Highlights from the Budget in this Report:

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1 In This Report: Economic Overview Specific Tax Measures: Personal Specific Tax Measures: Business Other Tax Provisions Knowledge Bureau Reporters: Walter Harder, DFA Tax Services Specialist Rosanna Sternat, CPA Evelyn Jacks, MFA, DFA - Tax Services Specialist President, Knowledge Bureau Editorial Team: Tammy Sigurdur Beth Graddon Christine Steendam March 19, FEDERAL BUDGET OVERVIEW: Highlights from the Budget in this Report: The Economic Overview: Slow Growth, High Taxes A Heavier Hand: CRA Gets More Money to Improve Services & Crack Down on Taxpayers Tax Fairness: More Rhetoric Amidst Changes for Mutual Funds For Start-Ups: Those Employee Stock Options Are Not Affected by New Rules For Workers and Care Providers: Changes to the Canada Workers Benefits For New Home Owners: Enhanced RRSP Home Buyers Plan & CMHC Opportunities For Separating Couples: New Rules for Your HBP For Real Estate Owners: New Rules for Buying Homes and Changing Use of Property For Investors: Beware of Character Conversion Transactions, TFSA Business rules For Retirees: Check Out Changes to Pension Income Planning, Annuities, IPPs, RDSPs For Students: A Small But Complicated New Canada Training Credit and EI Benefits For Journalism and Media: Previously announced tax provisions take flight For Donations and Medical Expenses: New Rules for Cultural Property and Cannabis For Farmers, Fishers and Business Owners: Stay tuned on Succession Planning For Environment Lovers: New Incentives on Zero-Emission Vehicles GST/HST Changes Previously-Announced Provisions for and beyond 1

2 The Economic Overview: Global Growth Has Peaked, Business Activity Slows, And So Does The Canadian Economy...But Taxes Remain High By Evelyn Jacks In today s federal budget Finance Minister Morneau updated his November 21, 2018 Fall Economic Statement with a downgraded economic outlook. Back in November, Finance Canada reported that Canada has been in a strong economic position since But dark clouds were on the horizon as global economic growth peaked and sputtered into a surprising stall in early. Now, private sector forecasts confirm that for the next 5 years, economic grow in Canada will languish at less than 2%. In fact, Canada s economic growth had averaged close to 2.5% since the end of 2015 and in the last three years ending 2018, with the unemployment rate falling to 5.8%, which is the lowest level in 40 years. That positive news brought with it, strong wage growth. But in this pre-election budget, it s clear that Canada can expect average growth rates of 1.8% and that the broadest measure of the tax base which pays for our expenses the nominal GDP will be lower by an average of $12 Billion per year as compared to the 2018 Fall Economic Statement. AVERAGE PRIVATE SECTOR FORECASTS (% unless otherwise indicated) Projection Real GDP Growth* GDP Inflation Nominal GDP growth month treasury bill rate year government bond rate Exchange rate US/C$ Unemployment rate Consumer Price Index Inflation Crude oil (US$/barrel) * vs. U.S. Real GDP growth Despite these tepid numbers it s important to note that Personal Income Tax revenues are projected to increase by 6% - three times the Real GDP growth - or $9.2 Billion in 2018-, a number that is even higher than that previously forecasted in the fall. These taxes are the largest component of budgetary revenues and will total $162.8 Billion in Personal income taxes will rise by 4.3% annually over the rest of the forecast period, largely due to the progressive nature of our tax system; that is, with projected real income gains, taxes also increase. But in addition, Canadians have seen increases in personal income taxes on high incomes and on non-eligible dividends in particular. Corporate income tax revenue, also subject to significant changes recently, is expected to increase by $4.2 Billion or 8.7% to $52.0 Billion in At least part of this large increase is attributed to several large reassessments resulting from audit activity by the CRA. Corporate tax revenues are expected to decline in -20 largely as a result of the temporary capital cost allowance measures introduced in Fall Economic Statement and then grow at an average rate of 3.3%. 2

