SAUNA AND HYDROTHERAPY POOL: Medical Expense Tax Credit

 

In a December 4, 2018 Technical Interpretation, CRA was asked whether the costs of installing a steam shower (sauna) and hydrotherapy pool could be eligible for the medical expense tax credit (METC). The use of these devices was recommended as treatment to maintain strength and mobility.

CRA noted that, for renovations to be eligible, they must:

1. enable the patient to gain access to the dwelling or be mobile and functional within it;
2. not typically be expected to increase the value of the dwelling; and
3. not normally be undertaken by individuals with normal physical development or who do not have a severe and prolonged mobility impairment.

While the expenses contemplated may meet criteria (a), CRA opined they would likely fail criteria (b) and (c) and, therefore, not be eligible for the METC. However, eligibility remains a question of fact, with the onus on the taxpayer to demonstrate that all requirements were met.

Also, CRA noted that a renovation cost incurred for the main purpose of enabling a qualifying individual to gain access to the dwelling or be mobile and functional within it (the same as criteria (a) for the METC) could be eligible for the home accessibility tax credit (HATC). The HATC is a non-refundable credit that provides tax relief on up to $10,000 annually of renovations to a home to enhance mobility or reduce risk of harm for a qualifying individual (those 65 years of age or older at the end of the taxation year or eligible for the disability tax credit). The HATC requirements do not exclude costs failing criteria (b) or (c) above. 

 

ACTION ITEM: There are several renovations that can be eligible for one or both of these credits. Receipts, invoices and/or other supporting documents should clearly identify the health benefits and purpose.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

FIRST TIME HOME BUYER INCENTIVE: New Possibility

 

Budget 2019 proposed the new Canada Mortgage and Housing Corporation (CMHC) first-time home buyer incentive, which is a shared equity mortgage that would give eligible first-time home buyers the ability to lower their borrowing costs by sharing the cost of buying a home with CMHC. Funding of 5% of the home purchase price would be available, enhanced to 10% if the home is newly constructed. To be eligible, the following requirements must be met:

• the individual must be a first-time home buyer and the household income must be under $120,000 per year;
• the insured mortgage combined with the incentive cannot exceed four times the annual household income; and
• the minimum down payment for an insured mortgage must be made.

 Regular repayments would not be required. Details of the ultimate repayment were not provided, although repayment when the home is sold was noted as an example in the Government documents. The Budget papers were also unclear on whether CMHC would share in appreciation, or any decline, in the house value, which is typically a feature of shared equity mortgages.

Many commentators are reporting that this would only assist on the purchase of homes valued at up to $480,000 (4 x $120,000). However, based on the details released thus far, it appears that it is not the house price, but rather the total mortgage that is limited to $480,000. For example, where a $25,000 down payment is paid (assuming 5% down), a house valued at approximately $500,000 could be purchased (assuming family income was just under $120,000, and the mortgage totalled $475,000).

 It is uncertain whether there will be a cap on the maximum deposit or house value. More details will be released later this year, with the program expected to be operational by September 2019.

The Budget also announced financing to work with the broader financial community to assist third party providers of shared equity mortgages in scaling up their business and to encourage new players to enter this market.

 

ACTION ITEM: Watch out for details of this new incentive to be released in the fall.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

HOME BUYER’S PLAN (HBP): Enhanced Possibilities

 

The HBP allows first-time home buyers (special rules apply for those with a disability) to withdraw amounts from their RRSP to buy or build a home. Budget 2019 proposed to increase the HBP withdrawal limit to $35,000 from $25,000. As the HBP is avilable to each individual, a couple could access up to $70,000 to assist in a first-time home purchase. This increase is effective for withdrawals made after March 19, 2019.

Taxpayers are considered first-time home buyers if, in essence, they did not occupy a home that they or their current spouse or common-law partner owned in the last four years. Specifically, they could not have occupied the home in the period beginning on January 1 of the fourth year before the year the funds are withdrawn, and ending 31 days before the funds are withdrawn.

Funds must be repaid into the RRSP over a 15-year period. If no repayment is made for a year, the individual will have an income inclusion equivalent to the required repayment. However, this could still be advantageous as the tax on the withdrawal is at least deferred to later years.

Budget 2019 also proposed an expansion to the rules such that individuals who experience a breakdown of a marriage or common-law relationship may be eligible even if they do not meet the first-time home buyer requirement. This will allow access to the HBP for either a new home or acquiring the former spouse’s interest in the couple’s existing house. However, where an individual’s principal place of residence is a home owned and occupied by a new spouse or common-law partner, the individual will not receive access to the HBP.

 

ACTION ITEM: Consider whether an RRSP contribution should be made now in order to benefit from the tax deduction, while making equity available for a later home purchase. Funds withdrawn under the plan must be in the RRSP at least 90 days prior to the withdrawal.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

OLD AGE SECURITY (OAS) DEFERRAL: Opting Out Retroactively

 

As of July 1, 2013, where receipt of OAS is delayed, the monthly pension is increased by a factor of 0.6% for each month deferred, to a maximum of 36% (60 months, commencing receipt at age 70). This option may be especially desirable for those whose OAS would be entirely clawed back due to high income. For 2019, every $1 of income in excess of $77,580 results in a $0.15 clawback. While it is best to do the analysis and make the decision appropriately from the outset, the following considers what happened when those opportunities were missed.

In a January 31, 2019 Federal Court case, at issue was whether an individual could apply for his OAS pension to be cancelled slightly more than one year after it had begun in order to benefit from the voluntary deferral option.

The individual applied for OAS on March 1, 2013. His first payment was received in February 2014, the month after he turned 65.

In April of 2015 he realized that his entire OAS pension for the previous year was lost due to high earnings, and also that recent changes allowed deferral of receipt in exchange for higher payments. As such, a request to cancel it was submitted.

An individual has the ability to cancel a pension within six months of the commencement (i.e. the first payment). There is no specific provision that allows for an extension to this time limit.

