New child benefit for 20162016 Budget

Commencing July 1, 2016, the family child benefit will pay $6,400 pa for each child under age 6 in the year and $5,400 for those aged 6-17 in the year. Disabled children receive an additional $2,730. The benefit is family net income-tested, with a two-part phase-out algorithm based upon incomes over $30,000 and over $65,000.

There is a CRA web calculator to estimate your entitlement:

http://www.cra-arc.gc.ca/bnfts/clcltr/cfbc-eng.html

 

Personal tax rates

Subsequent to taking office last Fall, and prior to the Spring 2016 budget, the new government reset for 2016 and beyond, the longstanding federal marginal tax bracket scale. The second lowest bracket saw a rate drop of 1.5% to 20.5% and a new top bracket was introduced for net income over $200,000, with a new top rate of 33%, 4% higher than before.

For BC taxpayers, this federal rate hike comes after the withdrawal of BC’s two-year temporary rate hike.

High income earners will enjoy the BC drop and the 1.5% drop above to mitigate, wholly or partly, the higher rate now to be paid over $200,000.

The new top bracket causes a domino effect of other changes. The donation credit algorithm now will give credit at that higher 33% for taxpayers in that bracket. The top trust tax bracket also must change to align. The federal tax rate for personal service corporations has increased from 28% to 33%.

The 2016 tax rate graph appears on our website.

 

Capital cost allowance

A previous Budget promise now has been executed. Starting with years ending in 2017, the old schedule 10 account for eligible capital property will be discontinued. The balance in that account will be transferred to a new class 14.1, with some time-consuming transitional calculations. The opening balance in this new class will include:

  • 4/3rds of the final balance in schedule 10, plus
  • 4/3rds of schedule 10 deductions ever claimed (if not recaptured from a sale), minus
  • 4/3rds of any negative schedule 10 balance

Furthermore, if multiple items have been placed in Schedule 10 over the years, one ought to allocate the new starting balance amongst these items (for future capital gains/recapture purposes).

The opening balance in this new class can be written off annually at the greater of 7% and $500. Any new additions into the account can be written off annually at 5% (more accounting)!

In the future, one historical schedule 10 item- incorporation costs-now will be able to be written off, to a maximum of $3,000.

 

Tax credits

The two year Family income splitting provision has been scrapped for 2016.

Various credits, for students’ textbooks and living allowance and children’s fitness and arts, will be eliminated for 2017.

In replacement, the government proposes to enhance the Student Grant system.

 

Passive income corporate tax rates

The new top rate also has a domino effect over to the corporate tax system for private companies earning passive income. The 4% personal tax hike is tacked on to the 6 2/3rds refundable tax, as well as to the 26 2/3rds Part One Refundable tax. These two increases take full effect as at December 31, 2016 and are prorated in the usual fashion for year-ends throughout 2016. A third corollary causes the dividend refund rate to increase to 38 1/3rd, fully effective for dividends paid after December 31, 2015.

 

Small business tax rate

This Budget retreats from previous proposals, and limits the reduction in the federal active business rate to one .5 % reduction, phased in through 2016. Three more .5% reductions for 2017 onwards have been cancelled.

But bigger than that….access to the small business rate has been side-swiped significantly. “Association” rules long have been in place to prevent multiple access to the tax preference on small business profit under $500,000. The government has never been satisfied that this provision could achieve its desired result. After many, many years, they have added a new weapon, which applies to tax years commencing on or after Budget Day. The new tack skates around the limitations resulting from the “associated” definitions, and now can dig deeper into other structures of common ownership, which escape “association”.

