2017 Federal Budget Summary

INTRODUCTION

The Minister of Finance, Bill Morneau, presented the 2017 federal budget on March 22, 2017. The following is a summary of the budget.

PERSONAL INCOME TAX MEASURES

Disability tax credit – nurse practitioners

The budget proposes to add nurse practitioners to the list of medical practitioners that could certify eligibility for the disability tax credit. A nurse practitioner would be permitted to certify for all types of impairments that are within the scope of their practice.

This measure will apply to disability tax credit certifications made on or after March 22, 2017.

Medical expense tax credit – eligible expenditures – treatment of fertility-related expenses

The budget proposes to clarify the application of the Medical Expense Tax Credit so that individuals who require medical intervention in order to conceive a child are eligible to claim the same expenses that would generally be eligible for individuals on account of medical infertility. This measure will apply to the 2017 and subsequent taxation years. A taxpayer will be entitled to elect in a year for this measure to apply for any of the immediately preceding ten taxation years in their return of income in respect of the year.

Consolidation of caregiver credits

The budget proposes to simplify the existing system of tax measures for caregivers by replacing the existing caregiver credit, infirm dependant credit and family caregiver tax credit with a new Canada Caregiver Credit. The Canada Caregiver Credit will be reduced dollar-for-dollar by the dependant’s net income above $16,163 (in 2017). The dependant will not be required to live with the caregiver in order for the caregiver to claim the new credit. The Canada Caregiver Credit will no longer be available in respect of non-infirm seniors who reside with their adult children.

The Canada Caregiver Credit will apply for the 2017 and subsequent taxation years.

Mineral exploration tax credit for flow-through share investors

The Government proposes to extend eligibility for the mineral exploration tax credit for an additional year, to flow-through share agreements entered into on or before March 31, 2018.

Electronic distribution of T4 information slips

The budget proposes to allow employers to distribute T4 (Statement of Remuneration Paid) information slips electronically to current active employees without having to obtain express consent from those employees in advance. Employers are required to have sufficient privacy safeguards in place before T4s can be sent without express consent.

This measure will apply in respect of T4s issued for the 2017 and subsequent taxation years.

Tuition tax credit

The budget proposes to extend the eligibility criteria for the tuition tax credit to fees for an individual’s tuition paid to a university, college or other post-secondary institution in Canada for occupational skills courses that are not at the postsecondary level (e.g., training in a second language or in basic literacy and numeracy to improve job skills). This measure will apply in respect of eligible tuition fees for courses taken after 2016.

To improve fairness, the budget proposes to expand the range of courses eligible for this credit to include occupational skills courses that are undertaken at a post-secondary institution in Canada, and to allow the full amount of bursaries received for such courses to qualify for the scholarship exemption (where conditions are otherwise met).This measure will apply to the 2017 and subsequent taxation years.

Ecological gifts program

Budget 2017 proposes a number of measures to better protect gifts of ecologically sensitive land.

• 50% tax if the transferee changes the use of the property, or disposes of the property, without the consent of Environment and Climate Change Canada (ECCC);
• Clarification of the Minister of ECCC’s ability to determine whether proposed changes to the use of lands would degrade conservation protections;
• Extension of the requirement to approve recipients, on a gift-by-gift basis, to municipalities and municipal and public bodies performing a function of government;
• Private foundations are no longer permitted to receive ecogifts;
• In Québec, subject to certain conditions, donations of personal servitudes may qualify as ecogifts.

These measures will apply in respect of transactions or events that occur on or after March 22, 2017.

Public transit tax credit

The budget proposes that the public transit tax credit be eliminated, effective as of July 1, 2017.

Home relocation loans deduction

The value of any portion of the benefit that is in respect of an eligible home relocation loan may be deductible from taxable income. However, the amount deductible is generally limited to the annual benefit that would arise if the amount of the loan were $25,000. The budget proposes to eliminate the deduction in respect of eligible home relocation loans.

This measure will apply to benefits arising in the 2018 and subsequent taxation years.

Anti-avoidance rules for registered plans

The budget proposes to extend the anti-avoidance rules listed below to RESPs and RDSPs:

• The advantage rules, which help prevent the exploitation of the tax attributes of a registered plan;
• The prohibited investment rules; and
• The non-qualified investment rules, which restrict the classes of investments that may be held.

