April 21, 2015
2015 FEDERAL BUDGET HIGHLIGHTS
Finance Minister Joe Oliver presented his first budget on April 21, 2015. The government has presented a balanced budget which forecasts a surplus of $1.4 Billion for 2015-2016.
The budget proposes expenditures to enhance research and innovation and to make investments in transportation and infrastructure. There is help for small businesses through lower tax rates as well as funds to help families and create jobs.
The following is an overview of some of the key changes.
PERSONAL TAX CHANGES:
TAX-FREE SAVINGS ACCOUNT (TFSA)
The TFSA annual contribution limit for 2015 prior to the budget was $5,500 per person, which was to be indexed for inflation starting in 2016. Budget 2015 proposes to increase the annual contribution limit to $10,000 effective January 1, 2015. The limit will be fixed at $10,000 annually instead of being indexed for inflation.
CHANGES TO REGISTERED RETIREMENT INCOME FUND (RRIF) MINIMUM WITHDRAWAL FACTORS
All holders of Registered Retirement Savings Plans (RRSP) must convert their RRSP into a RRIF by the end of the year in which the holder turns 71. Following the conversion into a RRIF, minimum annual withdrawals from the plan are required to be made beginning the next year.
The withdrawal factors have been the same for many years, and were originally based on the assumption that the RRIF will earn a 7% nominal rate of return. The factors start at 7.38% of the remaining RRIF balance at age 72 and increase to 20% for ages 95 and over.
Budget 2015 proposes to reduce the minimum RRIF withdrawal factors by approximately 2% each year. This will bring the factors in line with a 5% nominal rate of return, which is more consistent with historical rates of return on investment portfolios as well as expected rates of inflation.
The following are the adjustments to the RRIF withdrawal factors for the first 5 years:
Age at start of year Existing Factor New Factor
71 7.38% 5.28%
72 7.48% 5.40%
73 7.59% 5.53%
74 7.71% 5.67%
75 7.85% 5.82%
CHANGES TO THE DIVIDEND TAX CREDIT AFFECTING INDIVIDUALS
In conjunction with the reductions to the small business tax rate (see below), non-eligible dividends paid from corporate income taxed at the small business rate will receive a reduced dividend tax credit. The gross-up factor for non-eligible dividends will decrease from 18% to 17% effective January 1, 2016. The corresponding dividend tax credit applied to the grossed-up dividend will decrease from 11% to 10.5% effective January 1, 2016. The gross-up will stay at 17% for 2017 and then decrease to 16% and 15% for 2018 and 2019 respectively. The dividend tax credit will reduce by 0.5% from 11% in 2015 to 9% in 2019.
HOME ACCESSIBILITY TAX CREDIT
This is a new non-refundable personal tax credit which will be available to persons 65 years of age or older or any individual who is eligible to claim the disability tax credit. The credit is also transferable to a spouse, common law partner, or a person claiming the individual as a dependent.
This new credit will allow qualified individuals to claim up to $10,000 per year to renovate their principal residence to allow the qualified person to gain better mobility, functionality or access of the home. Examples of qualified expenditures would be the costs to acquire and install wheelchair ramps, walk-in bathtubs, and accessible showers.
This credit will not be reduced by any other available tax credit or grant to which these expenditures may qualify. As a result expenditures may qualify for both this new credit and the medical expense credit.
This credit will be eligible for expenditures made after 2015
REPEATED FAILURE TO REPORT INCOME PENALTY
Changes are proposed to the calculation of federal tax penalties for individuals who have failed to report all of their income on their tax return. Currently the penalty for unreported income can be 10% of the amount of the unreported income and possibly up to 50% of the amount of the understated tax if the omission was due to gross negligence.
The budget proposes to change this penalty to only be applicable if a taxpayer fails to report at least $500 of income in the year or any of the three preceding years. The amount of the penalty will be the lower of:
- 10% of the unreported income, or
- an amount equal to 50% of the unpaid tax on the unreported income.
Gross negligence penalties may still apply in appropriate cases. These changes take effect for taxation years after 2015.
DONATIONS FOLLOWING THE SALE OF REAL ESTATE OR PRIVATE COMPANIES
Commencing after 2016, the Budget creates a tax sheltering opportunity for those who have philanthropic goals that they wish to achieve following the sale of a private business or real estate. The Budget provides that a portion of the resulting capital gain may be exempted from tax when a cash donation is made to a qualifying charity within 30 days of an arm’s-length sale.
