budget impact Canadian private businesses? The better the question. - - PowerPoint PPT Presentation

The better the question. The better the answer. The better the world works.

How does the 2017 federal budget impact Canadian private businesses?

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Today’s Presenters

David Steinberg

Tax Partner and National Co- leader Private Client Services practice EY

John Sliskovic

Tax Partner Private Client Services practice EY

Ryan Ball

Tax Partner Private Client Services practice EY

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Agenda

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Business income tax measures:

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Corporate tax rates

►

Computation of income for professionals

►

Factual control

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Miscellaneous measures

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Personal tax measures:

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Personal tax rates

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Tax credits

►

Other

►

Principal residence exemption

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Private company tax planning

►

What wasn’t in the budget

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Questions

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Business income tax measures

Corporate Tax

► No changes to corporate tax rates ► See chart and the appendix in the tax alert for summary of

personal tax rates

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(as at 22 March 2017 for Dec. 31 year-ends)

2017 combined corporate income tax rates

Corporate income tax rates for active business income Corporate investment income tax rates Income eligible for small business deduction (SBD) (%) (generally up to $500,000) Manufacturing and processing (M&P) income not eligible for federal SBD (%) (greater than $500,000) General income not eligible for SBD (%) (non-M&P income) Investment income earned by CCPCs (%) Investment income earned by non-CCPCs (%) % % % % % Federal only

10.50 15.00 15.00 38.67 15.00

British Columbia

12.60 26.00 26.00 49.67 26.00

Alberta

12.50 27.00 27.00 50.67 27.00

Saskatchewan

12.50 24.75 26.75 50.42 26.75

Manitoba

10.50 (up to $450K) 22.50 ($450K-$500K) 27.00 27.00 50.67 27.00

Ontario

15.00 25.00 26.50 50.17 26.50

Quebec

18.50 26.80 26.80 50.47 26.80

New Brunswick

13.62 29.00 29.00 52.67 29.00

Nova Scotia

13.50 (up to $450K) 26.50 ($450K to $500K) 31.00 31.00 54.67 31.00

Prince Edward Island

15.00 31.00 31.00 54.67 31.00

Newfoundland and Labrador

13.50 30.00 30.00 53.67 30.00

Northwest Territories

14.50 26.50 26.50 50.17 26.50

Nunavut

14.50 27.00 27.00 50.67 27.00

Yukon

12.00/13.50 17.50 30.00 53.67 30.00

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Business income tax measures contd.

Computation of income for professionals

► Accountants, dentists, lawyers, medical doctors, veterinarians and

chiropractors are currently allowed to report income when only amounts are actually billed to clients

► The current rules facilitate a deduction of revenue for work in progress

(WIP)

► The Budget proposes to phase out the WIP deduction for these

professionals over 2 years

► For December 2018 years, only 50% of WIP will be allowed as a

deduction and for December 2019 years, no WIP deduction is allowed

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Business income tax measures contd.

Factual control

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The Income Tax Act contains two different definitions of control that apply for various purposes. Some provisions rely on legal control while others rely on factual control

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The most common private company tax provisions that are impacted by control are: Canadian Controlled Private Company (CCPC) status, and sharing of tax benefits such as the small business deduction and refundable R&D tax credits

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A recent Federal Court of Appeal (FCA) decision restricted the scope of the factual control test. Budget 2017 proposes to remove this restriction

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These proposed changes could impact the determination of whether a private company with certain foreign shareholders or voting arrangements meets CCPC status tests, or whether preferential tax benefits are to be shared with

• ther associated corporations

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Business income tax measures contd.

Miscellaneous measures

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Oil and Gas sector – changes to the CDE/CEE classification for discovery wells (In certain cases could lead to a 30% declining balance deduction instead of 100% deduction)

►

Oil and Gas sector – changes to flow through expenditure rules for small oil and gas companies. Could change CEE to CDE for investor

►

Farming business – a public consultation regarding the ability to take advantage

• f a deferral in respect of deferred cash purchase tickets issued for deliveries of

certain listed grains

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Personal tax measures: tax rates

► No changes to the federal personal tax rates or tax

brackets

► Tax brackets will continue to be indexed for inflation

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2017 maximum combined personal marginal income tax rates

(as at 22 March 2017)

Ordinary income 2017 2016 2017 Increase (decrease) Eligible dividends Ordinary dividends Capital gains % % % % % % Federal only 33.00 33.00 0.00 24.81 26.30 16.50 BC 47.70 47.70 0.00 31.30 40.95 23.85 Alberta* 48.00 48.00 0.00 31.71 41.24 24.00 Saskatchewan 48.00 47.75 (0.25) 30.33 39.62 23.88 Manitoba 50.40 50.40 0.00 37.78 45.74 25.20 Ontario 53.53 53.53 0.00 39.34 45.30 26.76 Quebec 53.31 53.31 0.00 39.83 43.84 26.65 NB 53.30 53.30 0.00 33.51 45.96 26.65 NS 54.00 54.00 0.00 41.58 46.97 27.00 PEI 51.37 51.37 0.00 34.22 43.87 25.69 NL 49.80 51.30 1.50 42.61 43.62 25.65 NWT 47.05 47.05 0.00 28.33 35.72 23.53 Nunavut 44.50 44.50 0.00 33.08 36.35 22.25 Yukon 48.00 48.00 0.00 24.81 40.17 24.00

