By: Arthur B C. Drache C.M., Q.C.
We have been watching federal budgets at close range for more than four decades. The style has changed, of course. The notion of Budget secrecy has essentially gone by the boards…along with the timing which used to be eight o’clock in the evening.
But certain things don’t change…but vary with the times and the political situation. Pre-election budgets were always interesting in part because they were so blatantly vote seeking and because some of the worst tax policy initiatives were contained in them. We think for example of the two budgets of 1974, one before and one after the election of that year which gave us the Registered Home Ownership Savings Plan which took years to kill.
There is no point in being cynical in an election year. It’s like being disappointed that there will be snow on the ground in February.
However, the run-up to this year’s budget was unusual if not unique. First we had the major tax policy announcements made six months before the Budget came down…and before the price of oil tumbled and before any rational assessment of the fiscal situation could be made. But that clearly didn’t bother the Government which is always in a position to ensure a surplus or deficit is announced…whatever suits their agenda.
What was unusual is that unlike most pre-budget scenarios, nobody was worried about the negative aspect of tax and spending announcements. Indeed, the controlled leaks made the point of implying that there would be goodies for everyone…families (though they already had their bonuses in the pocket), seniors, small businesses, exporters, and so forth. We cannot remember a pre-Budget run-up in which we heard nobody voice concerns about what was coming…except those who worry about such things as terrible tax policy decisions. But by now the critics are inured to bad policy decisions.
All that having been said, waiting for the unveiling of the document really became more a matter of awaiting the details of the leaked proposals rather than looking for surprises, good or bad.
In macro terms, as was expected, the Conservative government’s heralded return to balanced budgets hinged on using $2-billion in contingency funds, one-time asset sales and expectations that oil prices are poised to rise.
The 2015 budget promises to climb out of deficit and post a $1.4-billion surplus in 2015-16. That is accomplished in part by reducing the size of the annual contingency fund from $3-billion to $1-billion per year over the next three years. Had Ottawa maintained the contingency fund at the levels used in budgets since 2012, the forecast would show deficits running for another two years. There was also some creative accounting with regard to E.I. premiums which helped the overall picture.
But all that was a foregone conclusion…the only questions being how the surplus was arrived at.
As usual, there was a melange of proposals, the vast majority of them “goodies” in the traditional sense. But many of them are back-end loaded to take effect after the next election, changes such as a new fund for transit infrastructure that begins in 2017-18 and will grow to $1-billion per year by 2019-20 and small business tax cuts.
We will not try to note every jot and tittle of the massive document but note those changes which we find of most interest and which were not announced earlier by the government.
The Budget proposes to further reduce the small business tax rate to 9 per cent by 2019. This will be the largest tax rate cut for small businesses in more than 25 years. This 2-percentage-point reduction will be phased in as follows:
- 10.5 per cent effective January 1, 2016;
- 10 per cent effective January 1, 2017;
- 9.5 per cent effective January 1, 2018; and
- 9 per cent effective January 1, 2019.
For taxation years after 2015, the Lifetime Capital Gains Exemption for qualified farm or fishing property will be maintained at $1 million until the indexed LCGE applicable to capital gains realized on the disposition of qualified small business shares ($813,600 in 2015) exceeds $1 million. At that time, the same LCGE limit, indexed to inflation, will once again apply to the three types of property.
For manufacturers, Oliver announced a 10-year extension of the accelerated capital cost allowance, which allows companies to take generous write-offs for new equipment. The measure will cost $1.1-billion over the next four years.
As was predicted, the formula for RRIF withdrawals has been changed substantially reducing the mandatory annual payout.
The existing RRIF factors have been in place since 1992. The new RRIF factors will range from 5.28 per cent at age 71 to 18.79 per cent at age 94. The percentage that seniors will be required to withdraw from their RRIF will remain capped at 20 per cent at age 95 and above
The new RRIF factors will apply for the 2015 and subsequent taxation years. To provide flexibility, RRIF holders who at any time in 2015 withdraw more than the reduced 2015 minimum amount will be permitted to re-contribute the excess (up to the amount of the reduction in the minimum withdrawal amount provided by this measure) to their RRIFs. Re-contributions will be permitted until February 29, 2016 and will be deductible for the 2015 taxation year. Similar rules will apply to those receiving annual payments from a defined contribution RPP or a PRPP.
