Leading up to the release of the 2016 budget, there was much talk about whether or not the new Liberal government would implement changes that would impact the income splitting opportunities for small businesses. This had the potential to greatly impact a large number of professionals across Canada, and a large portion of TPC Financials’ clients. We are happy to announce that no changes were made to the income splitting opportunities for small businesses. Further, the changes that were announced in the budget are not as substantial as was expected by a number of advisors across Canada. While the budget addressed a number of different changes, we have outlined some items that we found to be the most important with regards to our clients across Canada:
Small Business Tax Changes
Small Business Tax Rate
The budget proposes that the small business deduction rate will remain at 10.5%. (The rate was to decrease to 9% in 2019.) The gross-up rate on non-eligible dividends will be maintained at 17% and the dividend tax credit rate will continue to be 21/29 of the gross-up amount in order to maintain tax integration. While this will result in a slightly higher corporate tax obligation, any increase in corporate taxes will be offset by a reduction in personal taxes.
Professional Corporations
The budget did not change the income splitting rules related to professional corporations. Income tax deferrals and savings will remain, and there will be no changes to the income splitting opportunities available to professional corporations.
Personal Tax Changes
Family Income Splitting
The budget proposes to eliminate the income splitting tax credit for couples with children under the age of 18 for the 2016 and subsequent taxation years. This credit had allowed an eligible higher-income spouse or common-law partner to notionally transfer up to $50,000 of taxable income to their spouse or common-law partner to reduce the couple’s total income tax liability by up to $2,000. Pension income splitting for retirees will not be affected by this change.
Introduction of the Canada Child Benefit
Starting in July of 2016, the Universal Child Care Benefit (UCCB) and the Canada Child Tax Benefit (CCTB) will be replaced with one non-taxable Canada Child Benefit. The budget declares that the Canada Child Benefit will be simpler, tax-free, better targeted and much more generous.
Children’s Fitness and Arts Tax Credits
The budget proposes to phase out the Children’s Fitness and Arts Tax Credits by 2017. The Children’s Fitness Tax Credit provides a 15% refundable tax credit on up to $1,000 of eligible fitness expenses for children under 16 years of age at the beginning of the taxation year. The Children’s Arts Tax Credit provides a 15% non-refundable tax credit on up to $500 in eligible fees for programs of artistic, cultural, recreational and developmental activity for children under 16 years of age.
Top Marginal Income Tax Rate
The budget proposes amendments to reflect the new top 33% federal personal tax rate further to the amendments made on December 7, 2015. In December 2015, the federal government announced two tax rate changes for individuals: a reduction in the federal tax rate for income between $45,283 and $90,563 to 20.5% (from 22%) and an increase of 4% in the tax rate for income over $200,000 to 33% (from 29%), starting January 1, 2016. This increase in tax for income over $200,000 outlines the importance of removing funds from your company in an efficient manner as to avoid the punitive tax brackets on higher income amounts.
Post-Secondary Education
The budget eliminates the education credit of $400 a month for full-time students, $120 a month for part-time and the textbook tax credit for $65 a month full-time and $20 a month part-time, but those credits carried forward from years before 2017 will still be claimable in 2017 and beyond.
Taxation of Mutual Fund Switch Fund Shares
The budget notes that many mutual fund corporations are organized as “switch funds”. The budget proposes amendments so that an exchange of shares of a mutual fund corporation (or investment corporation) that results in the investor switching between funds will be considered to be a disposition at fair market value for tax purposes. This is to ensure the appropriate recognition of capital gains. Currently, this type of exchange of convertible corporate securities is deemed not to be a disposition for income tax purposes.
The measure will not apply to switches where the shares received in exchange differ only in respect of management fees or expenses to be borne by investors and otherwise derive their value from the same portfolio or fund within the mutual fund corporation (e.g., the switch is between different series of shares within the same class). This measure will apply to dispositions of shares that occur after September 2016.
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If you have any questions or concerns about the 2016 Federal budget and how it relates to your own personal and professional finances, please do not hesitate to contact your TPC Financial coordinator who will be able to review the specific implications with regards to your situation.