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Personal tax measures – Canada caregiver credit

► A new 15% non-refundable caregiver credit replaces the infirm

dependent tax credit, the caregiver tax credit and the family caregiver credit for 2017

► Credit amount of $6,883 or $2,150 will be reduced dollar for dollar by

the dependent's net income above $16,163

► The lower credit amount applies if also claiming the spousal amount,

the eligible dependent amount or if an infirm child under 18

► The dependent is not required to live with the caregiver ► Not available for non-infirm seniors residing with their adult children

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Personal tax measures – tax credits

► Amounts paid for tuition to a post-secondary institution for

• ccupational skills courses that are not at the post-secondary level

now eligible for the tuition tax credit

► Public transit tax credit eliminated for transit use after June 2017 ► Budget 2016 previously eliminated the education and textbook tax

deduction for 2017 and subsequent years

► Budget 2016 previously eliminated the children's fitness and arts tax

credits for 2017 and subsequent years

► Mineral exploration credit extended to 31 March, 2018

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Personal tax measures – other

► Anti avoidance rules including advantage tax rules, the prohibited

investment rules and non-qualified investment rules extended to apply to RESPs and RDSPs (Previously only applied to TFSAs, RRSPs and RRIFs)

► Taxable benefit for a home relocation loan can no longer be reduced

by the benefit relating to $25,000 of the loan

► Non-accountable allowances paid to members of legislative

assemblies and certain municipal offices will be taxable

► Stop-loss rule for straddle transactions

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Personal tax measures - principal residence exemption (pending legislation)

► Requirement to report the sale of a principal residence in 2016 and

subsequent years

► Extended reassessment period if the disposition is not reported ► Revised calculation of the exemption for nonresidents ► Certain trusts no longer qualify to designate a property as a principal

residence

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Private company tax planning

► Budget 2017 confirmed the government’s intent to review tax planning

strategies involving private corporations

► Budget 2017 identified 3 strategies that are perceived to give high

income taxpayers an “unfair advantage”

► Government will release a paper in the coming months identifying these

and perhaps other arrangements that are perceived to be advantageous and unfair

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Private company tax planning

Budget example 1 - “sprinkling income”

Examples:

► Paying dividends to low income earners (ie. spouse and/or children (>18)) ► Possible use of tax free capital gains exemption ($836,000) for multiple

shareholders

• Mr. A

Dividend

• Mrs. A

Children beneficiary Opco

20% 60%

Trust

20% Dividend

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Private company tax planning

Budget example 1 - “sprinkling income”

What might the government propose?

► Possibly extend ‘kiddie tax’ to taxpayers over 18 ► Possibly deny multiple capital gains exemption if not ‘active’ in the business

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Private company tax planning

Budget example 2 - “accumulated earnings”

Example:

► Opco invests $1,470,000 into a passive investment portfolio or perhaps

dividends $1,470,000 to Holdco which invests in passive portfolio

• Mrs. A

100%

Holdco 1

100%

Opco

Active Business Income $2,000,000 Corporate tax (high rate – Ontario <530,000> After tax Accumulated Earnings $1,470,000

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Private company tax planning

Budget example 2 - “accumulated earnings”

What might the government propose?

► Possibly tax ‘accumulated earnings’ that are invested in ‘passive’

portfolio with an extra 25% refundable tax

► Results in overall tax rate of approximately 51%

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Private company tax planning

Budget example 3 – “converting regular income into capital gains”

(Surplus Strip)

Examples:

► Mr. A can take dividend from Opco at a rate of 40/45% ► Planning can be done to create a capital gain inside Opco and allow

for distribution at effective integrated rate of 27%

• Mr. A

Opco

100%

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Private company tax planning

Budget example 3 – “converting regular income into capital gains” What might the government propose?

► Possibly add extra tax on perceived internally generated capital gain ► Possibly change inclusion rate on capital gains

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What wasn’t in the budget

► No changes to inclusion rate on capital gains which remains at 50%

►

Significant difference remains in tax rates on capital gains compared to dividends

► No changes to treatment of stock options

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No changes to existing rules CCPC stock options

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Not taxable on issuance

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Not taxable on exercise

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Taxable on sale of shares

► No changes to dividend tax credit mechanism ► No change to small business deduction or professional corporations

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Questions?

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John Sliskovic

Tax Partner, Private Client Services Practice

519.646.5532 john.t.sliskovic@ca.ey.com

Contact us

David Steinberg

Tax Partner, National Co-leader, Private Client Services Practice

416.932.6206 david.a.steinberg@ca.ey.com

Ryan Ball

Tax Partner, Private Client Services Practice

306.649.8225 ryan.ball@ca.ey.com