The 2017 Federal Budget tabled a number of proposals that will impact the financial, tax and estate plans of Canadians. The following is a summary of the most relevant budget proposals that may impact financial advisors and their clients.
There were no changes to personal income tax rates or brackets, nor any changes to corporate tax rates.
Measures for Investors
Corporate Mutual Funds: Merger of Switch Corporations into Mutual Fund Trusts
Canadian mutual funds can be in the legal form of a trust or a corporation. The Income Tax Act contains special rules to facilitate the merger of mutual funds on a tax-deferred basis, under which two mutual fund trusts can be merged or a mutual fund corporation can be merged into a mutual fund trust; however, these rules do not provide for the reorganization of a mutual fund corporation into multiple mutual fund trusts.
Budget 2017 proposes to extend the mutual fund merger rules to allow the reorganization of a mutual fund corporation that is structured as a switch corporation into multiple mutual fund trusts on a tax-deferred basis, on or after March 22, 2017. It is further proposed that segregated funds be allowed to merge on a tax-deferred basis on or after December 31, 2017.
Anti-Avoidance Rules for Registered Plans
A number of anti-avoidance rules exist for other tax-assisted registered plans (i.e., Tax-Free Savings Accounts, Registered Retirement Savings Plans and Registered Retirement Income Funds) to help ensure that the plans do not provide excessive tax advantages unrelated to their respective basic objectives.
To improve the consistency of the tax rules that apply to investments held by registered plans, Budget 2017 proposes to extend the anti-avoidance rules to RESPs and RDSPs.
Subject to the exceptions described below, this measure will apply to transactions occurring, and investments acquired, after March 22, 2017. The exceptions to this effective date are as follows:
- The advantage rules will not apply to swap transactions undertaken before July 2017; however, swap transactions undertaken to ensure that an RESP or RDSP complies with the new rules by removing an investment that would otherwise be considered a prohibited investment, or an investment which gives rise to an advantage under the new proposals, will be permitted until the end of 2021.
- Subject to certain conditions, a plan holder may elect by April 1, 2018 to pay Part I tax (in lieu of the advantage tax) on distributions of investment income from an investment held on Budget Day that becomes a prohibited investment as a result of this measure.
Phasing Out of the Canada Savings Bond Program
Canada Savings Bonds currently represent less than 1 per cent (about $5 billion) of total federal market debt. The Program is no longer a cost-effective source of funds for the Government. The Government of Canada will discontinue the sale of new Canada Savings Bonds in 2017. All outstanding retail debt will continue to be honoured.
Mineral Exploration Tax Credit
The 15% Mineral Exploration Tax Credit helps junior mineral exploration companies raise capital by providing an incentive to individual investors in flow-through shares issued to finance “grassroots” mineral exploration. This credit is in addition to the deduction provided to the investor for the exploration expenses “flowed through” from the company that issues the shares. The credit is scheduled to expire on March 31, 2017. Budget 2017 proposes to extend the credit for an additional year, until March 31, 2018.
Gains and Losses on Derivatives
Derivatives are sophisticated financial instruments whose value is derived from the value of an underlying interest. Aside from the mark-to-market property regime applicable to financial institutions, there are no specific rules in the Income Tax Act that govern the timing of the recognition of gains and losses on derivatives held on income account. Budget 2017 proposes two measures that clarify the scheme of the Income Tax Act in this regard.
- Mark-to-Market Method: Budget 2017 proposes to introduce an elective mark-to-market regime for derivatives held on income account. Specifically, an election will allow taxpayers to mark to market all of their eligible derivatives. Once made, the election will remain effective for all subsequent years unless revoked. Once an election is made by a taxpayer, the taxpayer will be required to annually include in computing its income the increase or decrease in value of its eligible derivatives. Furthermore, the recognition of any accrued gain or loss on an eligible derivative (that was previously subject to tax on a realization basis) at the beginning of the first election year will be deferred until the derivative is disposed of. This election will be available for taxation years that begin on or after March 22, 2017.
- Straddle Transactions: A straddle is a transaction in which a taxpayer concurrently enters into two or more positions – often derivative positions – that are expected to generate equal and offsetting gains and losses. Shortly before its taxation year end, the taxpayer disposes of the position with the accrued loss (the losing leg) and realizes the loss. Shortly after the beginning of the following taxation year, the taxpayer disposes of the offsetting position with the accrued gain (the winning leg) and realizes the gain. The taxpayer claims a deduction in respect of the realized loss against other income in the initial taxation year and defers the recognition of the offsetting gain until the following taxation year. The taxpayer could attempt to indefinitely defer the recognition of the gain on the winning leg by entering into successive straddle transactions.
Budget 2017 proposes to introduce a specific anti-avoidance rule that targets straddle transactions. In particular, a stop-loss rule will effectively defer the realization of any loss on the disposition of a position to the extent of any unrealized gain on an offsetting position. A gain in respect of an offsetting position would generally be unrealized where the offsetting position has not been disposed of and is not subject to mark-to-market taxation.
This measure will apply to any loss realized on a position entered into on or after March 22, 2017.