INCREASE TO THE LIFETIME CAPITAL GAINS EXEMPTION – FARMERS AND FISHERS
In an effort to accelerate the benefit to farmers and fishers of the current $813,600 Lifetime Capital Gains Exemption which is currently indexed to increase with inflation, the Budget increases that amount immediately to $1,000,000, where it will remain until the regular exemption catches up based on its inflationary increases.
CORPORATE TAX CHANGES:
SMALL BUSINESS TAX RATE REDUCTION
The small business federal rate is currently 11% and when combined with a Nova Scotia provincial rate of 3% (N.B. is 4% and PEI is 4.5%), the rate of tax on the first $350,000 of Net Income earned is 14%. The budget proposes a 2% decrease in the federal rate from 2016 to 2019.
The following table illustrates the combined federal and provincial rates:
Federal (1) NS NB (2) PEI (2)
2016 10.5 13.5 14.5 15.0
2017 10.0 13.0 14.0 14.5
2018 9.5 12.5 13.5 14.0
2019 9.0 12.0 13.0 13.5
- The federal rate reduction is on income up to $500,000.
- NB and PEI rates are on income up to $500,000 while NS is on income up to $350,000
AVOIDING TAXES ON CORPORATE CAPITAL GAINS – SUBSECTION 55(2)
Subsection 55(2) is an anti-avoidance provision intended to prevent the inappropriate reduction of a capital gain by paying deductible inter-corporate dividends.
The provision currently applies where one of the purposes of the dividend was to generate a significant reduction in the capital gain that would have been realized on the disposition of any share, but for the dividend.
There are exceptions to the application of 55(2) which include related party transactions, dividends paid from safe income, dividends subject to Part IV tax, and transactions qualifying as butterfly transactions.
Currently, if subsection 55(2) applies, the dividend is treated as proceeds of disposition of the share, or as a gain from the disposition of capital property, depending on the circumstances.
The subsection does not currently apply to dividends that create or increase an unrealized capital loss where taxpayers may be able to use the unrealized loss to shelter a capital gain on another property.
The proposed changes to subsection 55(2) will have the anti-avoidance rule apply where one of the purposes of the dividend is to significantly reduce the fair market value of any share or significantly increase the cost of properties of the dividend recipient, regardless of whether the dividend reduces a capital gain. Other changes will see 55(2) apply where the value of a relevant share is or becomes nominal.
Additional changes will address the use of stock dividends – dividends that consist of additional shares of the same corporation as a means of getting around subsection 55(2).
Also, the current exception from 55(2) for dividends paid in related party situations is to be amended so that the exception will only apply to dividends received as a result of the corporation redeeming, acquiring or cancelling the shares.
The changes will apply to dividends received on or after April 21, 2015
SMALL BUSINESS DEDUCTION – ACTIVE VS PASSIVE INCOME UNDER CONSULTATION
The budget announces a review of the circumstances in which income from a business, the principal purpose of which is to earn income from property, should qualify as active business income eligible for the lower corporate tax rate.
Interested parties are invited to submit comments by August 31, 2015.
STREAMLINED REPORTING REQUIREMENTS FOR FOREIGN ASSETS ON FORM T1135
Currently, Canadian resident individuals, corporations or trusts are required to report details of specified foreign property owned, if the total cost of all such property owned was greater than $100,000 at any time during the year. This information is reported on Form T1135 – Foreign Income Verification Statement. The Canada Revenue Agency introduced a revised Form T1135 in 2013, which requires taxpayers to report more details of their specified foreign property which has resulted in a significant compliance burden for taxpayers.
Budget 2015 proposes to simplify the foreign property reporting requirements for taxpayers who own specified foreign property with a total cost of less than $250,000 throughout the year. The current reporting requirements will continue for those taxpayers who own specified foreign property with total cost of $250,000 or more during the year.
The comments made in this article are provided for information purposes only and are not intended to be used for tax planning purposes.
Please contact a WBLI advisor to discuss any of the items mentioned above and the implications these may have on you or your business.
A PDF version of our 2015 Federal Budget Presentation is available HERE