Following last week’s provincial budget release, yesterday Finance Minister Bill Morneau delivered his 2018 Federal Budget.
The key item was additional clarity on the taxation of passive income in a corporation. This is in addition to previously-announced measures for corporations such as the elimination (in some cases) of income sprinkling.
The budget did not deliver any significant economic stimulus or drastically change the course of Canada’s competitiveness. The announced measures do not have large investment implications. The budget was centered around social change including a focus on science, increased gender equality, and preparing for the future.
Budget 2018 addressed the economic challenges associated with U.S. tax reform and NAFTA negotiations, though it did not respond with specific measures to address concerns.
A total of about $20 billion was introduced for the support of new programs and initiatives – less than half of that introduced last year, and a marked slowdown from the government’s spending mode a couple of years ago.
The government expects to continue running a fiscal deficit through 2022-23 and Canada’s debt-to-GDP is forecasted to decline to 28.4 per cent.
Below is a summary of the changes:
- Parental Leave: Budget 2018 introduced a new “use-it-or-lose-it” EI benefit of an additional five weeks in support of two-parent families, should they decide to share parental leave responsibilities. This will not add any more financial aid from the EI program, simply more time off. This would allow a parent to take five weeks off from his/her employer without having to dip into his/her vacation time.
Under the current rules for the standard, year-long parental leave, parents can share 35 weeks (preceded by 17 weeks of maternity leave, which only the mother can take) of paid leave whichever way they want. The new rules would enable families to take up to 40 weeks of leave as long as the second parent claims at least five weeks of it.
- Low and Middle-Income Workers: The Working Income Tax Benefit, a refundable tax credit that supplements the earnings of low-income Canadian workers, will be renamed the Canada Workers Benefit. Support to recipients will be expanded under this program.
- CPP Enhancement: This previously announced measure (covered in our January Newsletter) will be phased in January 2019. An increase in CPP premiums will lead to higher CPP benefits at retirement.
- Registered Education Savings Plan (RESP): Increased access to the Canada Learning Bond available for low-income families. This is not to be confused with the 20 per cent Canada Education Savings Grant, which remains unchanged.
- Registered Disability Savings Plan (RDSP): When an RDSP is set up for a beneficiary who is over the age of majority, the plan holder must be either the beneficiary or, if the beneficiary lacks the capacity to enter into a contract, the beneficiary’s legal representative. Where the adult individual does not have a legal representative in place, rules will be introduced to allow a qualifying family member to be the plan holder.
- Passive Investment in a Corporation: Budget 2018 proposes to reduce the small business limit for corporations when investment income ranges between $50,000 and $150,000. The small business deduction will be eliminated for use on active income when passive investment income reaches $150,000 (reduced by $5 for every $1 of investment income above the $50,000 threshold). Earning a rate of return of 5 per cent, passive investments of $1,000,000 can be held without a reduction in the small business limit.
- Income tax measures released on December 13, 2017 to address income sprinkling.
- The income tax measure announced on October 16, 2017, to lower the small business tax rate from 10.5 per cent to 10 per cent, effective January 1, 2018, and to 9 per cent, effective January 1, 2019 (with related amendments to dividend tax credits for taxable dividends).
- Pay Equity Legislation: The Liberal Government will draft legislation that it says will help bridge the 12-cent hourly wage gap that currently exists between men and women who work full-time. There will also be increased funding to encourage women to join the skill trades, a source of well-paying jobs that remains largely male-dominated.
- Reporting Requirement for Trusts: In an aim to combat tax avoidance and evasion, Budget 2018 proposes to require that trusts provide additional information annually and will impose an obligation to file a T3 return where one does not currently exist. The proposed measures are meant to improve collection of beneficial ownership information, which appears to be a concern for the Government as is consistent with what’s happening globally.
- Improving Client Service at the Canada Revenue Agency (CRA): Anyone who’s ever had to call CRA can relate to this. CRA fields 20 million call a year, and callers are often met with busy signals, dropped calls or long wait times. A November 2017 report found that call centre agents gave wrong information 30 per cent of the time. The government is proposing to spend $206 million over five years to review and improve CRA’s service model.
Overall, Canada’s global competitiveness remains in question, but we believe that markets will be broadly unchanged given how little was announced. This year’s budget is likely to be perceived as a ‘placeholder’ until next year, given that budgets are generally larger in scope when immediately before or after an election year.