The much anticipated 2016 Federal budget was presented today by Finance Minister Bill Morneau. For most of our clients, the tax changes were insignificant, with the major change being the new personal high tax bracket introduced in January. Below are some tax highlights.
- Restricting Small Business Rate Multiplication – The budget introduces measures that eliminate the small business deduction for corporations that provide services to a partnership during the year, where at any time, the corporation or shareholder of the corporation is a member of the partnership. This impacts professional service firms with complex structures, however it does not impact the structures used by most of our clients.
- Increased Personal Service Business Rate – Effective for 2016 and later years, the federal tax rate on such corporations is increased 5% from 28% to 33% making the rates on such a business much worse off than earning the income as a self employed individual. This increases the downside for individuals who might be considered employees rather than independent contractors.
- Life Insurance Transfers – Effective March 22, 2016, measures were passed to ensure that life insurance
policies transferred into a corporation do not result in amounts that can be extracted by the shareholder tax
free. This change was expected for several years.
- Eligible Capital Property replaced – A new amortization (CCA) class with 5% amortization rate is being introduced eliminating eligible capital pools with the transition effective January 1, 2017. Current balances will transfer to the new CCA class. Future sales of goodwill and other former eligible capital property will result in recapture and capital gains. This effects clients who are selling their business and may make a share sale more attractive than an asset sale.
- Canada Child Benefit – Effective July 2016, this replaces the Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB). The benefit is as much as $6,400 for children under the age of 6 and $5,400 per child aged 6 through 17. The benefit is tax free however the amount received is income tested.
- Child related credits removed – The arts and fitness tax credits are being halved in 2016 and completely eliminated in 2017.
- Income Splitting – The budget introduced measures to remove income splitting through the family tax cut which previously saved families up to $2,000 per year. This is eliminated effective for 2016 and future years.
- Eliminating the Education and Textbook tax credits – Effective January 1, 2017, there will be no credits for education and textbooks, however a credit will remain for the tuition itself.
- OAS – The changes which were put in place to move the Old Age Security application age to 67 are eliminated, accordingly OAS application remains at age 65.
- Increased audit and collection activity – The budget earmarks money and concerted effort in the area of increasing CRA audit activity and CRA collections.
- Making Post-Secondary Education More Affordable – Through increases to Canada Student Grants (effective for the 2016-2017 year), increasing repayment income thresholds and other similar measures.
- Labour Sponsored Venture Capital Corporation (LSVCC) Tax Credit – The budget restores to 15% such credits effective for the 2016 tax year for provincially registered LSVCCs.