The 2016 Federal Budget was delivered on March 22, 2016. We would like to highlight some important personal, family and small business tax measures that affect your business, family and yourself. We have compiled a summary of notable changes discussed in the CPA Canada Federal Budget Summary for your reference. Read the complete CPA Canada Federal Budget Commentary 2016
The CPA Summary report points out key themes that are prevalent in the new Federal Budget, including economic growth, job creation, and the strengthening of a stronger middle class. Many measures have been introduced to encourage growth or restore benefits eliminated by the previous Conservative government. Additional program spending proposed in the 2016 budget places more focus on families, seniors, veterans, health care, post-secondary education, innovation and clean energy.
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Highlights from the 2016 CPA Federal Budget Commentary
Key Budget Measures for Business
The small business tax rate will remain at 10.5 per cent. The former government had scheduled regular decreases in the rate over the next few years, but Morneau has put those changes on hold. Business owners will also face stricter rules with regard to using partnerships or corporations to multiply access to the small business deduction and avoid tax.
The Eligible Capital Property (ECP) regime will be repealed and ECP will fall under a new Capital Cost Allowance class with a 100 per cent inclusion rate and 5 per cent annual depreciation rate. The transition will begin January 2017.
Key Personal Measures
As noted in the government’s December 2015 update, the second marginal income tax rate has decreased from 22 per cent to 20.5 per cent and a new top tax rate of 33 per cent has been added for incomes above $200,000.
The government also returned the TFSA contribution limit to $5,500 (from $10,000) and promised to index the limit to inflation.
Beginning July 2016, the new Canada Child Benefit (CCB) will provide up to $6,400 for each child under age 6 and up to $5,400 for children aged 6–17. Only families with incomes below $30,000 per year will receive the full benefit. The CCB will replace the Canada Child Tax Benefit and Universal Child Care Benefit.
The family tax cut credit for families with at least one child under 18 at home and the children’s fitness and arts tax credits will also be eliminated.
Business Income Tax Measures
Small Business Tax Rate
The federal small business reduction will remain at 17.5 per cent for 2016 and subsequent taxation years, which provides for a federal small business tax rate of 10.5 per cent, down from 11.0 per cent in 2015. Of course, the provincial rate must be added to determine the actual rate.
The related dividend gross-up of 17 per cent for other than eligible dividends and the dividend tax credit of 21/29 of the gross-up will remain for 2016 and subsequent taxation years. Consequently, the prior proposals to further increase the SBD rate and reduce the related small business tax rate for 2017 and subsequent taxation years, along with the consequential changes to the dividend gross-up and dividend tax credit, will not be going ahead.
Tax on Personal Services Business Income
Effective January 1, 2016, the federal tax rate on personal services business income will be increased by 5 per cent (from 28 per cent to 33 per cent) to correspond with the increase in the top federal marginal personal tax rate to 33 per cent on taxable income over $200,000 for 2016 and subsequent years. The rate increase will be prorated for taxation years which straddle January 1, 2016.
Eligible Capital Property
The 2014 federal budget announced that the existing rules that related to both the acquisition and disposition of eligible capital property (ECP) (such as goodwill) would be reviewed.
At the present time, 75 per cent of the cost of ECP is added to the cumulative eligible capital (CEC) pool which is amortized at the rate of 7 per cent per annum of the declining balance. The proceeds of disposition of ECP are first credited to the CEC pool, if any, and previous deductions are recaptured. 50 per cent of the balance is treated as active business income (and 50 per cent falls into the CDA). The effective tax rate is therefore half of the small business rate and/or half of the general rate applicable to active business income.
Note that each of the provinces imposes its own provincial rate. So, for example, in Ontario, the rate applicable to the small business income portion would be 7.50 per cent (50 per cent of 15.0 per cent) and 13.25 per cent (50 per cent of 26.5 per cent) on the non-small business portion; in British Columbia, the rate applicable to the small business income portion would be 6.50 per cent (50 per cent of 13.0 per cent) and 13.00 per cent (50 per cent of 26.0 per cent) on the non-small business portion.
Ignoring the lack of a reserve for deferred proceeds on the sale of goodwill, this treatment has, initially, been more attractive than the result of treating the gain as a capital gain which is taxed at 50 per cent of the high corporate rate applicable to investment income resulting in an effective rate of approximately 25 per cent.
The Budget introduces a new regime that will be effective on January 1, 2017.
The new rules will add 100 per cent of the cost of what has heretofore been classified as ECP to a new capital cost allowance (CCA) class, Class 14.1, which will be depreciated at the rate of 5 per cent of the declining balance per annum. 100 per cent of the proceeds of disposition of this type of property will be credited to the pool in accordance with the existing rules applicable to dispositions of depreciable property.
Transitional rules will transfer December 31, 2016 CEC pool balances to Class 14.1. For 10 years, pre-2017 balances will be depreciated at the rate of 7 per cent of the declining balance per annum. Small businesses will benefit from more generous write-offs for minor expenditures. For example, the first $3,000 of the cost of incorporation will be deductible as a current expense.
