You may have read other newsletters and reports about the federal Budget of April 21, 2015. If so, this newsletter will give you some new perspectives and ideas about the Budget proposals. And if not, there’s lots of new information for you here!
This is a “political” Budget, with an eye to the upcoming election in October. Some of the changes are included in Bill C-59, which was tabled in Parliament on May 7 and will be enacted by the end of June. Others have been left to the fall, and might not be enacted if the Conservatives do not form the next government after the election.
Here are some of the nicer changes in the budget, and some new perspective and information about them that you may not have read.
Capital gains exemption for farm/fishing property
The capital gains exemption for farm/fishing property and qualified small business corporations was $500,000 for many years, then was increased to $750,000 in 2007, $800,000 in 2014, and was indexed to inflation as of 2015, so that it is $813,600 for 2015. As well, in 2014 a technical change was passed to merge the exemptions for “farm property” and “fishing property”, so that a business that is partly farming and partly fishing can qualify. The taxpayer has to meet certain conditions about active use of the property in farming or fishing. Shares of a “family farm/fishing corporation” or an interest in a “family farm/fishing partnership” can qualify.
The exemption is not technically an exemption but the “capital gains deduction”. The capital gain must still be reported; half the capital gain is still included in income as a “taxable capital gain”. A deduction can then be claimed against the taxable capital gain (e.g., for 2015, up to $406,800, as that is half of $813,600).
What’s the nice change?
The Budget increases the exemption for qualified farm/fishing property to $1 million. This amount will no longer be indexed to inflation, until the small-business-share exemption (currently $813,600) catches up to $1 million. That will take many years; no doubt this rule will be changed long before then.
Donating proceeds of private companyshares, or real estate, to charity
The Income Tax Act has had a rule since 2006 permitting donations of publicly-traded securities to a charity without recognizing and paying tax on the capital gain that would normally apply when making a gift (i.e., the accrued capital gain up to current market value). The only exception is flow-through shares, which are already eligible for huge tax benefits when the shares are acquired.
What’s the nice change?
The Budget proposes to allow donation of the proceeds of private company shares, and real estate, to a charity without recognizing the capital gain from selling the property. A charity cannot normally own private company shares and would rarely own real estate, so the property itself would not be donated to the charity. Instead, you’ll be able to sell the property and donate (all or part of) the cash proceeds to a charity within 30 days after the sale. You will then not have to recognize the capital gain (or a proportional part if you don’t donate all the proceeds.) This will significantly increase the value of the donation from the existing 45-50% donation credit.
This rule will not take effect until 2017.
Notably, the Budget proposal does not make it clear whether the actual proceeds of sale have to be kept segregated, tracked and donated within 30 days, or whether it will be enough to donate any money within the 30 days. The Department of Finance has indicated that it will make the answer clear once it releases draft legislation.
Foreign property reporting simplified for many
Taxpayers with “foreign property” costing over C$100,000 have been required for many years to report this fact to the CRA on their T1 return and to file a Form T1135 foreign property reporting form. The purpose is to allow the CRA to ensure that the taxpayer is properly reporting, and paying tax on, income from foreign investments.
Until 2013, the T1135 was a simple “check the box” form that merely asked for the categories of foreign investment (e.g. foreign shares, loans or real estate). Starting with the 2013 year, the CRA made the form far more complex, requiring extensive work to complete. More changes were made for the 2014 year, making the form even more complex and requiring identification of the type and value of properties, the income from them and the country of source. Reporting is required even for foreign securities that are held in Canadian investment dealer accounts, though all amounts for one country in a single account can be grouped together.
What’s the nice change?
Starting with reporting for the 2015 year, the T1135 will be simplified for taxpayers whose total cost of foreign property is from $100,000 to $250,000. Only over $250,000 will the current detailed reporting be required.
Home accessibility tax credit
In 2009, the government introduced a “home renovation tax credit”, allowing all taxpayers a 15% credit for home renovations exceeding $1,000 and up to $10,000 (i.e., a maximum credit of $1,500). This measure was available only for 2009, as a stimulus to the economy in the middle of the 2008-09 recession. It proved to be very popular, and no doubt helped the economic recovery.
What’s the nice change?
The Budget proposes a similar “home accessibility tax credit”, but limited to renovations that are needed to make a home more accessible for a person over 65 or a person with a severe disability (eligible for the disability credit) who lives in the home. The credit will be 15% of the renovation cost up to $10,000 — i.e., a maximum credit of $1,500 per year. It will not expire; it will be available for expenditures starting in 2016.
A taxpayer will be able to split work over a calendar year-end and effectively double the $10,000 limit by spending half in one year and half in another year.
Manufacturing & processing – capital cost allowance
A business that purchases capital equipment can claim capital cost allowance, or CCA (tax depreciation), to write off the cost of the equipment over time. The Income Tax Regulations provide incentives to acquire certain kinds of property, by offering a high rate of CCA relative to the property’s likely actual depreciation.
Machinery and equipment acquired since 2007 and through 2015, primarily for use in Canada for the manufacturing or processing of goods for sale or lease, qualifies for a temporary accelerated CCA rate of 50% calculated on a straight-line basis (Class 29). In other words, the cost of the machinery or equipment can be fully written off over two years. For such property acquired after 2015, this measure is scheduled to expire, and the CCA rate goes back to 30% on a declining-balance basis (Class 43).
What’s the nice change?
The Budget proposes to create a new Class 53, allowing a 50% declining-balance CCA rate for such machinery and equipment acquired from 2016 through 2025.