3 Meanwhile, the government continues to run significant deficits adding to Canada s ballooning federal debt, now expected to reach $762 Billion dollars in the forecast period up close to $100 Billion from last year s $671 Billion. Including this year s budget measures, the deficit is projected to decline from $19.8 Billion in -20 to $9.8 Billion in The breakdown of all the average private sector forecast details follow. Note that totals may not add due to rounding. Source: March 19, Federal Budget Papers. Economic and Fiscal Developments Since Budget 2018 billions of dollars Projection BUDGETARY REVENUES* Program Expenses Public Debt Charges BUDGETARY BALANCE FEDERAL DEBT *Revenues Include: Personal income tax Corporate income tax GST/HST revenues Federal debt (per cent of GDP) Improving Services and Audit Capability at the CRA Canadians deserve to receive prompt, high-quality service in their interactions with Government including when dealing with the Canada Revenue Agency (CRA). Budget In this year s budget document, the Finance Department reiterates that there have been unacceptable delays at the CRA and that last year s investment of $206 Million over five years, dedicated to improving the CRA service model will reallocate funds internally to three specific areas: improved digital services to notify tax filers about progress on their file which can be viewed online more timely resolution to taxpayer objections, at least so that they meet CRA s published service standards and the addition of 1700 new visits each year to business owners by its liaison officers. This initiative will now include business that are incorporated. 3

4 Adjustments to T1 Returns. An additional $50 million will be allocated over 5 years in two key initiatives: To make adjustments to tax returns more quickly (more than two million requests are received annually) To provide dedicated phone support for tax service providers Fixing Phoenix. Fast CRA processing for federal government employees affected by payroll system problems will require an additional $545 million over 5 years. The money is to be spent on resources dedicated to addressing payroll errors, system improvements and preventative measures for the future. In addition CRA will receive $9.2 million more to process more quickly the income tax reassessments for federal government employees due to Phoenix payroll system problems and to support telephone inquiries. For Government Benefit Recipients. In addition, Finance Canada will invest $253.8 million over 5 years to improve decision timelines in the recourse process that is required for those who disagree with decisions on their claim for benefits from Employment Insurance, Canada Pension Plan and Old Age Security. A Heavier Hand - CRA Gets More Money to Improve Services & Crack Down on Taxpayers More auditors at the CRA will emerge from an additional $150.8 Million over 5 years to expand its audit initiatives; specifically: Digital Economy Issues. To hire more auditors, conduct outreach and build on technical expertise that targets noncompliance related to cryptocurrency transactions and the digital economy. Data Quality Examination Team for Non-residents. These auditors will focus on proper withholding, remitting and reporting of income by non-residents. Extension of offshore audit activity. In addition, $65.8 million will be invested over 5 years to improve the CRA s information technology systems. Tax Fairness: More Rhetoric Amidst Changes for Mutual Funds It is unfortunate that Finance Canada continues its rhetoric about Canadians who don t pay their fair share ; specifically those who have been following perfectly legal rules in arranging their affairs to pay the least amount of taxes legally possible within the intent of the law. In past controversial moves, this was directed at private business owners who split income with family members or earned passive income on their retained earnings. In this budget it could be average Canadians investing in mutual funds and business owners who save within an IPP who are targeted, as three new initiatives are introduced: 1. Mutual funds will be prevented from allocating capital gains or income to their redeeming unitholders if fully taxable ordinary income has been recharacterized as a capital gain or tax has been inappropriately deferred. 2. Character Conversions. Taxpayers who use derivative transactions to convert fully taxable ordinary income into capital gains will be curtailed by new rules. 3. IPPs. Business people who use Individual Pension Plans will be limited in their use of certain types of pension plans that transfer into the IPP. 4

5 New Tax Provisions for Individuals and Families For Start-Ups: Those Employee Stock Options Are Not Affected by New Rules Employee Stock Options When a corporation grants stock options with a fair market value (FMV) exercise price to employees, paragraph 110(1)(d) of the Income Tax Act (the Act) provides a deduction equal to 50% of the benefit realized on the exercise or disposition of options where certain other conditions are satisfied (the stock option deduction). Budget proposes to limit the availability of the stock option deduction where options are granted to employees of large, long-established, mature firms by limiting the availability of the stock option deduction to an annual maximum of $200,000 of stock option grants. Budget provides that the stock option deduction will remain unchanged for startups and rapidly growing Canadian business. For Workers and Care Providers: Changes to the Canada Workers Benefit January 1, 2009 The Working Income Tax Benefit will be renamed as the Canada Workers Benefit. The benefit will be enhanced for to compensate for increased costs for Canada Pension Plan contributions starting in. For, the benefit will be 26% (increased from 25%) of earned income over $3,000 (this threshhold is unchanged and not indexed). The maximum benefit will be increased to $1,355 in ($1,059 for 2018) for single taxpayers and $2,335 in ($1,922 for 2018) for couples and single parents. The clawback rate will be 12% in (15% for 2018) for income over $12,820 for singles and $17,025 for families. In addition, for disabled taxpayers, the new Canada Workers Benefit will be increased to $700. This benefit is reduced at a rate of 12% when only one partner is disabled and 6% when both partners are disabled. The clawback begins at $24,111 for one disabled and $36,483 when both spouses are disabled. Kinship Care Providers (This provision is deemed to come into force as of January 1, 2009 (backdated 10 years) This budget has announced that for the purposes of the Canada Workers Benefit (and Working Income Tax Benefit), taxpayers will be considered a parent of the child regardless of whether they receive assistance under a provincial kinship care program. This change is considered to be a clarification of existing policy. Financial assistance received under a provincial kinship care program are not taxable and are not included in net income for income-tested benefits or credits. 5

