By: Arthur Drache
Now that budget leaks are not a sin punishable by political death, it has become the norm that a lot of carefully planted “hints” from the government side give us a preview of what is to come.
This year the focus of the “leaks” was to address social issues, not the economy. But it was also clear that many of the approaches would be incremental.
For example, a national Pharmacare programme will be studied. We knew this when Eric Hoskins resigned as Ontario’s health minister the day before the budget and it was clear that he would be named as head of a project looking to establish a national Pharmacare program.
Similarly the government was looking at somehow funding local news sources without getting involved in direct funding to commercial media.
To ensure trusted, local perspectives as well as accountability in local communities, the Government proposes to provide $50 million over five years, starting in 2018–19, to one or more independent non-governmental organizations that will support local journalism in underserved communities. The organizations will have full responsibility to administer the funds, respecting the independence of the press. Over the next year the Government will be exploring new models that enable private giving and philanthropic support for trusted, professional, non-profit journalism and local news. This could include new ways for Canadian newspapers to innovate and be recognized to receive charitable status for not-for-profit provision of journalism, reflecting the public interest that they serve.
A plan to allow a new father (we can be accurate rather than politically correct) to get five weeks of parental leave was mooted, similar to a quite successful Quebec programme. This is part of a grander plan to get more women into the work force…a key component in driving economic growth). This year’s mantra is now “women” rather than he middle class.
Unlike most years, except for the Official Opposition, there is not much public interested in the question of debt and deficits. Indeed, the government no longer uses the size of the debt as a key measure but rather the debt to GDP ratio is said to be more important, and that is on a downward trend.. But the projected deficit for 2018-19 is at $18.1 billion despite the heavy spending announced in the budget.
But for most of our readers, they key element they were awaiting was a climb down by Finance Minister Morneau from the morass he created in small business tax reform starting last June. We were certain that there would be a retreat but didn’t know exactly how that would be accomplished.
So here it is.
Budget 2018 proposes to reduce the business limit for CCPCs (and their associated corporations) that have significant income from passive investments. Under this measure, the business limit will be reduced on a straight-line basis for CCPCs having between $50,000 and $150,000 in investment income.
The measure will affect CCPCs only to the extent that their business income exceeds the reduced business limit. For example, a CCPC with $100,000 of investment income would have its business limit reduced to $250,000. As long as the reduced business limit remains above the active business income of the CCPC, all of that income would continue to be taxed at the small business tax rate. A CCPC with $75,000 of business income would have to earn more than $135,000 in passive income before its business limit is reduced below its business income. This feature of the proposed rules recognizes that CCPCs with lower amounts of business income generate less retained earnings that can later be used for reinvestment in the business, and may have more difficulty accessing capital. CCPCs with business income above the reduced business limit will be taxed on income above the business limit at the general corporate tax rate.
The measure will be implemented based on a CCPC’s investment income which is earned on the underlying passive investment assets held by the corporation. Assuming a five-per-cent return on such investments, the business limit would effectively be reduced on a straight-line basis for CCPCs having between $1 million and $3 million of passive assets. Assuming a two-per-cent return in low-risk investments, the business limit would be reduced between $2.5 million and $7.5 million of passive assets.
It is expected that about three per cent of CCPCs claiming the small business deduction will be affected by the measure.
The business limit reduction under this measure will operate alongside the business limit reduction that applies in respect of taxable capital in excess of $10 million. The reduction in a corporation’s business limit will be the greater of the reduction under this measure and the existing reduction based on taxable capital. The reduction of the business limit for any particular corporation under this measure will be based on the investment income of the corporation and, consistent with the reduction in the business limit based on taxable capital, any other associated corporations with which it is required to share the business limit for a taxation year.
Some had predicted this sort of approach and we suspect that for most they will breath a sigh of relief.
New Trust Reporting Requirement: To improve the collection of beneficial ownership information with respect to trusts, Budget 2018 proposes to require that certain trusts provide additional information on an annual basis. The new reporting requirements will impose an obligation on certain trusts to file a T3 return where one does not currently exist. This information would be used to help the Canada Revenue Agency assess the tax liability for trusts and its beneficiaries.
