Federal Budget Highlights. What Does It Mean for You?

Transcription

1 Federal Budget Highlights What Does It Mean for You?

2 INTRODUCTION The Minister of Finance, Joe Oliver, presented the Federal Budget in the House of Commons on April 21, The government has balanced the budget and says it will focus on responsible fiscal management in the wake of falling oil prices. There were a number of measures aimed at helping families, the elderly, small business, job creation, as well as making investments in infrastructure and transportation - but how does that impact you, our valued MNP clients? MNP s tax team has analyzed the budget changes while asking the most important question, What does this really mean for you? The Big Picture All budgets are political and this one may be more than usual as it is a pre-election budget. The overall message in this budget was that Canadians live in turbulent times, but they can rely upon the Conservative government to navigate the dangerous waters, keep them safe, and even deliver a few perks. It relies heavily on the promises made, promises kept theme. Ironically, the Real Gross Domestic Product (RGD) is now above pre-recession levels. Unemployment is back to pre-2009 levels. Canada s performance may not have been as good as some other countries for the last couple of years, but it is the best performance in the G7 overall since Canada expects to maintain its AAA credit rating. The budget is designed to appeal to a few main demographic groups: Fiscal conservatives Families with children Older people Small business people Suburbanites Some of these groups overlap but the underlying theme is that these are groups the Conservatives have determined they must win over in order to return as government following the October election. TFSA changes will benefit tax payers from all sectors, especially due to the fact that contribution room is not dependant on earned income. There was nothing in the budget that spoke to paying down debt. We also did not hear anything from the opposition parties or budget commentators about paying down debt. The measure we heard most about was the debt-to-gdp ratio. With low interest rates becoming the new normal, debt seems to be acceptable, just as long as we re not creating too much more of it. Federal debt as a share of GDP is expected to decline next year and to fall to 25 per cent of GDP by 2021

3 Fiscal Conservatives Following the mid-90 s when we were battling large deficits, Canadians became, in large part, convinced deficits are bad and should only be run in unusual circumstances. The recent recession, despite being relatively mild in Canada, counted as such a circumstance to most people. Secondly, the government promised long ago this budget would be balanced. Because of these factors, the difference between a budget $200M in the red and $200M in the black has taken on a political significance far beyond its fiscal significance. It s taken on an almost moral hue. The Government has eliminated the deficit As a result, the government ensured it would meet its commitment to a balanced budget this year. It has cut spending. It has increased revenues. And when these measures weren t enough, it sold assets, cut the contingency reserve, projected oil prices to increase and moved some expenses from this year back to last year. Whether it s a surplus or a deficit, the amount is relatively small. On a $300-billion dollar enterprise, for all intents and purposes, it s balanced. With the federal tax burden at its lowest level (as a proportion of GDP) in 50 years, that will make a lot of Canadians happy. The revenue-to-gdp ratio has fallen since to its lowest level in over 50 years

4 HOW DOES THIS AFFECT YOU? You may be a member of one of the targeted groups, or you may not be, but there s probably something in the budget for you. We ve listed some of them below: Private Enterprise and Professionals In response to requests from small business and their representatives, the budget reduced the small business tax rate from 11% to 9%. As the number of small incorporated businesses climb, the number of people who will benefit from this reduction increases. However, it s important to note the reduction is largely a timing difference. A corporation benefits only while the earnings are retained inside the corporation. The government adjusted the personal tax on ineligible dividends to ensure when this corporate income is paid out as a dividend, the increased personal tax will make up the difference. The people who will benefit from reductions to the small business tax rate are ones who will keep the business profits inside the company for the long term. If they need to take out the income to live on, there s no benefit. A deferral of $10,000 of tax at most ($500K * (11%-9%)) is a fairly small benefit, especially as the reduction takes place gradually over four years, so it will be hard to notice. However, corporations which have used income-splitting among family members may allow some owners to permanently capture some of this benefit. Red tape is a constant irritation, and the government has brought in a number of measures to reduce it. BizPal is a program, now made permanent, to assist businesses in obtaining permits and licenses from all levels of government. It s not an expensive program, but it s a very helpful one for start-up companies. You can see it at In a very welcome move, new companies hiring employees will only be required to remit payroll taxes quarterly, instead of the current monthly requirement. While this benefit applies only to companies with small payrolls (remittances of under $1,000 per month, or about $43,500 of salary), it is a positive step to reduce the compliance burden. The budget proposes to expand the Canada Small Business Financing Program, to help companies get started. It has made over 50,000 loans since The budget increases the maximum loan amount for real property from $500K to $1M, and raises the eligibility criterion for businesses, moving the revenue threshold from $5M to $10M, so more businesses will qualify. There are a number of small programs designed to foster an entrepreneurial spirit, including Futurpreneur Canada for young people, and the new Action Plan for Women Entrepreneurs. With the decline in the proportion of long-term stable jobs-for-life, programs like these help instil a needed sense of flexibility in Canada s future workforce.

