Finance Minister Bill Morneau presented the 2019 Federal Budget on March 19, 2019. The following is a summary of some of the relevant measures proposed.
SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT (SR&ED) PROGRAM
Budget 2019 proposes to repeal the use of taxable income as a factor in determining a Canadian-Controlled Private Corporation’s (CCPC) annual expenditure limit for the purpose of the enhanced 35% refundable SR&ED tax credit. As a result, small CCPCs with taxable capital of up to $10 million will benefit from unreduced access to the enhanced refundable SR&ED credit regardless of their taxable income. As a CCPC’s taxable capital begins to exceed $10 million, this access will gradually be reduced.
This measure will apply to taxation years that end on or after March 19, 2019.
BUSINESS INVESTMENT IN ZERO-EMISSION VEHICLES
Budget 2019 proposes to provide a temporary enhanced first-year CCA rate of 100 per cent in respect of eligible zero-emission vehicles. Two new CCA classes will be created:
In the case of Class 54, there will be a limit of $55,000 (plus sales taxes) on the amount of CCA deductible in respect of each zero-emission passenger vehicle. This new $55,000 limit will be reviewed annually to ensure that it remains appropriate.
To be eligible for this first-year enhanced allowance, a vehicle must:
Vehicles in respect of which purchase assistance through other programs is received may be ineligible.
This measure will apply to eligible zero-emission vehicles acquired on or after March 19, 2019 and that become available for use before 2028, subject to a phaseout for vehicles that become available for use after 2023. A taxpayer will be able to claim the enhanced allowance in respect of an eligible zero-emission vehicle only for the taxation year in which the vehicle first becomes available for use.
HOME BUYER’S PLAN (HBP)
Budget 2019 proposes to increase the HBP withdrawal limit to $35,000 from $25,000. As a result, a couple will be able to withdraw $70,000 from their RRSP to purchase a first home.
This increase in the HBP withdrawal limit will apply to the 2019 and subsequent calendar years in respect of withdrawals made after March 19th, 2019.
Breakdown of a Marriage or Common-Law Partnership
An individual will not be excluded from participating in the HBP because they do not meet the first-time home buyer requirement due to a previous marriage or common-law partnership as long as the individual lives separate for a period of at least 90 days as a result of a breakdown in their marriage or common-law partnership.
However, in the case where an individual’s principal place of residence is a home owned and occupied by a new spouse or common-law partner, the individual will not be able to make the HBP withdrawal under these rules.
An individual will be required to dispose of their previous principal place of residence no later than two years after the end of the year in which the HBP withdrawal is made. This requirement will be waived for individuals buying out the share of the residence owned by the individual’s spouse or common-law partner as well as the existing rule that individuals may not acquire the home more than 30 days before making the HBP withdrawal.
Existing HBP rules will otherwise generally apply.
FIRST-TIME HOME BUYER INCENTIVE
To help make home ownership more affordable for first-time home buyers, the budget discusses introducing the First-Time Home Buyer Incentive.
The First-Time Home Buyer Incentive is a shared equity mortgage program financed through the Canada Mortgage and Housing Corporation (CMHC) that would give eligible first-time home buyers the ability to lower their borrowing costs. The incentive would provide funding of 5 or 10 per cent of the home purchase price. No ongoing monthly payments are required. The buyer would repay the incentive, for example, at re-sale.
CMHC would offer qualified first-time home buyers a 10 per cent shared equity mortgage for a newly constructed home or a 5 per cent shared equity mortgage for an existing home.
The incentive would be available to first-time home buyers with household incomes under $120,000 per year. At the same time, participants’ insured mortgage and the incentive amount cannot be greater than four times the participants’ annual household incomes.
The program is expected to be operational by September 2019 and further details are expected to be released before that date.
CANADA TRAINING CREDIT
Budget 2019 proposes to introduce the Canada Training Benefit aimed towards working Canadians.
The Canada Training Credit is a refundable tax credit aimed at providing financial support to help cover up to half of eligible tuition and fees associated with training. Eligible individuals will accumulate $250 each year in a notional account which can be accessed for this purpose.
In order to accumulate the amount of $250 in respect of a year, an individual must:
The amount of the credit that can be claimed for a taxation year will be equal to half of the eligible tuition fees paid in respect of the taxation year for a maximum of the balance accumulated in the notional account in respect of previous years.