The taxpayer cited various reasons why the application was not made in time, primarily in connection with his argument that the Government did not provide timely notification of this new possibility. In particular, he noted that he did not receive the letter sent out to those eligible to begin receipt in 2013 which explained the changes. Also, no notification of the new option was included in the application form nor in the letter he received advising him that his application was accepted.

  

ACTION ITEM: Determine whether it is best to defer receiving OAS prior to applying. If an error has been made, consider whether it was due to error in government advice or administration.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

VIDEO LEGACY: What Message Am I Leaving?

When conducting our estate plans, we are often focused on the distribution of assets (such as homes, bank accounts, investments, and interest in private corporations), providing for dependents, and ensuring overall family harmony. However, softer issues may be overlooked. For example, some suggest that it may be useful to leave a video legacy for surviving family members to view after a loved one passes.

One app, RecordMeNow, allows users to make a video legacy through targeted question-prompting and video recording. Users can create a video library organized into different subject areas for the surviving loved ones. As an individual’s death can rarely be predicted with certainty, the founder advises recording a legacy due to the risk of an untimely death.

The service was originally developed such that children who lost parents at a young age would have something to connect with their deceased parent(s); however, it can be used by individuals of all ages.

For further information see the BBC article (If you die early, how will your children remember you?, Shaw, Douglas), or go to www.recordmenow.org.

 

ACTION ITEM: What would happen if you were to pass away unexpectedly? Is everything in place such that in the days and years following, the desired results would be achieved? Consider revisiting your estate plan, will, and any other communications you would like to leave for your family.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

• Guidance from the Government of Canada on the new CPP regime, with a specific focus on the age to start your CPP retirement pension is now available. The website provides commentary on changes commencing in 2019, estimating future receipts, and determining past contributions. It also contains an explanatory video and links to the Canadian Retirement Income Calculator. For more information, see https://www.canada.ca/en/employment-social-development/campaigns/cpp-choice.html.

 

• Interest rates on Canada Student Loans and Canada Apprentice Loans will be lowered starting in 2019-20. The floating rate will be reduced to prime (from prime plus 2.5%), and the fixed rate will be reduced to prime plus 2% (from prime plus 5%). Also, the Canada Student Financial Assistance Act will be amended so that student loans will not accumulate any interest during the six-month grace period after a student leaves school, during which repayments are not required.

 

• Resolving objections with CRA can take a long time! For example, formal income tax objections resolved in April that were considered “medium complexity” (which includes many that we deal with) were completed by CRA in an average of 224 days from the date the objection was submitted.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

GST/HST NEW HOUSING REBATE: Meeting the Conditions

In a December 18, 2018 Tax Court of Canada case, the Court considered whether the new housing rebate was available where the taxpayer sold a newly developed property shortly after taking possession. The taxpayer entered into an agreement to purchase the land in 2012, took possession of it two years later when the building was completed, and then sold it three months later.

To qualify for the rebate, the purchaser, or a person related to the purchaser, must, at the time they become liable for the purchase, intend to use the property as their primary place of residence. Also, the taxpayer or a related person must either be the first individual to occupy it, or sell the property as an exempt supply before it was occupied by any person (normally meaning that it is simply sold before anyone moves in).

 Condition 1: Initial Intention

The Court noted the following as a non-exhaustive list of factors to evaluate when considering original intention:

1. demarcation of primary place of residence by change of address;
2. the relocation of sufficient personal effects to the rebate property;
3. if the buyer never moved in, was there cogent evidence that the original plan to live in the property was frustrated?;
4. permanent occupant insurance versus seasonal or rental coverage;
5. disposition of previous primary residence; and
6. if dual occupancy continues, then the rebate property must be more frequently occupied, more convenient to third party locations such as work, have more convenient amenities, and be more suitable to the needs of the taxpayer.

The taxpayer argued that there was a frustration of original intent as listed in c) above. In particular, the taxpayer noted that the purchase occurred as a result of a divorce. The ex-spouse did not want his children to live in the same house as the taxpayer’s new partner. Therefore, a new residence was required. However, this requirement was later waived, which frustrated the taxpayer’s original intent.

The Court found conflicting testimony and insufficient proof of this separation requirement (and subsequent removal of the condition) and, therefore, was not able to find that the original intent was to live in the location.

Condition 2: Occupy or Eligible Sale (exempt supply)

Although it was argued that the taxpayer originally occupied the home, there were no receipts for moving expenses, the property sale listing described it as “unoccupied and never used”, and it was listed for short-term rental on Airbnb two months after possession. Further, the Court noted that the taxpayer was living at the new spouse’s residence at the time of acquisition and that there was insufficient evidence that a move had been made. As such, the Court determined that it was not first occupied by the taxpayer.

The Court also found that the property was not sold as an exempt supply before it was occupied by any person but did not give any specific reasons. While the Court did not specifically list it as a reason for not meeting the exempt sale possibility in condition 2, it did mention that there was at least one rental of the property on Airbnb prior to sale. It is uncertain whether this offended the exempt supply possibility.

 

ACTION ITEM: In order to make the claim, ensure that both conditions are, or will be, met. If one will not be met, consider whether the GST/HST new residential rental rebate will be available instead.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

 

A. Personal Income Tax

Home Buyers’ Plan (HBP)

The HBP allows first-time home buyers to withdraw RRSP funds without tax to purchase or build a home, repaying the funds over a 15-year period. 

Budget 2019 proposes to increase the HBP withdrawal limit to $35,000 from $25,000. As a result, a couple will potentially be able to withdraw $70,000 from their RRSPs to purchase a first home. This increase in the HBP withdrawal limit will apply to the 2019 and subsequent calendar years in respect of withdrawals made after Budget Day.

Budget 2019 also proposes, generally, that an individual will be considered to meet the first-time home buyer requirement, provided that the individual lives separate and apart from their spouse or common-law partner for a period of at least 90 days as a result of a breakdown in their marriage or common-law partnership.  However, in the case where an individual’s principal place of residence is a home owned and occupied by a new spouse or common-law partner, the individual will not be able to make an HBP withdrawal under these rules.

