Like any budget, expensive political agendas and economic measures were enacted. Unfortunately, our ethically challenged finance minister and his friend Mr. Dress Up seem to think that running an endless deficit is acceptable financial planning for a nation. If we were a financial planning firm, we would take the time in this missive to explain the devastating effect of these ongoing deficits; however, instead of that, we are going to talk about the tax measures introduced in this budget.
CORPORATE INVESTMENT INCOME TO THE AFFECT SMALL BUSINESS DEDUCTION
The government introduced the anticipated tax increase on passive investment income earned by private corporations but changed their mind on how it would be implemented. In effect what they have done, is to reduce or eliminate access to the small business deduction (“SBD”) for private corporations who have too much passive investment income in an associated group of companies for a particular year. In general, the $500,000 small business deduction limit is fully available to a private company or associated group of companies which has $50,000 or less of passive investment income in the taxation year. If the private company has more than $150,000 of passive investment income in the taxation year then it is entitled to no small business deduction. For passive investment income between $50,000 and $150,000 the small business deduction gets “ground” (reduced) on a straight-line basis. On one hand, this is a far simpler measure to enact and administer then what they had previously proposed; however, it applies to all investment income of all private companies and there is no “grandfathering” for those companies who have already accumulated significant investment assets.
Overall this only impacts companies that are eligible for the small business deduction. For example, if your company resides in BC, has a 2018 profit of $500,000 that is eligible for the SBD and your company or an associated company has passive investment income in excess of $150,000, the company would lose the SBD. In these circumstances, this would result $70,000 more corporate tax than if the SBD were available. In effect, this is a reduction of the tax deferral available to the company. Later, when a dividend is paid by the company out of this higher tax rate income (called “GRIP”) the recipient would pay about $70,000 less in personal tax making the total of the personal and corporate tax rate the same. This results in the concept of integration being maintained as the total personal and corporate taxes on this income are comparable to the high personal tax rate if all of this income was earned by an individual.
While we are not happy with any changes which have a negative effect on the economic situation for our clients, we believe that this is a far more elegant solution than what had originally been proposed and it still gives our clients access to some significant tax deferral opportunities. We expect the outcry from the business and tax community over these proposals resulted in a solution that is far less punitive to companies. Thank you to those that took action to voice their displeasure with the government’s proposals.
CHANGES TO RECOVERY OF REFUNDABLE DIVIDEND TAX ON HAND
In conjunction with the effective tax increase on passive income of private corporations, some additional changes were made to the mechanism for making our tax system “integrated.” Integration in our tax system means that an individual would end up paying the same amount of tax whether they earns that income personally or if they set up a corporation to earn that income and assuming that they drew all of the income of the company in that taxation year. These changes surrounded the rules regarding the payment and recovery of Refundable Dividend Tax On Hand (“RDTOH”). These rules are somewhat technical and will only affect the recovery of RDTOH in certain circumstances. Arguably, we have been helping some of our clients take advantage of the way RDTOH could be recovered in the past and this type of planning will no longer be available. For the most part, this will not represent a significant change for most of you.
The income splitting or income sprinkling measures which were previously announced on December 13, 2017 will proceed as planned.
There were a grab bag of other measures which were tax related but will not have any impact on most of our clients. These measures included changes to the rules for tiered partnerships, additional tax support for clean energy, restriction on the creation of artificial losses by financial institutions (the large banks and brokerage houses), changes to the taxation of health and welfare trusts starting in 2021, a change of name and a slight increase to the Working Income Tax Benefit (now called the Canada Workers Benefit), extension to the medical expense tax credit for certain additional service animals and an extension of the mineral exploration tax credit for flow-through shares.
The budget also proposes to create new reporting requirements for family trusts starting in 2021. This will require that trust returns be filed for all trusts whether they have any income to report or not. There are a number of exceptions or exclusions which may apply but there is not sufficient information at this time for us to determine whether it would apply to most family trusts.
