Federal Budget Report 2018 | FBC, Canada's Farm & Small Business Tax Specialist

Federal Budget Report 2018

Federal Budget Report 2018

Federal Budget Report 2018

On February 27, 2018, the Honourable Bill Morneau presented his third budget as Minister of Finance.
 
The 2018 Federal Budget, entitled “Equality and Growth,” focuses on:

  1. Improving the economic success of women and advancing Canada’s gender equality goals.
  2. Enhancing innovation funding to improve the competitiveness of the Canadian business environment.
  3. Continuing with its agenda of changing the tax rules for private companies by introducing new measures that impact the taxation of passive investments.

The federal government announced that the deficit for the 2017-18 fiscal year is $19.4 billion, which is lower than the $28.5 billion deficit predicted in last year’s Budget. This is due to the enhanced performance of the Canadian economy over the past fiscal year.
 
For the 2018-19 fiscal year a deficit of $18.1 billion is forecast, which includes a $3 billion contingency reserve.

A significant concern for the Canadian business community is the balancing of the Budget and a plan for the elimination of the deficit, yet this Budget contains no mention of a plan for a return to surplus.

Highlights

  • Deficit of $17.8 billion for 2016-17
  • Projected deficit of $19.4 billion for 2017-18
  • Projected deficit of $18.0 billion 2018-19
  • No timetable set for balancing the federal budget
  • Changing the tax rules for private companies by introducing new measures that impact the taxation of passive investments.
Projections of federal surplus (deficit) and debt
  Surplus (Deficit) Outlook Federal Debt
  $billion $billion % of GDP
2017-18 (19.4) 651.5 30.4
2018-19 (18.1) 669.6 30.1
2019-20 (17.5) 687.1 29.8
2020-21 (16.9) 704.0 29.4
2021-22 (13.8) 717.8 28.9
2022-23 (12.3) 730.1 28.4

Breaking Down the Budget!

Key Economic Statistics (In Billions $)
  2018-19
Revenues:  
  • Personal Income taxes
$161.4
  • Corporate Income taxes
47.3
  • GST
37.7
  • Other income tax
8.3
  • Custom import duties
5.5
  • EI premium revenues
21.7
  • Other excise taxes/duties
12.2
  • Other revenues
    29.4
Total revenues $323.4
   
Expenses:  
  • Elderly benefits
$53.6
  • EI
20.7
  • Children’s benefits
23.7
  • Federal transfers (Health & Other Social programs)
73.6
  • Direct program expenses
140.4
  • Assessment of risk
3.0
  • Other (public debt charges)
     26.3
Total expenses $341.3
   
Deficit ($323.4 – 341.3) $    (18.1)

Personal Tax Measures

No Taxes Rate Increase & Decrease in 2018!

There are no individual income tax rate or tax bracket changes in this budget. The brackets will continue to be indexed for inflation. 

They appear as follows:

Personal Marginal Tax Rates

Tax brackets

2017 Tax Rate

Tax brackets

2018 Tax Rate

$0 – $45,916

15.0%

$0 – $46,605

15.0%

$45,917 – $91,831

20.5%

$46,606 – $93,208

20.5%

$91,832 – $142,353

26.0%

$93,209 – $144,489

26.0%

$142,354 – 202,800

29.0%

$144,490 – 205,842

29.0%

> $202,800

33.0%

> $205,842

33.0%

Personal tax credits for 2018 will be indexed by 1.015%. The maximum tax credit amounts and actual Federal tax credits for 2017 and 2018 are set out below.

Federal Non-Refundable Tax Credits
  2017 2018
Maximum Amount Federal Tax Credit Maximum Amount Federal Tax Credit
Basic Personal Amount $11,635 $1,745 $11,809 1,771
Spousal Amount 11,635 1,745 11,809 1,771
Eligible dependent amount 11,635 1,745 11,809 1,771
Age amount 7,225 1,084 7,333 1,100
Canada Caregiver credit 6,883 1,032 6,985 1,143
CPP Contributions 2,564 385 2,594 389
EI Contributions 836 125 858 129
Canada Employment Amount 1,177 177 1,195 179
Pension income amount 2,000 300 2,000 300
Disability amount 8,113 1,217 8,235 1,235
Disability supplement 4,732 710 4,804 721
Tuition tax credit amount Variable Variable Variable Variable
Adoption expenses 15,669 2,350 15,905 2,386
Medical expenses Variable Variable Variable Variable
Medical expenses (other dependents) Variable Variable Variable Variable
Interest on student loans Variable Variable Variable Variable
Donations & Gifts
-first $200
- over $200