 

Change in Use Rules for Multi-Unit Residential Properties

A taxpayer is deemed to have disposed of, and reacquired, a property when the taxpayer converts the property from an income-producing use (e.g., a rental property) to a personal use (e.g., a residential property) or vice versa. Where the use of an entire property is changed to an income-producing use, or an income-producing property becomes a principal residence, the taxpayer may elect that this deemed disposition not apply. As a consequence, the election can provide a deferral of the realization of any accrued capital gain on the property until it is realized on a future disposition.

The deemed disposition also occurs when the use of part of a property is changed. For example, this can occur where a taxpayer owns a multi-unit residential property, such as a duplex, and either starts renting or moves into one of the units. However, under the current rules, a taxpayer cannot elect out of the deemed disposition that arises on a change in use of part of a property. 

Budget 2019 proposes to allow a taxpayer to elect that the deemed disposition that normally arises on a change in use of part of a property not apply.  This measure will apply to changes in use of property that occur on or after Budget Day.

 

Canada Training Credit

Budget 2019 proposes the new Canada Training Credit, a refundable tax credit aimed at providing financial support to help cover up to half of eligible tuition and fees associated with training. Eligible individuals will accumulate $250 each year in a notional account which can be accessed for this purpose.  A taxpayer’s notional account balance will be communicated to them each year in their Notice of Assessment and will be available through CRA’s My Account portal.

The amount of a credit that can be claimed for a taxation year will be equal to the lesser of half of the eligible tuition and fees paid in respect of the taxation year and the individual’s notional account balance for the taxation year (based on amounts used or accumulated in respect of previous years).  Tuition and other fees eligible for the Canada Training Credit will generally be the same as under the existing rules for the Tuition Tax Credit.  The portion of the tuition fees refunded through the Canada Training Credit will not qualify as eligible expenses under the Tuition Tax Credit.

In order to accumulate the amount of $250 in respect of a year, an individual must:

• file a tax return for the year;
• be at least 25 years old and less than 65 years old at the end of the year;
• be resident in Canada throughout the year;
• have earnings (primarily income from employment or self-employment) of $10,000 or more in the year; and
• have net income that does not exceed the third tax bracket ($147,667 in 2019).

An individual must be resident in Canada throughout a year to claim   the credit for the year. Individuals will be able to accumulate up to a maximum amount of $5,000 over a lifetime. Any unused balance will expire at the end of the year in which an individual turns 65.

This measure will apply to the 2019 and subsequent taxation years. The credit will first be available for expenses in the 2020 taxation year.

Employment Insurance (EI) Training Support Benefit

In addition, a new benefit, expected to be launched in late 2020 through the EI program, would provide up to four weeks of income support, every four years. This income support would be paid at 55 percent of a person’s average weekly earnings while on training and without their regular paycheque.

 

Permitting Additional Types of Annuities Under Registered Plans

Budget 2019 proposes to permit two new types of annuities under the tax rules for certain registered plans:

• advanced life deferred annuities (ALDA) will be permitted under a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), deferred profit sharing plan (DPSP), pooled registered pension plan (PRPP) and defined contribution registered pension plan (RPP); and
• variable payment life annuities (VPLA) will be permitted under a PRPP and defined contribution RPP.

The measures will apply to the 2020 and subsequent taxation years.

Advanced Life Deferred Annuities (ALDA)

An ALDA will be a life annuity the commencement of which may be deferred until the end of the year in which the annuitant attains 85 years of age.  The value of an ALDA will not be included for the purpose of calculating the minimum amount required to be withdrawn in a year from a RRIF, a PRPP member’s account or a defined contribution RPP member’s account, after the year in which the ALDA is purchased.

An individual will be subject to a lifetime ALDA limit equal to 25 percent of the sum of:

• the value of all property (other than most annuities, including ALDAs) held in the qualifying plan as at the end of the previous year; and
• any amounts from the qualifying plan used to purchase ALDAs in previous years.

An individual will also be subject to a comprehensive lifetime ALDA dollar limit of $150,000 from all qualifying plans (indexed to inflation, rounded to the nearest $10,000).

 

Variable Payment Life Annuities (VPLA)

A VPLA will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants.

VPLAs will be required to comply with certain conditions which include that they:

• commence payments by the later of the end of the year in which the member attains 71 years of age and the end of the calendar year in which the VPLA is acquired;
• provide annual or more frequent periodic payments, after commencement, for the life of the annuitant, or for the joint lives of the annuitant and the annuitant’s spouse or common-law partner;
• provide periodic payments which are equal, except to the extent they are

o    adjusted annually to reflect in whole or in part changes to the Consumer Price Index or a fixed rate specified in the annuity contract not to exceed two percent per year,

o    reduced on the death of the annuitant or the annuitant’s spouse or common-law partner, or

o    adjusted to reflect the investment performance of the annuities fund and the mortality experience of the pool of VPLA annuitants.

 

Employee Stock Options

Budget 2019 announces that the Government plans to apply a $200,000 annual cap on employee stock option grants (based on the fair market value of the underlying shares) that may receive tax-preferred treatment for employees of large, long-established, mature firms. For start-ups and rapidly growing Canadian businesses, employee stock option benefits would remain uncapped.

Further details of this measure will be released before the summer of 2019.  Any changes would apply on a go-forward basis only and would not apply to employee stock options granted prior to the announcement of legislative proposals to implement any new regime.

Medical Expense Tax Credit – Cannabis

Budget 2019 proposes to reflect the current regulations for accessing cannabis for medical purposes. That is, a patient may claim a medical tax credit if they hold a medical document to support their use of cannabis for medical purposes.  The claim may be made in respect of cannabis, cannabis oil, cannabis plant seeds or cannabis products purchased for medical purposes from a holder of a licence for sale for medical purposes (see https://www.canada.ca/en/

health-canada/services/drugs-medication/cannabis/industry-licensees-applicants/licensed-cultivators-processors-sellers.

html for a listing of holders of such licenses). This change comes as a result of access to cannabis being regulated under the Cannabis Regulations under the Cannabis Act, as compared to the prior regulation under the Access to Cannabis for Medical Purposes Regulation.

