The Federal Budget was presented March 22, 2016 by Finance Minister Bill Morneau.
Many of the speculated and feared changes did not materialize. In particular there was no change made to the capital gains inclusion rate from the current 50%, nor was the access to the small business deduction altered for Professional Corporations earning income directly. The following represent what we feel are key changes impacting our clients:
Corporate Tax
Previously announced decreases in the small business tax rate for small business income earned by a Canadian controlled private corporation (CCPC) of 0.5% per year for 2017, 2018 and 2019 were revoked. As a result the 2016 rate of 10.5% for Federal corporate tax purposes on the first $500,000 of active business income is to remain in place going forward. In Ontario the combined rate is therefore 15% for the calendar year 2016 and beyond.
The general corporate tax rate of 15% for Federal tax purposes remains the same for active business income not eligible for the small business deduction.
Access to the $500,000 small business deduction on active business income is restricted for certain corporate and partnership structures for taxation years beginning on or after March 22, 2016. These rules apply in very specific circumstances so professional advice is required if you think this might apply to your situation. Of particular note, there was no change to the basic definitions that allow a corporation to claim the small business deduction and hence the low rate of corporate tax in general.
There is also a change in the way income from an associated company on property is taxed in very specific circumstances. The budget proposes to limit the eligibility of having income taxed at the small business rate earned from an associated corporation where the corporation is not a CCPC or has made an election not to be associated. Again these are very specific circumstances and professional advice is required should you fall into this change.
The budget also noted that the government has completed its review the characterization of income from property as active and hence eligible to be taxed at the small business rate and determined that no change is to be made at this time.
Changes to the rules for the tax treatment of eligible capital property previously announced will be effective January 1, 2017.
The tax rate for personal services businesses is increased to 33% from 28% for Federal income tax purposes.
Life Insurance
Budget 2016 proposes two major changes:
- Dispositions occurring after March 21, 2016 will include the fair market value of any consideration paid to the policy holder in their proceeds of disposition. Previously the proceeds of disposition were measured as the cash surrender value.
- Changes to reduce the inclusion to the capital dividend account for deaths occurring on or after the budget date.
Personal Tax
No further tax rate changes were proposed.
The following tax credits were eliminated:
- Family tax cut.
- Education and text book credits.
- Children’s fitness and arts tax credits.
The budget did however include one new tax credit for teacher and early childhood educator school supplies to a maximum of $1,000 spent on qualified items.
There were also a number of very specific changes applying in limited circumstances that do not apply to the average taxpayer.
GST/HST
There are no changes proposed in this area.
Please consult your trusted advisor at Graham Scott Enns LLP to discuss how any of these changes might apply to your unique tax situation.