Personal Tax Measures
Disability Tax Credit – Nurse Practitioners
Nurse practitioners are registered nurses with additional educational preparation and experience who possess and demonstrate the competencies to diagnose autonomously, order and interpret diagnostic tests, prescribe pharmaceuticals, and perform specific procedures within their legislated scope of practice.
Budget 2017 proposes to add nurse practitioners to the list of medical practitioners that could certify eligibility for the disability tax credit. A nurse practitioner would be permitted to certify for all types of impairments that are within the scope of their practice.
This measure will apply to disability tax credit certifications made on or after March 22, 2017.
Medical Expense Tax Credit – Costs Related to Reproductive Technologies
The medical expense tax credit is a 15% non-refundable tax credit that recognizes the effect of above-average medical or disability-related expenses on an individual’s ability to pay tax. For 2017, the medical expense tax credit is available for qualifying medical expenses in excess of the lesser of $2,268 and three per cent of the individual’s net income.
Many of the costs related to the use of reproductive technologies are eligible expenses for the medical expense tax credit on account of medical infertility. Budget 2017 proposes to clarify the application of the medical expense tax credit so that individuals who require medical intervention in order to conceive a child are eligible to claim the same expenses that would generally be eligible for individuals on account of medical infertility.
This measure will apply to the 2017 and subsequent taxation years. A taxpayer will be entitled to elect in a year for this measure to apply for any of the immediately preceding ten taxation years in their return of income in respect of the year.
Consolidation of Caregiver Credits
The current system includes three non-refundable tax credits; infirm dependant credit, caregiver credit, and family caregiver tax credit with varying eligibility conditions based on the circumstances of the caregiver and the dependant.
Budget 2017 proposes to replace the existing three caregiver tax credits with a new Canada Caregiver Credit.
The new Canada Caregiver Credit amount will be:
- $6,883 in respect of infirm dependants who are parents/grandparents, brothers/sisters, aunts/uncles, nieces/nephews, adult children of the claimant or of the claimant’s spouse or common law partner.
- $2,150 in respect of an infirm dependent spouse or common-law partner in respect of whom the individual claims the spouse or common-law partner amount, an infirm dependant for whom the individual claims an eligible dependant credit, or an infirm child who is under the age of 18 years at the end of the tax year.
The Canada Caregiver Credit will be reduced dollar-for-dollar by the dependant’s net income above $16,163 (in 2017). The dependant will not be required to live with the caregiver in order for the caregiver to claim the new credit. The Canada Caregiver Credit will no longer be available in respect of non-infirm seniors who reside with their adult children.
Tuition Tax Credit
The tuition tax credit is a 15% non-refundable tax credit in respect of eligible fees for tuition and licensing examinations paid by an individual enrolled at an eligible educational institution. Budget 2017 proposes to extend the eligibility criteria for the tuition tax credit to fees for an individual’s tuition paid to a university, college or other post-secondary institution in Canada for occupational skills courses that are not at the postsecondary level. This measure will apply in respect of eligible tuition fees for courses taken after 2016.
Public Transit Tax Credit
The public transit tax credit provides a 15% non-refundable tax credit in respect of the cost of eligible public transit passes, which include annual and monthly passes, as well as weekly passes and electronic fare cards used on an ongoing basis.
Budget 2017 proposes that the public transit tax credit be eliminated, effective as of July 1, 2017.
Allowances for Members of Legislative Assemblies and Certain Municipal Officers
Certain officials may receive non-accountable allowances for work expenses that are not included in computing income for tax purposes. These officials are:
- elected members of provincial and territorial legislative assemblies and officers of incorporated municipalities;
- elected officers of municipal utilities boards, commissions, corporations or similar bodies; and
- members of public or separate school boards or of similar bodies governing a school district.
The excluded amount is limited to half of the official’s salary or other remuneration received in that capacity in the year. Budget 2017 proposes to require that non-accountable allowances paid to these officials be included in income. In order to provide affected organizations more time to adjust their compensation schemes, this measure will apply to the 2019 and subsequent taxation years.
Home Relocation Loans Deduction
Where a person receives a loan because of their employment, and the interest rate on the loan is below a prescribed rate, that person is deemed to have received a taxable benefit. The amount of the taxable benefit is determined by reference to the difference between these two rates.
The value of any portion of the benefit that is in respect of an eligible home relocation loan may be deductible from taxable income; however, the amount deductible is generally limited to the annual benefit that would arise if the amount of the loan were $25,000. Eligible home relocation loans are loans used to acquire a new residence where the employee starts work at a new location. This new residence must be at least 40 kilometres closer to the new work location than the old residence.
Budget 2017 proposes to eliminate the deduction in respect of eligible home relocation loans. This measure will apply to benefits arising in the 2018 and subsequent taxation years.
Measures for Donors
Elimination of First-Time Donor's Super Credit
As originally planned, Budget 2017 confirms that the First-Time Donor's Super Credit will be allowed to expire at the end of 2017.