6 For New Home Owners: Enhanced RRSP Home Buyers Plan & CMHC Opportunities RRSP Home Buyer s Plan (HBP) Incentive Effective after March 19,, individuals with savings in their RRSPs will be able to tap into more of their savings on a tax free basis under the Home Buyers Plan (HBP). An increase in withdrawal from $25,000 to $35,000 will be allowed; couples can thus withdraw up to $70,000 under the HBP. The increased withdrawal limit will also apply to the acquisition of a new home to be more accessible to a disabled person. However, the money will need to be repaid in 15 years or added to income, as per existing rules. CMHC First-Time Home Buyer Incentive Note: the program details to be released later but expected to be operational by September. First-time home buyers whose household income is $120,000 or less may qualify for a CMHC shared equity mortgage of 5% of the cost of an existing home or 10% of the cost of a new home. To qualify, the CMHC insured mortgage plus the CMHC shared equity mortgage must be less than four times their annual income. There will be no payments or interest accruing on the shared equity mortgage, but it must be repaid when the home is sold. It remains unclear whether the amount to be repaid on sale is the original amount provided by CMHC or a percentage of the sales price equivalent to the percentage of the equity invested. For Separating Couples: New Rules for your HBP 2020 Effective after, couples who suffer a relationship breakdown may participate in the Home Buyers Plan as individuals even if they don t otherwise qualify as a first-time buyer. To qualify the taxpayer must be living apart from their former spouse or common-law partner at the time of the withdrawal and the separation began in the current or four preceding years. In addition, the taxpayer may not make a withdrawal if they move into a home owned and occupied by a new spouse or common-law partner. Where the purpose of the HBP withdrawal is not to buy out the share of the residence owned by the former spouse or common-law partner, the former principal residence must be disposed of no later than two years after the HBP withdrawal. Taxpayers who have an existing HBP balance may not make a new HBP plan withdrawal until the former plan withdrawal is repaid. For Real Estate Owners: New Rules for Changing Use of Property After March 19, Change in Use of Multi-Unit Residential Properties Elections for no change in use will be available to owners of multi-unit properties as well as single-unit properties after budget day. This effectively allows homeowners who change the use of their property from personal to income-producing and vice versa to defer the tax consequences until the property is disposed of. Current elections do not apply when the change in use is for only part of a property. For example, when moving into one side of a duplex which was previously rented, the election to defer recognition of the change in use is not available under current legislation. These elections will now apply to multi-unit properties where part of the property changes use. 6

7 For Investors: Beware of Character Conversion Transactions, TFSA Business Rules, RDSP Rules Mutual Funds (Allocation to Redeemers Methodology: Effective for Taxation Years of Mutual Fund Trust Beginning After Budget Day) The allocation to redeemers methodology is being replaced with a new rule which denies the trust, in certain circumstance, a deduction for the portion of the allocation made to a unitholder on redemption of a unit that is greater than the capital gain that would otherwise have been realized by the unitholder on redemption of the units. Deferral: Effective for Business Years of Mutual Fund Trusts Beginning After Budget Day. To curb the conversion of ordinary income to capital gains by mutual fund trusts using the allocation to redeemers methodology, a mutual fund will no longer be allowed a deduction in respect of an allocation if the allocation is ordinary income and the unitholders redemption proceeds are reduced by the allocation. Character Conversion Effective for transactions entered into on or after March 19, as well as after December 31, for transactions entered into before budget day. A new qualification is added to the commercial exception to character conversion transactions that makes the exception unavailable if it can reasonably be considered that one of the main purposes of the series of transactions is for a taxpayer to convert the amount paid for a security into a capital gain. Carrying On Business in A Tax-Free Savings Account (TFSA) Effective for the and Subsequent Taxation Years The TFSA exempts income from property earned within the plan from taxation. It does not exempt income from business, so when a business is operated within a TFSA, the income is subject to tax. When a business is carried on within a TFSA, the holder of the TFSA and the TFSA issuer (trust) are jointly and severally liable for the taxes payable on that business income but the issuer s liability is limited to the property that the issuer is in possession and control of at the time the business was operating plus the distributions made to the taxpayer after the Notice of Assessment was sent in respect of the taxation year. Note: TFSAs will now have to protect themselves when allowing withdrawals to ensure there is no outstanding assessment with respect of any business operated within the TFSA. Electronic Delivery of Requirements for Information (Effective January 1, 2020) With the bank s permission, CRA will be allowed to send requirements for information to banks and credit unions electronically (rather than the on paper). Proof of electronic delivery may be made by a sworn affidavit of an officer of CRA. 7

