MNP Federal Budget Summary – 2019 FEDERAL BUDGET SUMMARY – 2019 FEDERAL BUDGET HIGHLIGHTS On Tuesday, March 19, 2019, the Honourable Bill Morneau, Minister of Finance tabled his fourth budget: Investing in the Middle Class. Reflecting weaker economic growth in late 2018 and early 2019, the government is projecting sizeable deficits stretching to 2024. The deficit for the current year ending March 31, 2019 is projected to be $14.9 billion, increasing to $19.8 billion for the next fiscal year. Budget 2019 does not contain any provisions to enhance Canadian tax competitiveness; however, MNP is pleased to see the government has acknowledged the importance business owners place on being able to pass their businesses on to their children. The government’s commitment to develop proposals in 2019 to better accommodate intergenerational transfers of businesses, in a manner such that there is a level playing field compared to selling the business to a third party, is commended. Below are highlights from Budget 2019. A. Corporate Tax Measures CORPORATE TAX RATES As previously announced, the federal small business rate was reduced from 10 percent to 9 percent, effective January 1, 2019. The combined federal and provincial corporate tax rates for calendar 2019 are as follows: Small Business Rate General Rate Rate Threshold Non-M&P M&P Federal 9.00% $500,000 15.00% 15.00% British Columbia 11.00% $500,000 27.00% 27.00% Alberta 11.00% $500,000 27.00% 27.00% Saskatchewan 11.00%/17.00% $500,000/$600,000 27.00% 25.00% Manitoba 9.00% $500,000 27.00% 27.00% Ontario 12.50% $500,000 26.50% 25.00% Quebec 15.00% $500,000 26.60% 26.60% New Brunswick 11.50% $500,000 29.00% 29.00% Nova Scotia 12.00% $500,000 31.00% 31.00% Prince Edward Island 12.50% $500,000 31.00% 31.00% Newfoundland and Labrador 12.00% $500,000 30.00% 30.00% FEDERAL BUDGET SUMMARY – 2019 BUSINESS INVESTMENT IN ZERO EMISSION VEHICLES Motor vehicles are generally included in Class 10, 10.1 or 16. On November 21, 2018, the government announced a temporary first-year accelerated investment incentive that allowed businesses to depreciate asset purchases in these classes at capital cost allowance (CCA) rates of 45 percent, 45 percent and 60 percent, respectively. Beyond the first year, the historical CCA rates will apply. Budget 2019 proposes to provide a temporary enhanced first-year CCA rate of 100% in respect of zero-emission vehicles. This would include new vehicles that are fully-electric, plug-in hybrids with a battery capacity of at least 15 kWh or fully powered by hydrogen. Two new CCA classes will be created for zero-emission vehicle purchases: • Class 54 if the vehicle would otherwise be included in Class 10 or 10.1 • Class 55 if the vehicle would otherwise be included in Class 16 Class 54 will have a limit of $55,000 (plus sales taxes) on the amount of CCA deductible. There is no limit to the amount of CCA deductible for Class 55. This measure will apply to eligible zero-emission vehicles acquired on or after March 19, 2019 and that become available for use before 2028, subject to a phase-out for vehicles that become available for use after 2023. EMPLOYEE STOCK OPTIONS Budget 2019 introduces proposed changes to align Canada’s employee stock option tax treatment with that of the U.S. by applying a $200,000 annual cap on employee stock option grants (based on the fair market value of the underlying shares) that may receive tax-preferred treatment for employees of large, long-established mature firms. For start-ups and rapidly growing Canadian businesses, employee stock option benefits would remain uncapped. Further details of this measure will be released before the summer of 2019. The proposed changes will apply on a go-forward basis only and will not apply to employee stock options granted prior to the announcement of legislative proposals to implement the new regime. MNP INSIGHT: Businesses may still have time to implement an employee stock option plan under the existing regime. Also, Budget 2019 does not clarify the extent to which Canadian-controlled private corporations (CCPC) and applicable employment income tax-deferrals will be affected by the changes. FEDERAL BUDGET SUMMARY – 2019 CARRYING ON BUSINESS IN A TAX-FREE SAVINGS ACCOUNT The tax-free savings account (TFSA) is a registered account that allows Canadians to earn tax-free investment income on a wide range of investments. However, a TFSA is liable to pay tax under Part I of the Income Tax Act on income from a business carried on by the TFSA or from non-qualified investments. Under the current rules, the trustee of a TFSA (i.e. financial institution) is jointly and severally liable with the TFSA for Part I tax while the holder of the TFSA is not. Budget 2019 proposes that the joint and several liability for tax owing on income from carrying on a business in a TFSA be extended to the TFSA holder. This measure will apply to the 2019 and subsequent taxation years. SMALL BUSINESS DEDUCTION – FARMING AND FISHING Budget 2019 proposes relief for farming and fishing businesses by eliminating the requirement that sales must be to a farming or fishing co-operative in order to be excluded from specified corporate income. Instead, any income from the sales of farming products and fishing catches to any arm’s length corporation will not be subject to the specified corporate income rules. This measure will apply retroactive to any taxation years that began after March 21, 2016. INTERGENERATIONAL BUSINESS TRANSFERS The government will continue consultations with farmers, fishers and other business owners throughout 2019 to develop new proposals to facilitate the intergenerational transfers of businesses while protecting the integrity and fairness of the tax system. MNP INSIGHT: This clarification will provide greater certainty to agricultural producers as well as related businesses in the agricultural sector. Specifically, producers will be able to market their grain and livestock to the purchaser that makes the most business sense without concern for potential income tax consequences. The expansion to include any arm’s length corporation as opposed to solely agricultural co-operative corporations should incentivize new producer owned agribusinesses to emerge. FEDERAL BUDGET SUMMARY – 2019 PERSONAL INCOME TAX CREDIT FOR DIGITAL SUBSCRIPTIONS Budget 2019 proposes a temporary, non-refundable 15 percent tax credit on amounts paid by individuals for eligible digital news subscriptions. This will allow individuals to claim up to $500 in costs paid towards eligible digital subscriptions in a taxation year, for a maximum tax credit of $75 annually. In the case of combined digital and newsprint subscriptions, individuals will be limited to claiming the cost of a stand-alone digital subscription. This credit will be available in respect of eligible amounts paid after 2019 and before 2025. B. Personal Tax Measures PERSONAL TAX RATES No new personal income tax rate or tax bracket changes were announced in this year’s Budget. CANADA TRAINING CREDIT Budget 2019 proposes to introduce the Canada Training Benefit to address barriers to professional development for working Canadians. Included in the Canada Training Benefit is the new Canada Training Credit, a refundable tax credit to support eligible tuition and fees associated with training. Eligible individuals will accumulate $250 annually in a notional account which can be accessed for this purpose. In order to accumulate the $250 in respect of a year, an individual must: • File a tax return for the year; • Be at least 25 years old and less than 65 years old at the end of the year; • Be resident in Canada throughout the year; • Have earnings of $10,000 or more in the year; and • Have individual net income for the year that does not exceed the top of the third tax bracket for the year ($147,667 in 2019). The amount of the credit that can be claimed for a taxation year will be equal to the lesser of half of the eligible tuition and fees paid in respect of the taxation year and the individual’s notional account balance for the taxation year. Any amount claimed will offset tax otherwise payable or will be refunded to the individual to the extent that the amount exceeds tax otherwise payable. Individuals can accumulate a maximum of $5,000 in their lifetime; however, an individual must be resident in Canada throughout a year to claim the credit for the year. Unlike the Tuition Tax Credit, educational institutions outside of Canada will not be eligible for the purpose of the Canada Training Credit. Any unused balance will expire at the end of the year in which an individual turns 65. FEDERAL BUDGET SUMMARY – 2019 This measure will apply to 2019 and subsequent taxation years. The annual accumulation to the notional account will start based on eligibility in respect of the 2019 taxation year and the credit will be available to be claimed for expenses in respect of the 2020 taxation year. HOME BUYERS’ PLAN Budget 2019 proposes to increase the Home Buyers’ Plan withdrawal limit to $35,000 from $25,000 for first-time home buyers. This increase to $35,000 will also apply to the Home Buyers’ Plan rules facilitating the purchase of an accessible home suited for the care of an individual eligible for the disability tax credit (even if first-time home-buyer requirement is not met). This increased limit will apply to the 2019 and subsequent calendar years in respect of withdrawals made after March 19, 2019. Budget 2019 also proposes to extend access to the plan in order to help Canadians maintain homeownership after the breakdown of a marriage or common-law partnership; this measure will be applicable to withdrawals made after 2019. NEW FIRST-TIME HOME BUYER INCENTIVE Budget 2019 proposes to introduce the First-Time Home Buyer Incentive. The incentive enables home buyers to reduce the amount of money required from an insured mortgage without increasing the amount they must save for a down payment. Canada Mortgage and Housing Corporation (CMHC) would offer qualified first-time home buyers a 10-percent shared equity mortgage for a newly constructed home or a 5-percent shared equity mortgage for an existing home. The incentive would be available to first-time home buyers with household incomes under $120,000 per year. At the same time, participants’ insured mortgage and the incentive amount cannot be greater than four times the participants’ annual household incomes. More details about CMHC’s First-Time Home Buyer Incentive and funds to assist other providers of shared equity mortgages will be released later this year, with the programs expected to be operational by September 2019. MNP INSIGHT: It is not clear whether the amount to be repaid to CMHC on a future sale of a property would require repayment of the original debt or repayment of the “equity interest” if this amount is greater than the debt. FEDERAL BUDGET SUMMARY – 2019 CHANGE IN USE RULES FOR MULTI-UNIT RESIDENTIAL PROPERTIES To improve the consistency of tax treatment of owners of multi-unit residential properties in comparison to owners of single-unit residential properties, Budget 2019 proposes to allow a taxpayer to elect the deemed disposition that normally arises on a change in use of part of a property not apply. This measure will apply to changes in use of property that occur on or after March 19, 2019. ADDITIONAL TYPES OF ANNUITIES UNDER REGISTERED PLANS To provide Canadians with greater flexibility in managing their retirement savings, Budget 2019 proposes