Eligible fees will include:
The portion of the tuition fees refunded through the Canada Training Credit will not qualify as eligible expenses under the Tuition Tax Credit. The difference between the total eligible fees and the portion refunded through the Canada Training Credit will continue to qualify as eligible fees under the Tuition Tax Credit.
Individuals will be able to accumulate up to a maximum amount of $5,000 over a lifetime. Any unused balance will expire at the end of the year in which an individual turns 65.
This measure will apply to the 2019 and subsequent taxation years. Consequently, the credit will be available to be claimed in respect of the 2020 taxation year.
EMPLOYMENT INSURANCE (EI) TRAINING SUPPORT BENEFIT
This new benefit, which is expected to be launched in late 2020, would be available through the EI program and would provide up to four weeks of income support, every four years, to allow workers to train whenever works best for them. This income support will be paid at 55 per cent of a person’s average weekly earnings.
Starting in 2020, any business that pays employer EI premiums equal to or less than $20,000 per year would be eligible for a rebate to offset the upward pressure on EI premiums resulting from the introduction of the new EI Training Support Benefit.
MAKING CANADA STUDENT LOANS MORE AFFORDABLE
The budget proposes the following changes to Canada Student Loans and Canada Apprentice Loans:
The Canada Student Financial Assistance Act will also be amended so that student loans will not accumulate any interest during the six-month non-repayment period (the “grace period”) after a student loan borrower leaves school.
IMPROVING THE ECONOMIC SECURITY OF LOW-INCOME SENIORS
To allow low-income older Canadians to take home more money while they work, the budget proposes to enhance the Guaranteed Income Supplement (GIS) earnings exemption beginning with the July 2020 to July 2021 benefit year. The enhancement would:
– Increasing the amount of the full exemption from $3,500 to $5,000 per year for each GIS or Allowance recipient as well as their spouse;
– Introducing a partial exemption of 50 per cent, to apply to up to $10,000 of annual employment and self-employment income beyond the initial $5,000 for each GIS or Allowance recipient as well as their spouse.
CHANGE IN USE RULES FOR MULTI-UNIT RESIDENTIAL PROPERTIES
The Income Tax Act deems a taxpayer to have disposed of, and reacquired, a property when the taxpayer converts the property from an income-producing use to a personal use or vice-versa. Where the use of an entire property is changed in the manner described above, the taxpayer may elect that this deemed disposition not apply. The election can then provide a deferral of the realization of any accrued capital gain on the property until it is disposed of.
Prior to Budget 2019, this election was not available in situations where the change in use applied to a portion of a property.
To improve the consistency of the tax treatment of owners of multi-unit residential properties in comparison to owners of single-unit residential properties, Budget 2019 proposes to allow a taxpayer owning multi-unit residential properties to elect that the deemed disposition that normally arises on a change in use of part of the property not apply.
This measure will apply to changes in use of property that occur on or after March 19th, 2019.
REGISTERED DISABILITY SAVINGS PLAN (RDSP) – CESSATION OF ELIGIBILITY FOR THE DISABILITY TAX CREDIT
An RDSP may be established only for a beneficiary who is eligible for the disability tax credit (DTC). When a beneficiary no longer qualifies for the DTC, the current RDSP rules can require that the plan be closed, and grants and bonds be repaid to the Government of Canada.
Budget 2019 proposes to remove the time limitation on the period that an RDSP may remain open after a beneficiary becomes ineligible for the DTC and to eliminate the requirement for medical certification that the beneficiary is likely to again become eligible for the DTC in the future in order for the plan to remain open.
This measure will apply after 2020. An RDSP issuer will not, however, be required to close an RDSP on or after Budget Day and before 2021 solely because the RDSP beneficiary is no longer eligible for the DTC.
Also, unlike RRSPs, amounts held in RDSPs are not exempt from seizure by creditors in bankruptcy. Budget 2019 proposes to exempt RDSPs from seizure in bankruptcy, with the exception of contributions made in the 12 months before the filing.
DONATIONS OF CULTURAL PROPERTY
The Government of Canada provides certain enhanced tax incentives to encourage donations of cultural property of “national importance” to certain designated institutions and public authorities in Canada.
Budget 2019 proposes to amend the Income Tax Act and the Cultural Property Export and Import Act to remove the requirement that property be of “national importance” in order to qualify for the enhanced tax incentives for donations of cultural property.
This measure will apply in respect of donations made on or after March 19, 2019.
