Some Budget Highlights that may effect you!
Our Federal Government released the much awaited new budget last week. I wanted to pull out some of the highlights that may affect my clients and this industry as a whole and communicate that to you. Whether you agree or disagree with the budget is up to you, I am not a fan of the changes to tax rates and the debt that I believe will be wasted away as governments may promise to put money where its needed but often that money just goes into a black hole that will need to be repaid at some point. I hope that I am wrong!
It will be interesting when the new Alberta budget comes in next month(???) to see just how much poorer we become as a province. Again the increased taxation and anti business position of the new government is not favorable to our provincial economy. Again I hope that I am wrong and that the government does a great job of steering our province back in the right direction and we get people working, not just collecting more EI.
Enjoy this light reading!!
PERSONAL TAX MEASURES The following are the key personal tax measures proposed in Budget 2016: Personal Income Tax Rate Changes On December 7, 2015, the Government announced a reduction of the second personal income tax rate to 20.5 percent from 22 percent and the introduction of a 33 percent personal income tax rate on individual taxable income in excess of $200,000, effective for the 2016 and subsequent taxation years. These proposals were included as part of Bill C-2, which was tabled on December 9, 2015. Budget 2016 includes further amendments to reflect the new top marginal income tax rate in these provisions. These measures will apply to the 2016 and later taxation years.
Canada Child Benefits There are currently two main federal measures which provide financial assistance to families with minor children: the Canada child tax benefit (CCTB) and the universal child care benefit (UCCB). The CCTB is a non-taxable benefit that is paid monthly. The benefit is based on adjusted family net income and the number of children in the family. It has three components: a base benefit, a national child benefit supplement and a child disability benefit. Whereas the CCTB is non-taxable, the UCCB provides a taxable benefit of $160 per month for each child under the age of six and $60 per month for each child aged 6 through 17. Budget 2016 introduces a new Canada Child Tax Benefit that replaces the CCTB and UCCB. Depending on the number of children in the family, the new system will be beneficial to families with adjusted family net income under about $140,000. The Canada Child Benefit (CCB) will be non-taxable, tied to family income, and apply to families with children up to 17 years old. It will provide a maximum benefit of $6,400 per child under the age of 6 and $5,400 per child aged 6 through 17. The benefit will be phased out at increasing rates depending on adjusted family net income and number of children in the family. The budget will continue to provide an additional amount of up to $2,730 per child eligible for the disability tax credit (which is phased-out as family income increases). The CCB will be effective July 1, 2016, with entitlement for the July 2016 to June 2017 benefit period based on 2015 adjusted family net income. The CCB will not reduce benefits paid under the GST credit and will not be included in income for the purposes of federal income tested programs delivered outside of the income tax system, such as the guaranteed income supplement.
Family Income Splitting Credit A non-refundable income splitting tax credit is available for couples with at least one minor child, which allows a higher-income spouse or commonlaw partner to notionally transfer up to $50,000 of taxable income to their spouse or common-law partner for the purpose of reducing the couple’s total income tax liability by up to $2,000. The income splitting tax credit for eligible couples with minor children will no longer be available for 2016 and subsequent tax years.
Education and Textbook Tax Credits The education tax credit and textbook tax credit provide 15 percent non-refundable tax credits based on months of full-time or part-time enrolment in qualifying educational programs at designated educational institutions. Budget 2016 proposes to eliminate the education and textbook tax credits. This measure does not eliminate the tuition tax credit. This measure will apply effective January 1, 2017. Unused education and textbook credit amounts carried forward from years prior to 2017 will remain available to be claimed in 2017 and subsequent years.
Action Step: Although the budget eliminates the education and textbook tax credits, this was done to provide the ability to enhance the Canada Student Grants and Canada Student Loans programs. On more options regarding education planning, please consult your financial advisor.
Children’s Fitness and Arts Tax Credits The Children’s Fitness and Arts Tax Credits provide 15 percent non-refundable tax credits on fees paid for qualifying programs for children under 16 years of age. Budget 2016 proposes to phase out the children’s fitness and arts tax credits by reducing the 2016 maximum eligible amounts to $500 from $1,000 for the children’s fitness tax credit (which will remain refundable for 2016) and to $250 from $500 for the children’s arts tax credit. Both credits will be eliminated for the 2017 and subsequent taxation years.
“Corporate-Class” Mutual Funds Canadian mutual funds can be in the legal form of a trust or a corporation. Many of these mutual fund corporations are organized as “switch funds”. These offer different types of asset exposure in different funds, but each fund is structured as a separate class of shares within the mutual fund corporation. Investors are able to exchange shares of one class of the mutual fund corporation for shares of another class, on a tax-deferred basis, in order to switch their economic exposure between the mutual fund corporation’s different funds. Budget 2016 proposes that fund switches within a mutual fund corporation be considered a disposition at fair market value for income tax purposes. The measure will not apply to switches where the shares received in exchange differ only in respect of expenses to be borne by investors and otherwise derive their value from the same portfolio within the mutual fund corporation (e.g., the switch is between different series of shares within the same class). This measure will apply to dispositions of shares that occur after September 2016.
Action Step: The use of “switch funds” or “corporate class” mutual funds in the past provided a good opportunity to defer tax on the switch from one fund to another within the same corporation. If you have made an investment in such a fund in the past, the ability to make tax-deferred switches may be gone, but this doesn’t necessarily mean you should rush to sell these funds. After all, making a change could trigger a taxable event. Speak to your advisor about the continued appropriateness of these funds and whether and when a change should be made.