Measures Impacting Individuals
Employee Stock Options
The current tax rules provide preferential personal tax treatment to holders of employee stock options in the form of a stock option deduction which, if available, can effectively tax the stock option benefit at a personal tax rate similar to a capital gain.
Budget 2019 proposes to limit the tax-preferred treatment of employee stock options to annual grants of $200,000, based on the fair market value of the underlying shares at the time the options are granted. This limit will only apply to stock options issued to employees of large, long-established, mature firms, and is not intended to apply start-ups and rapidly growing Canadian business. It should be noted that draft legislation, including definitions of these terms, has yet to be released. Stock option benefits realized on options in excess of this limit would not be eligible for the stock option deduction and will be fully taxable at the employee’s personal tax rate.
As an example, let’s assume Michael is a manager of a large, long-established, mature company that grants him employee stock options to acquire 10,000 shares at an exercise price of $50 per share, which is equal to the fair market value of the shares on the grant date. Let’s also assume the value of the shares increases to $70 when Michael exercises his options. In this instance, the current preferential tax treatment will continue to apply to stock option benefits realized on 4,000 options ($200,000 / $50 = 4,000 options) allowing Michael to claim a deduction equal to half of the $80,000 ($20 x $4,000) stock option benefit. The $120,000 benefit ($20 x $6,000) realized on the remaining 6,000 options will be fully taxable to Michael.
Additional details are expected to be provided in the coming months. The budget indicates that these measures will not apply to stock options granted prior to the announcement of the legislative proposals.
Home Buyers’ Plan
Budget 2019 proposes to increase the Home Buyers’ Plan (HBP) withdrawal limit from $25,000 to $35,000 for 2019 and subsequent years to allow first-time home buyers greater access to their RRSPs to purchase or build a home.
Budget 2019 also proposes measures that will take effect in 2020 to extend access to the HBP to help maintain home ownership after the breakdown of a marriage or common-law partnership.
First Time Home Buyer Incentive
Budget 2019 proposes to introduce the First-Time Home Buyer Incentive to make home ownership more affordable starting in September 2019. This incentive provides eligible first-time home buyers with the option to finance a portion of their home purchase through a shared equity mortgage with CMHC, with maximum limits of 10% for a newly constructed home or 5% for an existing home. As no monthly mortgage payments are required on the CMHC shared equity portion of the mortgage, this lowers the borrower’s mortgage payments and may allow more individuals to buy their first home. The incentive is designed to assist a home owner with annual income of less than $120,000. The repayment terms for the incentive have not yet been provided and more details are expected about this new program.
Canada Training Credit
Budget 2019 proposes a new refundable tax credit intended to cover up to half of eligible tuition and fees associated with postsecondary or occupational-skills training. Eligible working adults between the ages of 25 and 65 will accumulate $250 each year in a notional account, which can be claimed in the year eligible training expenses are incurred. The amount of the credit that can be claimed is equal to the lesser of half of the eligible tuition and fees paid in the taxation year and the individual’s notional account balance for the taxation year. The claim will offset, dollar for dollar, tax otherwise payable or will be refunded to the extent this amount exceeds tax otherwise payable, to a lifetime maximum value of $5,000.
Canada Student Loans – Lower Interest Rate
Budget 2019 proposes a significant reduction in the interest rate that is charged on Canada Student Loans and Canada Apprentice Loans. Starting in 2019-2020, the fixed rate will be reduced from prime plus 5% to prime plus 2% and the popular variable interest rate will drop from prime plus 2.5% to prime. Currently there is a six-month grace period after graduation, where the new graduate does not have to make any payments, but interest still accrues. The budget proposes to eliminate interest charges on student debt during this six-month grace period.
Change in Use Rules for Multi-unit Residential Properties
A deemed disposition normally applies when part of a property’s use is changed. This situation may arise for owners of multi-unit residential properties who decide to begin living in a previously rented unit, or vice versa. Budget 2019 proposes to let a taxpayer elect out of the normal deemed disposition in situations when there is a change-in-use on part of a property on or after March 19, 2019.
Canada Pension Plan
The standard age to receive Canada Pension Plan (CPP) retirement benefits is 65, but some people may choose to delay the start of their pension benefits until age 70. For those who defer their start date, this provides a permanent increase in their pension amount.
The budget proposes to proactively enroll CPP contributors who are age 70 or older in 2020 but have not yet applied to receive their retirement benefit.
Budget 2019 also proposes to extend the opt-out period from six months to a year. This will ensure that Canadians who choose not to receive a CPP retirement pension are not disadvantaged by proactive enrollment.
Guaranteed Income Supplement
Currently, low-income seniors and their spouses may each earn up to $3,500 per year in employment income without triggering a reduction in Guaranteed Income Supplement (GIS) or Allowance benefits. The budget proposes that, beginning with the July 2020 to July 2021 benefit year:
- The full exemption will increase from $3,500 to $5,000 per year, and
- A new partial exemption of 50% will apply to up to a further $10,000 of annual employment and self-employment income.
Registered Disability Savings Plans (RDSPS)
An RDSP can only be established for a disabled person (“the beneficiary”) if the beneficiary is eligible for the federal disability tax credit (DTC).
Under current rules, an RDSP must be closed by the earlier of
- the end of the year following the first full year throughout which the beneficiary is DTC-ineligible, or
- the end of the fourth year following the first full year throughout which the beneficiary is DTC-ineligible, if the beneficiary’s medical practitioner gives a professional opinion that the beneficiary is likely to regain DTC status in the future.
When an RDSP is closed because of the loss of the DTC, all the government grants and bonds received by the RDSP in the 10 years prior to losing the DTC will be repaid to the government, and the rest of the RDSP will be paid to the beneficiary.