This measure will apply to expenses incurred on or after October 17, 2018, the same date recreational cannabis was legalized.

 

Medical Expenses Tax Credit – Fertility

Budget 2019 also committed to reviewing the tax treatment of fertility-related medical expenses under the medical expense tax credit for fairness and consistency, and in light of work being undertaken by Health Canada in relation to the Assisted Human Reproduction Act and supporting regulations.

 

Registered Disability Savings Plan (RDSP) – Cessation of Eligibility for the Disability Tax Credit (DTC)

Budget 2019 proposes to remove the time limitation on the period that an RDSP may remain open after a beneficiary becomes ineligible for the DTC and to eliminate the requirement for medical certification that the beneficiary is likely to become eligible for the DTC in the future in order for the plan to remain open.  Previously, the RDSP was generally required to be closed by the end of the year following the first full year throughout which the beneficiary was not eligible for the DTC. There are also some modifications to the rules in respect of withdrawals taken, and required repayments of Canada Disability Savings Grants and Canada Disability Savings Bonds.

Budget 2019 also proposes to exempt RDSPs from seizure in bankruptcy, with the exception of contributions made in the 12 months before the filing.

 

Tax Credit for Eligible Digital News Subscription

Budget 2019 proposes a temporary personal tax credit for eligible digital news subscriptions, in conjunction with other proposals in support of Canadian journalism.  Further details are provided in the discussion of these proposals in Section B. Business Income Tax section of this newsletter.

 

Tax Measures for Kinship Care Providers

A number of provinces and territories offer kinship and close-relationship care programs (referred to as kinship care programs) as alternatives to foster care (or other formal care by the state) for children in need of protection who require out-of-home care on a temporary basis.  As part of their kinship care programs, some of these jurisdictions provide financial assistance to care providers to help defray the costs of caring for the child.

Budget 2019 proposes to clarify that an individual may be considered to be the parent of a child in their care for the purpose of the Canada Workers Benefit, regardless of whether they receive financial assistance from a government under a kinship care program.

Budget 2019 also proposes to clarify that financial assistance payments received by care providers under a kinship care program are neither taxable, nor included in income for the purposes of determining entitlement to income-tested benefits and credits.

These measures will apply for the 2009 and subsequent taxation years.

 

Tax Liability when TFSA is Carrying on a Business

Budget 2019 proposes that the joint and several liability for tax owing on income from carrying on a business in a TFSA be extended to the TFSA holder. The present joint and several liability of a trustee of a TFSA at any time in respect of business income earned by a TFSA will be limited to the property held in the TFSA at that time plus the amount of all distributions of property from the TFSA on or after the date that the notice of assessment is sent.

This measure will apply to the 2019 and subsequent taxation years.

 

Transfers to Individual Pension Plans (IPP)

Budget 2019 proposes to prohibit IPPs from providing retirement benefits in respect of past years of employment that were pensionable service under a defined benefit plan of an employer other than the IPP’s participating employer (or its predecessor employer). Any assets transferred from a former employer’s defined benefit plan to an IPP that relate to benefits provided in respect of prohibited service will be considered to be a nonqualifying transfer that is required to be included in the income of the individual for income tax purposes. 

This measure addresses concerns that planning was done to establish an IPP by an individual who terminated employment with their former employer.  The individual would then transfer the full commuted value of their pension entitlement from the former employer’s defined benefit plan to the new IPP, effectively avoiding restrictions on the amount of assets that could be transferred to the individual’s RRSP on a tax-deferred basis.

This measure applies to pensionable service credited under an IPP on or after Budget Day.

 

Contributions to a Specified Multi-Employer Plan (SMEP) for Older Members

Budget 2019 proposes to prohibit contributions to a SMEP (a specific type of union-sponsored, defined benefit pension plan) in respect of a member after the end of the year the member attains 71 years of age and to a defined benefit provision of a SMEP if the member is receiving a pension from the plan (except under a qualifying phased retirement program).  This measure will apply in respect of SMEP contributions made pursuant to collective bargaining agreements entered into after 2019, in relation to contributions made after the date of the agreement.

 

Donations of Cultural Property

Budget 2019 proposes to amend the Income Tax Act and the Cultural Property Export and Import Act to remove the requirement that property be of “national importance” in order to qualify for the enhanced tax incentives for donations of cultural property. No changes are proposed that would affect the export of cultural property.  This proposal addresses concerns that certain donations of important works of art that are of outstanding significance but of foreign origin may not qualify for the enhanced tax incentives.

This measure will apply in respect of donations made on or after Budget Day.

 

B. Business Income Tax

Business Investment in Zero-Emission Vehicles

Budget 2019 proposes to provide a temporary enhanced first-year CCA rate of 100 percent in respect of eligible zero-emission vehicles. Two new CCA classes will be created.  Class 54 will include zero-emission vehicles that would otherwise be included in Class 10 or 10.1, which presently include most motor vehicles.  Class 55 will include zero-emission vehicles that would otherwise be included in Class 16, which presently includes heavy freight tractor units and taxicabs. In the case of Class 54, there will be a limit of $55,000 (plus sales taxes) on the amount of CCA deductible in respect of each zero-emission passenger vehicle. This new $55,000 limit will be reviewed annually.

Only new vehicles will qualify, and they must be fully electric, a plug-in hybrid with a battery capacity of at least 15 kWh or fully powered by hydrogen.  Vehicles in respect of which assistance is paid under the new federal purchase incentive (see Section E. Other Tax and Business Measures) will be ineligible.

To parallel the income tax proposals, Budget 2019 proposes to increase the amount of GST/HST that businesses can recover in respect of zero-emission passenger vehicles.

