We’ve now seen some of the provinces come through with their budgets and as a general rule there are certainly financial concerns, dealt with by tax increases (direct or indirect) and spending cuts. With the federal budget (on the first day of the real March Madness games) we are faced with much of the same – but a few tidbits for real estate investors and other business owners. Others have focused on the various funding elements that make up the most of the budget, but we want to take a look at the various tax elements which we thought more of our clients would be interested in.
Overall the government wants to emphasize the good fiscal position of Canada (no thanks to Ontario and Quebec) compared to other countries, and in particular the G7. Certain kudos are due. But, some of the tactics seem juvenile. And, government revenues have decreased since the last budget (almost a $1 billion dollar decrease in revenues – relatively minute as a percentage of expected revenues). But, I’m having trouble understanding how the country’s finances forced us to spend over $7 billion more than projected from our prior annual budget.There’s no one tax element that most people will find overwhelming, but certainly the majority of elements seem negative from a business owner and investor’s perspective. Alternatively, many of the announced programs appear too small to make a significant impact.
So, what tax changes are in the budget?
No tax rate changes but, let’s take advantage of… The CRA is changing the dividend tax credit rules to reduce the benefits of corporate owners who pay themselves dividends. This will increase the tax rate roughly 2%. Let’s wait for the provinces to pile on and punish business and real estate owners further! This is a conservative government, right? They are on the side of business, right? While dividend payments will still be better in many cases, this encourages funds to remain at the corporate level so that fewer taxes are incurred.
Manufacturing. Those in the manufacturing industry will receive an extension of the tax treatment for depreciation on qualifying asset additions.
The Snitch Line. The CRA will pay those who rat out taxpayers who have greater than $100,000 of federal taxes from foreign activities. Unquestionably we support tax compliance. Our concern is that over time, the $100,000 threshold is significantly reduced and becomes subjective, a tactic not unheard of from the CRA.
Closing tax planning “loop holes”. The government is taking a “strong stance against tax loop holes” by removing or reducing long-standing tax planning which provided:
- estate and succession planning (changing certain insurance policy rules)
- corporate tax planning amongst related companies (corporate loss trading – an enormous disappointment for business owners who were lead to believe some restrictions would shortly be removed)
- investment from foreign entities in Canadian businesses and jobs (“thin capitalization rules”)
Sore losers…farm losses. The courts told the CRA that they were being unfair with farmers who also had other sources of income, ruling against the CRA’s interpretation of the rules. Essentially the government had restricted losses which can be claimed by someone other than, for example, full-time farmers. Part of the court`s theory was that the government was forbidding part-time farmers/entrepreneurs from recognizing significant but real losses. As a result of the ruling, the CRA increased the restricted loss deduction limits to $17,500 but changed the rules to enforce the policies previously being used.
Capital gains exemption increase. OK, I’ve found something useful. The capital gains exemption for qualifying corporations has been increased to $800,000 with a promise to increase this by inflation. In other words, if you sell the shares of your company for $800,000 tomorrow, it may be tax free!
Safety deposit boxes? They removed the tax deduction for holding safety deposit boxes.
First-time donors? And now, a first donation tax credit applied to your first donation. I’m thinking, my first donation, I’m a teenager or early twenties when I can actually claim it, and my donation is say, $10? Hmmmmmm, very generous and meaningful.
Dying looks to become more expensive. The government is looking at testamentary trusts and the tax rates applicable where for example you give your children assets from your estate. While no formal changes have been made, they are considering it. Essentially in many business owners’ or investors’ wills provisions exist to help their children or grandchildren with the ownership of assets that mom and dad or the grandparents held. If the government cannot fight you when you’re alive, they’ll fight you when you’re dead apparently.
Increased penalties for hidden sales. This makes sense. I accept that there should be stringent penalties for business owners (restaurant owners are the target, or those helping them) that use software to hide some of their sales for income or sales tax purposes.
SRED reporting. If you conduct scientific research and experimental development (SRED) work, additional disclosure will be required for those who help you prepare your claims and the billing arrangements that you have. In particular the government is looking at contingency pricing and what they consider inappropriate claims.
Foreign assets? More time to audit, more details to provide. Big Brother is still interested in your foreign assets and ensuring that they have ample opportunity to audit you on these. So, they have increased by another three years the period of time an audit can be completed. Additional details of your foreign assets will also be needed. On the plus side, soon we will be able to electronically submit the forms as compared to the current system of forced paper filing. This is particularly relevant to our clients who own US or other foreign real estate, and fits in with a general trend the past few years.
“Character conversion contracts” restricted. While you may not have heard of “character conversion contracts”, various investment products exist that essentially convert investment income into capital gains, for example. These investments can significantly reduce taxes through the use of derivatives, or rather, they used to.
An assortment of GST/HST changes. These are relatively minor for the most part but may be significant for those directly involved in a particular industry. For example, medical practitioners are going to be dinged more HST on their reports. (Guess who pays for this?) One thing of note: the CRA is getting pickier on filing various bits of information for their records. They will have the ability to withhold refunds where their information returns are not completed to the CRA’s satisfaction. You will need to be more diligent and organized.
I wasn’t expecting a great budget and recognized there were certain financial realities. Perhaps it doesn’t make a huge difference financially, but the trend is unpleasant. I would prefer to see the continuation of many long standing planning techniques and as needed, clean out a variety of miscellaneous tax credits and deductions which have emerged over the past few years. The surveillance trend is worrisome in that I appreciate the need to harshly deal with tax fraud, but also appreciate there are more and more instances where the legitimate interpretation of subjective tax rules is deemed to be offensive.
George E. Dube, CPA, CATags: budget, federal, foreign assets, GST, SRED