200
75% of income

30
Variable

200
75% of income

30
Variable
In general, credits are multiplied by 15% to arrive at the deduction from Federal Tax. 
In the case of donations and gifts over $200, the credit is 29% or 33% depending on whether $200,000 income threshold is reached

Medical Expense Tax Credit

It is proposed that eligible expenses incurred after 2017 for the acquisition and care of a specially trained service animal will be allowed for a service animal trained to assist individuals to cope with certain severe mental impairments.

Mineral Exploration Tax Credit

The mineral exploration tax credit, equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors, will be extended to flow-through share agreements entered into on or before 31 March 2019. The credit was scheduled to expire on 31 March 2018

Canada Workers Benefit (formally the Working Income Tax Benefit)!

The Working Income Tax Benefit is a refundable tax credit that supplements the earnings of low-income workers.

The Budget proposes to enhance this benefit starting in 2019 and to rename the benefit the Canada Workers Benefit.
 
The changes include:

  • For 2019, the maximum benefit will be $1,355 for a single individual without dependants (an increase of $170 in 2019) and $2,335 for families. In addition, the disability supplement will be increased to $700 in 2019.
  • The benefit will be reduced for single individuals with income in excess of $12,820 and families with income over $17,025. The credit will be fully eliminated for individuals with income in excess of $24,111 and families with income in excess of $36,483.
  • Access to the benefit will also be improved. While the working income tax benefit is required to be claimed on the individual’s tax return, Budget 2018 proposes to allow the CRA to determine an individual’s eligibility for the Canada Workers Benefit even when not specifically claimed, effective for 2019 and later years.

Under the current rules, individuals (with no dependants) who are enrolled as full-time students at a designated educational institution for a total of more than 13 weeks in a taxation year will not be eligible for the benefit.

Budget 2018 proposes that designated educational instructions be required to report to the CRA prescribed information regarding students’ enrolment after 2018.

Child Benefits

Foreign-Born Status Indians

Eligibility requirements for the former Canada Child Tax Benefit, the National Child Benefit supplement and the Universal Child Care Benefit will be amended retroactively to ensure that foreign-born status Indians residing legally in Canada who are neither Canadian citizens nor permanent residents will be eligible for those benefits if all other eligibility requirements are met.

These individuals are currently eligible for the Canada Child Benefit, which replaced the previous system of child benefits.

Provincial/Territorial Access to Taxpayer Information

The Income Tax Act will be amended to permit the federal government to share taxpayer information related to the Canada Child Benefit with the provinces and territories, beginning 1 July 2018. 

Access to the information is to be provided solely for the purpose of permitting the provinces and territories to administer their social assistance payment regimes.

Business Tax Measures

No New Corporate Taxes Rate Increases for 2018!

No changes are proposed to the corporate income tax rates or to the $500,000 small-business income limit of a Canadian-controlled private corporation (CCPC). 

The budget re-confirms the reductions in the small-business corporate income tax rates previously announced in October 2017.

The enacted (or announced) Canadian federal corporate income tax rates are summarized as follows:

Federal Corporate Income Tax Rates
  2017 2018 2019
General Corporate Rate 15.0% 15.0% 15.0%
Small Business Rate 10.5% 10.0% 9.0%
CCPC investment income rate 34.67% 34.67% 34.67%

Accelerated Capital Cost Allowance for Clean Energy Equipment: Class 43.2

Continuing with the theme of prior budgets, the minister announced changes impacting capital cost allowance rates:

Extension of availability of Class 43.2

Eligible investments in specified clean energy generation and conservation equipment may qualify for accelerated capital cost allowance rates by being included in either Class 43.1 or 43.2 (30% and 50% declining balance, respectively).

Class 43.2 was introduced in 2005 and applies to eligible property acquired before 2020. It generally includes property that would otherwise be included in Class 43.1, except that in certain cases Class 43.2 imposes stricter eligibility criteria.

Budget 2018 proposes to extend the availability of Class 43.2 by 5 years so that it will be available for eligible property acquired before 2025.

Tax Planning Using Private Corporations

Passive Investment Income

On 18 July 2017, the federal government proposed to tax the reinvestment of after-tax corporate business earnings in passive investments in private corporations on a go-forward basis.