The new reporting requirements will apply to express trusts that are resident in Canada and to non-resident trusts that are currently required to file a T3 return. An express trust is generally a trust created with the settlor’s express intent, usually made in writing (as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the provisions of a statute). Exceptions to the additional reporting requirements are proposed for the following types of trusts:
- mutual fund trusts, segregated funds and master trusts;
- trusts governed by registered plans (i.e., deferred profit sharing plans, pooled registered pension plans, registered disability savings plans, registered education savings plans, registered pension plans, registered retirement income funds, registered retirement savings plans, registered supplementary unemployment benefit plans and tax-free savings accounts);
- lawyers’ general trust accounts;
- graduated rate estates and qualified disability trusts;
- trusts that qualify as non-profit organizations or registered charities; and (Our emphasis)
- trusts that have been in existence for less than three months or that hold less than $50,000 in assets throughout the taxation year (provided, in the latter case, that their holdings are confined to deposits, government debt obligations and listed securities).
Where the new reporting requirements apply to a trust, the trust will be required to report the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability (through the trust terms or a related agreement) to exert control over trustee decisions regarding the appointment of income or capital of the trust (e.g., a protector).
These proposed new reporting requirements will apply to returns required to be filed for the 2021 and subsequent taxation years.
As usual there are myriad proposals, great and large. Here are a few in brief.
- The budget proposes pay-equity legislation for employees in the federal government and federal-regulated sectors but fails to put a dollar amount on that plan. The legislation, which will draw on models from Ontario and Quebec, will ensure that men and women receive the same pay for equal work. The government says it will continue to consult with employers, unions and other stakeholders over the coming months as it works to develop the pay-equity legislation, which will be included in the budget bill. Preliminary estimates suggest the legislation could reduce the gender-wage gap by about 2.7 cents on the dollar for the federal government and 2.6 cents for the federal private sector, according to the budget.
- The government is proposing to invest $447-million over five years to create a new Indigenous Skills and Employment Training Program. The program, which will replace the Aboriginal Skills and Employment Training Strategy, will help close the employment and pay gap between Indigenous and non-Indigenous people by focusing on training for higher-quality, better-paying jobs.
- The budget also proposes more than $1.4-billion over six years for First Nations child and family services. Indigenous children under the age of 14 comprise 7.7 per cent of all children in Canada but represent more than half of all children in foster care. The money will help alleviate pressures on child and family services agencies and increase prevention resources in First Nations communities so families can stay together.
- In total, the budget commits $3.8-billion more over the next five years to support science. A large share of this will be aimed at stepping up funding in physical and life sciences, social sciences and health for fundamental research at universities and other institutions. By 2023, scientists will have roughly half a billion more for fundamental research than they do today
- And as usual, tobacco taxes have been raised.
Interestingly and perhaps predictably, there was no obvious attempt to respond to the U.S. tax reform regime.
By the numbers
- $21.5B in new spending over 6 years, including the fiscal year just ending.
- $18.1B projected deficit for 2018-19 (including $3B for risk), falling to $12.3B by 2022-23.
- $750M over 5 years to improve cyber security.
- $231M over 5 years to address the opioid crisis, including $165M this year.
- 5 weeks extra leave for two-parent families under the EI Parental Sharing Benefit (June 2019).
- $172.6M more over 3 years for clean drinking water on reserves.
- $1.3B over 6 years in new funding for First Nations Child and Family Services.
- $10M over 5 years for an RCMP unit to review 25,000 cases of sex assault deemed “unfounded.”
- $1.3B over 5 years to conserve land, waterways and wildlife and protect species at risk.
- $100M over 5 years to develop rural broadband innovation, including low-earth-orbit satellites.
- New judges – 6 for Ontario, 1 for Saskatchewan – and more money to help ease court backlogs.
- $173M to address irregular border-crossings and asylum seekers.
- $6M for a new process to hold federal leadership debates during election years.
- $50M over 5 years to one or more independent organizations to support local journalism.
- $30M over 3 years to promote women and girls’ participation in sport.
- Free admission for kids to national parks will be made permanent.
After every federal budget we end our first piece by saying that there will undoubtedly be much more to report in future issues.