«2016 FEDERAL BUDGET Wealth Planning Group Assante Private Client, a division of CI Private Counsel LP Tax highlights from the 2016 Federal budget ...»
2016 FEDERAL BUDGET
Wealth Planning Group
Assante Private Client, a division of CI Private Counsel LP
Tax highlights from the 2016 Federal budget
Canada’s Finance Minister, the Honourable William Morneau, tabled the 2016 federal budget on March 22, 2016. The
following global economic developments and outlook were noted:
• Global growth has slowed;
• Financial market volatility has risen; and
• Commodity prices have fallen sharply.
The fragile and uncertain global economic environment has weighed on Canada’s economy. Over the past four years, growth in Canada has slowed to below 2% on average and the sharp decline in global crude oil prices since the end of 2014 has placed significant downward pressure on the economy. However, the conditions are in place for the economy to begin to regain momentum and post more solid GDP growth and job creation going forward.
Using a February outlook for planning purposes, and accounting for budget measures, the budgetary balance is expected to show a deficit of $29.4 billion in 2016-17, gradually declining to a deficit of $14.3 billion in 2020-21. These details are summarized below.
Summary of fiscal developments since the February outlook (billions of dollars) PROJECTION 2015-16 2016-17 2017-18 2018-19 2019-20 2020-2021 February outlook -2.3 -18.4 -15.5 -13.9 -11.0 -7.2 Budget 2016 measures -3.1 -11.0 -13.5 -8.9 -6.7 -7.0 Budget 2016 budgetary balance -5.4 -29.4 -29.0 -22.8 -17.7 -14.3 Repealing the Federal Balanced Budget Act Balanced budget legislation enacted under the previous Government is inconsistent with the current Government’s plan.
As a result, the Government will propose legislative repeal of the Federal Balanced Budget Act.
The following pages are a summary of the changes announced in the budget. Please note that these changes are still proposals until passed into law by the federal government.
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PERSONAL TAX MATTERSPersonal income tax rates There were no changes to personal income tax rates in the budget.
The new federal marginal tax rate of 33% for taxable income in excess of $200,000 became effective January 1, 2016, as did the reduction of the second bracket tax rate from 22.0% to 20.5%. Tax brackets have been indexed by 1.3% for 2016 to reflect the impact of inflation. Theeffective rates for 2016 and corresponding tax bracket thresholds are shown in the following table.
$45,283 - $90,563 20.5% $90,564 - $140,388 26.0% $140,389 - $200,000 29.0%
Taxation of shares of a mutual fund corporation Canadian mutual funds can be in the legal form of a trust or a corporation. While many funds are structured as mutual fund trusts, some are structured as mutual fund corporations.
Many mutual fund corporations are organized as “switch funds” which offer different types of asset exposure in different funds, but each fund is structured as a separate class of shares within the mutual fund corporation. Investors are able to exchange shares of one class of the mutual fund corporation for shares of another class, in order to switch their economic exposure between the mutual fund corporation’s different funds. By virtue of a general provision in the Income Tax Act that applies to convertible corporate securities, this exchange is deemed not to be a disposition for income tax purposes.
To ensure recognition of capital gains, Budget 2016 proposes to amend the Income Tax Act so that an exchange of shares of a mutual fund corporation (or investment corporation) that results in the investor switching between funds will be considered to be a disposition at fair market value for tax purposes. The measure will not apply to switches where the shares received in exchange differ only in respect of management fees or expenses to be borne by investors and otherwise derive their value from the same portfolio or fund within the mutual fund corporation (e.g. the switch is between different series of shares within the same class). This measure will apply to dispositions of shares that occur after September 2016.
To simplify and consolidate existing child benefits, Budget 2016 proposes to replace the CCTB and UCCB with a new Canada Child Benefit.