The budget proposes that starting in 2021, RDSPs will no longer be required to be closed if a beneficiary ceases to be DTC-eligible. The RDSP holder may request a plan closure but will not be required to close the RDSP. While the beneficiary is DTC-ineligible, the plan cannot receive new contributions, grants, or bonds, but it can still pay Disability Assistance Payments (withdrawals) to the disabled beneficiary, subject to normal maximum withdrawal limits. The claw-back rules will be amended slightly so that the maximum repayment amount will be all the grants and bonds received by the RDSP in the 10 years prior to the beneficiary losing the DTC, but this maximum amount will be reduced for beneficiaries turning age 51 and older.
If the RDSP beneficiary becomes DTC-eligible in the future, then regular RDSP rules will apply commencing with that year. The RDSP can once again receive contributions, grants, and bonds.
As a transitional measure, financial institutions will not be required to close an RDSP on or after Budget Day and before 2021 simply because the beneficiary ceased to be DTC-eligible.
Budget 2019 also proposes to exempt RDSPs from seizure in bankruptcy, with the exception of contributions made in the 12 months before the filing.
Individual Pension Plans
To prevent planning to circumvent the prescribed transfer limits related to defined benefit registered pension plans, Budget 2019 proposes to prohibit individual pension plans (IPPs) from providing retirement benefits in respect of past years’ employment that were pensionable service under a defined benefit pension plan of an employer other than the IPP’s participating employer (or its predecessor employer). Effective March 19, 2019, any assets transferred from a former employer’s defined benefit pension plan to an IPP that are related to benefits provided in respect of prohibited service will be considered to be a non-qualifying transfer that is required to be included in the income of the plan member for income tax purposes.
Additional Annuities Permitted Under Registered Plans
To provide greater flexibility for retirement savings, commencing in 2020 the budget proposes to allow the creation of an Advanced Life Deferred Annuity (ALDA) under an RRSP, RRIF, DPSP, PRPP or defined contribution registered pension plan. Life annuity payments under an ALDA can be deferred until the end of the year in which the annuitant turns 85, which is an extension from the existing age 71 requirement. A lifetime limit of 25% of the registered plan can be used to purchase an ALDA, up to a maximum amount of $150,000, indexed for inflation for taxation years after 2020.
In addition, the budget proposes to permit PRPPs and defined contribution pensions to provide variable payment life annuities to members directly from the plan.
Medical Expense Tax Credit
Budget 2019 proposes to expand the range of cannabis products eligible for the medical expense tax credit, applicable for expenses incurred on or after October 17, 2018.
Measures Impacting Businesses
Accelerated Deduction for Purchase of Zero-emission Vehicles
Budget 2019 proposes an enhanced temporary first-year capital cost allowance (CCA) rate of 100% for eligible zero-emission vehicles purchased after March 18, 2019, that become available for use before 2028, subject to a phase-out. The CCA claim for passenger vehicles will be limited to $55,000 (plus sales taxes) per vehicle.
Support for Canadian Journalism
Journalism organizations that meet certain criteria established by an independent panel may qualify as a Qualified Canadian Journalism Organization (QCJO). QCJOs may be able to register with Canada Revenue Agency as a qualified donee which will allow individuals to claim a charitable donation tax credit for donations made to these organizations starting in 2020.
Individuals will also be able to claim a new temporary 15% nonrefundable federal tax credit for eligible digital news subscription costs paid to QCJOs up to a maximum of $500 per year. This new digital subscription tax credit is available for the years 2020 through to 2024.
Small Business Deduction – Farming and Fishing
Enacted in 2016, a Canadian Controlled Private Corporation’s (CCPC’s) specified corporate income is disqualified from eligibility for the small business deduction. However, certain income from a CCPC’s farm or fishing business that arose from sales to a farming or fishing cooperative were excluded from specified corporate income.
Budget 2019 expands this exemption such that sales by a CCPC’s farm or fishing business to any arm’s length corporation are excluded from specified corporate income. Patronage payments from a purchaser corporation continue to not qualify for the exclusion. The measure is retroactive to March 21, 2016.
Scientific Research and Experimental Development Program
Canadian controlled private corporations that engage in Research and Development activities are entitled to a refundable enhanced 35% tax credit on up to $3 million in qualifying expenditures (annual expenditure limit). Currently, the annual expenditure limit is gradually reduced when the corporation’s taxable income for the previous tax year exceeds $500,000 or when taxable capital exceeds $10 million. The budget proposes that a corporation with a taxation year that ends after March 19, 2019 will no longer be subject to a reduction in the amount that can be claimed based on its taxable income. This means that Canadian corporations with taxable capital less than $10 million will be able to claim up to $3 million in qualifying expenditures regardless of their taxable income.
Other Tax Measures
The Budget proposes to eliminate practices that resulted in certain deferral of capital gains realized by mutual fund trusts and/or transactions that converted ordinary income of mutual funds into capital gains. We do not expect any impact to our funds or our unit holders from these proposals.
GST/HST Health Measures
Budget 2019 proposes to extend the application of GST/HST relief to certain biologicals, medical devices and health care services, including human reproduction procedures, foot care devices and multidisciplinary health care services for supplies made after March 19, 2019.
Budget 2019 proposes that edible cannabis, cannabis extracts and cannabis topicals be subject to excise duties imposed on cannabis licensees at a flat rate applied on the quantity of total tetrahydrocannabinol (THC) contained in a final product, effective as of May 1, 2019.
This report specifically written and published by IG Wealth Management is presented as a general source of information only, and is not intended as a solicitation to buy or sell specific investments, nor is it intended to provide legal or tax advice. Clients should discuss their situation with their Consultant for advice based on their specific circumstances.