1, $2, $25, $500 and $1,000—but Canadians don’t need to worry about these notes losing their value.

Once authority is granted, the Bank of Canada says it “will provide clear information to Canadians on how to redeem the affected bank notes,” which would involve a period during which notes can be redeemed through financial institutions.

The central bank adds, “After this period, the notes can be redeemed directly through the Bank of Canada.”

For all budget details, read the full budget. For detailed summaries, read the analyses from EY and PwC.