“Frankly, Scarlett . . . .”
Ten years, more or less, seems to be all the tolerance that Canadians have for their Governments. At least, that is what we must assume, given our total surprise at the extent of the Liberal electoral victory last October. In fact, as things evolved through the campaign, it seemed rather more likely that we would see the NDP holding the balance of power, in a Tory minority government. NDP leader Thomas Mulcair must have believed it, too, as he was quoted making statements that were generally quite friendly (or at least conciliatory) to business. That left the Liberals to carve out more extreme positions during the campaign, in order to distinguish themselves from the throng.
It seems Canadians were angrier with the Conservatives than was generally perceived, and the depth of support for the NDP caucus in Quebec was much shallower than first thought. Or, maybe the election campaign was simply too long. In any event, it seems the Liberals’ come-from-behind victory was buoyed with plenty of ‘throw the rascals out’ sentiment.
Justin Trudeau’s lack of credentials to lead the country was heavily criticized by the Tories in the months prior to the election. That did not seem to make any difference. In fact, it seems now that “experience” may actually be a handicap to getting elected – as proof, we need only look to the south, for the amazing phenomenon of Donald Trump’s successes, so far.
However, Canada and the U.S. seem to be headed in opposite directions – down south, the Republican Party appears to continue to garner significant support for yet more reductions in the already-low taxes paid by wealthy Americans, who are generally perceived, rightly or wrongly, to be “job creators”. From a Canadian perspective, all this seems incredible because here, we are heading towards an even more enthusiastic embrace of the principles of “tax and spend”, with no apparent concern for deficits, or debt levels.
Will this massive increase in Canada’s debt level “force” the Government to raise taxes in future Budgets? Bet on it.
So we return to a path of massive public debt. For those of us who have been in this business for decades, it is a movie that has played here before, one that seems destined to keep repeating itself, like re-runs of ‘Gone with the Wind’ . . .
What They Did Not Do:
Up to the Budget Speech, there was considerable angst amongst the tax community and others that tough provisions would be announced, such as:
- An increase to the capital gains inclusion rate;
- A requirement for all small business corporations to have at least 3 full-time employees; and
- A possible extension of the existing “kiddie tax” rules to adult children and/or spouses, such that any dividends from private corporations paid to such persons would suffer the maximum tax rate.
Thankfully, the Budget contained NONE of these things.
General Business Changes
Future tax rate reductions cancelled
The former Government promised us some nice income rate reductions for small business. These will not happen, now.
Partnerships and the Small Business Deduction
Some of our clients have structured their affairs so as to defeat the general rule that corporate partners must share a single small business deduction (s.b.d.) (i.e., the low tax rate on $500,000 of profits, per year). There have been 3 main ways to achieve that:
- By forming a second corporation, in addition to a corporation that holds the partnership interest. The first corporation pays all of its annual profits to the second corporation, which, because it is not a partner, had an unrestricted entitlement to the s.b.d.;
- By incorporating the partnership itself, and billing that ‘main business’ corporation for services using a second corporation. In such a case, the second corporation would not be a partner, so would have an unrestricted s.b.d.; or
- By continuing to hold the partnership interest directly, as an individual, but to create a corporation which would contract with the partnership as an ordinary service provider, thus supplying the partnership with the services that the individual partner would have otherwise provided. That corporation, too, would have an unrestricted entitlement to the s.b.d.
This Budget has effectively done away with that sort of planning.
In case (1) & (2) above, the second corporation’s s.b.d. would be denied (if the other corporation uses up its full s.b.d. allotment), and in case (3) above, the ‘contracting corporation’ will be deemed to be a ‘designated member’ of the partnership, thus bringing it within the ambit of the existing s.b.d. restriction.
These changes come into effect as of the first fiscal year that begins on or after March 22, 2016. Therefore, for most of those clients affected, at least we have time to unwind these structures since most of them will have fiscal periods that match the calendar year.
Some, however, will be caught earlier – therefore, some immediate planning for the inevitable tax increase should be done, in the very near future.
It may be most expedient to plan for the amalgamation of “dual corporation” structures, so as to occur January 1, 2017. However, those who lack a ‘holding company’ but could use one, might consider preserving the second company, and modify it to become such. Holding companies have excellent tax planning and asset protection qualities that many of our clients should consider.
Planning opportunities that remain:
We recall our newsletters of recent years in which we referred to a “golden age” of corporations. That basically referred to the generally excellent tax rate regime that is now in place for the taxing of active business profits, earned in Canada by private corporations. In BC, that has been 13.5% for the first $500,000 of profits, and 26% thereafter, without limit.
For reasons noted above, corporate access to the 13.5% rate may disappear, or be massively reduced, for some clients that operate in large partnerships. However, the 26% rate would still apply, and that rate remains significantly less than the top marginal rate of tax on individuals, which currently is 47.7% in BC. (53.53% in Ontario!). Thus, clients whose annual income is less than their household spending needs can see significant tax deferral opportunities continue, using corporations to accumulate investment capital.
However, with regard to household cash needs, it appears that there would be no particular advantage in drawing those accumulations as dividends, as opposed to ordinary salary (assuming full exposure to CPP premiums). In that regard, the ‘integration’ principle (which basically is the Government’s attempt to ensure the rough equivalency of overall taxes paid, whether earned through a corporation or directly) is generally preserved. Clients may prefer the alternative of salary, then, since that generates additional CPP entitlement.
General Personal Tax Changes of Note
Clients will recall that a few key changes were put through in December of last year, which are now being officially enacted, with this Budget.
- The introduction of a new, fifth tax bracket, applying to taxable income over $200,000. That gets a 33% Federal rate (the highest rate previously having been 29%).
- A reduction in the rate applied to the “middle” tax bracket, from 22% to 20.5% (a provision that will generally benefit all of our clients), commencing in 2016;
- A roll-back of the maximum TFSA contribution for 2016, from $10,000 to $5,500.
New with this Budget, several tax measures of aid to families have been eliminated:
- “Income splitting” was a benefit introduced in 2014 – of some benefit to families with children under 18 that had no other way to split income from a business has been eliminated as of 2016 (this should not to be confused with the general principle of income splitting, as it has applied to owners of private corporations for many years);
- The children’s fitness and arts credits are removed, as of 2017;
- The student education and textbook tax credits are removed, as of 2017 (this does not affect tuition credits); and
- The ‘child tax benefit’ and ‘universal child care benefit’ will be eliminated after June 2016.
Some compensation for low-income families will be provided with the new, non-taxable “Canada Child Benefit” of $6,400 per child under age 6, and $5,400 per child age 6 thru 17. Families with income of less than $30K will get the maximum benefit. The benefit is reduced, as family income increases, subject to a relatively complex formula, based on income, and age and number of eligible children in the family.