While this is an improvement over the 30% rate, this is actually a negative change from the current rule allowing a two-year writeoff. The new Class 53 will be, as noted, on a “declining balance” basis, and the “half-year rule” allowing only half of the CCA in the year of acquisition, will apply to Class 53. So for such property acquired in 2016 for $1,000, instead of $500 in each of 2016 and 2017, the deduction will be:
| Year | CCA claim | UCC for next year |
|---|---|---|
| 2016 | $250 (50% of $1,000, subject to half-year rule) | $750 |
| 2017 | $375 (50% of undepreciated capital cost of $750) | $375 |
| 2018 | $183 (50% of undepreciated capital cost of $375) | $182 |
| 2019 | $92 | $91 |
Penalties relief – repeated unreported income
As we explained in our March 2015 Tax Letter, Income Tax Act subsection 163(1) provides a penalty that can be devastating to someone who fails to report some amount of income in two years out of any four. The penalty (including a parallel provincial penalty) is currently 20% of the unreported income, even if tax was withheld at source so that there is no unpaid tax.
In our March letter, we gave this example of how harsh the penalty can be:
When Joe gave his accountant his papers for his 2011 tax return, he misplaced one of the twelve T5 and similar slips he’d received for various kinds of investment income. The slip in question showed he’d earned interest of $75. So that $75 of income was omitted from his return.
In 2014, Joe retired and received a payout of $100,000, from which tax was withheld by his employer. Because of the tax withheld, he did not have to pay any additional tax on the $100,000. Again he misplaced the T-slip and neglected to tell his accountant about this amount, and his 2014 return was filed without showing the $100,000 of additional income or the tax that had been withheld on it.
The CRA will assess penalty of $20,000, even though the 2011 unreported income was trivial and the 2014 amount led to no unpaid tax.
What’s the nice change?
The Budget proposes to change this penalty so that it will apply only if both unreported amounts were at least $500; and the penalty cannot exceed 50% of the unpaid tax on the unreported income. In Joe’s example above, the penalty would not apply because the first year’s unreported income was only $75; and even if that were not the case, since there was no additional tax to pay due to the source withholding, there would be no penalty at all.
This new rule will apply to 2015 and later years.
RRIF Minimum withdrawals reduced
A taxpayer with an RRSP must wind up the RRSP by the year they turn 71 (or in some cases, the year their younger spouse turns 71). They can withdraw all the funds and pay full tax immediately; or buy an annuity; or convert the RRSP to a registered retirement income fund (RRIF). A RRIF is like an RRSP, but allows no new contributions, and a “minimum amount” must be withdrawn every year (somewhat like a pension). The taxpayer can always choose to withdraw more than the minimum.
The minimum amount is based on a table that was set in 1992, when 6-10% interest rates on government bonds were common. It requires an increasing amount to be withdrawn each year, e.g. 7.85% at age 75 and 8.75% at age 80. With interest rates at all-time lows in recent years, few taxpayers have been able to withdraw the minimum without impairing their RRIF capital and thus their future income.
What’s the nice change?
The Budget proposes to change the “minimum amount” table in subsection 7308(4) of the Income Tax Regulations, to allow lower withdrawals and thus to allow taxpayers to keep funds growing tax-free in their RRIF for longer. Using the above examples, the required withdrawal at age 75 will now be 5.82%, and at age 80 will be 6.82%. Of course, this will only be helpful to a taxpayer who has enough to live on without taking too much out of their RRIF.
This change takes effect as of 2015. Recognizing that some taxpayers may have already taken out their “minimum amount” for 2015 before the Budget, and thus will have taken out more than they needed to, a special rule in Income Tax Act section 60.022 will allow the excess to be recontributed back to the RRIF without penalty, by February 29, 2016.
Small business corporate income tax rate reduced
The “small business deduction” provides for a much lower rate of corporate income tax on small corporations’ first $500,000 of active business income than applies to large corporations or to income at higher levels. The $500,000 must be shared by “associated” corporations (within the same control group).
The regular federal tax rate on corporations (not counting provincial corporate tax) is 28%. The small business deduction is 17 points of tax, so the small business rate is 11%.
What’s the nice change?
The Budget proposes to increase the small business deduction, and thus reduce the small business corporate income tax rate, by half a percentage point per calendar year for four years (with prorating across January 1 each year). The federal corporate income tax rate will thus be 10.5% for 2016, 10% for 2017, 9.5% for 2018 and 9% starting 2019.
(Provincial corporate tax rates on small business income range from 0% (in Manitoba) to 4.5% (in Ontario and PEI), except that the rate is 8% in Quebec.)
TFSA Contribution limit increased to $10,000
The tax-free savings account (TFSA) permits cumulative contributions of up to $5,000 per year for 2009-2012 and $5,500 per year for 2013-2015 — total $36,500 for someone born before 1992 (since a TFSA can be set up only if the taxpayer is at least 18 by year-end). Funds grow tax-free in the TFSA and can be withdrawn at any time. Withdrawing funds recreates the same amount in new contribution room,
but not immediately — only as of the next calendar year January 1.
What’s the nice change?
The Budget proposes to increase the TFSA contribution limit to $10,000 per year, starting 2015. As a result, if you have already contributed the maximum, you can contribute another $4,500 immediately. The CRA announced on April 25, 2015 that they will immediately administer the Act as though this rule were enacted, so the extra $4,500 can be contributed right away.
Veterans who are injured
Veterans Affairs Canada has created a new “Critical Injury Benefit”, a $70,000 award to support the most severely injured and ill Canadian Armed Forces (CAF) members and veterans.
Veterans Affairs Canada has also created a “Family Caregiver Relief Benefit”, which will provide veterans with an annual tax-free grant of $7,238. This funding can be used for relief options such as covering the cost of having a professional caregiver come into the home or covering the cost for another family member or friend to travel to the veteran’s home. The new benefit is expected to provide relief to approximately 350 spouses or caregivers of the most seriously ill and injured veterans by 2020.
Both of these awards will be tax-free.