{"id":1155,"date":"2016-03-23T20:51:25","date_gmt":"2016-03-23T20:51:25","guid":{"rendered":"http:\/\/andrewwbradley.ca\/Retirement-Made-Easy\/?p=1155"},"modified":"2016-03-23T20:51:25","modified_gmt":"2016-03-23T20:51:25","slug":"2016-federal-budget-highlights","status":"publish","type":"post","link":"https:\/\/blog.andrewwbradley.ca\/index.php\/2016\/03\/23\/2016-federal-budget-highlights\/","title":{"rendered":"2016 Federal Budget Highlights"},"content":{"rendered":"

\"2016<\/a>\u00a0On March 22, 2016, Finance Minister Bill Morneau tabled his first Federal Budget. After 10 years of Conservative Budgets, this one feels different.\u00a0\u00a0It may be a matter of style and tone but there are also substantive changes.
\nMany measures previously proposed by the Conservatives were not proceeded with. Of note here is the Budget 2015\u00a0proposal and related July 31, 2015 draft legislation providing an exemption from capital gains on the disposition ofprivate company shares or real estate when cash proceeds of sale are gifted to charity. (AAMOT Sept 2015 )
\nOther measures enacted by the Conservatives were eliminated or will be phased out over time.\u00a0\u00a0See the discussion\u00a0below regarding several personal tax credits.
\nOf the measures that were introduced, some were known issues on the Department of Finance\u2019s list \u2013 it was a question\u00a0of when not if the loopholes would be plugged.\u00a0\u00a0Transfers of life insurance into a corporation and capital dividend\u00a0account maximization where a different corporation is named as a beneficiary under the policy are examples here.
\nSome were a surprise \u2013 the elimination of the tax deferral on fund switches within a mutual fund corporation.
\nSome items are yet to come.\u00a0\u00a0Hinted at in the Liberal Party Platform and directly commented on in the Budget\u00a0documents was the intention to do a \u201creview of the tax system to be completed in the coming year\u201d to address \u201cthe\u00a0ability of high\u2010net\u2010worth individuals to use private corporations to inappropriately reduce or defer tax.\u201d
\nThe biggest tax change proposed by the new government is already in effect.\u00a0\u00a0In December 2015, effective January 1,\u00a02016, it was announced that the second federal income tax bracket was to be reduced from 22 percent to 20 percent\u00a0and a new 33 percent tax bracket would apply for taxable income in excess of $200,000.\u00a0\u00a0With this also came a tax\u00a0increase of 4 percent on investment income of a corporation and adjustments to dividend refund and refundable
\ndividend tax on hand calculations.
\nBy far the biggest pre\u2010Budget speculation did not come true \u2013 no change to the capital gains inclusion rate nor the stock\u00a0options deduction.\u00a0The following represents a summary of changes of interest to people and family’s planning for their retirement.<\/p>\n

2016 Budget – Personal Changes<\/h2>\n

Top Marginal Income Tax Rate \u2013 Consequential Amendments
\nOn December 7, 2015, the Government announced the introduction of a 33 percent top marginal tax rate on taxable income in excess of $200,000 for the 2016 and subsequent taxation years.\u00a0\u00a0Budget 2016 proposes further consequential amendments to reflect the new top marginal income tax rate. These amendments include:
\n\uf0b7 Provide a 33 percent charitable donation tax credit (on donations above $200) to trusts that are subject to the\u00a033 percent rate on all of their taxable income for donations after the 2015 taxation year.
\n\uf0b7 For 2016 and later taxation years, the new 33 percent top rate will apply to excess employee profit sharing plan\u00a0contributions.
\n\uf0b7 Increase the tax rate from 28 percent to 33 percent on personal service business income earned by corporations
\neffective January 1, 2016, and;
\n\uf0b7 The recovery tax rule for qualified disability trusts will be amended to refer to the new 33 percent top rate after
\nthe 2015 taxation year.<\/p>\n

