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A quick tax summary of the Budget

Posted By: Anonymous

By: Nizam Shajani, CPA, CA, MBA, Partner

The Minister of Finance, the Honourable Bill Morneau released the 2018 Federal Budget on February 27th.  The government plans to collect $309.6 billion in 2018 compared to $293.5 billion in 2017 for an increase of $16.1 billion.  There will be an increase in spending by the Federal government from $311.3 billion to $329.0 billion over that same timeframe – resulting in a deficit of $19.4 billion for 2018 (compared to $17.8 billion in 2017).

No changes to the personal and corporate tax rates. 

Changes to Business Tax

Two major areas of change include how passive income will be taxed and how refundable taxes will be recovered by corporations.

Passive income

Passive income is subject to different corporate tax rates.  This generally includes interest, rents, royalties, dividends from portfolio investments and taxable capital gains.  

You should also be aware that qualifying small businesses pay a lower rate of tax (12% in Alberta) for income under $500,000.  Amounts over this are taxed at 27% (in Alberta).   

The new budget proposes that corporations that earn passive income will be limited to $50,000 in this type of income.  Amounts greater than $50,000 will result in a reduction of the small business deduction at a rate of $5 for each $1 in passive income earned over $50,000 – with no small business deduction available for passive income of $150,000 or more.  This will be applied to all associated companies who must share the small business deduction limit.

This matters to businesses that are actively operating and are saving – such as for large capital purchases or for the owner’s pension. 

Refundable taxes

Traditionally businesses that receive passive income pay a higher rate of tax on that portion of income.  However, a portion of that tax is refunded when the business pays dividends to its owners.  This has allowed the government to collect the personal tax revenues in advance without having to wait for the business owner to pay themselves from the business.

This new budget rules no longer makes that refundable portion automatic.  There are now restrictions.  Recovering the refundable taxes will generally require the payment of non-eligible dividends.  Non-eligible dividends are taxed at a higher rate then an eligible dividend. 

There is an exception for refundable taxes arising from eligible dividends received.  As most public corporations pay eligible dividends, this type of investment should not be affected.  However, a calculation of eligible RDTOH and ono-eligible RDTOH will now be necessary.

Changes to Personal Tax

Canada workers benefit (a benefit for receiving employment income) will increase from $1,192 to $1,355 for individuals and from $2,165 to $2,335 for families.  There is a claw back of 12% to these amounts for income more than $12,820 for individuals and $17,025 for families. 

Medical expense tax credits will now include costs for animals specially trained to perform tasks for patients.  Note this does not include comfort or emotional support pets. 

Tax credits for flow through investments for mineral exploration have been extended for investments made before March 31, 2019.  

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action.

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