There are some other measures but they will not generally apply to any of our clients.
BC PROVINCIAL BUDGET – TAXATION ISSUES
The BC budget came out on February 20, 2018. The most significant tax measures introduced in this budget attempt to pour additional cold water on a hot housing market and punish employers for hiring and paying employees in BC.
PROPERTY TRANSFER AND FOREIGN BUYERS TAX
The provincial government has decided to increase the property transfer tax (“PTT”) from 3% on the fair market value of properties above $2 million to 5% on the portion of that fair market value which exceeds $3 million. In addition, the foreign buyers tax will increase from 15% to 20% and the areas which are subject to this tax have been expanded to include Victoria (the Capital Regional District), the Regional District of Central Okanagan, the Fraser Valley Regional District and the Regional District of The Nanaimo. The general anti-avoidance rule which currently only applies to the foreign buyers tax now applies to all transactions subject to property transfer tax.
A “speculation tax” will be introduced in 2018 which will apply to certain areas in BC such as Metro Vancouver, the Fraser Valley, the Capital Regional District (Victoria) and the Nanaimo Regional District as well as the municipalities of Kelowna and West Kelowna. The logic behind this kind of tax is that foreign buyers acquire homes in these areas to take advantage of the value derived, in part, from the infrastructure and social systems which exist here and which we (the local taxpayers) fund through the very reasonable amount of income tax we are all happy to pay. However, the foreign buyers get a free ride – they get all the benefits which are derived from our income tax payments but do not themselves pay more than a modest amount of property tax. This tax will target homeowners who do not pay income tax in British Columbia. This will include families with high worldwide household income which pay little or no income tax in BC. There will be exemptions for most principal residences and rental properties. The tax rate will be $5 per $1,000 of assessed value in 2018 and $20 per $1000 of assessed value in 2019 and thereafter. A non-refundable income tax credit will be introduced for those people who do not qualify for an exemption but who do pay income tax in BC. So basically, in 2019, a non-resident of Canada who pays no income tax in Canada (or BC for that matter) and who has a $5 million home in Vancouver will pay speculation tax of $100,000 per year on their home. I spoke with the BC Tax Policy Office to suggest this kind of tax two years ago as a way to help cool the housing market and also as a way to ensure that offshore buyers are contributing to our infrastructure costs. We will have to see whether the Province can implement it in a manner which does not inadvertently punish “innocent” parties.
The homeowner grant threshold is being increased very slightly to property values over $1.65 million and the amount of the grant is reduced slightly. In addition, the school tax is being increased for properties that have an assessed value which exceeds $3 million.
EMPLOYER HEALTH TAX
Most surprising is the creation of an anti-employment tax which the NDP government calls the Employer Health Tax. In order to eliminate MSP premiums in 2020, the provincial government is creating a new tax which will be assessed on the annual BC payroll of employers. There is an exemption for businesses with a payroll of $500,000 or less. Employers with payroll of more than $500,000 subject to a sliding scale with the tax rate going from zero up to 1.95% at $1.5 million. So, a company with payroll of $1.5 million would pay $29,250. Clearly, companies will have an incentive to outsource as much work as possible, convert employees to contractors and move jobs to other jurisdictions such as Alberta, or offshore to India or perhaps the Philippines.
There are a number of other tax measures including extension of the interactive digital media tax credit, extension of the mining flow-through share tax credit, expansion of the BC film incentive tax credit to include scriptwriting, extension of the book publishing tax credit, extension of the farmers food donation tax credit a change to the infirm dependent tax credit and caregiver tax credits and surprisingly, elimination of the BC education tax credit starting in 2019.
Our federal and provincial governments both seem to believe that there is an endless capacity for taxpayers to pay increasing amounts of tax. Based on my experience, the more taxes which are imposed, the more the taxpayers take efforts to minimize and avoid the taxes, eventually speaking with their feet. It seems a shame that our governments are so foolish that they need to learn this lesson yet again.