The Canada Child Benefit will provide a maximum benefit of $6,400 per child under the age of six and $5,400 per child aged
six through 17. The benefit will be phased out based on family net income and number of children as indicated below:
Canada child benefit phase-out rates and adjusted family net income thresholds
To recognize the additional costs of caring for a child with a severe disability, Budget 2016 proposes to continue to provide an additional amount of up to $2,730 per child eligible for the disability tax credit. The phase-out of this additional amount will be made to generally align with the Canada Child Benefit.
Entitlement to the Canada Child Benefit for the July 2016 to June 2017 benefit year will be based on adjusted family net income for the 2015 taxation year.
Canada Child Benefit payments will start in July 2016. The UCCB and CCTB will be eliminated for months after June 2016.
Elimination of family tax cut The Family Tax Cut, a non-refundable income splitting tax credit available for couples with at least one child under the age of 18, allows a higher-income spouse or common-law partner to notionally transfer up to $50,000 of taxable income to their spouse or common-law partner for the purpose of reducing the couple’s total income tax liability by up to $2,000.
Budget 2016 proposes to eliminate this credit for the 2016 and subsequent taxation years.
Children’s fitness and arts tax credits The children’s fitness tax credit provides a 15% refundable tax credit on up to $1,000 of eligible fitness expenses for children under 16 years of age at the beginning of the taxation year. For children who are eligible for the disability tax credit and have at least $100 of eligible expenses, the credit amount is increased by $500 and is extended to children under 18 years of age.
The children’s arts tax credit provides a 15% non-refundable tax credit on up to $500 in eligible fees for programs of artistic, cultural, recreational and developmental activity for children under 16 years of age. As with the children’s fitness tax credit, the age limit of the children’s arts tax credit is extended to children under 18 years of age and an additional $500 credit amount is available in respect of children eligible for the disability tax credit.
Page 3 of 11 Budget 2016 proposes to phase out the children’s fitness and arts tax credits by reducing the 2016 maximum eligible amounts to $500 from $1,000 for the children’s fitness tax credit and to $250 from $500 for the children’s arts tax credit.
The supplemental amounts for children eligible for the disability tax credit will remain at $500 for 2016. Both credits will be eliminated for the 2017 and subsequent taxation years.
Education and textbook tax credits The education tax credit provides a 15% non-refundable tax credit of $400 per month of full-time enrolment in a qualifying educational program and $120 per month of part-time enrolment in a specified educational program at a designated educational institution. The textbook tax credit provides a 15% non-refundable tax credit of $65 per month of full-time enrolment in a qualifying educational program and $20 per month of part-time enrolment in a specified educational program at a designated educational institution.
A tuition tax credit is also available that provides a 15% non-refundable tax credit on eligible fees for tuition and eligible examination fees paid to certain educational institutions.
Budget 2016 proposes to eliminate the education and textbook tax credits. Note this measure does not eliminate the tuition tax credit. Changes will be made to ensure that other income tax provisions – such as the tax exemption for scholarship, fellowship and bursary income – that currently rely on eligibility for the education tax credit or use terms defined for the purpose of the education tax credit will be unaffected by its elimination.
This measure will apply effective January 1, 2017. Unused education and textbook credit amounts carried forward from years prior to 2017 will remain available to be claimed in 2017 and subsequent years.
Teacher and early childhood educator school supply tax credit Teachers and early childhood educators often incur at their own expense the cost of supplies for the purpose of teaching or otherwise enhancing students’ learning in the classroom or learning environment. To provide tax recognition for these costs, Budget 2016 proposes to introduce a teacher and early childhood educator school supply tax credit. This measure will allow an employee who is an eligible educator to claim a 15% refundable tax credit based on an amount of up to $1,000 in expenditures made by the employee in a taxation year for eligible supplies.
Teachers will qualify as eligible educators if they hold a teacher’s certificate that is valid in the province or territory in which they are employed. Likewise, early childhood educators will qualify as eligible educators if they hold a certificate or diploma in early childhood education recognized by the province or territory in which they are employed.
