Jamie Kungel, CPA, CA
On March 22, Minister of Finance Bill Morneau delivered the Liberal Government’s second federal budget. For small business owners, what was not in the budget was just as relevant as what made it into the final document.
Leading up to the federal budget, there was concern that a number of significant income tax changes would be implemented, including an increase in the capital gains inclusion rate and further changes to the small business deduction. Thankfully, neither of these changes materialized in the budget; however, there may still be changes coming that will impact business owners.
Minister Morneau said the federal government will be reviewing various tax planning strategies that utilize private companies to reduce or defer income taxes for high income individuals. Some of the specific strategies the federal government will be looking at include:
- Using private companies to sprinkle income between family members, either by way of dividends or capital gains;
- Accessing lower corporate taxes that allow for the quicker accumulation of portfolio investments inside a company; and
- Converting a private company’s income into capital gains.
The federal government intends to release a paper in the coming months outlining the nature of its concerns in more detail, as well as propose changes to address these issues.
As for what actually made it into the budget, here are a few highlights:
- No changes to corporate income tax rates
- No changes to personal income tax rates
- Billed Basis Accounting – Professionals, such as accountants, lawyers, doctors, etc. are able to exclude from income the amount of their work in progress (“WIP”). WIP is included in income when it is billed to the customer. The budget proposes to eliminate the WIP deduction for taxation years that begin on or after budget day. This measure will be transitioned in by including 50% of the lesser of the cost or fair market value of the WIP in income for the first taxation year after March 22, 2017, with the remainder of the WIP being included in income in the following taxation year.
- Disability Tax Credit – A proposed change to the Disability Tax Credit will allow nursing practitioners to be added to the list of medical professionals who can certify eligibility for the Disability Tax Credit
- Medical Expense Tax Credit – The budget proposes to clarify the application of the medical expense tax credit allowing individuals to claim the cost of reproductive technologies where medical intervention is required to conceive a child, even in the absence of an existing illness or condition.
- Public Transit Tax Credit – Effective July 1, 2017, the 2017 budget proposes to eliminate the Public Transit Tax Credit.
Among other things, there were changes to the Tuition Tax Credit and a consolidation of the various Caregiver Credits into a single credit: the Canada Caregiver Amount.
While the budget was light on changes that will impact the small business owner, it will be particularly interesting to see the federal government’s paper when it is released with respect to tax planning strategies associated with private corporations. If an individual has a business operated through a private company, he or she may want to consider implementing some of the current tax strategies that may no longer be available in the near future.
Jamie Kungel, CPA, CA is the Regional Tax Leader for MNP LLP. For more information, contact Jamie at 250.734.4303 or firstname.lastname@example.org. Please consult a tax advisor for advice about how the above information should be applied.