The Federal government presented its annual budget on February 27, 2018. Some of the major tax announcements are summarized below.
- Enhancement of the Working Income Tax Benefit, to be renamed the Canada Workers Benefit
- Medical expense tax credit
- Mineral exploration credit
- Reporting requirements for trusts
- Passive investment income of CCPC
- Artificial losses and stop-loss rules
- At-risk rule for limited partnerships
- Re-assessment periods
Enhancement of the Working Income Tax Benefit, to be renamed the Canada Workers Benefit
This is a refundable tax credit that assists very low-income individuals and families who have employment income, to encourage working over taking social assistance. Beginning in 2019, the maximum benefit for single individuals will be increased from $1,192 to $1,355, and the maximum benefit for families will be increased from $2,165 to $2,335. The rate at which the benefits are phased out (as income goes up) will be reduced. A supplemental benefit for disabled individuals will also be increased.
Currently, individuals must apply for this credit by filling out a schedule with their tax return. The Budget allows the Canada Revenue Agency (“CRA”) to determine if individuals are eligible for the credit even if they do not file the schedule.
Medical expense tax credit
The current credit covers expenses incurred in respect of animals that assist physically disabled individuals, such as dogs that assist blind persons. The Budget provides that the expenses will also include expenses for animals that assist individuals with severe mental impairments in performing specific tasks, for expenses incurred after 2017.
Mineral exploration credit
This credit has been extended by one year every year since 2003, and this year is no exception. The credit can be claimed by individuals for certain investments in mining flow-through shares of corporations, and is equal to 15% of the specified mineral exploration expenses renounced by the corporation to the individual. The Budget extends eligibility for the credit by an additional year, so that it can be claimed for flow-through share agreements entered into on or before March 31, 2019.
For the corporation, under a “look-back” rule, funds raised by the corporation in one year that qualify for the credit can be spent on eligible exploration up to the end of the following calendar year. Therefore, funds raised by the corporation in the first 3 months of 2019 can be used on eligible exploration up to the end of 2020.
Reporting requirements for trusts
Under current rules, some general information regarding a trust must be provided when the trust files its T3 income tax return for a taxation year. However, there is no rule that requires the identity of all of the beneficiaries of the trust.
The Budget proposes new reporting requirements for trusts resident in Canada, and for non-resident trusts that are required to file a T3 return. Such trusts will be required to report the identity of all trustees, beneficiaries, settlors and protectors of the trust, in addition to other specific information. The requirements begin with the 2021 taxation year, and monetary penalties will apply where the reporting is not provided. As well, many more trusts will be required to file the T3 than currently are.
Exceptions to the reporting rules will apply to mutual fund trusts, registered retirements savings plans, registered pension plans and similar deferred income plans that are governed by trusts, graduated rate estates and qualified disability trusts, trusts that have been in existence for less than 3 months, and trusts that hold less than $50,000 in assets throughout the taxation year where the assets are limited to certain listed deposits and securities.
The Budget also states that a lawyer’s general trust account (for multiple clients) will not have to report. This implies that a lawyer’s trust account for a specific client would have to file and report information about the beneficiaries. However, that would run into problems with solicitor-client privilege, so it is expected that this part of the proposal either will be modified or might be struck down by the Courts.
Passive investment income of CCPC
Last year, the Department of Finance announced that it would be changing the income tax treatment of passive investment income earned by a Canadian-controlled private corporation (“CCPC”).
Instead of changing the tax rate on investment income, the Budget provides that the small business deduction limit for the CCPC – currently a maximum of $500,000 of active business income per year – will be reduced on a straight-line basis, by $5 for every $1 of the CCPC’s investment income for the previous year in excess of $50,000. For example, if the investment income was $75,000, the maximum small business limit will be reduced to $375,000, which is another way of saying that up to $375,000 of the corporation’s active business income will be eligible for the small business deduction. Business income over the limit will be subject to the general corporate tax rate.
Another change relates to the refundable dividend tax on hand (“RDTOH”) of a CCPC, which tracks the amount of refund the CCPC can obtain when it pays a dividend. Under current rules, it is possible for a CCPC to get the refund even if eligible dividends are paid out of business income, even though RDTOH is meant to track investment income. The Budget proposes that the refund will normally apply only on the payment of non-eligible dividends.
The passive income measures will apply to taxation years that begin after 2018.
Artificial losses and stop-loss rules
The Budget tightened up certain rules that apply to these losses, to clarify that they can apply where taxpayers create artificial tax losses through the use of equity-based financial arrangements and in certain other circumstances. The changes are very technical in nature.
At-risk rule for limited partnerships
Generally speaking, losses of a partnership for a taxation year can be allocated to a limited partner to the extent of the partner’s “at-risk amount” in respect of the partnership for the year; losses over that amount cannot be deducted in the year by the partner. However, the excess losses can be carried forward indefinitely to the extent of the partner’s at-risk amount in future years.
The Budget clarified that the at-risk rules can apply to tiered partnerships, such as where a partnership (an upper partnership) is itself a limited partner in another partnership. In such case, the losses in excess of the upper partnership’s at-risk amount will be denied and will not be allowed the indefinite carry-forward. This effectively overturns the effect of the Federal Court of Appeal’s 2017 decision in the Green case. The Budget measure applies to taxation years that end after February 26, 2017.
The normal re-assessment period for an individual or CCPC is three years after the original CRA assessment and four years for other corporations. In conjunction with its assessment duties and general power to administering income tax laws, the CRA may make demands for information from taxpayers.
Under current rules, if the CRA makes a demand for foreign-based information from a taxpayer, the re-assessment period is extended if the taxpayer contests the demand and applies to a court for review, generally by the length of time between the taxpayer’s application and the court’s final decision. Current rules do not normally extend the re-assessment period if the CRA makes a demand from a taxpayer for non-foreign information. The Budget changes this, so that the extension will also apply to other demands for information that are contested by taxpayers, as well as compliance order requests made to the Federal Court.
Another technical amendment ensures that where a taxpayer carries back a loss from one year to a previous year, and the CRA re-assesses the first year at a later time because of a transaction with a non-resident person, the CRA can re-assess the loss claimed in the previous year.