In mid-October 2017 (after the consultation period for the proposals ended on 2 October 2017), the government announced that proposals targeting the reinvestment of after-tax corporate business earnings in passive investments would be limited to private corporations with passive investment income in excess of $50,000.

Budget 2018 proposes two measures to limit the deferral advantage of private companies earning passive investment income. These measures are applicable for taxation years beginning after 2018.

Clearly the Department of Finance has reviewed the feedback received from the tax community and has proposed legislation that is much simpler and workable than what was discussed in the 18 July 2017 discussion document and the modifications mentioned in October 2017.

New Measures

The government has introduced two separate measures to reduce the tax deferral benefit of earning investment income in a private corporation.

These new rules will apply where the corporation also earns active business income taxed at the small business rate.

These measures are substantially less aggressive than the proposals initially put forward in the July 2017 consultation paper, and more beneficial to taxpayers than the proposed relief announced in October 2017.
 
Measure #1—Limiting Access to the Small Business Tax Rate

Canadian-controlled private corporations (CCPCs) pay corporate income tax on active business income up to the small business limit at a low small business tax rate, currently 10% federally, to be reduced to 9% in 2019.

The small business deduction limit is $500,000 federally and in most provinces (except for Manitoba where it is $450,000 and Saskatchewan where it is $600,000).

Access to the small business tax rate begins to be phased-out for associated CCPCs with greater than $10 million of aggregate taxable capital employed in Canada and is eliminated when aggregate taxable capital reaches $15 million.

This Budget proposes to limit the ability of CCPCs to benefit from the small business tax rate where the corporation combined with its associated corporations earns more than $50,000 of passive investment income in a year.

This $50,000 threshold was previously announced in October 2017 based on the government’s estimate that it represents approximately $1,000,000 in invested assets, using an assumed 5% rate of return.

This threshold is aimed at providing flexibility for small business owners to save for multiple purposes such as sick leave, parental leave, an economic downturn or retirement.

The Budget indicates that the small business deduction will be reduced by $5 for every $1 of investment income above the $50,000 threshold and will be eliminated when investment income reaches $150,000.

This measure will affect CCPCs when the active business income exceeds the reduced small business limit. At $150,000 of investment income, the small business limit would be nil.

Where active business income exceeds the reduced small business limit, the excess income will be taxed at the general corporate tax rate. This rate is 15% federally, and varies from 26.5% to 31% when combined with provincial or territorial tax rates.

The small business limit reduction under this measure will operate alongside the existing reduction that applies in respect of taxable capital in excess of $10 million.

The reduction in the small business limit will be the greater of the reduction under the new measure and the existing reduction based on taxable capital.
 
Measurement of investment income
In order to apply this new measure, a new concept of “adjusted aggregate investment income” (AAII) is being introduced and will be based on “aggregate investment income” (a definition that is currently used in computing refundable taxes in respect of a CCPC’s investment income) with certain adjustments.

Taxable capital gains and allowable capital losses arising from the disposition of “active assets” will not be included in AAII.

“Active assets” is a defined term that includes property that is used principally in an active business carried on primarily in Canada by the corporation or by a related corporation.

It also includes a share of another corporation that is connected with the corporation, where, generally, all or substantially all of the fair market value of the assets of the other CCPC is attributable directly or indirectly to assets that are used principally in an active business carried on primarily in Canada, and certain other conditions are met.

Certain partnership interests will also be active assets.

In addition to excluding gains and losses from the disposition of active assets, AAII will include:

  • Dividends from non-connected corporations, and
  • Income from savings in a life insurance policy that is not an exempt policy, to the extent it is not otherwise included in aggregate investment income.

Net capital losses carried forward from other taxation years will be excluded from the calculation of AAII.

Consistent with the existing rules related to aggregate investment income, adjusted aggregate investment income will not include income that is incidental to an active business.  

In addition, investment income from AgriInvest is not considered to be passive income.
 
Application
This measure will apply to taxation years that begin after 2018.

However, it may apply to an earlier tax year if the taxpayer enters into transactions designed to avoid the measure, such as the creation of a short taxation year in order to defer its application. 

In addition, a new anti-avoidance rule will generally apply to deem corporations to be associated where transactions are undertaken to transfer property to avoid the application of these rules.
 