Accelerated Capital Cost Allowance
The Budget proposes to expand CCA Classes 43.1 and 43.2 to include electric vehicle charging stations and electric energy storage equipment acquired on or after Budget Day that would otherwise be included under CCA Class 8. This would provide tax deferral as Classes 43.1 and 43.2 provide for CCA at rates of 30 per cent and 50 per cent, respectively, on a declining-balance basis, while Class 8 only provides a declining-balance rate of 20 per cent.
Charging stations that supply less than 90 kilowatts of power would be included in Class 43.1, while stations that supply 90 kilowatts or more would be included in Class 43.2.
Electric energy storage equipment that is part of an electricity generation system that is eligible for Class 43.1 or 43.2 will be included in the same class as the system. Standalone electrical storage equipment may also be eligible for Class 43.1 or 43.2 treatment if certain criteria are met.
Personal Tax Measures
Canada Child Benefit
The non-taxable Canada Child Benefit (CCB) will replace the Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB) assistance programs effective July 1, 2016.
Akin to the CCTB and UCCB, the new CCB will provide financial assistance in the form of monthly payments to families with children under the age of 18. A maximum benefit of $6,400 will be provided for each child under the age of 6 and $5,400 for children aged 6 to 17. These maximums begin to phase out where the adjusted family net income is between $30,000 and $65,000. The phase-out rates in this threshold range from 7 per cent for a one-child family up to 23 per cent for a family with 4 or more children. Once adjusted family net income exceeds $65,000, any remaining benefit is phased out at slower rates ranging from 3.2 per cent to 9.5 per cent.
The Budget broadens the definition of an eligible individual for purposes of the CCB to include an Indian within the meaning of the Indian Act provided that all other criteria under the definition are met.
Also beginning July 1, 2016, the children’s special allowance is proposed to be increased to the same level as the CCB so that families with children in child protection agencies are treated consistently.
Family Tax Cut Credit
For the 2016 taxation year and beyond, the Budget proposes to eliminate the Family Tax Cut Credit that currently permits limited income splitting for couples with at least one child under the age of 18.
This credit allows a higher-income earning spouse or common-law partner to notionally transfer up to $50,000 of taxable income to their spouse or common-law partner in order to reduce the couple’s combined tax liability by a maximum of $2,000.
Children’s Fitness and Arts Tax Credits
The government proposes to halve the maximum eligible expenditures on which the 15 per cent refundable Children’s Fitness and Art Tax Credits can be claimed in the 2016 taxation year, and will eliminate the credits in 2017.
In particular, the Budget proposes to reduce the Children’s Fitness Credit maximum eligible amount from $1,000 to $500 in 2016 and eliminate it in 2017. The maximum eligible amount for the Children’s Arts Tax Credit would be reduced from $500 to $250 in 2016 and, again, eliminated in 2017.
Education and Textbook Tax Credit
Effective January 1, 2017, the Budget proposes to eliminate the 15 per cent non-refundable Education and Textbook Tax Credits. Unused education and text book credits carried forward from prior to 2017, will remain available to be claimed in 2017 and subsequent years.
Teacher and Early Childhood Educator School Supply Tax Credit
The Budget proposes to introduce the new Teacher and Early Childhood Educator School Supply Tax Credit, a 15 per cent refundable credit based on the amount of expenditures, up to a maximum of $1,000, made for eligible supplies purchased on or after January 1, 2016.
The credit is available to eligible educators who are teachers or early childhood educators that hold a valid certificate recognized by the province or territory in which they are employed. The credit cannot be claimed on expenditures claimed under any other provision of the Income Tax Act.
Top Marginal Tax Rate — Further Consequential Amendments
On December 7, 2015, the government announced that it will reduce the personal income tax rate in the second bracket from 22 per cent to 20.5 per cent in the 2016 taxation year. A new top tax bracket of 33 per cent on taxable income over $200,000 will be introduced as well.
Changes for Seniors OAS & GIS
The Prime Minister has confirmed the Federal Government will restore the Old Age Security eligibility age back to 65. The previous plan, under the Conservative Government, was to push the retirement age to 67 beginning 2023. Moreover, other measures for seniors in this new budget include increasing the Guaranteed Income Supplement benefit by up to $947 annually for single seniors. This increased supplement which start in July will benefit seniors who are at financial risk and rely heavily on the OAS. Single seniors whose annual income is $4,600 or less will receive the maximum increase.
Improvements to Employment Insurance
The Government is taking immediate action to improve Employment Insurance. There will be changes to the eligibility rules for new entrants and reentrants, improvement in service delivery. Starting 2017, waiting periods to receive benefits are expected to be reduced from 2 to 1 week.
For questions related to other tax areas including International Tax, we have included a link to the complete Federal Budget
Note: The above information is a summary taken from the CPA Federal Budget Commentary 2016 and the complete Federal Budget.