Subject to certain exceptions, this measure will apply to transactions occurring, and investments acquired, after March 22, 2017. For this purpose, investment income generated after March 22, 2017 on previously acquired investments will be considered to be a “transaction occurring” after March 22, 2017.

BUSINESS INCOME TAX MEASURES

Investment fund mergers

Merger of switch corporations into mutual fund trusts

The budget proposes to extend the mutual fund merger rules to facilitate the reorganization of a mutual fund corporation that is structured as a switch corporation into multiple mutual fund trusts on a tax-deferred basis. This measure will apply to qualifying reorganizations that occur on or after March 22, 2017.

Segregated fund mergers

The budget proposes to allow insurers to effect tax-deferred mergers of segregated funds. This measure will apply to mergers of segregated funds carried out after 2017 and to losses arising in taxation years that begin after 2017.

Clean energy generation equipment: geothermal energy

The budget proposes three changes:

• Eligible geothermal energy equipment under Classes 43.1 and 43.2 will be expanded to include geothermal equipment that is used primarily for the purpose of generating heat or a combination of heat and electricity.
• Geothermal heating will be made an eligible thermal energy source for use in a district energy system:
  • Equipment that uses geothermal energy used primarily for heating purposes will be included in category 43.1 (rate of 30%) or 43.2 (rate of 50%) instead of category 1 (rate of 4%).
• Expenses incurred for the purpose of determining the extent and quality of a geothermal resource and the cost of all geothermal drilling (e.g., including geothermal production wells), for both electricity and heating projects, will qualify as a Canadian renewable and conservation expense.
  • These expenses will be entirely deductible in the year they are incurred where certain conditions are met.

The measures will apply in respect of property acquired for use on or after March 22, 2017 that has not been used or acquired for use before March 22, 2017.

Canadian exploration expense: oil and gas discovery wells

The budget proposes that expenditures related to drilling or completing a discovery well (or in building a temporary access road to, or in preparing a site in respect of, any such well) generally be classified as a Canadian development expense (CDE) at a rate of 30% instead of a Canadian exploration expense (CEE) at a rate of 100%.

This measure will apply to expenses incurred after 2018. However, the measure will not apply to expenses actually incurred before 2021 where the taxpayer has, before March 22, 2017, entered into a written commitment to incur those expenses.

Reclassification of expenses renounced to flow-through share investors

The budget proposes to no longer permit eligible small oil and gas corporations to treat the first $1 million of CDE as CEE. This measure will apply in respect of expenses incurred after 2018, with the exception of expenses incurred after 2018 and before April 2019 that are renounced under a flow-through share agreement entered into after 2016 and before March 22, 2017.

Meaning of factual control

The Income Tax Act recognizes two forms of control of a corporation: de jure (legal) control and de facto (factual) control.

Factual control of a corporation exists where a person has “directly or indirectly in any manner whatever” influence that, if exercised, would result in control in fact of the corporation. A recent court decision held that, in order for a factor to be considered in determining whether factual control exists, it must include “a legally enforceable right and ability to effect a change to the board of directors or its powers, or to exercise influence over the shareholder or shareholders who have that right and ability”.

The budget proposes that the Income Tax Act be amended to clarify that, in determining whether factual control of a corporation exists, factors may be considered that are not limited to the requirement set out above. This measure will apply in respect of taxation years that begin on or after March 22, 2017.

Timing of recognition of gains and losses on derivatives

Aside from the mark-to-market property regime applicable to financial institutions, there are no specific rules in the Income Tax Act that govern the timing of the recognition of gains and losses on derivatives held on income account.

The budget proposes to introduce an elective mark-to-market regime for derivatives held on income account. Specifically, an election will allow taxpayers to mark-to-market all of their eligible derivatives. Once made, the election will remain effective for all subsequent years unless revoked with the consent of the Minister of National Revenue.

Furthermore, the recognition of any accrued gain or loss on an eligible derivative (that was previously subject to tax on a realization basis) at the beginning of the first election year will be deferred until the derivative is disposed of.

This election will be available for taxation years that begin on or after March 22, 2017.

The budget also proposes to introduce a specific anti-avoidance rule; more particularly a stop-loss rule. This will effectively defer the realization of any loss on the disposition of a position to the extent of any unrealized gain on an offsetting position.

A gain in respect of an offsetting position would generally be unrealized where the offsetting position has not been disposed of and is not subject to mark-to-market taxation.

This measure will apply to any loss realized on a position entered into on or after March 22, 2017.