Measure #2—Limiting Access to Refundable Taxes
 
The second measure dealing with tax advantages in respect of passive income is limiting access to refundable taxes for Canadian-controlled private corporations (CCPCs).

A refundable tax mechanism applies to the income of a private corporation from passive investments at approximately the top personal income tax rate while that income is retained in the corporation.

Under this mechanism, the refundable taxes are added to the refundable dividend tax on hand (RDTOH) account and are refundable when the corporation pays taxable dividends to its shareholders.

Taxable dividends paid from a corporation are classified as either eligible or non-eligible.

Eligible dividends are those paid from income taxed at the general corporate rate and are taxed in the hands of the individual shareholder at a lower rate than non-eligible dividends.

A corporation can receive an RDTOH refund upon the payment of lower taxed eligible dividends in situations where the corporation’s RDTOH was generated from investment income that would need to be paid as a non-eligible dividend. This can provide a tax deferral advantage as it still allows a CCPC to claim a refund of taxes paid on their investment income, which is intended to be taxed at higher rates.

This Budget proposes that a refund of RDTOH will generally only be available in cases where a private corporation pays non-eligible dividends.

The current RDTOH account will now be referred to as “non-eligible RDTOH” and will track refundable taxes paid under Part I of the Income Tax Act (ITA) on investment income as well as under Part IV on non-eligible portfolio dividends (i.e., dividends that are paid by non-connected corporations as non-eligible dividends).

Refunds from this account will be obtained only when non-eligible dividends are paid.

An exception will be allowed where RDTOH arises from eligible portfolio dividends received by the corporation. This new account will be “eligible RDTOH” and will track refundable taxes paid under Part IV of the ITA on eligible portfolio dividends.

Any taxable dividend will entitle the corporation to a refund from its eligible RDTOH account (subject to an ordering rule).

With two accounts, an ordering rule will apply on the payment of a non-eligible dividend, such that a refund must be obtained from the non-eligible RDTOH account before obtaining a refund from the eligible RDTOH account.

In situations with connected corporations, the account for the RDTOH addition for the recipient corporation will match the RDTOH account from which the payor corporation obtained its refund.
 
Application
This measure will apply to taxation years that begin after 2018.

An anti-avoidance rule will apply to prevent the deferral of the application of this measure through the creation of a short taxation year.

On transition, a special rule will apply to determine how to allocate a CCPC’s existing RDTOH balance between the two RDTOH accounts.

Under this rule, the lesser of a CCPC’s existing RDTOH balance and an amount equal to 38⅓% of the balance of its general rate income pool, if any, will be allocated to its eligible RDTOH account. Any remaining balance will be allocated to its non-eligible RDTOH account.

For any other corporation, the existing RDTOH balance will be allocated to the corporation’s eligible RDTOH account.

Charities and Non-Profit Organizations

Transfers to Municipalities

This Budget proposes to amend the Income Tax Act to allow charities to consider transfers of property to municipalities qualifying expenditures for purposes of the revocation tax, subject to the approval of the Minister of National Revenue.

This change will allow property of a charity to be transferred to a municipality, without detriment to the charity, for transfers made on or after February 27, 2018.

Universities Outside Canada

The requirement that universities outside Canada be prescribed in the Income Tax Regulations to be considered qualified donees will be removed, as they are already listed on the Government of Canada website. (Applicable as of 27 February 2018.)

Nonprofit Journalism

It is the Government’s intention over the next year to explore new models that enable private giving and philanthropic support for trusted, professional, nonprofit journalism and local news.

Budget 2018 indicates that this support could include providing Canadian newspapers with charitable status for not-for-profit provision of journalism.

Political Activities

Finally, Budget 2018 indicates that it will provide, in the coming months, a response to the recommendations made in 2017 by the consultation panel on the political activities of charities.

Trusts

Enhanced Requirements for Trust Reporting

The Budget proposes an enhanced annual reporting structure for certain trusts that will require express trusts resident in Canada to file T3 returns, starting in 2021.

Each trust will be required to report the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability (through the trust terms or a related agreement) to exert control over trustee decisions regarding the appointment of income or capital of the trust (e.g., a protector). 

An express trust is generally a trust created with the settlor’s express intent as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the provisions of a statute.

The current rules provide that such trusts need only report in years that the trust has taxes payable or makes a distribution to one or more beneficiaries.

This enhanced reporting measure is proposed to improve the collection of beneficial ownership information with respect to trusts. This will help authorities more effectively counter aggressive tax avoidance, tax evasion, money laundering and other criminal activities perpetrated through the misuse of trusts.

