Federal Budget 2017

FEDERAL BUDGET 2017

The 2017 Federal Budget was brought down this afternoon by the Liberal Government.  There were a few specific tax measures included in the budget and the government gave notice that they are looking at some significant changes intended to shut down tax planning structures which benefit “wealthy” Canadians.

SPECIFIC TAX CHANGES ANNOUNCED

Accountants and lawyers were specifically targeted with a change to the law which currently allows them to delay paying tax on work which they have done for clients but which they have not yet

invoiced to their clients.  This is a very narrow change which will raise very little revenue and which means accountants and lawyers will need to pay tax on work done which they may not be able to bill and collect for months into the future.

An obscure tax deferral strategy called a “tax straddle” will be shut down by way of a series of anti-avoidance rules.  We do not think this will affect any of our clients.

There were a grab bag of other small changes such as the tuition tax credit was expanded to allow for occupational skills, the public transit tax credit was cancelled, the caregiver credits were expanded and the mineral exploration tax credit will be extended until March 2018.

FUTURE TAX CHANGES UNDER STUDY

It appears that the liberal government sees tax planning arrangements involving private corporations to be a significant problem.  Their position is that wealthy Canadians are using private corporations to avoid paying their “fair share” of taxes.  Of specific note are the following:

  1. Income splitting arrangements using private companies where family members directly or indirectly (through a trust for example) hold shares in the company.
  2. Holding investments inside of a private corporation to facilitate accumulation of investment assets by the owners of private corporations.
  3. Converting regular income of a private Corporation into capital gains instead of being taxed as dividends.

These issues are intended to be dealt with by the government “in the coming months” by way of a paper discussing the issues in more detail as well as considering some proposed policies to deal with them.

WHAT DID NOT CHANGE

The tax and investment community was concerned (and convinced) that the capital gains inclusion rate was going to be increased from 50% to 66%  or 75%.  While that change has not been made yet, we still expect it is on the agenda.  In addition, there was some expectation that income splitting strategies would be under attack in this most recent budget; however, it appears that this will be deferred until the paper described above, has been completed.

FUTURE CHANGES

We are concerned that future changes to the capital gains rate, income splitting, taxation of investments in private corporations, etc. may not be announced in a future budget but instead may be announced by way of a “surprise” bill in the legislature.  It is not necessary for these major changes to be enacted by way of a budget.  Instead, changes to our tax system can simply be made by a majority government bringing forward a bill in the House Of Commons.  These kinds of bills can arrive at any time the House of Commons is in session and therefore we may have no notice before they come into effect.

WHAT CAN YOU DO

If you are concerned about these changes which are being discussed, we encourage you to contact your Member of Parliament and express your concerns.  I am personally concerned that many of these measures may drive medical doctors (specialists in particular) out of Canada so that they can practice in the United States where they can make more money and potentially pay less tax.  In addition, many entrepreneurs will find it more appealing to work from a lower tax jurisdiction which appreciates and rewards them for taking the risks inherent in running their own business.  Increasing tax rates significantly on “the wealthy” typically results in less revenue for the government and typically drives the economic leaders from that jurisdiction.

Wendell Meeres, B.Comm., CPA, CA, C.F.P.

HOUSING MARKET TAX RULES TIGHTENED UP

HOUSING MARKET TAX RULES TIGHTENED UP

October 4, 2016

On October 3, 2016 Bill Morneau, the federal Minister of Finance, announced some changes in the way principal residences are taxed.  These changes are not likely to have any significant impact on any of our clients; however, I am pleased to see the federal government finally take some steps to try and reign in some of the tax abuse which has been going on.

There are two significant changes and it can be summarized as follows:

  1. When you sell a principal residence you will now be required to report the sale on your personal income tax return.
  2. A homebuyer must also file a tax return in the year that they buy a home.

There has always been an obligation to prepare the form designating a property as a principal residence (Form T2091) but there was no obligation to file it unless it was requested by the Tax Department.  In the 30 years that I have been practising, I have never once seen a request from the Tax Department for one of these forms.  Making filing this form mandatory will make it much easier to determine if the home actually qualifies for the exemption or not.  Auditing this claim by the tax department is much easier as well.  They can simply look at the land titles records in each province to determine which properties have been sold and then check to see whether the property has been properly reported as either a principal residence or as a taxable transaction.

The obligation to file a tax return in the year of purchase is solely aimed at non-resident buyers.  This singular change “puts them on the radar” so that any future claim for the principal residence exemption has some supporting “start point.”  While this, in and of itself, will not solve the tax abuse from not reporting gains on such real estate, it will help to flag situations where the principal residence exemption should not be available.

As a final step, I would like to see the Tax Department set up a task force to review all property purchase and sale transactions in the last couple of years (by reviewing land titles records) to determine the extent of the tax evasion which has occurred.  This would be a relatively simple matter and would allow them to both quantify the amount of the abuse and to potentially make a claim for unpaid taxes against other properties still owned by tax cheats.

When other people fail to pay their fair share of taxes that means my clients and I have to pay their taxes as well as our own taxes.  This makes my blood boil.

Wendell Meeres, B.Comm., CPA, CA, C.F.P.