As the federal government has been indicating for some time, the 2014 federal budget was relatively boring as budgets go. Really, it was meant to show the economic management prowess the government possesses. But, next year’s election year budget will be the one to really watch.
Balanced budgets…and debt reduction?
While quite happy to see that spending is being reduced, we want to now address the fact that:
- the government has spent an enormous amount of money since the recession
- is just coming out of the annual deficits financially with essentially a break-even position expected for the 2014-2015 fiscal year
- they are only projecting miniscule surpluses in the future to start paying back the debt we accumulated, and we would like to prudently prepare for the next recession
The reality is that there is still a lot of money that goes to debt servicing that could have gone to health, education, reduced taxes, infrastructure, helping those less fortunate, pick your pet project.
Greedy corporations…or just a regular small business owner?
Consistent with the last few budgets, there were not any major changes that will shock people. It appears that the government is continuing to provide the image that they are closing loopholes that “greedy multinational companies” or “rich people” take advantage of, particularly those who dare to involve themselves with international business activities. The problem is that this wide net snags many small businesses and investors with:
- additional compliance costs
- red tape
- hurdles to leap
Further, as CRA administers our tax system in a more and more punitive manner, as compared to educational, many who are trying to abide by the rules are increasingly frustrated.
Paying the fair share…but what is fair?
To emphasize, we are all for a progressive tax system where those who are better off pay more of the tax burden. In a recent article from Mark Milke (a senior fellow at the Fraser Institute), he noted that recently released statistics from the Canada Revenue Agency for the 2011 tax year, show that the top 6.6% of income earners in Canada (those who made $100,000 and up) paid 47% of all federal and provincial taxes in the country.
Further, there were approximately 33.5 million Canadians according to the 2011 census, of which only 16.7 million paid taxes according to the CRA. Effectively, only half the people in the country pay any taxes at all (or 66.5% of all taxpayers if we remove children and others who simply do not file tax returns). These numbers suggest that our country’s tax system is fairly progressive in trying to ensure that those who cannot pay much in taxes, pay very little if any.
Yes, we get it, we prefer to pay less taxes too. But, we agree this must be a reasonable amount with reasonable compliance costs to pay, although we would prefer to see a less punitive manner against those who make honest mistakes.
Highlights that affect our clients directly
While the budget contains a host of measures and announcements, the following comments are related to the tax portions that we believe will impact more of our clients. Keep in mind that the descriptions in the budget do not provide all of the little details that approved legislation does, and thus there can still be more issues that develop.
You’ll note that a variety of small changes were made to help out low and middle income earners, consistent with prior years.
- The Adoption Expense Tax Credit will be increased to $15,000 per child for 2014 and thereafter indexed to inflation, similar to many of the personal tax credits.
- Effective in 2014, Medical Expense Tax Credits will now include certain therapy plans for those eligible for the Disability Tax Credit, and allow for the use of service animals for those with diabetes.
- A search and rescue tax credit will be available for those who volunteer at least 200 hours per year.
- The “kiddie tax” will be expanded where children are taxed essentially at the maximum tax rate for funds received from most businesses and trusts. They are eliminating some minor exceptions for business income and rental income received by some trusts and partnerships. The wording surrounding some elements is quite “fuzzy” and thus the actual impact on specific real estate investors remains to be seen. This will not affect the majority of our clients who have real estate investments through trusts, but, unfortunately it may affect some who we earmarked for future planning, with grandchildren in particular.
Business and corporate tax
- The government is looking to change the eligible capital property rules. Typically these rules deal with intangibles such as goodwill, farm quota, trademarks, patents, franchise fees, etc. They want to allow the creation of a separate capital cost allowance class which would be depreciated at 5% but have 100% of the cost of the asset depreciated (vs. 7% and 75% currently for eligible capital property). On the disposition of the property, there may be increased taxes, but through the life or, if no value, at the conclusion of the asset’s life, this will most likely be in the taxpayer’s favour.
- Beginning in 2015, threshold levels for payroll remittances will be increased. Instead of remitting twice per month if your remittances are $15,000 or more, the limit will increase to $25,000. Similarly, for the 4 remittances per month, the average threshold will increase from $50,000 to $100,000 or more.
- Kudos here to the government as they will now automatically process GST/HST credit applications for taxpayers who qualify based on their personal tax returns each year, as compared to having to formally apply for the audit through the tax return. A small step to save time and needless work.
- Positive and negative changes are coming for GST/HST elections between related groups and co-venturers beginning in 2015. Many of the details are in the draft stage and waiting for consultation.
- On the plus side, GST/HST will be eliminated immediately for the development of certain therapy plans, services from acupuncturists, and services from naturopaths.
- As mentioned in the last budget, the government looked at, and now will unfortunately implement, changes to estates beginning in 2016. The tax rates will become flat rates of tax 36 months after the date of death (unless the beneficiary qualifies for the Disability Tax Credit). Before the rates were progressive, which provided the opportunity to give bequests to multiple people who could pay lower rates of taxes. The other major change is forcing a calendar year reporting period on the estate.
- Effective in 2016, donations made through a deceased taxpayer’s will can now receive a tax credit within the estate in the year the donation was made, provided this is done within the first 36 months of the estate, or in the final two years of the taxpayer’s life. Previously the donations had to be claimed by the deceased as compared to the estate. This will allow for more flexibility in administering someone’s estate in a tax effective manner.
- Immigration trusts will have significant changes made to them, essentially increasing the taxes of new immigrants who previously could phase some taxes in after 60 months.
- Continued changes are envisioned to the “thin-capitalization” rules (which reduce the amount of interest deductions available for Canadian taxpayers where investments are made directly or indirectly from international sources) and tax withholding rules where back-to-back loans are made in specific cases.
- Various consultations and work will be done with respect to “treaty shopping”, OECD base erosion and profit shifting (BEPS), essentially meaning that most countries are looking to capture as much of an international business’s or investor’s taxes as possible, with Canada being no different.
- A reminder that the government has just negotiated with the United States (in particular dealing with their Foreign Accounts Tax Compliance Act (FACTA)) to share more financial data for those with assets in either country but residing/citizens of the other beginning July 1, 2014.
- Charitable organizations who accept funds from foreign states who are considered supporters of terrorism can have their charitable status revoked. This may present some practical difficulties in identifying targeted donations.
- The government is investigating whether changes are needed to remove or amend the criteria for the tax exemptions for non-profit organizations and the amount of disclosure that the government feels is appropriate.