On March 22, 2017, Federal Finance Minister Morneau presented the Liberal government’s second budget. The budget reinforced the government’s on-going themes of helping middle class families, growing the economy and creating jobs.
In terms of specific initiatives, the government has introduced what they are calling the “Innovation and Skills Plan”. The plan will focus on six areas: advanced manufacturing, agri-food, clean technology, digital industries, health and bio-sciences, and clean resources. A number of additional programs are proposed to support innovation and to foster growth in the clean energy sector. Among these programs is the establishment of Innovation Canada, an investment in business led “superclusters”, the creation of a new Strategic Innovation Fund, the launch of a new Venture Capital Catalyst Initiative, and access to financing for clean technology firms.
As well, the government intends to close loopholes that cause unfair tax advantages for some at the expense of others. The budget also proposes an investment of an additional $523.9 million over five years to build on previous investments to support the Canada Revenue Agency’s efforts to prevent tax evasion and improve tax compliance.
The deficit for 2016-2017 is estimated to be $23 billion, and a deficit of $28.5 billion is predicted for 2017-2018. That represents a year-over-year increase of almost 24%. The deficit is projected to decline gradually, reaching $18.8 billion by 2021-2022. The federal debt-to-GDP ratio is estimated to be 31.6% for 2017-2018. This ratio is estimated to decline to 30.9% in 2021-2022. GDP is expected to grow by 1.9% in 2017 and by 2.0% in 2018.
The CPI inflation rate for 2017 is estimated at 2.0%, and is expected to remain stable over the near to medium term. The unemployment rate for 2017 is estimated to be 6.9% and is expected to decrease to 6.4% in 2021.
TAX ISSUES RE BUSINESS
There are proposed changes in the legislative meaning of “de facto” control. The revised meaning will apply for taxation years beginning on or after March 22, 2017.
The budget indicates that Canada is pursuing signature of the Multilateral Instrument (MLI) released on November 24, 2016 as a result of the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting Initiative. The MLI has the potential to modify certain provisions of numerous tax treaties simultaneously.
The government intends to release a paper discussing issues and providing proposed policy changes relating to tax planning strategies being used by private corporations that provide tax advantages which may be perceived as unfair. There are also proposed changes with respect to both the Canadian development expense and the Canadian exploration expense.
The budget also proposes an expansion of the accelerated capital cost allowance and Canadian renewable conservation expense regimes to provide further incentives with respect to the use of geothermal energy for the production of both heat and electricity. It also proposes that taxpayers be permitted to elect to have gains or losses included in income on a mark-to-market basis for certain eligible derivatives held on income account. There are also changes proposed with respect to Canadian life insurers.
TAX ISSUES RE INDIVIDUALS
Eligibility for the disability tax credit requires certification by an eligible medical practitioner. The budget proposes to add nurse practitioners to the list of eligible medical practitioners for this purpose, effective March 22, 2017. As well, the ability to claim costs related to the use of reproductive technologies as a medical expense is proposed to be enhanced. This provision is to be applicable to 2017 and subsequent taxation years, with an election to apply the provision to any of the ten preceding taxation years.
The three tax credits available to caregivers, ie., infirm dependent credit, caregiver credit , and family caregiver credit are proposed to be consolidated into one credit, the Canada Caregiver Credit. The credit amount will be consistent with the amounts available under the three previous programs. The credit will no longer be available with respect to non-infirm seniors who reside with their adult children.
The 15% mineral exploration tax credit for flow-through share investors is proposed to be extended for another year, for flow-through share aggreements entered into on or before March 31, 2018.
The tuition tax credit is proposed to be available for an expanded range of programs.
The public transit tax credit is proposed to be eliminated as of July 1, 2017.
Effective July 1, 2017, it is proposed that the GST/HST rules applicable to taxi businesses be amended in order to ensure they are equally applicable to commercial ride-sharing services.
Excise duties on alcohol products are proposed to be increased by 2% effective March 23, 2017, with annual indexing of rates on a go-forward basis.
A FINAL COMMENT
The angst and uncertainty felt by many Canadians with respect to the possibility of changes to the capital gains inclusion rate are now things of the past. For now. As you saw above, the federal deficit is projected, by the government itself, to rise by almost 25% next year. Obviously, that is not even close to being sustainable. One solution would be meaningful spending cuts. That is not going to happen. In fact, the opposite is happening. Government spending is increasing dramatically. So the only other option is to significantly increase revenues. There is only one way to do that: increase tax revenue.
So, how in the current environment can the government increase taxes? As I see it, there are four ways to do that: increase the income tax rate, increase the inclusion rate on capital gains, reduce the dividend tax credit, and tax a portion of the gain on the sale of a principal residence. Given the level of current tax rates and understanding that any tax on a principal residence would affect every single homeowner (not just the “rich”), I think those two possibilities will not come to pass. With the need for substantial increases in revenue, it would not surprise me to see changes in the capital gains rate and a reduction of the DTC over the next couple of years.
President, HG Partners Limited
Director, Private Client Group &
Senior Financial Advisor,
HollisWealth Advisory Services Inc.
This article was prepared solely by Howard Goodman who is a registered representative of HollisWealth Advisory Services Inc. (a member of the Mutual Fund Dealers Association of Canada and the MFDA Investor Protection Corporation). The views and opinions, including any recommendations, expressed in this article are those of Howard Goodman alone and they are not those of HollisWealth Advisory Services Inc.
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