Non-resident trusts that are currently required to file a T3 return will also be required to make an annual filing and to comply with the enhanced reporting requirements including the naming of beneficiaries.

Certain types of trusts will be excluded from these proposed additional reporting requirements, including:

  • Mutual fund trusts, segregated funds and master trusts
  • Trusts governed by registered plans
  • Lawyers’ general trust accounts
  • Graduated rate estates and qualified disability trusts
  • Trusts that qualify as nonprofit organizations or registered charities
  • Trusts that have been in existence for less than 3 months or that hold less than $50,000 in assets throughout the taxation year (with the assets confined to deposits, government debt obligations and listed securities)

New penalties will be introduced for the failure to file a T3 return and will be equal to $25 per day of delinquency (with a minimum penalty of $100 and a maximum of $2,500), including an additional penalty where the failure to file the return was made knowingly or due to gross negligence.

This additional gross negligence penalty will be equal to 5% of the maximum fair market value of property held during the year, with a minimum penalty of $2,500.

One of the effects of these proposals is that family trusts will need to be transparent with respect to all possible beneficiaries, even contingent beneficiaries, of the trust, as well as making annual trust filings in years where there is no distribution of income or capital.

Partnerships

At-Risk Rules for Tiered Partnerships

Under existing legislation, limited partners of a partnership may deduct their share of the partnership’s losses only to the extent of their at-risk amount.

The at-risk amount of a limited partner generally represents the partner’s invested capital that is at risk in the partnership.

It consists of the adjusted cost base of the limited partner’s interest in the partnership, subject to a number of adjustments (e.g., increased by partnership income allocated to the partner for the year, and decreased by amounts owed to the partnership).

The portion of the loss that exceeds the limited partner’s at-risk amount is not deductible, but instead becomes a limited partnership loss, which may be carried forward indefinitely and deducted in a subsequent year to the extent that the limited partner’s at-risk amount has increased.

Any undeducted limited partnership losses at the time a limited partner disposes of a limited partnership interest increases the limited partner’s adjusted cost base of the partnership interest, thereby reducing the capital gain (or increasing the capital loss) realized on the disposition.

The at-risk rules have been administered on the basis that they apply to tiered partnership structures in which a limited partner is, itself, another partnership.

Under these structures, it has been the view of the department of finance that limited partnership losses would not be eligible to be carried forward by the partnership holding the limited partnership interest but would, instead, be reflected in the adjusted cost base of the limited partnership interest.

In response to a recent Federal Court of Appeal decision which was inconsistent with this understanding, Budget 2018 proposes to clarify and ensure that the at-risk rules apply at each level of a tiered partnership structure.

For a limited partner that is itself a partnership, its share of losses from the other partnership that can be allocated to its own members will be restricted by that limited partner’s at-risk amount in the other partnership.

In addition, measures will be introduced to treat limited partnership losses of a limited partner that is itself another partnership, as previously understood.

These measures will apply in respect of taxation years ending on or after 27 February 2018, including in respect of partnership losses incurred in a taxation year ending before 27 February 2018.

Therefore, such losses will not be available to be carried forward to a taxation year ending on or after 27 February 2018 where the losses, for the year in which the losses were incurred, were allocated to a limited partner that is, itself, a limited partnership.

International Tax Measures

Cross-Border Surplus Stripping Using Partnerships and Trusts

The paid-up capital (PUC) of shares of a Canadian corporation can be returned to shareholders free of tax, and is also relevant in determining deductible interest expense under the thin capitalization rules.

The Income Tax Act contains a rule that is intended to prevent a corporation’s nonresident shareholders from achieving a tax benefit by extracting (or “stripping”) a Canadian corporation’s surplus in excess of its PUC on a tax-free basis, or by artificially increasing the PUC of the shares. 

Some taxpayers have used partnerships or a trust in tax planning that seeks to preclude application of the anti-surplus stripping rule.

Budget 2018 proposes to amend the cross-border anti-surplus stripping rule, and the corresponding corporate immigration rule, to address situations where a partnership or trust is inserted into a corporate reorganization for the purpose of achieving a tax benefit that is intended to be denied by the anti-surplus stripping rule.

The rule is to effectively “look through” such partnerships or trusts for this purpose by allocating the assets, liabilities and transactions of a partnership or trust to its members or beneficiaries, as the case may be, based on the fair market value of their interests.