8 RDSPs (Registered Disability Savings Plan) New Rules Applicable To Years After RDSP may remain open after the taxpayer is no longer eligible for DTC (no time limit). In addition, the proportional repayment rules for withdrawals will be changed: If the taxpayer is not eligible for DTC and is under 51 will be based on the assistance repayment calculated immediately prior to the taxpayer not being eligible for the DTC less the amounts repaid while not eligible for DTC For the 10 years after the taxpayer becomes ineligible for the DTC, the repayment will be based on the 10-year period prior to them becoming ineligible for the DTC but reduced for each year their age exceeds 50. Rollovers of RDSP to RRSP of a financially dependent infirm child will only be available up until the end of four years after the taxpayer becomes ineligible for the DTC. For Retirees: Check Out Changes to Pension Income Planning, Annuities, IPPs, SMEPs 2020 Individual Pension Plans (Effective March 19, ) Taxpayers may no longer transfer funds from a defined benefit plan from a former employer to a new IPP. This is to stop the circumventing of prescribed transfer limits. ALDAs and Variable Payment Life Annuities (Effective 2020 and future years) advanced life deferred annuities will be permitted under a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), deferred profit-sharing plan (DPSP), pooled registered pension plan (PRPP) and defined contribution registered pension plan (RPP); and variable payment life annuities will be permitted under a PRPP and defined contribution RPP. An advanced life deferred annuity (ALDA) pays a pre-determined monthly income starting at a pre-determined age and continuing until the annuitant dies. To qualify, the income must start no later than the end of the year in which the annuitant attains 85 years of age. No more than 25% of the plan assets may be used to invest in an ALDA. There will also be a lifetime limit of $150,000 for an individual s contributions to ALDAs (indexed in increments of $10,000 beginning in 2020). Additional rules will apply as detailed in the budget documents. A variable payment life annuity (VPLA) pays a variable amount depending on the performance of the investment in the annuity fund and the mortality of the other VPLA annuitants. A minimum of ten retired members of the PRPP or RPP is required to participate in the VPLA before the arrangement can be established. The VPLA must begin payments to the members by the later of the end of the year in which the member attains the age of 71 years and the end of the year in which the VPLA is established. Additional rules apply see the budget document for more details. Specified Multi-Employer Plan for Older Members (Effective for collective bargaining agreements entered into after.) Contributions may not be made to a SMEP in respect of a member after the end of the year in which the member attains 71 years of age. This provision brings in line the rules for SMEPs with the rules for other defined benefit pension plans. 8

9 For Students: A Small But Complicated New Canada Training Credit, New EI Benefits Jan. 1 Canada Training Credit The Canada Training Credit is a non-taxable credit which is accumulated at a rate of $250 per year, starting in, with a lifetime maximum accumulation of $5,000. The taxpayer s available Canada Learning Credit will be shown on their Notice of Assessment. In order to earn a credit for the current year the taxpayer must meet the following criteria: They must file a tax return for the year. They must be between the ages of 25 and 65 at the end of the year. They must earn at least $10,000 from employment, self-employment, or taxable scholarships (including the nontaxable portion of income of volunteer firefighters or emergency service volunteers and the tax-exempt part of earnings of status Indians). Their taxable income must be no more than the upper limit of the third tax bracket ($147,667 in ) In the year that eligible tuition fees are paid, the taxpayer may claim the lesser of: Their available Canada Training Credit, and 50% of the eligible tuition fees paid. The amount claimed will offset, dollar for dollar, tax otherwise payable or will be refunded to the individual to the extent that the amount exceeds tax otherwise payable. In addition, the Tuition Amount the student may otherwise qualify for (a non-refundable credit) is limited to the portion of tuition paid less the Canada Training Credit claimed in respect of that tuition, which makes this provision complicated, to say the least. EI Training Support Benefit Expected to be launched in late 2020 Workers who go back to school may qualify to collect Employment Insurance (EI) benefits while they do so, but not for a while. The eligibility requirements will include the following. Up to four weeks paid leave (at 55% of weekly earnings) while on training and without a regular paycheque Minimum 600 hours insurable employment required May be taken over a four-year period. Small Business EI Rebate (Effective 2020) In recognition that this new EI benefit will increase EI premium rates, the budget proposes a Small Business EI Rebate. Businesses who pay EI premiums of $20,000 or less will be eligible for a rebate of an unspecified amount. 9