In another bow to the needs of some seniors, the Budget proposes a new, permanent Home Accessibility Tax Credit. The proposed 15 per cent non-refundable income tax credit would apply on up to $10,000 of eligible home renovation expenditures per year, providing up to $1,500 in tax relief.[1] Eligible expenditures will be for improvements that allow a senior or a person who is eligible for the Disability Tax Credit to be more mobile, safe and functional within their home. These improvements could help to ensure that seniors and persons with disabilities can live healthy, independent lives in the comfort of their home or family’s home.
Examples of eligible expenditures include costs associated with the purchase and installation of wheelchair ramps, walk-in bathtubs, wheel-in showers and grab bars. The Home Accessibility Tax Credit will apply in respect of eligible expenditures for work performed and paid for and/or goods acquired on or after January 1, 2016, another delayed provision.
There were a couple of substantive changes to the rules relating to charities.
At present, donations of private shares and real estate to registered charities and other qualified donees can give rise to taxable capital gains. To help Canadians provide more gifts, the Budget proposes to exempt individual and corporate donors from tax on the sale of private shares or real estate to an arm’s length party if the proceeds are donated within 30 days. If a portion of the proceeds is donated, the exemption from capital gains tax would apply to that portion. This measure will apply to donations in respect of dispositions occurring after 2016.
Recognizing that there would be huge opportunities for “abuse” there are anti-avoidance provision.
Anti-avoidance rules will ensure that the exemption is not available in circumstances where, within five years after the disposition:
- the donor (or a person not dealing at arm’s length with the donor) directly or indirectly reacquires any property that had been sold;
- in the case of shares, the donor (or a person not dealing at arm’s length with the donor) acquires shares substituted for the shares that had been sold; or
- in the case of shares, the shares of a corporation that had been sold are redeemed and the donor does not deal at arm’s length with the corporation at the time of the redemption.
Where the anti-avoidance rules apply, the exemption will be reversed by including the previously exempted amount in the income of the donor in the year of the re-acquisition by the donor (or the non-arm’s length person) or the redemption.
The Budget also would allow charities to invest in limited partnerships, something which has been de facto forbidden, because partners at law carry on the business of the partnership. This would allow charities to diversify their investment portfolios to better support their charitable purposes. In addition, since limited partnerships are also used to structure some social impact investments, allowing investments in limited partnerships would give charities the flexibility to use more innovative approaches to address pressing social and economic needs in Canada. This proposal will also apply to registered Canadian amateur athletic associations.
To ensure that a registered charity’s investment in a limited partnership remains a passive investment, the measure will apply only if:
- the charity – together with all non-arm’s length entities – holds 20 per cent or less of the interests in the limited partnership; and
- the charity deals at arm’s length with each general partner of the limited partnership.
These rules would not apply where a charitable organization or public foundation carries on a related business through a limited partnership.
In a fairly incomprehensible change, the budget proposes to amend the Income Tax Act to allow foreign charitable foundations to be registered as qualified donees if they receive a gift from the Government and if they are pursuing activities related to disaster relief or urgent humanitarian aid or are carrying on activities in the national interest of Canada. The Minister of National Revenue may, in consultation with the Minister of Finance, grant qualified donee status to a foreign charitable foundation that meets these conditions. Qualified donee status will be granted for a 24-month period that begins on the date chosen by the Minister of National Revenue, which normally would be no later than the date of the gift from the Government, and registered foreign charitable foundations will be included on the list of registered foreign charities maintained on the Canada Revenue Agency’s website.
We say that this seems incomprehensible simply because we cannot know why the change was made. We suspect that there may be one or more international organizations that the Government wants to register but could not without this change.
On the whole, as we said at the start of this piece, there really were no surprises in the document and anything which was not voter-friendly was buried.
For example, there will be provisions to ensure that corporations do not realize unintended tax benefits on synthetic equity arrangements., enhancing an existing anti-avoidance rule that is meant to prevent corporations from converting their taxable capital gains into tax-free dividends, improving an existing anti-avoidance rule in Canada’s foreign accrual property income regime regarding captive insurance to help ensure that income of foreign affiliates of Canadian taxpayers from the ceding of insured Canadian risks remains taxable in Canada and clarifying that the Canada Revenue Agency or the courts may increase or adjust an amount included in an assessment that is under objection or appeal, as long as the overall tax amount assessed does not increase.
The next question insofar as we are concerned is whether the government will sue its majority to push through these changes in the next few months…or wait until after the election. If the latter, the document can be more easily seen for what it is, a pre-election manifesto.
[1] Ontario has had a similar programme for a number of years.