Taxation of Switch Fund Shares Issued by Mutual Fund Corporations<\/h3>\n

Canadian mutual funds can be in the legal form of a trust or corporation.\u00a0\u00a0Many of these mutual fund corporations are\u00a0organized as \u201cswitch funds\u201d which offer different types of asset exposure in different funds with each fund structured as\u00a0a separate class of shares of the mutual fund corporation.\u00a0\u00a0Investors are able to exchange shares of one class of the\u00a0mutual fund corporation for shares of another class, in order to switch their economic exposure between different\u00a0funds.\u00a0\u00a0Currently, this type of exchange is deemed not to be a disposition for income tax purposes. This deferral benefit is not available to taxpayers investing in mutual fund trusts or directly in securities.
\nTo ensure the recognition of capital gains, Budget 2016 proposes amendments to the Income Tax Act (ITA) so that an\u00a0exchange of shares of a mutual fund corporation that results in the investor switching between funds will be considered\u00a0a disposition at fair market value for tax purposes.\u00a0\u00a0The measure will not apply to switches where the shares received in\u00a0exchange differ only in respect of management fees or expenses to be borne by investors and otherwise derive their\u00a0value from the same portfolio or fund within the mutual fund corporation (e.g., the switch is between different series ofshares within the same class). This measure will apply to dispositions of shares that occur after September 2016.
\nThis is only the latest measure to reduce the attractiveness of mutual fund corporations. If you recall Budget 2013\u00a0introduced the elimination of the use of forward transactions for income recharacterization purposes (i.e. converting\u00a0ordinary income to capital gains only 50 percent of which are included in income). Now with the proposed elimination of\u00a0the tax deferral advantage of fund switches, the future of mutual fund corporations is questionable.<\/p>\n

Sales of Linked Notes<\/h3>\n

A linked note is a debt obligation, the return on which is linked to the performance of reference assets or indexes such\u00a0as a basket of stocks, a stock index, a commodity, a currency or units of a fund.\u00a0\u00a0While the ITA contains rules that deeminterest to accrue annually, investors often take the position that the accrued return is not determinable and therefore\u00a0not taxable until maturity.\u00a0\u00a0Furthermore, investors who hold their linked notes as capital property often sell them prior\u00a0to the determination date to, in effect, convert the return on the linked notes from fully taxable income to a capital gain\u00a0taxed at 50 percent.
\nBudget 2016 proposes that the return on a linked note will retain the same character whether earned at maturity or\u00a0upon a sale before maturity.\u00a0\u00a0Specifically, a deeming rule will apply to treat the gain realized on the sale of a linked note\u00a0as interest that accrued on the debt obligation at the time of the disposition.\u00a0\u00a0However, any gain or loss on the linked\u00a0note due to foreign exchange fluctuations is excluded in determining the amount of accrued interest.\u00a0\u00a0Also, if a portion\u00a0of the return on a linked note is based on a fixed rate of interest, any part of the of the gain that is related to market interest rate fluctuations will also be excluded from the accrued interest and treated as a capital gain.This measure will apply to sales of linked notes that occur after September 2016.<\/p>\n

Canada Child Benefit<\/h3>\n

Effective July 1, 2016, the new Canada Child Benefit (CCB) program will replace the Universal Child Care Benefit (UCCB) and the Canada Child Tax Benefit (CCTB).\u00a0The Canada Child Benefit will provide a maximum benefit of $6,400 per child under the age of 6 and $5,400 per child aged 6 through 17.\u00a0\u00a0Budget 2016 proposes to continue to provide an additional amount of up to $2,730 per child eligible for the disability tax credit. The CCB declines based on adjusted family income and the number of children per family. The non\u2010taxable benefits will be paid monthly to eligible families beginning in July 2016 for the July 2016 to June 2017 benefit year and will be based on adjusted family net income for the 2015 taxation year.<\/p>\n