5 Oilfield Services As a substantial net oil exporter, Canada has been hurt by the recent dramatic decline in world oil prices. The drop in the value of exports has been $40B, almost 2% of GDP. There is little the government can do to offset this drop. However, oil production in Canada continues to increase, and consequently impact on oilfield services companies is somewhat muted. However, it s important to understand that these drops happen periodically. In each case, prices have eventually rebounded. The government predicts that oil prices will rise back to $78 by The current drop in WTI oil prices is the third largest decline in the last three decades Two measures were announced in March, so they re not formally part of the budget, but they deserve comment: The costs of environmental studies and community consultations are to be treated as Canadian Exploration Expense, allowing a more effective tax write-off, and flow-through treatment. In order to assist Canada s nascent Liquefied Natural Gas (LNG) industry, Canada increased the Capital Cost Allowance (depreciation) rates for equipment used in this sector from 8% to 30%, and for buildings from 6% to 10%. Technology The budget offers a number of small spending plans to assist small businesses, particularly those in the growth phase. Overall, there is $1.5B in the budget for science and technology, including: $100M for the Canada Accelerator and Incubator program $110M for the Industrial Research Assistance Program $400M under the Venture Capital Action Plan It is arguable these programs cause the government to choose winners and losers, but the money committed is real.

6 The budget increases funding for the Business Development Bank of Canada (BDC), Export Development Canada (EDC), The Venture Capital Action Plan, and other similar entities. MNP has the expertise available to assist you is accessing these incentives. Private and Public Companies The government has kept Employment Insurance premiums higher than the program s cost for a while now. As Canada s largest private-sector employers, this cost is a significant one to your employees, and to you. The government says over time the plan is to keep the EI plan in balance. It will reduce those premiums from $1.88 per $100 of earnings to $1.49 in It is fairly common for Canadian companies to engage foreign companies because they have specific expertise. Those companies will often bring their foreign employees to Canada temporarily. In this case, the foreign company is required to withhold Canadian employment tax. Many of these employees are not actually taxable in Canada, so they then need to file Canadian personal tax returns, just to get their withholdings back. Of course, all this paperwork costs time and money. The government will eliminate this withholding requirement for most short-term assignments to Canada, effective The main requirements for this exemption are: The employer is a resident of a country with which Canada has a tax treaty. It does not carry on business through a permanent establishment in Canada. It obtains certification from CRA. The employee is exempt from Canadian tax under a tax treaty (it need not be with the same country). He or she is present in Canada under 90 days in any 12-month period that includes the date he or she receives payment. Agriculture In a very targeted measure, the government increased the Lifetime Capital Gains Deduction so that up to $1M of gains on farming and fishing property will be effectively exempt from tax. This exemption is up from the $813,600 that still applies to the sale of shares of other small companies. It is important to note that due to the rules relating to Alternative Minimum Tax (AMT) not being updated recently, the changes to the Lifetime Capital Gains Deductions are not as effective as they could be. MNP is making recommendations to the government to update the AMT rules in order to keep pace with these changes. Manufacturing Since 2007, Canada has had an accelerated Capital Cost Allowance (depreciation) structure for manufacturing. That system allowed straight-line depreciation of 50% on machinery. That meant a deduction of 25% in the first year, 50% in the second year, and 25% in the third year. This regime expires at the end of 2015, and that means the deduction would become 30% declining balance, a much slower approach. The budget proposes to move to a 50% declining-balance approach not quite as fast as the existing one, but close.

7 Combined with the reductions in the general tax rate, the Marginal Effective Tax Rate ( METR ) on new business investment has fallen from 33% (at the high end of the G7) to 17.5% (the lowest). The METR on new manufacturing investment is only 9.1% - also the lowest in the G7. Canada leads the G-7 with the lowest overall tax rate on new manufacturing investments Aboriginals The budget provides for the following funds: $30M over five years for expansion of the First Nations Land Management Regime $200M over five years for primary and secondary education $12M over three years for post-secondary scholarships (Indspire) $2M per year for mental wellness

8 Real Estate and Construction The increased funding for infrastructure is the good news; the fact funding doesn t arrive until makes the promise much less meaningful. With the growing appetite for transportation, the political pressure to increase funding may be helpful in driving the construction industry. The price of oil may rise. The accelerating U.S. economy, may lift the Canadian one with it. Time will tell. Charitable Sector For some time it has been possible to donate public-company shares to charity on a taxadvantaged basis. Shares could be donated in return for a receipt for the full value. At the same time, the gain on the shares is exempt from tax. It is easy for a charity to facilitate donations of public company shares it could turn the shares into cash simply by selling them in the market. For land and private-company shares, finding a buyer is more difficult. Charities are not generally experienced vendors of such things. Yet, the impetus to get more money to charities remains, and there are many people with these kinds of assets who would like to donate more. To resolve this difficulty, effective for donations after 2016, the government will allow individuals and corporations who sell these assets and donate the proceeds within 30 days the same tax benefits as currently accrue to owners of public-company shares. This takes the charities off the hook for sales they just collect money. There will be details to work out, such as how one deals with instalment sales, for instance, but it s a very elegant solution. CONCLUSION Anti-Avoidance Rules There was a change introduced to the government s anti-avoidance rules mainly focused on the way dividends pass tax-free through corporations. These changes are complicated and MNP can assist you in determining their impact on your corporate tax planning. This budget is essentially a steady-as-she-goes document, designed to make Canadians feel secure and comfortable and from what we ve seen from the press so far, it seems to have accomplished that goal. Certain groups, such as families with children, TFSA investors, and small business owners will enjoy the proposals targeted directly at them. However, in light of the upcoming election, it remains to be seen what will move from being proposed legislation to passed legislation.

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