10 For Journalism and Media: Previously Announced Tax Provisions Take Flight Refundable Labour Tax Credit: Effective for a period on or after January 1, A 25% refundable labour tax credit will be available for salary or wages paid to qualifying employees of a Qualified Canadian Journalism Organization (QCJO). The maximum credit is $13,750 per employee per year ($55,000 maximum eligible salary per employee). A QCJO will not qualify if: it is carrying on a broadcasting undertaking or it receives funding under the Aid to Publishers (from the Canadian Periodical Fund) To qualify, a QCJO must be listed on a stock exchange in Canada if it is a public corporation or be at least 75% owned by Canadian citizens if it is a private corporation. The following criteria will be subject to change after an independent panel is established and determines eligibility criteria: an eligible employee must be employed by the QCJO for at least 40 weeks for a minimum of 26 hours per week and the employee must spend at least 75% of their time producing news content. Qualified Donee Status: Effective January 1, 2020 Qualified Canadian Journalism Organizations (QCJO) may register to become qualified donees which means that they can issue tax receipts for donations to their organizations. To qualify, these organizations: must be a corporation or a trust that have purposes exclusively related to journalism; will not be permitted to distribute their profits; will be required to have a board of directors or trustees, each of which deals at arm s length with the others; must not be controlled by one person or a group of related persons; must not receive more than 20% of its gifts or donations from any one source (except bequests and one-time gifts to establish the organization. Personal Income Tax Credit for Digital News Subscriptions: Effective after and before 2025 Individuals will be eligible to claim a non-refundable tax credit for 15% of up to $500 paid for eligible digital news subscriptions in the tax year. An eligible digital news subscription is a subscription that allows the taxpayer access to content provided in digital form by a QCJO that is primarily engaged in the production of written content. Where the subscription includes content not in digital format, the claim may not exceed the cost of a comparable digital-only subscription. Where there is no comparable subscription, only 50% of the cost may be claimed. This credit may be split between taxpayers. 10

11 For Donations and Medical Expenses: New Rules for Cultural Property and Cannabis 2018 and Donations of Cultural Property (Effective March 19, ) To qualify for the enhanced donation tax credit for the donation of cultural property, the requirement that the property be of national importance is removed. The enhanced donation tax credit includes an exemption from tax on the increase in value of the property while allowing the taxpayer to claim a capital loss on the disposition if the property decreases in value. In addition, the amount of the gift that may be claimed may exceed 75% of net income (the normal limit for claiming the credit for charitable donations) Medical Expense Tax Credit (Effective October 17, the date when cannabis became legal) The purchase of cannabis products from a holder of a license for sale of such products may claim the expense as a medical expense if they are a holder of a medical document as defined in the Cannabis Regulations. A prescription will not be required. The medical document must be issued by a medical practitioner or nurse practitioner. Specific Tax Measures: For Business For Farmers, Fishers and Business Owners: Stay Tuned on Succession Planning There are two specific provisions worth noting here from the budget documents: 1. Intergenerational Business Transfers. The government will continue its outreach to farmers, fishers and business owners on developing new proposals to better accommodate intergenerational transfers of businesses while protecting the integrity of the tax system. This is a warning that the ill-received provisions from July 17, 2017 have not yet vanished from the minds of the Finance Department. Stay tuned. 2. Access to Small Business Deduction. Budget 2016 limited access to small business deduction under certain corporate and partnership structures that could previously multiply the number of small business deductions. Canadian Controlled Private Corporation s (CCPC) specified corporate income was not eligible for this deduction. Specified corporate income includes income from sales to a private corporation, in which the CCPC or certain specified person, holds a direct or indirect interest. Exceptions apply to income earned by a CCPC s farming or fishing co-operative corporation. 11

