The 2017 Budget was the fifteenth Rachel Gervais, partner and GTA Tax Service Line Leader for BDO has analyzed over the course of her career as a tax practitioner. From her view, it is one of the first that seemed to be more like an election platform than a typical federal budget.
"There were more promises of things to come than actual decisions,” says Gervais. “More socializing of future action than implementation of real income tax change, or any specifics. The government has painted a picture of the future without providing much in the way of details.”
In some cases, what did not make it into the budget – at least this year – offers a reprieve for the middle class. In the lead up to Budget 2017 there was considerable media speculation that capital gains rates would increase. The same is true of anticipated changes to the treatment of stock options. From an income tax perspective, these were the two bright spots of Budget 2017.
That is not to say those changes won't happen – just not now. There were also more clues, or warnings, of what's on the horizon. The government announced a review of current tax saving strategies employing private corporations and will release a policy paper in the coming months. “It's clear the government does not like the use of private corporations to income split or minimize the amount of tax paid. The announcement of the policy paper is a way of socializing future change,” says Gervais.
For example, currently, some private corporations have multiple classes of shares and have the ability to pay dividends to some, but not necessarily all shareholders. In this way, if the corporation is a family business, income can be distributed among family member shareholders in lower tax brackets in order to lower the overall tax burden on the family. This form of income splitting is commonly referred to as “dividend sprinkling” and is an effective tax planning tool used by many middle class Canadian entrepreneurs. With this pending policy paper promised by Finance, the question becomes how long private corporations and their shareholders will be able to use it?
The same question applies to investment holdings inside private corporations. Corporate tax rates on business income are generally significantly lower than personal income tax rates. Investment holdings at the corporate level allow companies and their shareholders to accumulate after-tax business earnings that can be passively invested. Finance views this as a perceived advantage but have not advised how this will be addressed, nor if it will apply to all types of business. “We will have to wait and see,” says Gervais.
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Another tax strategy used by some Canadian entrepreneurs that may have an expiry date? The ability for them to undergo corporate reorganizations that allow them to access funds from their corporations at capital gains personal tax rates instead of the higher personal tax rates that would normally apply to salaries or dividends. Gervais indicates these strategies are not only used by what Finance defines as “high-income” earners but also “hard working middle class Canadian entrepreneurs.”
At this stage, the government is committed to issuing a policy paper in the “coming months” which will include “proposed solutions.” “Shareholders that have accumulated significant wealth inside their private corporations should be exploring distribution planning strategies now, while they still can,” says Gervais.
While the budget could have been worse, it also could have been better for the middle class. It eliminates the popular public transit tax credit and makes it more expensive to buy alcohol, cigarettes or hail an Uber. Canada's professionals (accountants, dentists, lawyers, doctors, veterinarians and chiropractors) in particular have taken a hit with this budget which plans to eliminate their ability to defer paying tax on work-in-progress. BDO's Tax Alert – 2017 federal budget eliminates professional's ability to claim a deduction for WIP discusses the impact of this change.
“The finance minister continues to call this the budget for a stronger middle class,” says Gervais. “It's not. From an income tax perspective, it takes things away from the middle class.”
Watch BDO's webinar Budget 2017: Business as usual? to hear about additional impacts from the federal budget. If you have any questions about the Federal Budget and how it may impact your business, please contact your local BDO office.
The information in this publication is current as of March 27, 2017.
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