Elimination of Additional Deduction for Gifts of Medicine
A donation made by a corporation to a registered charity is deductible in computing the corporation’s taxable income within certain limits. An additional deduction is allowed for corporations that donate medicine from their inventory to an eligible charity. Budget 2017 proposes to eliminate the additional deduction for gifts of medicine. This measure does not affect the general income tax treatment of donations made by corporations to registered charities, including donations of medicine.
This measure will apply to gifts of medicine made on or after March 22, 2017.
Ecological Gifts Program
Under the Canadian ecological gifts program, certain donations of ecologically sensitive land or easements, covenants and servitudes on such land (ecogifts) are eligible for special tax treatment. The ecogift program is primarily administered by Environment and Climate Change Canada (ECCC). The donation has to reach some conditions to be eligible to the special tax assistance.
To help ensure that donated land is not subsequently used for other purposes, the Income Tax Act imposes a tax of 50% of the fair market value of the land upon a recipient who, without the consent of ECCC, changes the use of the property or disposes of it. To better protect gifts of ecologically sensitive land, Budget 2017 proposes the following measures. These measures will apply in respect of transactions or events that occur on or after March 22, 2017.
Transfers of ecogifts
Where ecogifts are transferred between organizations for consideration, the protection offered by the 50% tax may be inappropriately lost. Budget 2017 proposes that the transferee of the property in such a situation be subject to 50% tax if the transferee changes the use of the property, or disposes of the property, without the consent of ECCC.
Approval of recipients
Where it is proposed that a registered charity be the recipient of an ecogift, the Minister of ECCC must approve the recipient on a gift-by-gift basis. Municipalities and municipal and public bodies performing a function of government are automatically eligible recipients. Budget 2017 proposes that the requirement to approve recipients be extended to municipalities and municipal and public bodies performing a function of government.
Private foundations can currently receive ecogifts, but this can give rise to concerns about potential conflicts of interest. To prevent these situations, Budget 2017 proposes that private foundations no longer be permitted to receive ecogifts.
In Quebec, under civil law, both real servitudes and personal servitudes can exist. Only real servitudes may be donated under the ecogift program since personal servitudes cannot run in perpetuity. If a number of conditions are met, Budget 2017 proposes that certain donations of personal servitudes qualify as ecogifts.
Business Tax Measures
Tax Planning Using Private Corporations
While there were no proposals to address tax planning by private corporations, the federal government indicated that they will further review the use of tax planning strategies that inappropriately reduces personal taxes of high-income earners through the release of a paper in the coming months. The strategies the government is reviewing include (but is not limited to):
- Income sprinkling, which reduce income taxes by flowing dividends to family members who are taxed at lower income tax rates.
- Use of a private corporation to accumulate earnings that can be invested in a passive portfolio.
- Strategies that convert a private corporation’s regular income into capital gains, which can reduce income taxes by taking advantage of the lower tax rates on capital gains.
The government will ensure that corporations which contribute to job creation and economic growth by actively investing in their business continue to benefit from a highly competitive tax regime.
Professional Corporations to Include Work in Progress as Income
Taxpayers are generally required to include the value of work in progress (WIP) in computing their income for tax purposes; however, professionals who are able to incorporate (i.e., accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors) may elect to exclude the value of WIP in computing their income. This election effectively allows income to be recognized when the work is billed (billed-basis accounting). Billed-basis accounting enables taxpayers to defer tax by permitting the costs associated with WIP to be expensed without the matching inclusion of the associated revenues.
Budget 2017 proposes to eliminate the ability for designated professionals to elect to use billed-basis accounting.
This measure will apply to taxation years that begin on or after March 22, 2017.
Meaning of Factual Control
The Income Tax Act recognizes two forms of control of a corporation: de jure (legal) control and de facto (factual) control. The concept of factual control is broader than legal control and is generally used to ensure that certain corporate tax preferences are not accessed inappropriately.
Factual control of a corporation exists where a person has “directly or indirectly in any manner whatever” an influence that, if exercised, would result in control in fact of the corporation. As a result, seemingly unassociated corporations could be deemed to be associated when a mutual shareholder has factual control of both. This result, for example, could require the corporations to share the $500,000 small business deduction, rather than each corporation benefitting from the deduction independently.
Budget 2017 proposes to amend the Income Tax Act to clarify the conditions determining whether factual control of a corporation exists, potentially expanding upon some conditions that have been established through previous court decisions.
This measure will apply in respect of taxation years that begin on or after March 22, 2017.
Reclassification of Expenses Renounced to Flow-Through Share Investors
An eligible small oil and gas corporation (i.e., with taxable capital employed in Canada of not more than $15 million) can currently treat up to $1 million of Canadian development expenses (CDE) as Canadian exploration expenses (CEE) when renounced to shareholders under a flow-through share agreement. CDE is deductible at a rate of 30 per cent per year on a declining-balance basis. CEE is fully deductible in the year it is incurred.
Budget 2017 proposes to no longer permit eligible small oil and gas corporations to treat the first $1 million of CDE as CEE. This measure will have an impact on investors of flow through shares who rely on the tax benefits associated with claiming the CEE on their personal tax returns. This measure will apply to expenses incurred after 2018 (with exceptions).