The measure will apply to transactions that occur on or after 27 February 2018.

Foreign Affiliates

Budget 2018 proposes modifications to the foreign affiliate rules resulting from its “ongoing monitoring of developments in this area.” 

No draft provisions were included in the Notice of Ways and Means Motion released with the budget information.
 
Foreign Affiliates - Reporting and Reassessments
This Budget proposes to bring the information return deadline in respect of a taxpayer’s foreign affiliates (Form T1134) in line with the taxpayer’s income tax return deadline by requiring the information returns to be filed within 6 months after the end of the taxpayer’s taxation year.

This measure will apply to taxation years of a taxpayer that begin after 2019.

This is a significant change to the current rules that require the information return to be filed within 15 months of the year end of the taxpayer.

This Budget also proposes to apply the extended 3-year reassessment period in respect of income arising in connection with a foreign affiliate of the taxpayer.

This measure will apply to taxation years of a taxpayer that begin on or after February 27, 2018.
 
Investment Business
This Budget proposes to introduce a rule for the purposes of the investment business definition so that, where income attributable to specific activities carried out by a foreign affiliate accrues to the benefit of a specific taxpayer under a tracking arrangement, those activities carried out to earn such income will be deemed to be a separate business carried on by the affiliate.

This will require each separate business of the affiliate to satisfy each relevant condition in the investment business definition, including the 6 employees test, in order for the affiliate’s income from that business to be excluded from foreign accrual property income (FAPI).
 
Controlled Foreign Affiliate Status
This Budget also proposes to deem a foreign affiliate of a taxpayer to be a controlled foreign affiliate of the taxpayer if FAPI attributable to activities of the foreign affiliate accrues to the benefit of the taxpayer under a tracking arrangement.

This measure is designed to ensure that each taxpayer involved in a tracking arrangement is subject to accrual taxation in respect of FAPI attributable to that taxpayer. FAPI is taxed immediately in Canada regardless if the taxpayer receives a distribution from the foreign affiliate.
 
Trading or Dealing in Indebtedness
This Budget proposes to add a minimum capital requirement to the trading or dealing in indebtedness rules of a foreign affiliate that is similar to a condition under the investment business rules which requires a taxpayer to satisfy certain minimum capital requirements in order to qualify for the regulated foreign financial institutions exception.

Reassessment Period

Requirements for Information and Compliance Orders

This Budget proposes to amend the Income Tax Act (ITA) to introduce a “stop-the-clock” rule for requirements for information generally and for compliance orders.

This rule will extend the reassessment period of a taxpayer by the period of time during which the requirement or compliance order is contested.

Non-Resident Non-Arm’s Length Persons

This Budget proposes to amend the ITA to provide the CRA with an additional 3 years to reassess a prior taxation year of a taxpayer, to the extent the reassessment relates to the adjustment of a loss carryback, where specific criteria are met.

Indirect Tax and Customs Changes

GST/HST and Excise Duty Legislative Amendments

Budget 2018 proposes the following measures regarding GST/HST:

Investment limited partnerships
Budget 2018 proposes to implement and modify the 8 September 2017 draft legislative and regulatory proposals relating to investment limited partnerships so that management and administrative services rendered by the general partner on or after 8 September 2017 be taxable based on the fair market value of such services.

The carry would presumably not be taxable. Such services rendered before 8 September 2017 will not be taxable unless the general partner charged GST/HST on such services before that date (that is, no retroactive relief before such date if tax was charged).

This will be implemented through changes to s.272. 1 (3) and new section 272.1 (8) to ensure such services are deemed to not be done by the general partner as a member of the investment limited partnership.

Investment limited partnerships are defined to be those promoted as collective investment vehicles, or a limited partnership where 50% or more of the total interests are owned by listed financial institutions.

In addition, Budget 2018 proposes that investment limited partnerships, other than nonresident investment limited partnerships (those where 95% or more of the total value of all interests is held by nonresident members) will be added to the definition of “investment plans” for purposes of the special GST/HST rules applicable to listed financial institutions.

Cannabis products not zero–rated for GST/HST
Budget 2018 proposes changes to zero–rating schedules will be made to ensure products do not qualify as basic groceries or qualifying agricultural products (e.g., seeds).