12 Scientific Research and Experimental Development Program Scientific Research and Experimental Development (SR & ED) Program Budget repeals the use of taxable income as a factor in determining a Canadian Controlled Private Corporation (CCPC) annual expenditure limit for the purchase of the enhanced SR & ED tax credit. Under the old rules, there was a cap of $500,000 a year and it phased out completely when the CCPC earned more than $800,000 before the government could claw back the value of the credit. On a go forward basis, CCPC s with taxable capital of up to $10 million will benefit from unreduced access to the enhanced refundable credit regardless of their taxable income. For Environment Lovers: New Incentives on Zero Emission Vehicles. Zero-Emission Vehicles (Effective to vehicles purchased on or after March 19, and before 2028) Two new CCA classes are created with a first-year rate of 100%. Class 54 is for a zero-emission vehicle that would otherwise be in class 10 or The maximum expenditure available for CCA is limited to $55,000 plus taxes. The normal CCA rate for class 54 will be 30%. Class 55 is for zero-emission vehicles that would otherwise be in class 16 (taxis, vehicles acquired for rental or shortterm leases, and heavy trucks and tractors). The normal CCA rate for class 55 will be 40%. Vehicles for which the federal purchase incentive ($5,000 for electric battery or hydrogen fuel cell vehicles with an MSRP of less than $45,000) is paid will not qualify for accelerated CCA. Details of this program have yet to be announced. The 100% CCA rate will be applicable for purchases up to December 31, The rate will be 75% for purchases in 2024 and 2025, and 55% for purchases in 2026 and For purchases after 2027, the normal CCA rates will apply. The normal short business year rules will apply to these new classes. In the year of disposition, recapture will apply, but the proceeds of disposition for class 54 assets will be prorated by the ratio of the CCA limit ($55,000) to the actual cost of the vehicle. Taxpayers who wish to place their zero-emission vehicles in the appropriate class (10, 10.1 or 16) may elect to do so. The interest limit for the purchase of passenger vehicles will also apply to interest on the purchase of a class 54 vehicle. 12

13 GST/HST Changes Budget proposes: to zero-rate the supply and import of human ova and in vitro embryos. To add licensed podiatrists and chiropodists to the list of practitioners on whose order supplies of foot care devices are zero-rated. To exempt from GST/HST the supply of multidisciplinary health services when rendered by a team of health professionals, such as doctors, physiotherapists and occupational therapists These services are exempt when supplied separately. This is provided that all or substantially all of the consideration for the service is reasonably attributable to services rendered by such a team of health professionals acting within the scope of their profession. Previously Announced Tax Changes For And Beyond Accelerated Investment Incentive November 20, 2018 In the November 21, 2018 Fall Economic Statement, the minister introduced changes to first-year capital cost allowance claims designed to spur capital investments by business. For most capital assets - except class 53: manufacturing and processing machinery and equipment and classes 43.1 and 43.2: clean energy equipment: First-year claims will be tripled for purchases between November 20, 2018, and December 31, Rather than restricting the claim to 50% of the normal Capital Cost Allowance (CCA) claim (half-year rule), the claim will be 150% of the normal CCA claim. For purchases in years 2024 to 2027, the half-year rule will be suspended and where the half-year rule does not apply, the claim will be 125% of the normal claim. For purchase after 2027 the current rules will apply. For class 53 - manufacturing and processing machinery and equipment): The CCA rate will be 100 % for purchases between November 20, 2018, and the end of For purchases in 2024 and 2025, the rate will be 75% For purchases in 2026 and 2027, the rate will be 55%. For purchases after 2027, the rate will return to 30% subject to the half-year rule. For class 43.1 and clean energy equipment, the same rules for class 53 will apply for purchases between November 20, 2018, and December 31, After that, the current rules will apply. In each case, the additional first-year claim will not affect the total amount of CCA that may be claimed in respect of any asset. As is currently the case, when assets are disposed of for more than their undepreciated capital cost, the excess claims will have to be recaptured (except for passenger vehicles). 13

14 Accelerated CCA will not apply if the asset is rolled over from non-income producing to income producing or if the asset was acquired from a non-arm s length party. Non-business assets that will be affected include autos purchased by employees who use their cars for business purposes and assets acquired to earn rental income. Summary: First-Year Claims for common classes of property Class Description Build. Equip. Autos Pass. Vehicles Before 11/21/ /21/ /31/2023 Elig. Cap. Prop. Leaseholds 2% 10% 15% 15% 3.5% Varies 1 6% 30% 45% 45% 10.5% 3X to % 20% 30% 30% 7% 2X 1 After % 10% 15% 15% 3.5% Varies 1 1 CCA on leaseholds is prorated over the life of the lease (min 5 years) half-year rule applies Changes to the Small Business Tax Rate and Dividend Tax Rates When Active Business Income (ABI) eligible for the $500,000 Small Business Deduction (SBD) is earned, tax rates will be reduced to 9% for and future years. However, the Small Business Deduction (SBD) will be clawed back when annual passive investment earnings in a private corporation exceed $50,000. Reductions in the Small Business Deduction The Small Business Deduction (SBD), which is also known as the business limit, is reduced on a straight-line basis when there is between $10 million and $15 million of taxable capital employed in Canada. The Small Business Deduction is not allowed when taxable capital exceeds $15 Million. For tax years after 2018, private corporations that earn more than $150,000 in passive investment income that is not incidental to an active business will pay tax on their active income at the general tax rate, currently 15%. If both restrictions apply to the corporation, the greater of the two will apply. More specifically, the business limit of $500,000 will be reduced, also on a straight-line basis, when Canadian Controlled Small Business Corporations (CCPCs) have passive investment income between $50,000 and $150,000. The reduction in the business limit is calculated as $5 for every $1 of adjusted aggregate investment income above $50,000 and will be calculated annually based on the prior year s passive investment income. This will allow for some investment planning, which will be discussed later. 14