This measure will apply to eligible assets acquired on or after Budget Day and that become available for use before 2028.  The 100% rate will apply from March 19, 2019 to the end of 2023.  For acquisitions in calendar 2024 and 2025, the first-year enhanced allowance will decline to 75%, with a further decline to 55% for 2026 and 2027. 

Any undepreciated capital cost remaining after the year of acquisition will be eligible for CCA of 30% (Class 54, the same as Class 10 and 10.1) or 40% (Class 55, the same as Class 16).  CCA must be pro rated for short taxation years.  When a Class 55 vehicle is disposed of, the proceeds which reduce the undepreciated capital cost pool will be pro rated based on the total cost compared to the $55,000 depreciable limit.  An election to forego these special rules, and place these vehicles in Class 10, 10.1 or 16, will be available.

 

Small Business Deduction (SBD) – Farming and Fishing

Three years ago, the March 22, 2016 Federal Budget introduced the Specified Corporate Income rules, which broadly restricted access to the SBD in respect of income earned from private corporations in which the CCPC, any of its shareholders, or non-arm’s length persons, holds a direct or indirect interest. On May 5, 2017, the Specified Cooperative Income rules were introduced to reduce the impact of these restrictions on farming and fishing businesses, however the criteria for this exception resulted in many farming and fishing businesses facing restricted access to the SBD.

Budget 2019 proposes to exclude income of a CCPC from sales of the farming products or fishing catches of its farming or fishing business to any arm’s length purchaser corporation from these restrictions – all such income will remain eligible for the SBD.  However, consistent with the existing rules, amounts allocated to a CCPC as patronage payments from a purchaser corporation will not qualify for this exclusion.

This measure will apply to taxation years that begin after March 21, 2016, so it is retroactive to the commencement of the Specified Corporate Income rules.

 

Support for Canadian Journalism

Budget 2019 proposes three new tax measures to support Canadian journalism:

• allowing journalism organizations to register as qualified donees;
• introducing a refundable labour tax credit for qualifying journalism organizations; and
• introducing a non-refundable tax credit for subscriptions to Canadian digital news.

 

An independent panel will be established to recommend eligibility criteria for the purposes of these measures. Once the panel has made its recommendations, eligibility of organizations will be evaluated and a recognition process will be put in place.

an organization be a Qualified Canadian Journalism Organization (QCJO). In order to be a QCJO, an organization will be required to be recognized as meeting criteria developed by the independent panel. This recognition will be made by an administrative body that will be established for this purpose.

However, the budget documents set out a number of requirements which appear to already be decided. QCJOs will be required to be resident in Canada. Its chairperson (or other presiding officer) and at least 75 percent of its Directors must be Canadian citizens. In general, in order for a partnership or trust to qualify, such corporations, along with Canadian citizens, must own at least 75 percent of the interests in it. A QCJO must also be primarily engaged in the production of original news content primarily focused on matters of general interest and reports of current events, not focused on a particular topic such as industry-specific news, sports or entertainment. 

Qualified donee status (the ability to issue receipts for donations eligible for credit similar to charitable donations) will require registration with CRA.  Various criteria will apply, generally aimed at ensuring these QCJOs are not organized or operated for profit, and are not used to promote the views or objectives of specific persons or groups (including requirements for a board of arm’s length persons, restrictions on control, and limits on revenues from any one source, generally to 20% of annual revenues).  Annual returns similar to other charitable organizations will be required, with public disclosure.  This measure will apply as of January 1, 2020.

The refundable labour tax credit will be 25% of salary or wages paid to eligible newsroom employees of qualifying QCJOs, to a maximum of $13,750 per employee (on a $55,000 annual salary).   Organizations carrying on a broadcasting undertaking (as defined in the Broadcasting Act) will not qualify, nor will QCJOs receiving funding from the Aid to Publishers component of the Canadian Periodical Fund in the taxation year.  Preliminary eligibility criteria for employees are included in the Budget, subject to amendment pending the work completed by the independent panel.  Salaries and wages earned from January 1, 2019 will be eligible for the credit.

Finally, Budget 2019 proposes a temporary, non-refundable 15 percent tax credit on amounts paid by individuals for eligible digital news subscriptions. Costs paid towards eligible digital subscriptions will qualify, to a maximum tax credit of $75 annually ($500 of subscription costs). In the case of combined digital and newsprint subscriptions, individuals will be limited to claiming the cost of a stand-alone digital subscription.  Eligible digital subscriptions are those that entitle a taxpayer to access content provided in a digital form by a QCJO that is primarily engaged in the production of written content. A subscription with a QCJO carrying on a broadcasting undertaking (as defined in the Broadcasting Act) will not qualify for this credit.  This credit will be available in respect of eligible amounts paid after 2019 and before 2025.

 

Scientific Research and Experimental Development (SR&ED) Program

Under the SR&ED tax incentive program, qualifying expenditures are eligible for an investment tax credit. The rate and level of refundability of the credit vary depending on the characteristics of the firm, including its legal status and its size.  For CCPCs, a fully refundable enhanced tax credit at a rate of 35 percent is available on up to $3 million of qualifying SR&ED expenditures annually. This expenditure limit for a taxation year is gradually phased out where taxable income for the previous taxation year exceeds $500,000, and where taxable capital employed in Canada for the previous taxation year exceeds $10 million.  Qualifying expenditures in excess of a CCPC’s expenditure limit are eligible for the 15 percent tax credit.

Budget 2019 proposes to repeal the use of taxable income as a factor in determining a CCPC’s annual expenditure limit for the purpose of the enhanced SR&ED tax credit. As a result, small CCPCs with taxable capital of up to $10 million will benefit from unreduced access to the enhanced refundable SR&ED credit regardless of their taxable income. Where a CCPC’s taxable capital exceed $10 million, this access will gradually be reduced from taxable capital of $10 million to $50 million, and eliminated for taxable capital of $50 million or more.

This measure will apply to taxation years that end on or after Budget Day.