Confirmation of changes to GST/HST joint venture election
In Budget 2016, the Ministry of Finance committed to expand the availability of the GST/HST joint venture election by adding additional qualifying activities.  

Budget 2018 reaffirmed the government’s commitment to this proposal but provided no further information on when or how this will be done.

Consultations on GST/HST S.186 holding corporation rules
Budget 2018 proposes consultations on the “holding corporation” rules that allow a parent corporation to take Input Tax Credits (ITCs) to recover the GST/HST paid on expenses incurred in relation to shares or indebtedness of a related subsidiary operating company that is engaged in commercial activities.

The consultation relates to:

  • whether the rules should be limited to corporations;
  • the requisite degree of relationship between the parent and the operating commercial corporation; and
  • to clarify which expenses are in respect of the shares or indebtedness of the related commercial operating corporation (in response to recent court cases, presumably).

Excise Tax Measures

Budget 2018 proposes the following measures regarding excise duties on tobacco and cannabis products.

In Budget 2018, the federal government committed to:

Tobacco
Advance the existing inflation adjustments on tobacco excise duties from every 5 years (under the Economic Action Plan 2014) to an annual basis to take effect on April 1st of each year; however, effective 28 February 2018 an adjustment will be made to account for inflation since the last adjustment in 2014.

Budget 2018 also proposes to increase the excise duty rate by $1 per carton (200 cigarettes) and corresponding rates to other tobacco products.

In addition, inventories on hand at the end of 27 February 2018 will be subject to an inventory tax of .011468 per cigarette, this tax paid by 30 April 2018 in accordance with the cigarette inventory tax mechanism in the Excise Act 2001.
 
Cannabis
Impose excise duties on federally licensed cannabis producers once non–medicinal cannabis is available for legal retail sale in a province.

The duties will be paid by the licensee who packaged the product for final retail sale at the higher of a flat rate based on a dollar per gram (seed/seedling) basis or an ad valorem imposed on the dutiable amount of the transaction.  

Certain exemptions will apply to federally regulated prescription drugs with DIN numbers and for products containing less than 0.3% THC concentration.

GST/HST changes to zero–rating schedules will be made to ensure products do not qualify as basic groceries or qualifying agricultural products (e.g., seeds).

Pending Legislation

The government will proceed with the following pending legislative and regulatory proposals and other previously announced measures, as modified to take into account consultations and deliberations since their release.

Federal Backstop Carbon Pricing System

On 15 January 2018, the Minister of Environment and Climate Change, Catherine McKenna, and the Minister of Finance, Bill Morneau, released draft legislative and regulatory proposals relating to the proposed federal backstop carbon pricing system for public comment, as a follow-up to the technical paper released on 18 May 2017.

Minister McKenna also released for comment a regulatory framework describing the proposed federal approach to carbon pricing for large industrial facilities under the output-based pricing component of the system.

The federal system is intended to be applied in the fall of 2018 in the provinces and territories that notified the federal government (by the end of March 2018) of their decision to adopt such system, and as of January 2019 in those that don’t have their own system in place in 2018 that meets the federal benchmarks.

The consultation period for the proposals to implement the federal backstop carbon pricing system closed 12 February 2018, and the consultation period for the output-based pricing system regulatory framework will close by 9 April 2018.

Legislative proposals relating to the Income Tax Act re income-sprinkling and private corporations

On 13 December 2017, federal Finance Minister Bill Morneau released new draft legislation revising the income-sprinkling measures proposed on 18 July 2017.

The revised measures are intended to simplify and clarify the application of the July proposals (notably with respect to what will be excluded from the broadened tax on split income) while keeping the general scheme of the original proposals. (Generally effective for 2018 and later years.)

Agriculture and Agri-Food Canada Announcement Re Additional Support to Farmers

On 6 November 2017, Agriculture and Agri-Food Canada announced an extension of the existing tax deferral for taxpayers who receive compensation under the Health of Animals Act due to the 2016 and 2017 bovine tuberculosis outbreak in Alberta and Saskatchewan that forced the destruction of livestock.

Taxpayers will have the option to include in income the compensation amounts received in 2016 or 2017 over three years (83% in 2018, 11% in 2019, and 6% in 2020).

Notice of Ways and Means Motion re 2017 Fall Economic Statement

On 24 October 2017, the government tabled its fall economic statement together with a notice of ways and means motion (NWMM).

The NWMM included measures to implement the reduction in the small business corporate income tax rate (previously announced on 16 October 2017), in addition to bringing forward by two years the start date for indexation of the Canada child benefit.

