Will Budget Changes Affect You? In Brief: Federal Budget 2018

On February 27, the third Federal Budget of the Liberal government was released.* The Budget anticipates a deficit of $18.1 billion for 2018-19 and no timetable to balance the books. Consistent with previous years, the themes of this Budget focus on innovation, gender equality — including the introduction of a new Employment Insurance Parental Sharing Benefit — tax fairness and integrity.

From a personal and small business tax perspective, the Budget did not propose any changes to personal or corporate tax rates. However, two areas are worth mentioning that may impact tax planning for Canadian business owners and high-net worth individuals:

Taxation of Private Corporations — As expected, the Budget addressed changes to the tax treatment of passive income earned in Canadian-controlled private corporations (CCPCs). The Budget now proposes a more simple approach to limit perceived tax-deferral advantages from holding passive investment income, gradually reducing access to the small business tax rate for CCPCs that have significant passive investment income. As well, there are proposed limitations on the ability for CCPCs to receive refundable taxes on payments of eligible dividends.

If a CCPC (and associated corporations) earns more than $50,000 of passive investment income in a given year, the amount of income eligible for the lower small business tax rate will be gradually reduced. The small business deduction limit is proposed to be reduced by $5 for every $1 of aggregate investment income above the $50,000 threshold, such that the business limit of $500,000 would be reduced to zero at $150,000 of investment income. This measure will apply to taxation years beginning after 2018.

Trusts: Expanded Reporting Requirements — The Budget proposes enhanced income tax reporting requirements for certain trusts on an annual basis. New reporting requirements will require certain trusts to file a T3 return where one does not currently exist, and to report the identity of all trustees, beneficiaries and settlors of the trust. This will apply to “express trusts” (i.e., generally trusts created with the settlor’s express intent) that are resident in Canada and to non-resident trusts currently required to file a T3 return, with exceptions for specific types of trusts. This measure is expected to apply to returns filed for the 2021 and subsequent taxation years.

For greater detail on Federal Budget 2018, see www.budget.gc.ca.

*At time of writing, measures are in proposal stage and may not be enacted into law.