On March 22nd, Finance Minister Bill Morneau tabled the 2016 Federal Budget (the “Budget”). As expected, the Budget contained a number of measures impacting personal wealth planning. Some of the more significant measures include:
- Changes to personal income tax rates – The Budget reduces the personal income tax rate for the $44,702 to $89, 401 from 22% to 20.5%. This provides a maximum tax savings of $670 per individual. Unfortunately for many, the Budget also introduces a new personal income tax bracket for income over $200,000 with a rate of 33%. These changes take effect for the 2016 tax year.
- Professional corporations and the small business deduction – The government has introduced measures designed to close a perceived “loophole” that allowed multiplication of the small business deduction through the use of professional corporations. Specifically, the Budget targets the situation where a Canadian-Controlled Private Corporation (CCPC) provides services to a partnership and the shareholder of the CCPC is also a member of the partnership. Previously, the CCPC would not be considered to be associated with the partnership for the purposes of the specified partnership income (“SPI”) rules because the CCPC was not a member of the partnership, even though its shareholder may be. This allowed the CCPC to claim the full small business deduction in respect of its active business income earned in respect of the partnership.
To address this, the Budget extends the SPI rules to structures where a CCPC provides, directly or indirectly, services or property to a partnership of the CCPC where, at any time during the taxation year, a shareholder of the CCPC is a member of the partnership or does not deal at arm’s length with the partnership.
The change will dramatically impact the financial planning of many professionals. The changes apply to tax years that begin on or after March 22nd, 2016.
- Life insurance and partnerships or corporations – Measures were introduced that limit the amount that can be added to the capital dividend account of a corporation as a result of life insurance proceeds received on the death of an insured. Similar measures were introduced with respect to the adjusted cost base of a life insurance policy held by a partnership.
- Other changes – The back-to-back shareholder loans rules were extended to capture scenarios where an intermediary party is interposed between the corporation and the shareholder. There were several changes to personal tax benefits, including a revamping of the Canada child tax benefit that eliminates payment of the benefit to families with incomes above certain amounts (dependent on the number of children in the family). The income-splitting tax credit, Education and Textbook Tax Credit and the Children’s Fitness and Arts Tax Credit were all eliminated.
There were many other changes that may be of interest – too many to note here. For the interested, a more fulsome discussion of the changes highlighted above and a summary of other significant Budget proposals is available here: Budget proposals