PENSIONABLE SERVICE UNDER AN INDIVIDUAL PENSION PLAN
When an individual terminates membership in a defined benefit registered pension plan, the income tax rules allow for a tax-deferred transfer of all or a portion of the commuted value of the member’s accrued benefits in one of two ways:
Planning is being undertaken that seeks to circumvent these prescribed transfer limits. This planning seeks to obtain a 100-per-cent transfer of assets to the new IPP instead of the restricted transfer of assets to the individual’s registered retirement savings plan.
To prevent this inappropriate planning, Budget 2019 proposes to prohibit IPPs from providing retirement benefits in respect of past years of employment that were pensionable service under a defined benefit plan of an employer other than the IPP’s participating employer (or its predecessor employer). Any assets transferred from a former employer’s defined benefit plan to an IPP that relate to benefits provided in respect of prohibited service will be considered to be a nonqualifying transfer that is required to be included in the income of the member for income tax purposes.
This measure applies to pensionable service credited under an IPP on or after March 19, 2019.
CARRYING ON A BUSINESS IN A TAX-FREE SAVINGS ACCOUNT (TFSA)
A TFSA is liable to pay tax under Part I of the Income Tax Act (at the top personal tax rate) on income from a business carried on by the TFSA or from non-qualified investments.
Under the current rules, the trustee of a TFSA (i.e. a financial institution) is jointly and severally liable with the TFSA for Part I tax, while the holder of the TFSA is not.
Budget 2019 proposes that the joint and several liability for tax owing on income from carrying on a business in a TFSA be extended to the TFSA holder.
The joint and several liability of a trustee of a TFSA at any time in respect of business income earned by a TFSA will be limited to the property held in the TFSA at that time plus the amount of all distributions of property from the TFSA on or after the date that the notice of assessment is sent.
This measure will apply to 2019 and subsequent taxation years.
CONTRIBUTIONS TO A SPECIFIED MULTI-EMPLOYER PLAN FOR OLDER MEMBERS
Budget 2019 proposes to align the specified multi-employer plan (SMEP) rules with the pension tax provisions that apply to other defined benefit registered pension plans (DBRPP).
The provisions governing the taxation of pension plans provide that contributions to a DBRPP in respect of a member cannot be made after the member can no longer accrue further pension benefits. Employers with SMEPs are not restricted from making contributions for workers over age 71 or those receiving a pension from the plan, if such contributions are required by the plan. Budget 2019 proposes that pension benefits may no longer be accrued for a member after the end of the year in which a member reaches
71 years of age or if the member has returned to work for the same or similar employer and is receiving a pension from the plan (except under a qualifying phased retirement program).
This measure will apply in respect of SMEP contributions made pursuant to collective bargaining agreements entered into after 2019, in relation to contributions made after the date the agreement is entered into.
SUPPORT FOR CANADIAN JOURNALISM
Budget 2019 proposes a temporary, non-refundable 15-per-cent tax credit on amounts paid by individuals for eligible digital news subscriptions. This will allow individuals to claim up to $500 in costs paid towards eligible digital subscriptions in a taxation year, for a maximum tax credit of $75 annually.
Amounts paid to an organization will be eligible only if, at the time they are paid, the organization is a Qualified Canadian Journalism Organization (QCJO).
This credit will be available in respect of eligible amounts paid after 2019 and before 2025.
EMPLOYEE STOCK OPTIONS
The Government is studying a move towards changes to limit the benefit of the employee stock option deduction for high-income individuals employed at large, long-established, mature firms.
More specifically, the Government will move towards applying a $200,000 annual cap on employee stock option grants that may receive tax-preferred treatment for employees of large, long-established, mature firms.
The Government intends to release further details of this measure before the summer of 2019.
The public policy rationale for preferential tax treatment of employee stock options is to support start-ups and rapidly growing Canadian businesses. The Government does not intend to cap stock option grants for these businesses.
MAKING ZERO-EMISSION VEHICLES MORE AFFORDABLE
The budget proposes to introduce a new federal purchase incentive of up to $5,000 for electric battery or hydrogen fuel cell vehicles with a manufacturer’s suggested retail price of less than $45,000.
The Government will be providing further details of on the program in the future.
GST/HST HEALTH MEASURES
The budget proposes to extend the application of the GST/HST relief to certain biologicals, medical devices and health care services to reflect the evolving nature of the health care sector including Human Ova and In Vitro embryos, foot care devices supplied on the order of a podiatrist or chiropodist and multidisciplinary health care services.
Sam Lackman, CPA, CA, Jennifer Warner, LL.B., LL.M. Tax and Julien Tessier, CPA auditor