Niche nuggets in Budget 2017

Tax expert John Sliskovic is more enthusiastic about the government’s pending review of the current tax system than he is about Budget 2017.

“What caught our eye the most was the comments about the government releasing a paper that will talk about some of the issues that concern them,” says Sliskovic, who’s a tax partner for the Private Client Services Practice at EY in London, Ont. (See pages 199 to 200 of Budget 2017). “We’re curious where [the government] might go with this, and that would be relevant to advisors.”

Read: Liberals reviewing private corporations, high-income tax strategies

In the meantime, the government has done “some smaller housekeeping,” says Curtis Davis, director of tax and estate planning at Mackenzie Investments in Toronto, who’s looking forward to the fall economic update. “What potentially put some bigger changes on hold might have been the political climate in the U.S., given their policies can have such a huge impact on our economy.”

For now, the experts suggest sharing these highlights with clients who are impacted by the budget.

Disability Tax Credit and medical expenses

With the Disability Tax Credit (DTC), there’s only one proposed change: the budget wants nurse practitioners to be added to the list of eligible medical practitioners that can certify the impacts of impairments for those applying for the credit.

“This is a good thing,” says Davis. “In some provinces, the profession of a nurse practitioner is pretty prevalent, so their role is important in various communities.” Nurses are regulated and recognized, similar to doctors, he adds, and they often have closer relationships with patients—that could be the case in rural communities, for example, where there aren’t as many doctors.

This change will help clients who are applying for the first time or who have to reapply for the credit. Says Davis: “Eligibility can change,” depending on the disability. Think of something like diabetes and the differing needs of children versus adults, he adds, noting, “There is the possibility of being assessed and re-assessed for the credit.”

Sliskovic says the tweak to the DTC may be helpful if clients currently have trouble reaching their doctor, and a nurse practitioner is more readily available. “We have a handful of clients who do claim the credit. The form that the medical practitioner has to complete is fairly detailed but, normally, if you’re able to get a hold of a doctor, it can get turned around pretty quickly.” It typically takes a few weeks.

Going forward, we could see more changes to the DTC application process, says Davis. “I’ve heard it’s quite an ordeal to go through the certification. It would have been nice to see some potential changes there, given it’s a crucial credit for those with disabilities.”

Regarding the Medical Expense Tax Credit, the budget’s focus is on the costs of fertility treatments, and other medical interventions and medications for those trying to conceive.

“Those costs have always been eligible, but the challenge was it required the diagnosis of a condition, and that requirement has been dropped,” says Davis. Starting in 2017, any family can now claim these costs and, going forward, can look back up to 10 years—this compares to a two-year window for many other credits, Davis adds.

He cites the high cost of fertility treatments as a main driver of this change, also noting, “The Liberals are very focused on supporting families of all types.”

RESPs and RDSPs

The budget proposes that the anti-avoidance rules that apply to registered plans like RRSPs, TFSAs and RRIFs also be applied to RESPs and RDSPs.

Sliskovic explains, “There are three components that we call the advantaged tax rules, prohibited investment rules and non-qualified investment rules, and they will all now apply to all of these plans, but the budget itself says these changes won’t have wide application because most RESPs and RDSPs are just investing in conventional, marketable securities.”

Davis agrees, noting, “Most financial institutions that administer these accounts weren’t really allowing investments that weren’t allowed in other registered plans anyway. There shouldn’t be a high number of accounts that get trapped,” so it’s more to prevent people from taking advantage of the loophole.

One example of something that won’t be allowed any longer is “when you try and swap an investment that’s in a taxable with an investment, of equal value, that’s in a registered account. Then, when you would dispose of the investment in the registered account, you’ve then avoided tax.” The government will only allow swaps if you have an investment in a registered account that’s no longer eligible; you can swap that for something that is eligible, until the end of 2021.

Don’t forget about derivatives

Attention all day traders and portfolio managers: you may have noticed that the budget proposes that derivatives be treated differently when it comes to the timing of recognition of gains and losses on such instruments held on income account. The budget says, “Aside from the mark-to-market property regime applicable to financial institutions,” there are no specific Income Tax Act rules that govern this.

Curtis Davis of Mackenzie Investments says, “There’s a particular strategy called straddling transactions. In the straddle, the idea is you have positions that are offsetting—say one position works out while the other loses—but what traders were doing was realizing loser positions in the current tax year and deferring winners to the future, and thus timing when they want to realize income.”

Now, he adds, you’ll have to realize losses and gains at the same time, “and these changes are targeted at specific investors” using complex strategies.