The 2016 Federal Budget was released on Tuesday. Many changes and additions to the budget were expected, and many were certainly not.
The Federal Budget can affect you, your business, and your family. With many of the tax changes, you need to know which ones to stay on top of. We have outlined many of the important updates for you! Some of our main points are below. Download the HGA 2016 Federal Budget Commentary for a more detailed description of the changes.
1. Retroactive Child Benefit Related Payments:
Budget 2016 proposes to allow a taxpayer to request a retroactive payment of the Canada Child Benefit, CCTB or UCCB in respect of a month on or before the day that is 10 years after the beginning of that month, effective for requests made after June 2016. Previously, retroactive payments could be requested as far back as when the programs were introduced.
2. Canada Child Benefit:
Budget 2016 proposes to replace the Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB) with a new Canada Child Benefit. The 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. The benefit will be phased out based on adjusted family net income as follows:
Budget 2016 proposes to continue to provide an additional amount of up to $2,730 per child eligible for the disability tax credit and the phase-out rates will generally align with the Canada Child Benefit.
Entitlement to the Canada Child Benefit for the July 2016 to June 2017 benefit year will be based on adjusted family net income for the 2015 taxation year.
The rules governing the Canada Child Benefit will generally be based on those which apply to the old CCTB. For example:
- The Canada Child Benefit will be paid monthly to eligible families.
- Amounts received under the new Canada Child Benefit will not be taxable and will not reduce the goods and services tax credit. They will also not be included in income for the purposes of federal income-tested programs delivered outside of the income tax system, such as the Guaranteed Income Supplement, the Canada Education Savings Grant, the Canada Learning Bond, the Canada Disability Savings Bond and the Canada Disability Savings Grant.
- To be eligible for the Canada Child Benefit, an individual must be a resident of Canada for tax purposes and must reside with the qualified dependant and be the parent who primarily fulfils the responsibility for the care and upbringing of the qualified dependant or be a shared custody parent.
Canada Child Benefit payments will start in July 2016. The UCCB and CCTB will be eliminated for months after June 2016.
It is also noted that the phase-out rates have been increased as compared to what was presented in the Liberal Election Platform. Therefore, the point at which the Benefits will be fully eroded has slightly dropped.
3. Income Splitting Credit (Family Tax Cut):
Budget 2016 proposes to eliminate the income splitting tax credit for couples with at least one child under the age of 18 for the 2016 and subsequent taxation years. The credit was previously valued at up to $2,000 and based on a notional transfer of up to $50,000 of taxable income.
Pension income splitting, however, is not being removed or modified.
4. Education & Textbook Tax Credit:
Budget 2016 proposes to eliminate the education and textbook tax credits after 2016. The tuition tax credit will remain available. 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. Unused credits carried forward from prior years will remain available to be claimed after 2016.
5. Children’s Fitness & Arts Credits:
Budget 2016 proposes to phase out these credits by halving the 2016 maximum eligible amounts to $500 from $1,000 for the fitness credit (which will remain refundable) and to $250 from $500 for the arts credit. Both credits will be eliminated for 2017 and later years. The supplemental amounts for children eligible for the disability tax credit will remain at $500 for 2016.
6. Multiplication of the Small Business Deduction:
Budget 2016 proposes measures to prevent business owners from multiplying access to the $500,000 small business deduction limit using complex partnership and corporate structures.
The small business deduction that a CCPC which is a member of a partnership can claim in respect of its income from the partnership is limited to the lesser of the active business income that it receives as a member of the partnership (its “partnership ABI”) and its pro-rata share of a notional $500,000 business limit determined at the partnership level (its specified partnership income limit, or “SPI limit”). A CCPC’s SPI is added to its active business income from other sources, if any, and the CCPC can claim the small business deduction on the total (subject to its annual business limit).
Some taxpayers have implemented structures to circumvent the application of the SPI rules. In a common structure, a shareholder of a CCPC is a member of a partnership and the partnership pays the CCPC as an independent contractor under a contract for services. As a result, the CCPC claims a full small business deduction in respect of its active business income earned in respect of the partnership because, although the shareholder of the CCPC is a member of the partnership, the CCPC is not a member.
To address this, Budget 2016 proposes to extend the SPI rules. Basically, income paid by the partnership to a CCPC which is a member of the partnership, has a shareholder who is a partner in the partnership, or does not deal at arm’s length with a member of the partnership, will be restricted by the SPI provisions unless substantially all of the CCPC’s active business income is derived from provision of property or services to arm’s length persons other than the partnership.
7. Eligible Capital Property:
Eligible capital property for income tax purposes includes intangible property such as goodwill and licences, franchises and quotas of unlimited duration, as well as certain other rights.