Specifically, the NWMM included the following income tax measures:

  • Small business tax rate ̶ Reduction in the current 10.5% rate applicable on small business income of a Canadian-controlled private corporation to 10%, effective 1 January 2018, and to 9%, effective 1 January 2019.
  • Non-eligible dividend rate – Reduction in the gross-up factor for non-eligible dividends from 17% to 16% for 2018 and to 15% for 2019 and subsequent years; the effective dividend tax credit (expressed as a percentage of the grossed-up amount of a non-eligible dividend) will be reduced from 10.5% to 10% for 2018 and 9% for 2019 and subsequent years.
  • Canada child benefit – Early start on 1 July 2018 of the annual indexing for the Canada child benefit, rather than on the currently legislated date of 1 July 2020.

Remaining Measures from the 8 September 2017 Legislative Proposals Relating to the Income Tax Act

Outstanding measures concerning the exemption of the military salaries of all Canadian Armed Forces personnel and police officers deployed on named international operational missions from federal income taxes, up to and including the pay level of Lieutenant-Colonel (General Service Officers) of the Canadian Forces. (Applicable to the 2017 and subsequent taxation years).

Remaining Measures from the 16 September 2016 Legislative Proposals Relating to Technical Amendments to the Income Tax Act and Income Tax Regulations

Outstanding measures concerning foreign spinoffs and shareholder benefit rules (applicable to divisions of non-resident corporations that occur after 23 October 2012).

Remaining Measures from the 2016 Federal Budget (tabled 22 March 2016)

Outstanding measures concerning new reporting requirements for corporate and partnership life insurance beneficiaries that are not policyholders, and the expansion of accelerated capital cost allowance (CCA) Classes 43.1 and 43.2 for clean energy assets (generally applicable after 21 March 2016).

Outstanding measures concerning the GST/HST joint venture election that were first announced in the 2014 budget under the previous government – the renewed intention to proceed with these measures was also confirmed by the current government in the 2017 budget, in addition to the 2016 budget.

Government Key Issues Announced Today

The key issues in the 2018 Budget for Canadian businesses include:

Gender Equality

The government has made it a priority to address gender inequality in Canadian society and promoting the economic success of women.

The government has indicated that the Budget measures have gone through a gender-based analysis with the goal of allocating government resources more equitably and efficiently.

The Budget includes measures such as a new Women Entrepreneurship Strategy designed to increase the number of businesses owned by women and an enhanced parental leave Employment Insurance benefit for the second parent.

Innovation

There is significant concern in the Canadian business community that the renegotiation of NAFTA and the reduction of U.S. corporate tax rates as part of U.S. Tax Reform may have a negative impact on Canadian business competitiveness.

There was very little acknowledgement of these concerns in the Budget with the government only indicating that it will monitor the impact of the U.S. tax reforms on Canada.

The Budget did contain new funding to support innovation in Canada with $2.6 billion to be spent over 5 years to transform Canada’s innovation programs.

No changes were announced to the Scientific Research and Experimental Development tax credit program.

Maximum Combined Personal Marginal Income Tax Rates

(As At 27 February 2018)

  Ordinary Income 2018
  2017 2018 Increase
(Decrease)
Eligible Dividends Ineligible Dividends Capital Gains
  % % % % % %
Federal only 33.00 33.00 0.00 24.81 26.64 16.50
BC 47.70 49.80 2.10 34.20 43.73 24.90
Alberta 48.00 48.00 0.00 31.71 41.64 24.00
Saskatchewan 47.75 47.50 (0.25) 29.64 39.76 23.75
Manitoba 50.40 50.40 0.00 37.78 45.92 25.20
Ontario 53.53 53.53 0.00 39.34 46.84 26.76
Quebec 53.31 53.31 0.00 39.83 43.94 26.65
NB 53.30 53.30 0.00 33.51 46.88 26.65
NS 54.00 54.00 0.00 41.58 47.33 27.00
PEI 51.37 51.37 0.00 34.22 44.26 25.69
NL 51.30 51.30 0.00 42.61 43.81 25.65
NWT 47.05 47.05 0.00 28.33 35.98 23.53
Nunavut 44.50 44.50 0.00 33.08 36.78 22.25
Yukon 48.00 48.00 0.00 28.92 41.42 24.00

 
(Source: Federal Government)

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