15 The new tax calculations focus on three things: (i) the Adjusted Aggregate Investment Income; (ii) the small business deduction available; and (iii) the amount of active business income earned. The calculation of the Adjusted Aggregate Investment Income used for these purposes will not include: Taxable capital gains and losses on the disposition of property used principally in an active business, carried on primarily (50% or more) in Canada, by the CCPC or a related CCPC; The disposition of a share of another connected CCPC, where all or substantially all of the fair market value of the assets are used primarily in Canada in an active business of the CCPC; and Net capital losses carried over from other tax years. But, the following sources must be included in the calculation: Dividends from non-connected corporations; and Income from savings in a non-exempt life insurance policy, if it is not otherwise included in the Adjusted Aggregate Investment Income. Dividend Tax Credit Changes Dividends paid out of the retained earnings of private corporations are classified into two categories: Eligible dividends originate from active business income earned above the small business deduction, which is taxed at the general rate of 15%. This includes any eligible portfolio dividends. Non-eligible dividends stem from active income taxed at the low small business tax rates and any passive investment income earned in the corporation (however this excludes eligible portfolio dividends, and the nontaxable portion of capital gains, which may be distributed as tax-free capital dividends.) The calculation of the tax on non-eligible dividends that are distributed into personal hands of the shareholders will change, as a result of the reduction in the small business tax rate. Recent History of Small Business Tax Rates, Non-Eligible Dividend Taxation Year Small Business Tax Rate Dividend Gross-Up Rate Dividend Tax Credit Rate* Dividend Tax Credit Rate** % 18% 11.0% 13/ % 17% 10.5% 21/ % 17% 10.5% 21/ % 16% 10.03% 8/11 9.0% 15% 9.03% 9/13 *as a percentage of the grossed-up dividend ** as a fraction of the gross-up 15

16 Eligible Dividends The rates applicable for eligible dividends are shown below. Dividend Gross-Up DTC Rate DTC Rate DTC Rate Year (of actual amount) (of actual amount) (of gross up) (of grossed up amount) After % 20.73% 54.54% (6/11) 15.02% Certain Allowances for Members of Legislative Assemblies and Certain Municipal Officers. A portion of allowances received by these taxpayers to cover costs incurred in the course of carrying out the duties of office or employment will become taxable for some. Specifically, non-accountable allowances received cannot exceed more than half of the official s salary or other remuneration to be tax exempt. Effective, any non-accountable portion of these allowances will be fully taxable; accountable allowances will remain non-taxable. CPP Contributions Increase. Above a basic exemption of $3500, prior to, employees contributed 4.95% of their pensionable earnings to the Canada Pension Plan (up to a maximum of $2,593.80, based on pensionable earnings of up to $55,900). The employer matched this contribution. For the self-employed, a contribution of 9.9% of net earnings, to a maximum of $5, is required, but one half of this amount can be claimed as a deduction on the T1 return; the other half as a non-refundable tax credit. Enhanced CPP Benefits Receivable Benefits will accrue starting in but a full two-thirds of income replacement will not occur until the worker has contributed for 40 years. This means if you are currently approaching retirement, you will see no increase in your pension despite the higher premiums. New Canada Pension Plan and Quebec Pension Plan Deduction for Forward Rather than claiming a tax credit, the enhanced premiums will qualify for a tax deduction for employee contributions made. New Reporting Requirements for Trusts 2021 Certain trusts (including some trusts that are not currently required to file a T3 return), will be required to file and report the identity of all trustees, beneficiaries and settlors of the trust and the identity of each person who has the ability to exert control over trustee decisions regarding the appointment of income or capital of the trust. An electronic platform for processing T3 return is now being developed. 16