Income Splitting Credit<\/h3>\n

Budget 2016 proposes to eliminate the income splitting tax credit (also known as the Family Tax Cut) for couples with at least one child under the age of 18 for the 2016 and subsequent taxation years. The credit allows a higher\u2010income spouse or common\u2010law partner to notionally transfer up to $50,000 of taxable income to their spouse or common\u2010law partner for the purpose of reducing the couple\u2019s total income tax liability by up to $2,000. Pension income splitting will not be affected by this change.<\/p>\n

Children\u2019s Fitness and Arts Tax Credits<\/h3>\n

Budget 2016 proposes to phase out the children\u2019s fitness and arts tax credits by 2017.\u00a0The children\u2019s fitness tax credit provides a 15 percent refundable tax credit on up to $1,000 of eligible fitness expenses for children under 16 years of age at the beginning of the taxation year.\u00a0\u00a0\u00a0For 2016, the budget reduces the 2016 maximum eligible amount for the refundable credit to $500 (from $1,000) The children\u2019s arts tax credit provides a 15 percent non\u2010refundable tax credit on up to $500 in eligible fees for programs of artistic, cultural, recreational and developmental activity for children under 16 years of age.\u00a0\u00a0For 2016, the Budget reduces the 2016 maximum eligible amount for the non\u2010refundable credit to $250 (from $500)The supplemental amounts for children eligible for the disability tax credit and who are under 18 years of age will
\nremain at $500 for 2016.<\/p>\n

Education and Textbook Tax Credits<\/h3>\n

Budget 2016 proposes to eliminate the education and textbook tax credits effective January 1, 2017. Unused education and textbook credit amounts carried forward from years prior to 2017 will remain available to be claimed in 2017 and subsequent years. This measure does not eliminate the tuition tax credit.The Budget notes that changes will be made to ensure that other income tax provisions (such as the tax exemption for scholarship, fellowship and bursary income) that currently rely on eligibility for the education tax credit or use terms defined for the purpose of the education tax credit will be unaffected by its elimination.<\/p>\n

Enhancing the Canada Pension Plan<\/h3>\n

In December 2015, the government began discussions on enhancing the Canada Pension Plan (CPP) with the provinces and territories.\u00a0\u00a0In the coming months, the government will expand this process, launching consultations to give Canadians an opportunity to share their views on enhancing the CPP.<\/p>\n

Restoring Eligibility Ages of Old Age Security Program<\/h3>\n

Budget 2016 proposes to restore the eligibility age for Old Age Security (OAS) and Guaranteed Income Supplement (GIS) benefits to 65 (from 67) and Allowance benefits to 60 (from 62).<\/p>\n

2016 Budget – Small Business Changes<\/h2>\n

Capital Dividend Account \u2013 Ownership and beneficiary of a life insurance policy\u00a0Budget 2016 proposes to address certain ownership structures that have resulted in artificial increases in a corporation\u2019s capital dividend account (CDA).\u00a0The ITA provides that the death benefit from a life insurance policy is generally received tax free. In order to preserve this treatment when a private corporation is the recipient of a life insurance death benefit, the ITA provides that the corporation receives a credit to its CDA equal to the excess of the death benefit received over the adjusted cost basis (ACB) of the policy to that corporation. Capital dividends can be paid out of a corporation to the extent of its CDA and\u00a0are generally\u00a0\u00a0non\u2010taxable to the shareholder. Some taxpayers were structuring their affairs so that the life insurance policy was owned by a different corporation than the corporation that was the beneficiary, so the reduction to the credit to the CDA did not apply. The budget proposes to amend the ITA so that after March 22, 2016 the credit to the CDA will be reduced by the ACB of the policy regardless of who owns the policy. A similar mechanism exists for partnerships to be\u00a0able to distribute life insurance death benefits on a tax free basis, and a similar change is proposed to prevent this planning in the partnership context.
\nAs an enforcement mechanism, the Budget introduces an information reporting requirement applicable to a corporation or partnership that is not a policyholder or owner but is entitled to receive a policy benefit.<\/p>\n

