A Child Disability Benefit (CDB) will continue to be available, providing up to $2,730 per child eligible for the Disability Tax Credit. The phase-out of this additional CDB will be made to 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.
Income splitting credit to be eliminated
The Budget proposes to eliminate the income splitting credit, known as the Family Tax Cut, effective for 2016 and subsequent tax years. This is a non-refundable credit available for couples with at least one child under the age of 18, and allows the higher-income spouse to notionally transfer up to $50,000 of taxable income to the lower-income spouse to reduce the tax liability of the couple by a maximum of $2,000.
The Budget does not propose to change the current pension income splitting provisions.
Children’s Fitness and Arts Tax Credits to be phased out
The children’s fitness tax credit and children’s arts tax credit are available on eligible fitness and art expenses for children under the age of 16. The Budget proposes to phase out the children’s fitness and children’s arts credits by halving the 2016 maximum eligible expense amounts from $1,000 to $500 and from $500 to $250 respectively. A supplemental amount for children with a disability will remain at $500 for 2016. Both credits will be eliminated for the 2017 and subsequent taxation years.
Education and Textbook tax credits eliminated
The education tax credit and textbook credit are non-refundable credits available for every month of enrolment in a prescribed educational program at a designated post-secondary institution. The Budget proposes to eliminate the education and textbook tax credits; however tax exemptions which currently rely on eligibility for the education tax credit will be maintained (e.g., the exemptions for scholarship, fellowship, and bursary income). These measures will apply effective January 1, 2017, however, unused education and textbook credit amounts carried forward from prior years will remain available to be claimed in 2017 and subsequent years.
The tuition fee tax credit, which is a non-refundable tax credit on eligible tuition and examination fees paid to a certified post-secondary educational institution, is not affected.
New Teacher and Early Childhood Educator School Supply Tax Credit
Effective January 1, 2016, the Budget proposes a 15% refundable tax credit for the cost of eligible supplies up to $1,000 by an eligible educator. Eligible supplies include both durable goods (e.g., games and puzzles, educational support software, containers) and consumable goods (e.g., paper, glue, paint, pens, pencils, construction paper).
Old Age Security and the Guaranteed Income Supplement enhanced
The Budget proposes to cancel the provisions in the Old Age Security Act that increased the age of eligibility for Old Age Security (OAS) and Guaranteed Income Supplement (GIS) benefits from 65 to 67 and Allowance benefits from age 60 to 62. These changes were to be phased in from 2023 to 2029 and would have affected individuals born after March 1958.
The Budget also proposes to increase the GIS top-up benefit by up to $947 annually for seniors who rely almost exclusively on OAS and GIS benefits. The Budget is also proposing to introduce amendments which will allow couples who receive GIS and Allowance benefits and have to live apart for reasons beyond their control (such as a requirement for long-term care) to receive higher benefits based upon their individual incomes.
Northern residents deduction increased
Individuals living in prescribed areas in northern Canada for at least 6 consecutive months in a taxation year may claim the northern residents deduction in computing their taxable income for that year. The Budget proposes to increase the maximum residency deduction that each member of a household may claim from $8.25 to $11 per day, and where no other member of the household claims the residency deduction, to increase the maximum residency deduction from $16.50 to $22 per day. Residents of the Intermediate Zone will be entitled to half of these increased amounts. These proposals will apply for the 2016 and subsequent taxation years.
PROPOSALS AFFECTING INVESTORS
Taxation of mutual fund corporations
Mutual fund corporations, including Investors Group Corporate Class, can be structured so that each class of shares represents a separate fund with its own investment mandate. Under current legislation, this structure allows for tax deferred switching from one fund to another within a mutual fund corporation. Effective for switches that occur after September 2016, the Budget proposes to treat a switch or exchange of class funds as a disposition at fair market value for tax purposes. The Budget documents indicate that the proposals are not to apply to switches between different series within the same class of shares. No draft legislation relating to this proposal was released with the Budget material. Investors Group will closely monitor this situation and assess its potential implications to our clients.
Labour-sponsored venture capital corporations (LSVCC) tax credit
The previous Government introduced legislation to gradually reduce and ultimately eliminate the federal tax credit available to individuals who acquired both federally and provincially registered LSVCC shares. For 2016 and future years, the Budget proposes to restore the 15% federal tax credit for purchases of shares of provincially registered LSVCCs that meet certain conditions prescribed under the Income Tax Act.
PROPOSALS IMPACTING BUSINESS OWNERS
Small business tax rate and non-eligible dividend taxation
For a Canadian Controlled Private Corporation (CCPC), the first $500,000 of active income is eligible for the small business deduction. The resulting federal tax rate for 2016 is 10.5%. This rate was scheduled to decrease gradually to 9% by 2019. The Budget proposes that the tax rate on income subject to the small business deduction will remain at 10.5%. As a result, the gross-up factor applicable to non-eligible dividends will be maintained at 17% and the corresponding dividend tax credit rate will be 12.3% of the actual dividend.
Small business deduction
Corporations that are members of a partnership are required to share one annual $500,000 small business deduction limit among the corporate partners based on their pro-rata share of partnership profits. Many partnerships have put in place organizational structures utilizing services corporations that allow each partner to access a separate $500,000 small business deduction limit. The Budget proposes to eliminate this planning opportunity by prorating a corporation’s small business deduction limit on income realized from services performed for the partnership. These structures were common among professionals who carry on their practices through professional corporations. This change is to apply to taxation years that begin on or after March 22, 2016.
Eligible Capital Property
Beginning January 1, 2017, the Budget proposes that Eligible Capital Property (ECP) rules will be repealed and replaced by a new capital cost allowance class, Class 14.1. Property that was ECP (e.g., purchased goodwill) will now be considered depreciable property and will be treated as such (the half-year rule, recapture, and capital gains will now apply). Effective January 1, 2017, new expenditures will fully be added to Class 14.1 with annual CCA available on this class of 5% on a declining balance basis.
PROPOSALS IMPACTING CHARITABLE DONATIONS
Donations of private corporation shares or real estate tax credit rescinded
Last year’s Budget included a proposal which, if enacted, would have provided that where the cash proceeds from the disposition of private corporation shares or real estate were donated to a registered charity or a qualified donee within 30 days of the disposition, there would be no tax applicable to any capital gains realized by the disposition. The 2016 Budget states that the Government will not proceed with this measure.