 

C. International Tax

Transfer Pricing

Budget 2019 proposes to clarify that the rules for transfer pricing (Part XVI.1 of the Income Tax Act), which can be used to adjust transaction prices for transactions between Canadian residents and non-arm’s length non-residents, will apply in priority to other provisions, including those which might also adjust these amounts.  This may have various implications, including with respect to the calculation of penalties imposed under Part XVI.1.

A second measure proposes extending the definition of “transaction” for transfer pricing purposes to provisions which extend the ordinary reassessment period relating to transactions involving a taxpayer and a non-arm’s length non-resident.  This will increase the situations which allow CRA an extra three years to issue transfer pricing reassessments. This measure will apply to taxation years for which the normal reassessment period ends on or after Budget Day.

 

Enhancing Anti-Avoidance Provisions

Budget 2019 includes complex proposals enhancing the anti-avoidance provisions related to foreign affiliate dumping.  As well, new proposals will address cross-border securities lending arrangements intended to avoid Canadian withholding taxes on dividends to foreign shareholders.

 

 

D. Sales and Excise Tax

GST/HST Relief – Various Health Care Supplies

Budget 2019 proposes to extend the application of GST/HST relief to certain biologicals, medical devices and health care services to reflect the evolving nature of the health care sector. 

Supplies and imports of human ova and imports of human in vitro embryos made after Budget Day will be zero-rated.  Foot care devices supplied on the written order of a licenced podiatrist or chiropodist will be zero-rated where supplied after Budget Day. 

Services rendered by a team of health professionals, such as doctors, physiotherapists and occupational therapists, whose services are GST/HST-exempt when supplied separately are presently not exempt when provided as a multidisciplinary health care service.  A new exemption will apply provided that all or substantially all, generally 90 percent or more, of the service is rendered by health professionals acting within the scope of their profession.  This measure will apply to supplies of multidisciplinary health services made after Budget Day.

 

Cannabis Taxation

Budget 2019 proposes that edible cannabis, cannabis extracts (including cannabis oils) and cannabis topicals be subject to excise duties imposed on cannabis licensees at a flat rate applied on the quantity of total tetrahydrocannabinol (THC), the primary psychoactive compound in cannabis, contained in a final product. The proposed THC-based rate would alleviate compliance issues that producers have encountered with respect to the tracking of the quantity of cannabis material contained in cannabis oils, and would allow producers and administrators to more easily calculate and verify excise duties for cannabis edibles, extracts and topicals.

The current excise duty regime and associated rates for fresh and dried cannabis, and seeds and seedlings, will be unaffected by this proposed change. Current exemptions under the excise duty framework will also continue to apply in respect of fresh and dried cannabis and cannabis oils that contain no more than 0.3 percent THC, as well as for pharmaceutical cannabis products that have a Drug Identification Number and can only be acquired through a prescription.

The combined federal-provincial-territorial THC-based excise duty rate for cannabis edibles, cannabis extracts (including cannabis oils) and cannabis topicals is proposed to be $0.01 per milligram of total THC. The new proposed rate is not expected to materially change the overall projected excise duty revenues from these products under the combined federal-provincial-territorial $1 per gram rate presented in Budget 2018.

The proposed changes to the excise duty framework will come into effect on May 1, 2019.  As a practical matter, they will initially apply only to cannabis oils, which are being folded into the broader category of cannabis extracts, and will apply to edible cannabis and cannabis topicals as these become legal for sale.

 

E. Other Tax and Business Measures

First-Time Home Buyer Incentive

Budget 2019 proposes to introduce the Canada Mortgage and Housing Corporation (CMHC) First-Time Home Buyer Incentive, which is a shared equity mortgage that would give eligible first-time home buyers the ability to lower their borrowing costs by sharing the cost of buying a home with CMHC. The Incentive would provide funding of 5 or 10 percent of the home purchase price. No ongoing monthly payments would be required. The buyer would repay the Incentive, for example at re-sale.  The Budget papers do not indicate when and how much needs to be repaid.  It is unclear whether CMHC will benefit from a proportionate share in appreciation of the house value.

For example, if a borrower purchases a $400,000 home with a 5 percent down payment and a 5 percent CMHC shared equity mortgage ($20,000), the size of the borrower’s insured mortgage would be reduced from $380,000 to $360,000, helping to lower the borrower’s monthly mortgage bill.

The Incentive would be available to first-time home buyers with household incomes under $120,000 per year. A participant’s insured mortgage combined with the Incentive amount cannot be greater than four times their annual household income.

CMHC would offer qualified first-time home buyers a 10 percent shared equity mortgage for a newly constructed home or a 5 percent shared equity mortgage for an existing home.

More details will be released later this year, with the program expected to be operational by September 2019.

 

Rebate for Electric Battery or Hydrogen Fuel Cell Vehicles

Budget 2019 announces a broad initiative to increase the use of zero-emission vehicles, with a long-term goal of having these account for all new vehicle sales by 2040.  Budget 2019 proposes to introduce a new federal purchase incentive of up to $5,000 for electric battery or hydrogen fuel cell vehicles with a manufacturer’s suggested retail price of less than $45,000, starting in 2019–20.  Details of this program were not provided. 

A number of other related initiatives, including deployment of recharging and refueling stations, securing voluntary zero-emission sales targets from auto manufacturers and providing access to funding to auto manufacturers and parts suppliers through the Strategic Innovation Fund, were also noted in Budget 2019.

 

Student Loans – Interest Relief

Budget 2019 proposes the following changes to Canada Student Loans and Canada Apprentice Loans:

• lower the floating interest rate, the rate chosen by approximately 99 percent of Canada Student Loans borrowers, to prime, from its current rate of prime plus 2.5 percentage points, starting in 2019–20; and
• lower the fixed interest rate to prime plus 2.0 percentage points, from its current rate of prime plus 5.0 percentage points, starting in 2019–20.

Budget 2019 also proposes to amend the Canada Student Financial Assistance Act, so that student loans will not accumulate any interest during the six-month non-repayment period (the “grace period”) after a student loan borrower leaves school.