Additional deduction for gifts of medicine

Corporations that donate medicine from their inventory to an eligible charity can claim an additional deduction equal to the lesser of the cost of the donated medicine and 50% of the amount by which the fair market value of the donated medicine exceeds its cost. The budget proposes to eliminate the deduction for gifts of medicine from a corporation to a registered charitable organization.

This measure will apply to gifts of medicine made on or after March 22, 2017.

Investment tax credit for child care spaces

The investment tax credit for child care spaces provides a 25% non-refundable tax credit on costs incurred to build or expand child care spaces in licensed child care facilities. These facilities must be for the benefit of children of the taxpayer’s employees and must be ancillary to the taxpayer’s business. The maximum value of the credit is $10,000 per space created. Unused amounts can be carried back three years and forward 20 years.

The budget proposes to eliminate the investment tax credit for child care spaces.

This measure will apply in respect of expenditures incurred on or after March 22, 2017. To provide transitional relief, the credit will be available in respect of eligible expenditures incurred before 2020 pursuant to a written agreement entered into before March 22, 2017.

Insurers of farming and fishing property

The budget proposes to eliminate the tax exemption for insurers of farming and fishing property.

This measure will apply to taxation years that begin after 2018.

Billed-basis accounting (deferral of work in progress)

The budget proposes to eliminate the ability for designated professionals (dentists, accountants, lawyers, doctors, chiropractors, and veterinarians) to elect to use billed-basis accounting to defer the taxation of their work in progress. This measure will apply to taxation years that begin on or after March 22, 2017.

To mitigate the effect on taxpayers, a transitional period will be provided to phase in the inclusion of work in progress into income.

For the first taxation year that begins on or after March 22, 2017, 50% of the lesser of the cost and the fair market value of work in progress will be taken into account for the purposes of determining the value of inventory held by the business under the Income Tax Act.

For the second, and each successive taxation year that begins on or after March 22, 2017, the full amount of the lesser of the cost and the fair market value of work in progress will be taken into account for the purposes of valuing inventory.

INTERNATIONAL TAXATION

Extending the base erosion rules to foreign branches of life insurers

The budget proposes to amend the Income Tax Act to ensure that Canadian life insurers are taxable in Canada with respect to their income from the insurance of Canadian risks. It is further proposed that complementary anti-avoidance rules be introduced to ensure the integrity of the proposed rule. This measure will apply to taxation years of Canadian taxpayers that begin on or after March 22, 2017.

SALES AND EXCISE TAX MEASURES

Taxi and ride-sharing services

To ensure that the GST/HST applies consistently to taxi services and ride-sharing services, the budget proposes to amend the definition of a taxi business to require providers of ride-sharing services to register for the GST/HST and charge tax on their fares in the same manner as taxi operators.

These changes will only apply to transportation that is supplied in the course of a commercial activity. These changes will not apply to a school transportation service for elementary or secondary students or a sightseeing service.

The amendment will be effective as of July 1, 2017.

GST/HST rebate to non-residents for tour package accommodations

The budget proposes to repeal the GST/HST rebate available to non-residents for the GST/HST that is payable in respect of the accommodation portion of eligible tour packages.

This repeal will generally apply in respect of supplies of tour packages or accommodations made after March 22, 2017. As a transitional measure, the rebate will continue to be available in respect of a supply of a tour package or accommodations made after March 22, 2017 but before January 1, 2018 if all of the consideration for the supply is paid before January 1, 2018.

OTHER MEASURES

A tax system that’s fair for middle class Canadians

Tax planning using private corporations

The review of federal tax expenditures highlighted a number of issues regarding tax planning strategies using private corporations. These strategies include:

• Sprinkling income using private corporations, which can reduce income taxes by causing income that would otherwise be realized by an individual facing a high personal income tax rate to instead be realized by family members subject to a lower rate of tax.
• Holding a passive investment portfolio inside a private corporation, which may be financially advantageous for owners of private corporations compared to otherwise similar investors.
• Converting a private corporation’s regular income into capital gains, which can reduce income taxes by taking advantage of the lower tax rates on capital gains.

The Government intends to release a paper in the coming months setting out the nature of these issues in more detail, including family-owned business transfers, as well as proposed policy responses.

Authors: Jennifer Warner, LL.B., LL.M. Tax and Élisabeth Daigneault, LL.B., M. Tax