Budget 2016 proposes to replace the ECP regime with a new capital cost allowance (CCA) class (Class 14.1) available to businesses, and to provide rules to transfer taxpayers’ existing cumulative eligible capital (CEC) pools to the new CCA class. The proposal is not intended to affect the application of the Goods and Services Tax/Harmonized Sales Tax (GST/HST) in this area.
As gains on property of this nature will now be capital gains, the tax deferral which was previously available on sales of ECP will be eliminated.
As part of this change, Budget 2016 also proposes some transitional rules, as follows:
- Under the proposal, CEC pool balances will be calculated and transferred to the new CCA class as of January 1, 2017. The opening balance of the new CCA class in respect of a business will be equal to the balance at that time of the existing CEC pool for that business.
- For the first ten years, the depreciation rate for the new CCA class will be 7 per cent in respect of expenditures incurred before January 1, 2017.
- A taxpayer will be permitted to deduct as CCA, in respect of expenditures incurred before 2017, the greater of $500 per year and the amount otherwise deductible for that year. This additional allowance will be provided for taxation years that end prior to 2027.
- A separate business deduction will be provided for incorporation expenses, such that the first $3,000 of these expenditures will be treated as a current expense rather than being added to the new CCA class.
This measure, including the transitional rules, will apply as of January 1, 2017.
8. Life Insurance Properties:
Budget 2016 proposes a number of complex changes to the rules surrounding taxation of life insurance policies, generally targeting strategies perceived as abusive. The discussion which follows is limited to a simplified outline of these changes.
Life insurance proceeds received due to the death of an insured individual are not taxable. A private corporation receiving such benefits adds them, to the extent they exceed the adjusted cost basis of the policy, to its capital dividend account (CDA), which can be paid out as a tax-free dividend to its shareholders.
Budget 2016 addresses structures perceived to allow excessive amounts to be received tax-free as a consequence of these provisions, generally involving a corporation being a beneficiary of a life insurance policy it does not also own. In very general terms, Budget 2016 proposes new measures to ensure that the adjusted cost basis of the policy reduces the amounts which a corporate recipient of insurance proceeds may add to its CDA.
Where a partnership receives life insurance proceeds, the adjusted cost base of the partners’ interest in the partnership is increased in the same manner a corporation’s CDA is increased. Budget 2016 proposes similar rules to restrict the increase in the adjusted cost bases of partnership interests.
Budget 2016 also introduces information reporting requirements for such situations. All of these provisions will be effective for policy benefits received in respect of deaths on or after Budget Day.
Transfer of Life Insurance Policy Interests
Prior to the Budget changes, a transfer of a life insurance policy between non-arm’s length parties was taxed on the basis that proceeds equaled the cash surrender value of the policy, if any. Budget 2016 proposes to tax the parties on the basis of proceeds equal to the full fair market value of the policy. As a result, such transfers will often attract significantly higher income tax costs. This change will apply to transfers on or after Budget Day.
For transfers which occurred prior to Budget Day for consideration in excess of the deemed proceeds (i.e. the cash surrender value), the increase to a corporate policyholder’s CDA, or the adjusted cost basis of the interests in a partnership to which a policy was transferred, will be reduced by any proceeds paid for the policy in excess of the cash surrender value. This change will apply to policy benefits received as a result of deaths occurring on or after Budget Day, regardless of how long ago the policy was transferred to the corporation or partnership.
9. Employment Insurance (EI) Improvements:
Budget 2016 proposes many changes to the EI rules, including the following:
- elimination of the higher eligibility requirements for new entrants and re-entrants to the labour market – effective July 2016, they will be subject to the same requirements as any other employee in the same region;
- effective January 1, 2017, the EI waiting period will be reduced from 2 weeks to 1 week;
- extension until August 2018, of the “Working While on Claim” pilot project, which permits workers to keep 50 cents of EI benefits for every dollar earned, up to a maximum of 90% of the weekly insurable earnings used to compute their benefits;
- reversal of changes in 2012 which required workers to accept work with lower pay rates and/or longer commute;
- extension of regular benefits by five weeks, to a maximum of 50 weeks, for claimants in twelve regions which have experienced the most severe increases in unemployment (Newfoundland/ Labrador, Sudbury, Northern Ontario, Northern Manitoba, Saskatoon, Northern Saskatchewan, Calgary, Northern Alberta, Southern Alberta, Northern British Columbia, Whitehorse, and Nunavut), with a further 20 weeks for long-tenured workers. These changes are effective July 2016 with the measure being retroactively applied to eligible claims back to January 4, 2015; and,
- extension of the maximum duration of Work-Sharing Agreements from 38 weeks to 76 weeks.
In addition, funds will be allocated to cope with the increase in claims, both to speed processing and improve access to EI Call Centres.
Finally, the Budget noted a $21 million investment over three years to promote compliance with program rules, and a commitment to further improvements, including easier access to Compassionate Care benefits, provision of care to seriously ill family members and greater flexibility in parental leave benefits.