 

Guaranteed Income Supplement (GIS) 

The GIS earnings exemption currently allows low-income seniors and their spouses to each earn up to $3,500 per year in employment income without triggering a reduction in GIS benefits.

Budget 2019 proposes to introduce legislation that would enhance the GIS earnings exemption beginning in July 2020.

The enhancement would extend eligibility for the earnings exemption to self-employment income.  Also, it would increase the amount of the full exemption from $3,500 to $5,000 per year for each GIS recipient as well as their spouse. In addition, it would introduce a partial exemption of 50 percent, to apply to the next $10,000 of annual employment and self-employment income beyond the initial $5,000.

 

Canada Pension Plan (CPP) – Proactive Enrollment

Budget 2019 proposes to introduce legislative amendments to proactively enroll CPP contributors who are age 70 or older in 2020 but have not yet applied to receive their retirement benefit.  The Government also proposes to extend the period under which a person can choose not to receive a CPP retirement pension from six months to a year.

 

Employment Insurance (EI) Small Business Premium Rebate

Budget 2019 proposes that, starting in 2020, any business that pays employer EI premiums equal to or less than $20,000 per year would be eligible for a rebate to offset the upward pressure on EI premiums resulting from the introduction of the new EI Training Support Benefit (see Section A. Personal Income Tax).  No further details of this measure were provided.

 

Income Protection for Supply-Managed Farmers

Following the recent ratifications of the Canada-European Union Trade Agreement (CETA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Budget 2019 proposes up to $3.9 billion in support for supply-managed farmers. 

Support will be offered to sustain the incomes of eligible dairy, poultry, and egg farmers, by making available up to $2.4 billion. Of this amount, $250 million has already been provided to support dairy farmers as a result of CETA, therefore a net amount of up to $2.15 billion will be available in coming years to deal with income losses associated with these agreements. 

Assistance will also be offered to protect the value of investments made by farmers in supply-managed sectors, through a Quota Value Guarantee Program that will protect against reduction in quota value when the quota is sold. $1.5 billion has been set aside for this demand-driven program.

Through 2019, the Government will continue to work in partnership with supply management stakeholders to address the impacts on processing, as well as potential future impacts of the Canada-United States-Mexico Agreement.

 

Mutual Funds – Redemptions

Budget 2019 proposes to introduce new anti-avoidance rules that will deny certain deductions available to mutual fund trusts on redemption of units.

A deduction in respect of the portion of an allocation that is greater than the capital gain that would otherwise have been realized by the unitholder on the redemption will be denied, if the following conditions are met:

• the allocated amount is a capital gain; and
• the unitholder’s redemption proceeds are reduced by the allocation.

This measure targets a strategy which accelerates deductions within the trust while not changing the income tax consequences to the unitholder whose units are redeemed.

A deduction in respect of an allocation made to a unitholder on a redemption will also be denied if:

• the allocated amount is ordinary income; and
• the unitholder’s redemption proceeds are reduced by the allocation.

This measure targets a strategy designed to convert ordinary income into capital gains for some unitholders (“character conversion”).

Both of the above measures will apply to taxation years of mutual fund trusts that begin on or after Budget Day.

 

Tax Compliance – Funding

Budget 2019 proposes to invest an additional $150.8 million over five years, starting in 2019–20. This investment will allow CRA to fund new initiatives and extend existing programs, including:

• hiring additional auditors, conducting outreach and building technical expertise to target non-compliance associated with cryptocurrency transactions and the digital economy;
• creating a new data quality examination team to ensure proper withholding, remitting and reporting of income earned by non-residents; and
• extending programs aimed at combatting offshore non-compliance.

 

Budget 2019 proposes to provide CRA with $50 million over five years, starting in 2019–20, to create four new dedicated residential and commercial real estate audit teams in high-risk regions, notably in British Columbia and Ontario. These teams will focus on ensuring that:

• taxpayers report all sales of their principal residence on their tax returns;
• any capital gain derived from a real estate sale, where the principal residence tax exemption does not apply, is identified as taxable;
• money made on real estate flipping is reported as income, not as capital gains;
• commissions earned are reported as taxable income; and
• builders of new residential properties remit the appropriate amount of GST/HST.

 

CRA Service – Funding

Budget 2019 proposes to invest an additional $50 million over five years, starting in 2019–20, in two key initiatives:

• improving speed of T1 adjustment processing; and
• making the dedicated telephone support line for tax service providers permanent.

 

CRA resources will be reallocated internally to improve service delivery. This includes:

• improved digital services — Canadians will be notified promptly as progress is made on their file, and will be able to view this progress online;
• timely resolution to taxpayers’ objections — disputes with CRA will be resolved in a more timely manner, allowing CRA to more consistently meet its published service standards; and
• additional liaison officers — CRA will broaden the reach and scope of this service, helping an additional 1,700 more businesses per year, including those that are incorporated.

 

Beneficial Ownership Transparency

In 2018, the Canada Business Corporations Act was amended to require federally incorporated corporations to maintain beneficial ownership information.  Budget 2019 proposes further amendments to the Canada Business Corporations Act to make the beneficial ownership information maintained by federally incorporated corporations more readily available to tax authorities and law enforcement.

 

Canadian Drug Agency

Budget 2019 announces the Government’s intention to work with provinces, territories, and stakeholders to create the Canadian Drug Agency.  The Agency would:

• assess the effectiveness of new prescription drugs;
• negotiate drug prices on behalf of Canada’s drug plans; and
• recommend which drugs represent the best value-for-money for Canadians, and in cooperation with provinces, territories and other partners, identify which drugs could form the basis of a future national formulary.

