On March 22, 2016, Finance Minister Bill Morneau tabled the first federal budget of the new Liberal government, entitled “Growing the Middle Class”.
Morneau’s first budget delivers on many elements of the Liberal government’s election platform, focusing on infrastructure spending – over $120 billion over ten years – and family benefits intended to “put people first” and strengthen Canada’s economic growth.
In addition to tax rate changes announced in December, such as the top federal income tax rate of 33% for individuals earning over $200,000 in taxable income, the government also vowed to undertake a thorough review of the tax system to identify efficiencies.
Despite pre-budget speculation, neither limitations on the exercise of stock options nor an increase to the capital gains inclusion rate were proposed.
Here are some of the highlights of the 2016 federal budget that may apply to you. Please consult with a tax advisor for specific advice on how any of these proposals may affect your personal situation.
The small business tax rate will remain at 10.5% after 2016, as rate reductions currently set for 2017, 2018 and 2019 will be deferred. Changes will also be introduced to the definition of “associated corporations” that will impact access to this rate.
Measures will be introduced to prevent business owners from using complex
partnership and corporate structures to multiply access to the small business deduction applicable to the first $500,000 in business income. This may increase taxes payable for certain ownership structures.
The budget proposes amendments to eliminate the use of certain insurance strategies that artificially increase a corporation’s capital dividend account credit.
Proposed changes will affect the tax benefit of transferring a personally held insurance policy to a corporation.
As of September 2016, switching money between two corporate class mutual funds in the same corporate structure will result in a taxable gain.
A 15% federal tax credit will apply to purchases of labour-sponsored venture capital funds to facilitate financing for small businesses.
The government will not proceed with the 2015 federal budget proposal to provide a capital gains tax exemption for the disposition of private corporation shares or real estate where the cash proceeds were to be donated to a registered charity within 30 days.
As of July 2016, an income-tested Canada Child Benefit will replace the Universal Child Care Benefit and the Canada Child Tax Benefit. Families benefitting will see an average increase of almost $2,300 annually, although those with incomes above $150,000 will receive lower benefits than under the old system.
Income splitting for couples with children under the age of 18 will be eliminated, however pension income splitting will not be affected.
Canada Student Grant amounts will increase by 50%, and a package of reforms to the Canada Student Loans Program will aim to make post-secondary education more affordable. The education tax credit and textbook tax credit will be eliminated as of January 1, 2017.
The eligibility age of the Old Age Security program will be restored to 65.
The government will initiate discussions on enhancing the Canada Pension Plan in an effort to ensure that Canadians do not outlive their retirement savings.