Eligible supplies will normally include durable and consumable goods including games and puzzles, supplementary books for classrooms, educational support software, construction paper for activities and art supplies. This measure will apply to supplies acquired on or after January 1, 2016.
Top marginal income tax rate – consequential amendments On December 7, 2015, the government announced the introduction of a 33% personal income tax rate on individual taxable income in excess of $200,000, effective for the 2016 and subsequent taxation years. These proposals were included as part of Bill C-2 (An Act to amend the Income Tax Act), which was tabled on December 9, 2015.
A number of amendments were included in Bill C-2 that were consequential to the introduction of the new 33% top personal income tax rate. Budget 2016 proposes further amendments to reflect the new top marginal income tax rate for
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• providing a 33% charitable donation tax credit (on donations above $200) to trusts that are subject to the 33% rate on all of their taxable income;
• applying the new 33% top rate on excess employee profit sharing plan contributions;
• increasing the tax rate on personal services business income earned by corporations from 28% to 33%;
• amending the recovery tax rule for qualified disability trusts to refer to the new 33% top rate.
These measures will apply to the 2016 and later taxation years. The charitable donation tax credit measure will be limited to donations made after the 2015 taxation year. In the case of the rate increase on personal services business income earned by corporations in taxation years that straddle 2015 and 2016, the rate increase will be prorated according to the number of days in the taxation year that are after 2015.
Labour-sponsored venture capital corporations tax credit A labour-sponsored venture capital corporation (LSVCC) is a form of mutual fund corporation sponsored by an eligible labour body. LSVCCs are mandated, under their enabling legislation, to provide venture capital to small and mediumsized businesses.
Prior to 2015, individuals acquiring LSVCC shares qualified for a 15% federal tax credit for investments of up to $5,000 each year. The federal LSVCC tax credit was reduced to 10% for the 2015 taxation year and to five percent for the 2016 taxation year. The credit is scheduled to be eliminated for the 2017 and subsequent taxation years.
A number of provinces offer a similar tax credit, at varying investment limits and tax credit rates. LSVCCs may be referred to by different names under provincial legislation.
Federally registered LSVCCs are subject to federal tax rules. Provincially registered LSVCCs are subject to provincial legislation. To be eligible for the federal tax credit, a provincially registered LSVCC must be prescribed for purposes of the Federal Income Tax Act.
Consistent with the scheduled reduction and elimination of the federal tax credit, new federal LSVCC registrations are not permitted, and new provincially registered LSVCCs are not permitted to be prescribed for the purposes of the federal tax credit.
To support provinces that use LSVCC programs to facilitate access to venture capital for small and medium-sized businesses, Budget 2016 proposes to restore the federal LSVCC tax credit to 15% for share purchases of provincially registered LSVCCs prescribed under the Income Tax Act for the 2016 and subsequent taxation years.
Mineral exploration tax credit for flow-through share investors Flow-through shares allow resource companies to renounce or “flow through” tax expenses associated with their Canadian exploration activities to investors, who can deduct the expenses in calculating their own taxable income. The mineral exploration tax credit provides an additional income tax benefit for individuals who invest in mining flow-through shares, which augments the tax benefits associated with the deductions that are flowed through. This credit is equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors.
Budget 2016 proposes to extend eligibility for the mineral exploration tax credit for one year, to flow-through share agreements entered into on or before March 31, 2017. Under the existing “look-back” rule, funds raised in one calendar year with the benefit of the credit can be spent on eligible exploration up to the end of the following calendar year.
Page 5 of 11 Sales of linked notes A linked note is a debt obligation, most often issued by a financial institution, the return on which is linked in some manner to the performance of one or more reference assets or indexes over the term of the obligation. The reference asset or index – which can be a basket of stocks, a stock index, a commodity, a currency or units of an investment fund – is generally unrelated to the operations or securities of the issuer.