 

F. Previously Announced

Budget 2019 confirms the Government’s intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release:

• Income tax measures announced on November 21, 2018 in the Fall Economic Statement to:
  • provide for the Accelerated Investment Incentive which allows for enhanced CCA in the year the depreciable property is acquired,
  • allow the full cost of machinery and equipment used in the manufacturing and processing of goods, and the full cost of specified clean energy equipment, to be written off immediately,
  • extend the 15-per-cent mineral exploration tax credit for an additional five years, and
  • ensure that business income of communal organizations retains its character when it is allocated to members of the communal organization for tax purposes;
• The income tax measures announced in Budget 2018 to implement enhanced reporting requirements for certain trusts to provide additional information on an annual basis;
• Regulatory proposals released on September 17, 2018 relating to the taxation of cannabis;
• Remaining legislative and regulatory proposals released on July 27, 2018 relating to GST/HST, including proposed changes in respect of eligible input tax credits for Holding Corporations investing in related companies;
• The measures referenced in Budget 2018 to support employees who must reimburse a salary overpayment to their employers due to a system, administrative or clerical error (draft legislation released on January 15, 2019);
• The income tax measures announced in Budget 2018 to facilitate the conversion of Health and Welfare Trusts to Employee Life and Health Trusts;
• Measures confirmed in Budget 2016 relating to the GST/HST joint venture election;
• The income tax measures announced in Budget 2016 expanding tax support for electric vehicle charging stations and electrical energy storage equipment; and
• The income tax measures announced in Budget 2016 on information reporting requirements for certain dispositions of an interest in a life insurance policy.

The Government also stated that it will continue its outreach to farmers, fishers and other business owners throughout 2019 to develop new proposals to better accommodate intergenerational transfers of businesses while protecting the integrity and fairness of the tax system.

No mention was made of the Government conducting a holistic review of the Income Tax Act, as desired by many tax and business organizations, including CPA Canada.

 

G. Other Budget Expenditures

Budget 2019 is proposing a new, coordinated plan that would deliver $5 to $6 billion in new investments in rural broadband over the next 10 years.

Budget 2019 proposes to provide $305.3 million over five years to Employment and Social Development Canada to continue improving and modernizing service delivery systems.

Budget 2019 proposes to invest $253.8 million over five years, starting in 2019–20, with $56.7 million per year ongoing to make the recourse process for EI, CPP and OAS easier to navigate and more responsive.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

TAX TICKLERS… some quick points to consider…

 

• A large amendment to a T4 slip may trigger a payroll audit. Ensure that T4 slips are as accurate as possible at the outset.
• CRA may request taxpayer information from third-parties. A recent project using third-party data identified $86 million of unreported income and attracted over $19 million in additional taxes. CRA stated additional projects began in late 2017.
• A recent poll found that 51% of Canadians have no will, and only 35% have one that is up to date. Quebec and B.C. lead the provinces (58% and 54% respectively), with the less than 50% in all other provinces.

 

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

2018 Remuneration

Higher levels of personal income are taxed at higher personal rates, while lower levels are taxed at lower rates. Therefore, individuals may want to, where possible, adjust income out of high income years and into low income years. This is particularly useful if the taxpayer is expecting a large fluctuation in income, due to, for example, an impending

• maternity/paternity leave;
• large bonus/dividend; or
• sale of a company or investment assets.

In addition to increases in marginal tax rates, individuals should consider other costs of additional income. For example, an individual with a child may receive reduced Canada Child Benefit (CCB) payments. Likewise, excessive personal income may reduce receipts of OAS, GIS, GST/HST credit and other provincial/ territorial programs.

There are a variety of different ways to legally smooth income over a number of years to ensure an individual is maximizing access to the lowest marginal tax rates. For example,

• Taking more, or less, earnings out of the company (in respect of owner-managed companies).
• Realizing investments with a capital gain/loss.
• Deciding whether to claim RRSP contributions made in the current year, or carry-forward the contributions.
• Withdrawing funds from an RRSP to increase income. Care should be given, however, to the loss in RRSP room based on the withdrawal.
• Deciding on whether or not to claim CCA on assets used to earn rental/business income.

Note that for the 2018 year, the tax cost of dividends paid out to shareholders of a corporation that do not “meaningfully contribute” to the business may increase.

Also note that the tax cost of any non-eligible dividend will increase in 2019. As such, some may consider declaring non-eligible dividends in 2018 to access current tax rates. Changes in provincial/ territorial rates may also impact the above decision.

Year-end planning considerations not specifically related to changes in income levels and marginal tax rates include:

1)      Corporate earnings in excess of personal requirements could be left in the company to obtain a tax deferral (the personal tax is paid when cash is withdrawn from the company).

          The effect on the “Qualified Small Business Corporation” status should be reviewed before selling the shares where large amounts of capital have accumulated.  In addition, changes which may limit access to the small business deduction where significant corporate passive investment income is earned should be reviewed.  

2)      Consider paying taxable dividends to obtain a refund from the “Refundable Dividend Tax on Hand” account in the corporation.

3)      Individuals that wish to contribute to the CPP or a RRSP may require a salary to generate “earned income”. RRSP contribution room increases by 18% of the previous years’ “earned income” up to a yearly prescribed maximum ($26,230 for 2018; $26,500 for 2019).

4)      Dividend income, as opposed to a salary, will reduce an individual’s cumulative net investment loss balance thereby potentially providing greater access to the capital gain exemption.

5)      Recent tax changes may make it costlier to earn income in a corporation from sales to other private corporations in which the seller or a non-arm’s length person has an interest.  As such, consideration may be given to paying a bonus to the shareholder and specifically tracking it to those higher taxed sales.  Such a payment may reduce the total income taxed at higher rates.

6)      Proposed changes to the tax regime will likely require more careful tracking of an individual shareholder’s labour and capital contribution to the business, as well as risk assumed in respect of the business. Inputs should be tracked in a permanent file.

7)      If you are providing services to a small number of clients through a corporation (which would otherwise be considered your employer), CRA could classify the corporation as a Personal Services Business. There are significant negative tax implications of such a classification. In such scenarios, consider discussing risk and exposure minimization strategies (such as paying a salary to the incorporated employee) with your professional advisor.

The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.

No individual or organization involved in either the preparation or distribution of this letter accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.