to permit two new types of annuities under the tax rules for certain registered plans: • Advanced life deferred annuities (ALDA) • Variable payment life annuities (VPLA) The rules currently require an annuity purchased with registered funds to commence by the end of the year in which the annuitant attains 71 years of age. An ALDA will be a life annuity, the commencement of which may be deferred until the end of the year in which the annuitant attains 85 years of age. An ALDA will be a qualifying annuity purchase 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); an ALDA will also be a qualified investment for a trust governed by an RRSP or RRIF. An ALDA will be subject to limits, including a comprehensive lifetime ALDA dollar limit of $150,000 from all qualifying plans and certain specified annuity requirements. Budget 2019 also proposes amendments to permit PRPPs and defined contribution RPPs to provide a VPLA directly from the plan. A VPLA will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of the VPLA annuitants. As with the ALDA, a VPLA will be subject to certain rules and specified annuity requirements. These measures will apply to the 2020 and subsequent taxation years. FEDERAL BUDGET SUMMARY – 2019 REGISTERED DISABILITY SAVINGS PLAN – CESSATION OF ELIGIBILITY FOR DTC Currently, when a beneficiary of a registered disability savings plan (RDSP) ceases to be eligible for the disability tax credit (DTC), no contributions may be made to, and no Canada Disability Savings Grants and Canada Disability Savings Bonds may be paid into, the RDSP. The rules generally require that the RDSP be closed by the end of the year following the first full year throughout which the beneficiary is not eligible for the DTC. Budget 2019 proposes to remove the time limitation on the period that an RDP may remain open after a beneficiary becomes ineligible for the DTC and to eliminate the requirement for medical certification that the beneficiary is likely to become eligible for the DTC in the future in order for the plan to remain open. The general rules that currently apply in respect of a period during which an election is valid will apply to an RDSP in any period during which the beneficiary is ineligible for the DTC, subject to certain modifications. This measure will apply after 2020. However, an RDSP issuer will not be required to close an RDSP on or after March 19, 2019 and before 2021 solely because the RDSP beneficiary is no longer eligible for the DTC. CANADA WORKERS BENEFIT Budget 2019 introduces an amendment to clarify that an individual may be considered to be the parent of a child in their care for the purpose of the Canada Workers Benefit, regardless of whether they receive financial assistance from a government under a kinship and close-relationship care program. Kinship care providers will thus be eligible for the Canada Workers Benefit amount available for families, provided all other eligibility requirements are met. Also proposed was an amendment to clarify that financial assistance payments received by care providers under a kinship care program are neither taxable, nor included in income for the purposes of determining entitlement to income-tested benefits and credits. Both amendments will apply for the 2009 (due to 10-year limitations under taxpayer fairness provisions) and subsequent taxation years. MNP INSIGHT: To recognize that life expectancy has increased for Canadians, the ALDA allows a limited deferral of withdrawals to age 85. It is unclear whether this will have a material impact on the early depletion of retirement assets. FEDERAL BUDGET SUMMARY – 2019 DONATIONS OF CULTURAL PROPERTY Budget 2019 amends the Income Tax Act and the Cultural Property Export and Import Act to remove the requirement that property be of “national importance” in order to qualify for the enhanced tax incentives for donations of cultural property. This measure will apply in respect of donations made on or after March 19, 2019. C. International Tax Measures TRANSFER PRICING There has been debate regarding the conflict between the transfer pricing rules and other income tax rules applying to a transaction. Budget 2019 clarifies that the transfer pricing rules apply before the application of other rules in the Income Tax Act. The Budget also aligns the definition of “transaction” in the extended reassessment period available for transfer pricing adjustments to the definition within the transfer pricing rules, which are broader in scope. These measures apply to taxation years that begin on or after March 19, 2019. FOREIGN AFFILIATE DUMPING Current rules provide for a potential deemed dividend where a corporation resident in Canada (CRIC) that is controlled by a non-resident makes an investment in a foreign affiliate (foreign affiliate dumping rules). These rules apply only in respect of certain CRICs that are controlled by a non-resident corporation (or by a related group of non-resident corporations). Budget 2019 proposes to expand the foreign affiliate dumping rules to a CRIC controlled by: • a non-resident individual; • a non-resident trust; or • a group of persons that do not deal at arm’s length (which would include the above and any non-resident corporation). This measure applies to taxation years that begin on or after March 19, 2019. CROSS-BORDER SHARE LENDING ARRANGEMENTS Under securities lending arrangement structures relating to Canadian corporation shares, a non-resident was able to receive dividend compensation payments as interest payments or derivative contract payments without withholding tax applying. Budget 2019 proposes to treat dividend compensation payments as dividends subject to withholding tax. Next >

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