17 According to Finance Canada (February 27, 2018 Federal Budget): A trust that does not earn income or make distributions in a year is generally not required to file an annual (T3) return of income. A trust is required to file a T3 return if the trust has tax payable or it distributes all or part of its income or capital to its beneficiaries. Even if a trust is required to file a return of income for a year, there is no requirement for the trust to report the identity of all its beneficiaries. Given the absence of an annual reporting requirement, and the limitations with respect to the information collected when reporting is required, there are significant gaps with respect to the information that is currently collected with respect to trusts. As a result, reporting rules will change as follows for 2021 forward for: express trusts that are resident in Canada non-resident trusts that are currently required to file a T3 return. An express trust is generally a trust created with the settlor's express intent, usually made in writing (as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the provisions of a statute). Not affected. According to the proposals, exceptions to the additional reporting requirements are proposed for the following types of trusts: mutual fund trusts, segregated funds and master trusts; trusts governed by registered plans (i.e., deferred profit sharing plans, pooled registered pension plans, registered disability savings plans, registered education savings plans, registered pension plans, registered retirement income funds, registered retirement savings plans, registered supplementary unemployment benefit plans and tax-free savings accounts); lawyers' general trust accounts; GRE (Graduated Rate Estates) and qualified disability trusts; trusts that qualify as non-profit organizations or registered charities; and trusts that have been in existence for less than three months or that hold less than $50,000 in assets throughout the taxation year (provided, in the latter case, that their holdings are confined to deposits, government debt obligations and listed securities). What needs to be reported: the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability (through the trust terms or a related agreement) to exert control over trustee decisions regarding the appointment of income or capital of the trust (e.g., a protector). Penalties effective for 2021 and subsequent taxation years The following will be implemented for those who fail to file trust returns: Late filing: $25 per day (minimum $100; maximum $2,500) Additional late filing penalty: 5% of fair market value of trust assets (minimum $2,500) where the failure to file the trust return was made knowingly or due to gross negligence CRA has been provided funding of $79 million over a five-year period and $15 million on an ongoing basis to support the development of an electronic platform for processing T3 returns. 17

18 About Knowledge Bureau Knowledge Bureau is a widely respected financial education institute and publisher based in Canada. Our world-class education is innovative, informative, and in-depth, with an academic approach focused on developing deep knowledge, skill building and leadership. Founded in 2003 by bestselling tax author and internationally acclaimed educational entrepreneur, Evelyn Jacks, Knowledge Bureau is home to thousands of professionals building their credentials with tax and financial expertise. Founded by Evelyn Jacks, Canada s most respected educator in tax and financial literacy and one of Canada s most prolific financial authors. She has twice been named one of the Top 25 Women of Influence in Canada. She has penned 55 books for consumers on tax and wealth management, many of them best-sellers, including her most recent to include the March 19, Budget, New Essential Tax Facts, How to Make the Right Tax Moves and Be Audit-Proof, Too will be mid-may. Also, available now Defusing the Family Business Time Bomb, Take Control of the Most Explosive Challenge in a Generation co-written with Jenifer Bartman. Knowledge Bureau is celebrating its 16th year, having grown to become Canada s only private educational institute to provide career training with specialization in tax, retirement, business building and succession as well as estate planning. It has trained tens of thousands of advisors and communicates with tens of thousands weekly. It is also a training partner to top national firms engaged in building sales forces and small business scaling activities. A national post-secondary educational institution, Knowledge Bureau offers comprehensive, certificate courses leading to the prestigious RWM (Real Wealth Manager), MFA (Master Financial Advisor) and Distinguished Financial Advisor designations. These courses are available online, through instructor-led Knowledge Bureau Education Days and the Distinguished Advisor Conference (DAC), and the new Business Builder Retreats. These programs are also recognized broadly for CE/CPD accreditation by most regulators and professional associations. At Knowledge Bureau, we uniquely provide practical, immediately implementable, and current tax and economic education needed by Real Wealth Managers and all the stakeholders under their care. Connect with us for more information. Visit our website at or call us toll-free in North America at Disclaimer Knowledge Bureau, Inc. The contents of this work are copyright protected; all rights are reserved. Users are herewith granted a one-time, limited use license for personal educational use only. This content or any derivative thereof may not be used or reproduced for any other purpose, nor may it be merged, distributed, modified or incorporated in whole with any other intellectual property in any medium or imparted to any party without permission from Knowledge Bureau, Inc. For further information or to request permission for reproduction call us at or by at admin@knowledgebureau.com. 18