Transfers of Life Insurance to a Corporation<\/h3>\n

Of no surprise is that Budget 2016 proposes to amend the ITA relating to transfers of a life insurance policy from a person to a related private corporation. Transfers of a life insurance policy generally give rise to a taxable policy gaineq ual to the excess of the proceeds received over the ACB of the policy. There is a loophole in the current rules that allows a person to sell a life insurance policy to a related corporation for an amount greater than that used to determine\u00a0their policy gain for tax purposes. This excess is not taxable to the transferor, so it essentially represents a way of extracting money from a corporation tax\u2010free. The Budget includes proposals that will prevent this planning after March 22, 2016 by ensuring the proceeds from the sale (that is used to determine the taxable policy gain)\u00a0\u00a0is not less than the amount of the consideration received from the corporation. In addition, the Budget proposes that if a policy was\u00a0transferred to a private corporation prior to March 22, 2016, the excess of the consideration received on the transfer over the proceeds used to determine the policy gain will reduce the CDA credit to the private corporation. So, transfers that have already occurred will be impacted. Similar changes are proposed to prevent this planning in the partnership context.<\/p>\n

Small Business Tax Rate<\/h3>\n

The federal small business tax rate applies to the first $500,000 of active business income of a Canadian\u2010controlled private corporation. Budget 2015\u00a0\u00a0proposed to reduce the rate from 11 to 9 percent over the next 4 years. Budget 2016 proposes that the small business tax rate remain at 10.5 percent after 2016. The Budget also proposes to maintain the current gross\u2010up factor and dividend tax credit rate applicable to non\u2010eligible dividends in order to preserve tax integration.<\/p>\n

Multiplication of the Small Business Deduction<\/h3>\n

Planning techniques exist that allow certain partnership and corporate structures access to multiple small business deductions.\u00a0\u00a0Budget 2016 proposes measures to limit structures that multiply access to the small business deduction.<\/p>\n

Active Versus Investment Income<\/h3>\n

Budget 2015 announced a consultation on the circumstances in which income from a business, the principal purpose of which is to earn income from property, should qualify as active business income.\u00a0\u00a0Budget 2016 maintains that such businesses must have more than five full time employees to claim the small business deduction.<\/p>\n

Eligible Capital Property (ECP)<\/h3>\n

Budget 2014 announced a consultation relating to the repeal of the ECP regime and replacement with a new capital cost allowance (CCA) class.\u00a0\u00a0Budget 2016 proposes to repeal the ECP regime with a new class of depreciable property for CCA purposes. In general, this measure will mean an increase in tax on the sale of goodwill, certain licenses, franchises and quotas. Under the proposal , cumulative eligible capital (CEC) pool balances will be calculated and transferred to the
\nnew CCA class as of January 1, 2017.
\nAndrewWBradley.ca<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

\u00a0On March 22, 2016, Finance Minister Bill Morneau tabled his first Federal Budget. After 10 years of Conservative Budgets, this one feels different.\u00a0\u00a0It may be a matter of style and tone but there are...<\/p>\n","protected":false},"author":1,"featured_media":1749,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"rop_custom_images_group":[],"rop_custom_messages_group":[],"rop_publish_now":"initial","rop_publish_now_accounts":[],"rop_publish_now_history":[],"rop_publish_now_status":"pending","footnotes":""},"categories":[13],"tags":[166,170,181,226,249,366,378,487,516],"_links":{"self":[{"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/posts\/1155"}],"collection":[{"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/comments?post=1155"}],"version-history":[{"count":0,"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/posts\/1155\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/"}],"wp:attachment":[{"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/media?parent=1155"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/categories?post=1155"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.andrewwbradley.ca\/index.php\/wp-json\/wp\/v2\/tags?post=1155"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}