If a CCPC qualifying for the small business deduction charges fees-for-services to another  private corporation with which, at any time in the year, the payee has a direct or indirect interest in the payer, then those fees are not eligible for the small business deduction. The “interest” in the payer is determined by either the CCPC itself, any one of its shareholders, or any person who does not deal at arm’s length with any of the payee shareholders. Unlike the association rules, there is no de minimus ownership interest percent that applies here,

If the payee has other arm’s length revenue sources, then this con-joining is avoided if those other sources are “substantially all” (notably 90%) of its revenues. If the payer has an amount eligible for the small business deduction (generally not likely!), it can assign the unused portion of it to the payee(s), to the limit of fees collected by them.

Like the Schedule 23 for associated groups, a new jointly-elected form will allow the payer corporation in a group to allocate its unused small business limit to the other payee corporation(s), This has to play off any prior allocation to associated entities of the payer on Schedule 23.

A new term “specified corporate income” (SCI) joins our tax lexicon!

In case you were wondering what this is all about….prior to this, the tax rate charged to the payee on the service fee revenue was significantly lower than the rate reduction enjoyed by the payer on the fee expense…in technical language… the difference between active and passive tax rates.

This also applies to, and strikes a blow at, CCPC payees providing services to a partnership payer. Taxpayers and tax advisors would be well advised to get on top of this new law.

 

TFSAs

The new government knocked back the recent TFSA contribution increase to $10,000, and returned it to $5,500 for 2016.

 

OAS

This Budget is rolling back the OAS eligibility to age 65, which previously was on a schedule to shift to age 67.

 

New home accessibility credit

Over the years, there have been various home renovation credits. This one starts January 1, 2016 and applies to individuals age 65 or older in the year or if you qualify for the disability credit. Eligible expenditures on the taxpayer’s principal residence must assist with access, functionability, mobility or safety. If the expenditure already qualifies as a medical expense, then the new provision effectively creates a double dip, making the tax recovery much greater. Lastly, if these qualifying expenditures do not cause a tax advantage to the taxpayer, they can pass to a related party who already claims the taxpayer as a dependent or the caregiver or infirm dependent credit. Note the taxpayer cannot legitimize such expenditures if they live in the home of the supporting related party.

The Province of BC also has had a Home Renovation Tax Credit for seniors and those with disabilities, resulting in a triple dip! The credit is 10%, to a maximum benefit of $1,000 pa.


Some matters from previous Budgets kick in through 2016 and 2017

Testamentary trust taxation

The present Budget advanced the initiative from the previous budget, which makes a radical and significant change to the taxation of testamentary trusts. Commencing with the 2016 tax year, existing testamentary trusts will no longer enjoy the favourable tax structure along the marginal tax scale, and instead be taxed like inter-vivos trusts at the top rate (now 45.8% in BC). New testamentary trusts will be able to enjoy the previous advantage for the first 36 months after death. If the trust continues after that, the top rate will apply.

The government’s love of calendar year-ends bears as well. Existing testamentary trusts will need to transition to a December 31 year-end in 2016. New testamentary trusts after 2015 will be allowed 36 months with their own fiscal year-end, but, after that, also must transition to a calendar year-end.

Other changes kick in from 2016, including the requirement for quarterly tax instalments and removal of the $40,000 MinTax exemption.

 

Charitable giving

The 2015 Budget expanded the range of donated properties which get a double-goodie—both the charitable break and exclusion from the related capital gain on disposition. Effective from January 1, 2017, this now includes the proceeds of shares of private corporations or real estate. This new inclusion also introduces a change in form of the transaction, although the substance will be the same. Rather than having to give the asset directly to the charity, it can be sold in the open market. Then a cash donation must be made within 30 days of the disposition: not much time to reflect on one’s philanthropic inclinations! This also requires prescient tax planning as the 30 days go by quickly!

There are other restrictive provisions to ensure this isn’t a colluded scam. The buyer of said property must be at arm’s length with both the donor and the donee, and the donor cannot reacquire the property within five years of the disposition. The law goes further to allow a partial prorata capital gains tax exemption where only a portion of the proceeds were donated.

This is a very broad and generous piece of tax law that could impact many taxpayers.