For information on changes related to individual taxpayers, read our blog – 2018 Canada Federal Budget Commentary - Part 1: INDIVIDUALS and FAMILIES.
Looking at the Budgets proposed changes, in terms of businesses, the following will discuss several changes that could affect your company’s tax planning strategy on a go forward basis. While there are many new proposals, some of the proposed measures, such as alterations to the management of passive investment income and income sprinkling, may be familiar to you, as they were originally introduced in 2017.
New Measures Have Been Proposed to Discourage Unfair Tax Strategizing Resulting from Passive Investment Income Earned by Private Corporations
Previously introduced in July 2017, the proposed changes to passive investments show little resemblance to those originally introduced.
The 2018 Federal Budget puts forth two new provisions that aim to reduce perceived tax advantages gained by private corporations who earn passive income.
Income Sprinkling Measures from December 2017 Stay the Same
Discussed in a previous blog, the Federal Government, proposed late last year, to extend the Tax on Split Income (TOSI), also known as the Kiddie Tax.
Under current legislation, Canadian minors are taxed at the highest rate on certain types of income, such as dividends and shareholder benefits derived from private company shares as well as income allocations from partnerships or trusts received from businesses of related parties.
As of January 2018, the rules for TOSI have been expanded to include any Canadian at any age. In addition, further types of income are being included, with some exceptions further discussed in our previous blog.
Tax Support for Clean Energy is Being Expanded
In 2005, Capital Cost Allowance (CCA) Class 43.2 was introduced to provide accelerated rates for clean energy generation and conservation equipment acquired prior to 2020. It is proposed that the eligibility for this category of equipment be expanded and that the acquisition date be changed to 2025.
Rules Governing Dividend Rental Agreements and Security Lending Agreements are Being Clarified
In the past, Canadian Businesses would gain unfair tax advantages when applying dividend deductions to Dividend Rental Agreements. As a result, the Government of Canada introduced rules that would deny the deduction of dividends where one party received a dividend and losses or opportunities were passed on to another party.
Unfortunately, it is believed that certain taxpayers are still taking advantage of questionable arrangements by circumventing current legislation.
In response, the government proposes to broaden the rules to include inter-corporate dividends where the risk or gains lie with someone other than the taxpayer.
In addition, clarification will be provided with regards to situations when a dividend compensation payment can be deducted.
Tax Losses to be Reduced on the Repurchase of Shares
Under the 2018 Budget, the Dividend Stop-Loss rule will be amended to reduce tax loss on shares held by a taxpayer as mark-to-market property where they are repurchased and the taxpayer receives inter-corporate tax deductible dividends.
This rule is being put into place to stop companies from realizing beneficial losses that offer unfair tax advantages.
Health and Welfare Trusts Will Be Transitioned to Trusts that Are Covered In the ITA
Currently, there is no tax legislation that deals with the taxation of Health and Welfare Trusts, which are trusts established by businesses to provide health and welfare benefits to employees. As a result, the government is looking to discontinue current administrative positions and encourage the transition of these ungoverned trusts to health and life trusts, which are covered in the Income Tax Act (ITA).
Unused Losses of a Second-Tier Partnership Can Not Be Carried-Forward
As of February 2018, it is proposed that losses allocated by a second-tier partnership will be limited to the at-risk amount of the top-tier partnership. Any amount in excess of the at-risk amount will not be deductible in that year, nor can it be carried forward.
Instead, unused losses will be added to the adjusted cost base (ACB) of the second-tier partnership’s partnership interest.
For more information on proposed changes for businesses and how they could affect you, contact us today!