FEDERAL BUDGET 2016
Federal Finance Minister William Morneau presented the 2016 budget on March
22, 2016. Despite assurances during the election that the Liberals would hold the
budget deficit to $10 billion the 2016 budget estimates the deficit at 3 times their
election promise to $29.4 billion. Subsequent budget deficits are now forecast by
the government to total $113 billion by the end of their mandate and since they
don’t seem to find their promises very binding it is more likely that the independent
estimates by various economists of $150 billion is more likely. Naturally this
assumes that interest rates hold steady at their ridiculously low current rates.

CORPORATE TAX

Small Business Tax Rate
The budget announcement of most import to small businesses is the cancellation
of the scheduled reduction in the Federal small business rate from 10.5% to 10%.
The government has also decided that no further decreases in the tax rate are
expected.


Small Business Limit
The government has announced changes that will have a substantial impact,
particularly on professional practices. Many professionals work in partnerships but
each partner has a separate professional corporation that earns the income related
to the work they have performed. Each corporation is eligible for the small business
deduction limit of $500,000. This set up, subject to parameters set by the Canada
Revenue Agency, were actually approved by a number of rulings by the CRA.

Effective for tax years beginning after March 21, 2016 these arrangements will no
longer be accepted. The partners will be required to share the $500,000 limit
rateably among all the partners to the extent that the fees earned are from the
partnership. Fees earned directly from third parties will not be restricted.

These rules will apply if the corporation is a designated member of the partnership.
This is meant to include corporations where the shareholder is an individual who
is directly or indirectly holding an interest in the partnership and the fees are being
paid by the partnership to the corporation.

Similar rules have also been put in place to deal with a corporation owned by the
professional corporations that pays the fees to the professional corporations on a
similar basis as the partnerships above.

It should be noted that this could also impact other arrangements other than
professional partnerships where income is being shared between two or more
corporate entities.

Taxpayers in these circumstances should revisit the structure of their current
arrangements and make appropriate changes before the beginning of their next
tax year.


Cross-Border Issues
At the cross-border level the government is expecting to make changes to the
transfer pricing guidelines and to strengthen the anti-abuse clauses in various tax
treaties. These moves are consistent with international moves by other countries
but the treaty changes are expected to take a long time as these negotiations are
never implemented quickly.


Corporate-Owned Life Insurance
The budget proposes a number of changes that have been long anticipated.
Previously shareholders of a corporation were allowed to sell personally-owned life
insurance policies to their corporation for fair market value with no tax implication.
This allowed shareholders to access substantial amounts of corporate funds
without incurring a tax liability.

Effective with the budget date the fair market value of the policy transferred that
exceeds the cash surrender value of the policy will be included in the transferor’s
income.

Another change involves the proceeds from a life insurance policy. Previously the
proceeds were allocated to a notional capital dividend account that could then be
paid out to the shareholders on a tax-free basis. The changes effective with the
budget date will reduce the amount of the proceeds allocated to the capital
dividend account by the amount of the adjusted cost basis of the policy to the
corporation.

For example, a $1 million life insurance policy that was transferred to the
corporation for $300,000 at a time when the cash surrender value was $50,000
would have an adjusted cost basis of $250,000. When the proceeds are received,
on the death of the insured, the amount added to the capital dividend account will
be limited to $750,000 which can be distributed tax-free. The balance of the
proceeds could only be paid out on a taxable basis.

The budget proposes that these changes will take affect with the budget date and
the recalculation of the cost basis of the policy will also apply to policies transferred
before the budget date. These changes will not affect policies as the result of the
death of an insured before budget date.
Eligible Capital Property

A welcome change proposed by the budget is to do away with the eligible capital
rules which are related to business that own trademarks, patents or goodwill.
These rules always confused the situation with amortizing the costs under a
separate regime from capital cost allowance (CCA) and also with gains from their
disposal.

Effective January 1, 2017 all eligible capital property will be reclassified into a new
CCA class and will part of the CCA rules. For the benefit of small businesses small
amounts of eligible capital property will be allowed to be written off subject to
certain limits.

PERSONAL TAX

Mutual Funds
The budget proposes to eliminate the ability of mutual funds with multiple share
classes representing different types of portfolios. Previously share switches, where
one class of share is exchanged for another within the same mutual fund
corporation, were not considered taxable. Effective for exchanges made after
September 30, 2016 these transactions will be taxable.
Canada Child Benefit

As previously announced by the government, the existing Canada Child Tax
Benefit and Universal Child Care Benefit will be replaced by the Canada Child
Benefit. This change will also remove the universality of the benefits and will be
income-based. The maximum benefit will be $6,400 per child under age 6 and
$5,400 for children aged 6 to 17. The benefit will begin to phase out with a net
family income of $30,000.

The changes are in effect for July 1, 2016.

Income Splitting
Also previously announced the budget eliminates the income splitting option for
parents of at least one child under 18. This is effective for the 2016 taxation year.
Textbook Tax Credit

The budget proposes to eliminate the $65 per month credit for full-time postsecondary
attendance and $20 per month credit for part-time post-secondary
attendance. This change will be effective for 2017. Amounts carried forward from
years prior to 2017 will not be eliminated.

Children’s Fitness and Arts Tax Credits
The current credits for a maximum of per-child expenditures of $1,000 for fitness
and $500 for arts will be eliminated by reducing the amounts by half for 2016 and
eliminating the credits completely for 2017.

Marginal Tax Rates
The government had previously announced that it would make changes to the
marginal tax rates. The budget proposes to reduce the second-tier rate from 22%
to 20.5% and introduces a new rate of 33% for income over $200,000. These rates
are for Federal tax rates but will also impact on Provincial rates. As a consequence
of these rate changes there will also be adjustments to the charitable donation tax
credit, excess employee profit sharing contributions, personal service business
income, the foreign affiliate tax factor, the capital gains refund for mutual fund trusts
and the recovery tax for qualified disability trusts.

OTHER MEASURES
Since the budget did not address any changes in the Canada Pension Plan it is
expected that Ontario will move forward with its Ontario Retirement Pension Plan.

IMPORTANT DATES
The filing deadline for US returns for non-US citizen or green card holders is April
15.

The filing deadline Canadian tax returns is May 2.

The filing deadline for Canadian self-employed tax returns and U.S returns for nonresident
US citizens and green card holders is June 15.