Capital gains exemption
Finance Ministers seem to have an affection for this piece of law…it regularly hits a Budget. Recently we absorbed the increase from $750,000 to $800,000 to an annual statutory inflation increment (thus now $813,600). Now it increases to $1M, which will trump the future inflation adjustment for several years. However, the new limit is effective only from Budget Day, and only for qualified farming and fishing property. Thus, the law in this area now splits in two, as the third category, qualified small business, did not receive the bump.
Capital cost allowance
Yet another favourite, and one that seems unnecessary. The depreciation of manufacturing and processing equipment has had preferential accelerated write-offs for decades, including the present day in Class 29. Despite that, a new Class 53 will provide 50% declining balance for additions from January 1, 2016 to December 31, 2025.
Small business tax rate
The small business tax rate has been locked at 13.5% for several years. That has come to an end. The Federal Budget announced a 4 year series of .5% reductions each. Thus, the federal rate component will reduce from 11% now to 9%; therefore, fully effective December 31, 2019. The different fiscal year-ends of companies cause pro rations of each .5% drop.
At 2.5% already, the BC provincial corporate tax rate doesn’t have much room to decrease as well. It is not clear to us that this drop was much needed nor called-for, but entrepreneurs no doubt will take it.
This is another Finance Minister favourite, which has seen many tweaks over the years. The policy precedent was established in the past to give a super tax-break to donations, if “done right”, which involved donating in kind, not in cash, of securities that had significant unrealized capital appreciation. The goodie was an exemption from the capital gains tax, in addition to the regular, rich donation tax credit.
This Budget raises the bar. The donated property will now include the proceeds of shares of private corporations or real estate, effective from January 1, 2017. A cash donation must be made within 30 days of the disposition, so effectively this requires prescient tax planning. There are other restrictive provisions to ensure this wasn’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.
Small business dividends
It is noteworthy that “integration”, the connectivity between corporate tax rates and the taxation schema for after-tax dividends paid to business owners, long was ignored in tax policy. Now, it is as automatic as the leg’s response to the hammer hit on the knee-cap! The Budget announces a four year series of changes to the gross up and credit system for ineligible dividends, which is purely corollary to the four year drop in small business tax rates.
The contribution limit for TFSAs has been increased by $4,500 to $10,000 per annum, effective from 2015. This replaces the previous scheme which saw the limit increase by $500 periodically. The immediate applicability causes some grief for our financial institutions, who need to do some computer programming to allow for the higher limits. Investment management firms will need to make a second pass through their clients TFSAs to top up the extra $4,500 for 2015 contributions.
Existing financial planning forecasts will be thrown out of whack now that TFSAs accumulate at a different rate. The periodic $500 contribution increment ultimately would have caught up to, and exceeded, the now locked-in $10,000 amount. The new limit may have other financial planning implications in that Canadians may see a different trade-off between TFSAs and RRSPs.
Once again, the government has re-visited the mandatory annual payout schedule for RRIFs. This change did result from public pressure and modern realities concerning average life expectancy and portfolio returns. The new schedule is retro-actively applicable from January 1, 2015. Previously, there were two withdrawal schedules for age 71 onwards, depending upon the year in which the RRIF was created. They both merge into one, now, and the annual withdrawal rate is substantially lower, particularly for RRIFs created after 1992 (eg the age 72 new rate is 28% lower). The reduction is substantially less for RRIFs created before 1993 (eg the age 72 new rate is only 3% lower), though the advantage increases over time (eg 22% lower at age 80). Click here to see the complete minimum amount withdrawal schedule.
All financial institutions will need to recalculate and report the revised 2015 minimum withdrawal to their clients. This Budget item pulled an old rabbit out of the hat again – if the taxpayer already withdrew the higher 2015 payout amount, they can pay back the difference by February 29, 2016 and, thus, not pay tax in 2015 on that difference.
Foreign asset reporting
We see the fourth tweak to this reporting burden in the last two years, which will be effective some time in 2015 when the government creates yet another new form. Presently, every taxpayer with reportable foreign assets having an aggregate cost base of at least $100,000 has to report on the form recently amended this Spring. Reporting obligations now will bifurcate. The existing form now will be required only for those with such assets over a new, higher base-$250,000. Those between the old $100,000 and the new $250,000 will be required to complete the new (presumably more facile) form. The base line of burden that taxpayers faced in 2014 was mitigated and rescued by the financial services industry, which no doubt absorbed the financial cost of supplying the information for the T1135.
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 to 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. 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.