On March 22, 2016, Finance Minister Bill Morneau delivered his first budget. Below are the key items that will impact your Toronto personal taxes and your small business.
New Canada Child Benefit
Starting July 2016, the Current Canada Child Tax Benefit and Universal Child Care Benefit is being replaced with a new Canada Child Benefit (CCB). The CCB is non-taxable and the amount received will depend on the number of children you have and your family income. Families will receive $6,400 per child under age of 6 and $5,400 per child aged 6 to 17. An additional amount of $2,730 per child will be available if your child is eligible for the disability tax credit. However, these amounts will be phased out for family incomes over $30,000.
Phase-Out Rate (%)
|Number of children||
$30,000 – $65,000
|4 or more||
Elimination of Income Splitting Credit
Previously, a maximum $2,000 non-refundable tax credit was available that allowed one spouse to notionally transfer up to $50,000 of taxable income to the other spouse. This credit is eliminated in 2016 and future years.
Teacher and Early Childhood Educator School Supply Tax Credit
If you are a teacher that pays for supplies in the course of your job, a $150 tax credit ($1,000 of supplies x 15% tax rate) will be available for supplies bought on January 1, 2016 or later. Your employer will have to certify this credit.
Elimination of Education and Textbook Tax Credits
The federal government will eliminate the current credits of $70 per month for full-time students ($465 per month x 15%). Unlike the Ontario budget, federal tuition credits for actual tuition paid will remain intact.
Elimination of Children’s Fitness and Arts Tax Credits
These $150 and $75 credits ($1,000 and $500 respectively) will be cut in half in 2016 and then eliminated in 2017. This elimination mirrors the recent Ontario elimination of their equivalent that was dependent on this amount.
Use of Mutual Fund Corporations to defer sales for Toronto personal taxes eliminated
Mutual funds are either setup as corporations or setup as trusts. Currently, if you exchange one mutual fund trust for another mutual fund trust, this exchange is taxable. While if you exchanged one class of a mutual fund corporation for another class in the same corporation, it was not a sale for tax purposes. The budget proposes that if you do an exchange after September 2016, the exchange will be taxable. For more information about mutual fund investing, please see my previous article about mutual funds that can be accessed here.
Sales of Linked Notes
Financial institutions sell debt products that are linked to the performance of an asset, typically a stock market index. Currently, the sale of these products before maturity would be treated as a capital gain which is taxed lower than interest income. The budget proposes to tax any gains on the sale of these products after September 2016 as interest income.
The good news here is that most of the feared changes implied in Mr. Trudeau’s comments in previous election were not implemented. This consisted of making the small business deduction harder to claim for business owners, similar to what the Quebec government has done. Fortunately, the government has only targeted amendments for structures designed to get multiple small business deductions. As well, structures used to split income with family members were also spared in this budget.
Small Business Tax Rate Reductions Cancelled
The small business tax rate will remain at 10.5% instead of going down to 9% by 2019, combined with the Ontario government keeping its rate constant. The current Ontario small business tax rate will be at 15% for the foreseeable future.
New Eligible Capital Property Regime
Currently, 75% of the cost of eligible capital property (goodwill on buying a business, incorporation costs, other unlimited life assets) are deprecated for tax purposes at a rate of 7% per year on a declining balance basis. Also, 75% of any sales of this type of property (a) reduce the cost to zero, (b) “recapture” any previous deductions and then the difference is considered to be business income that is included as income at a rate of 50% similar to capital gains.
This budget proposes to eliminate this system and have a new CCA class where 100% of the amount is deductible and depreciated at 5% on a declining balance basis. There will be transition rules to this new system and special rules for goodwill. To help the majority of taxpayers who have small balances, the greater of $500 and the amount otherwise allowed will be able to be claimed for expenses incurred before 2017. As well, up to $3,000 of incorporation costs can be written off immediately rather than enter this new regime.
Life Insurance Planning Curtailed
The government has closed two “loopholes” using this type of planning. First, if a person transfers a policy to their corporation, the person would only pay tax on the cash surrender value over their cost base but could get the fair value of the policy out tax-free. The government has now said that all transfers will be done at fair value for sales done after today.
The other type of planning being curtailed is to prevent “abuses” undertaken with split dollar policies. Life insurance proceeds are tax-free when received by individuals. When received in a corporation, the use of the “capital dividend account” ensures that life insurance remains tax-free. However, the tax-free amount has to be reduced by the tax cost of the policy. Since the cost of the policy in a split dollar situation is with another entity, the reduction to the capital dividend account would not occur. This budget proposes to eliminate such plans.
Insulin pens and insulin pen needles, are now zero-rated for HST purposes, in other words, businesses that supply them can claim HST refunds but customers do not have to pay HST, similar to food.
The government is going to implement the following items:
The government will not be implementing:
This analysis is intended as a brief overview and does not include all of the details to ensure you can take advantage of these rules as applicable. Please contact me to see how these changes can impact your Toronto personal taxes and your business.
William Khalilieh is a Chartered Professional Accountant, based in Oakville, Ontario, who provides practical tax and accounting solutions to individuals and their businesses in the Greater Toronto Area.