Income taxes and capital gains rates unchanged in 2018 Federal Budget
Finance Minister Bill Morneau released his 2018 federal budget (the “Budget”) on February 27, 2018 (the “Budget Date”). The Budget forecasts a deficit of $18.1 billion, which is improved from the fall economic statement estimate of $18.6 billion. Canada’s current net debt to GDP ratio of roughly 30% remains the lowest by a considerable margin of the G7 countries, and among the lowest of the G20 countries. Canada’s economy remains one of the fastest growing among the G7 countries, and its unemployment rate has fallen from 7.1% to 5.9% since November, 2015, close to its lowest level in nearly four decades. Of concern is that the Budget provides no timeline as to when the current government intends to balance its finances and to commence reducing the size of its cumulative debt in excess of $700 billion.
Against this backdrop, many business owners and their professional advisers have been nervously awaiting the Budget, in respect of the final clarification of Finance Minister Morneau’s proposals concerning the taxation of investment income earned by a Canadian controlled private corporation (“CCPC”). When initially proposed on July 18, 2017, the Department of Finance signaled its intention to increase the level of taxation arising on investment income earned by a CCPC where it can be traced to reinvested business earnings. The measures, if enacted, would have increased the combined level of corporation and personal taxation of such investment income from approximately 56% presently to as much as 73% for an Ontario resident. Then, on October 18, 2017, further announcements were released by the Department of Finance following the expiration of the public consultation period on October 2, 2017. At that time, it was announced that all past investments and the income earned from those investments will not be subject to the new taxation regime, and a $50,000 per annum threshold on passive income earned by a CCPC would not be subject to the new taxation regime. Still, numerous questions remained about how this new investment income taxation system would be implemented because, on the surface, it appeared to be horrendously complex to administer and extremely punitive financially.
Fortunately, the Budget announced a more practical approach to dealing with the foregoing tax issue, likely because of the difficulty in drafting workable legislation to implement what the government had originally announced, not to mention that they likely didn’t want to raise any further ire from the business community (it was reported that the government had received 23,000 submissions on their four proposed tax measures during the public consultation period). A description of these new tax measures is contained under the Business Income Tax Measures section of this Budget Summary that follows this introduction.
Interestingly, no specific tax reduction measures were announced in this Budget to keep pace with the reduced corporate and personal taxation in the US resulting from their recent tax reform legislation effective in 2018. The Budget offered no further insight on this other than a statement to the effect that the government will review the impact of the US tax reform measures and their impact on the Canadian economy in the coming months. While the Budget didn’t reduce corporate or personal income taxes – other than to reaffirm the previously announced reduction in the federal small business deduction (“SBD”) rate to 10% in 2018 and 9% in 2019 and beyond – at the very least, corporate and personal income tax rates were not increased. In particular, the Budget does not include the rumoured increase to the current 50% capital gains inclusion rate.
For more information on this year’s Federal Budget, contact your Zeifmans advisor today or connect with Nathan Choran, Partner at 647.256.7571 or firstname.lastname@example.org.