2016 Federal Budget^©

A preview of the 2016 federal budget under the Liberal government

On 22 March 2016, the Minister of Finance, Honourable William Francis Morneau tabled the Liberal government's first budget (hereinafter known as the Budget) after winning the last federal election. The following are not an exhaustive list of changes proposed by the Budget.

Selected Personal Tax Changes

• Starting July 2016, a new tax-free Canada Child Benefit paid monthly will replace the Universal Child Care Benefit (UCCB), Canada Child Tax Benefit (CCTB) and National Child Benefit. Like the previous child benefits, the new benefit declines as income rises. It may be reduced to nil when household income reaches $157,188. Additional amounts will continue to be provided if a child is eligible for disability tax credit. All individuals who are Indians under the Indian Act and residents of Canada for tax purposes are eligible to receive this new benefit.
  
  The Budget also proposes to allow taxpayers to request a retroactive payment of the Canada Child Benefit, CCTB or UCCB within a 10 year period effective for requests made after June 2016.


• Effective 1 January 2016, an eligible educator (individuals holding a valid teacher’s certificate in the province where they are employed) may claim a 15% refundable tax credit on up to $1,000 in eligible supplies for use in a school or regulated child care facility.


• Effective 2016, the maximum Northern residents deduction has increased to up to $11 per day per household member if no other member claims the deduction, to $22 per day.


• Effective 2017, education and textbook tax credits are eliminated resulting in a loss of tax savings to taxpayers with previously qualified education expenses of up to $720 and $117 respectively.


• Effective 2016, the maximum eligible Children’s Fitness and Arts Tax Credits will be reduced to $500 and $250 respectively, resulting in a loss of annual tax savings of up to $150 and $75. Both credits will be eliminated in 2017 and subsequent taxation years.

Selected Business Tax Changes

• Reductions in the small business tax rate legislated by the previous government for 2017, 2018 and 2019, have been deferred. Hence, the small business tax rate will remain at 10.5% after 2016 and the current gross-up factor and dividend tax credit rate applicable to non-eligible dividends will be maintained to preserve integrated tax rates.


• The Budget proposes amendments so that a Canadian-controlled private corporation (CCPC) will not be eligible for the small business deduction (SBD) on income from providing services or property directly or indirectly to another private corporation where at any time in a taxation year, the CCPC, one of its shareholders or a person that does not deal at arm’s length with the shareholder has a direct or indirect interest in the private corporation. This rule will not apply if all or substantially all of the CCPC’s active business income is earned from providing services or property to arm’s length persons other than the private corporation.
  
  This measure prevents some taxpayers to gain further access to the SBD through a structure where the shareholder(s) of a CCPC is the member of a partnership and the CCPC earns fees from the partnership under a contract for services, allowing the CCPC to potentially claim a full SBD on income earned from the partnership. For taxation years that begin after 21 March 2016, the budget proposes to address this tax planning by extending the current rules to capture situations in which a CCPC provides services or property directly or indirectly to a partnership.


• Taxation on corporate income tax is contingent upon its nature (ie. active business income or not) and SDB limit. Astute tax planning could allow associated corporate taxpayers to each enjoy its own SBD limit. Effective 21 March 2016, the Budget proposes amendments to ensure that, where election under subsection 256(2) of the Income Tax Act (ITA) is made, investment income derived from an associated corporation’s active business will be ineligible for the SBD.


• CCPCs that have principal income from property and have more than five full-time employees will continue to be eligible for the SBD.


• Before this Budget, 75% of eligible capital expenditures (such as licences, franchise rights, farm quotas and the acquisition of goodwill) are included in a cumulative eligible capital (CEC) pool. A deduction can be claimed against taxable income at the rate of 7% per year on a declining balance basis. Up to 75% of the proceeds received on the disposition of eligible capital properties (ECP) reduce the CEC pool. If the receipts exceeds the CEC pool, the excess first recaptures any previously claimed deductions. The remainder is included in business income at a 50% inclusion rate.
  
  Starting 1 January 2017, the Budget introduces a new CCA Class 14.1 in which CEC balances will be transferred to. 100% of expenditures that would previously have been included in the CEC pool will be amortized at 5% on a declining balance. The rules that currently apply to depreciable property, such as the “half-year rule” recapture and capital gains, will continue to apply to properties included in this new CCA class.

Other Changes

The Budget contains many changes in tax measures that affect most Canadians and marks a new era under a majority Liberal government. Unlike the Conversatives who advocate balanced budget, the Liberals tabled a deficit budget to fulfill their pre-election promises. The deficit ballooned from the previously expected $10 billion to $18.4 billion in 2016-17, almost twice as much.

The Liberal government alleged that the Budget is a goodwill gesture to improve relationship with the First Nation. Increased funding will improve Aboriginal housing, education and water quality. On the environmental front, it provided tax break (like accelerated CCA for electric vehicle charging stations and electrical energy storage properties) to help build a green economy. It also allocated $125 billion to public transit and social infrastructure (such as child care spaces and community centres).

Age eligibility for Old Age Security (OAS) was lowered to 65 from 67 and the guaranteed income supplement (GIS) for single low-income seniors was increased by 10%.

Furthermore, the Budget provided support to the CRA to:

• enhance its efforts to combat tax evasion and tax avoidance by hiring more tax auditors and specialists, developing robust business intelligence, increasing verification activities and improving the quality of investigative work that targets criminal tax evaders;


• improve its ability to collect outstanding tax debts;


• ramp up its outreach efforts to ensure that taxpayers understand and meet their tax obligations.

Remarks

The Budget will no doubt please some voters. However, the deficit and the resulting national debts to finance the proposed government spendings could have an adverse impact on the Canadian economy. In view of our aging population, lowering OAS age eligibility may eventually backfire, rendering Canada's largest pension program less robust. In short, the Budget will increase financial burden on future generations.

The Budget emphasized that government spendings focus on the middle class. However, replacing education and textbook tax credits by student loan grants that only low-income students qualify will likely raise the financial burden on many middle class families with children receiving post secondary education. The impact will also be determined by the eligibilities of the grants, which remain unclear at the point of writing.

Loopholes closed by the new tax measures suggested that the Budget targeted wealthy astute taxpayers to eliminate their tax saving opportunities.

Insofar as improving wellbeing of the indigenous people, more funding could harm more than help. First and foremost, federal subsidies on state-sponsored child removal from First Nation families contribute to the over representation of Aboriginal children in foster care. In many cases, child protection agencies of provincial governments appear to have used native children as tool to get transfer payments under the pretext of child protection.

In our opinion, a better goodwill gesture is to eliminate child removal related financial incentives, such as federal subsidies and Children's Special Allowances

Pursuant to the Children’s Special Allowances Act (1992, c. 48, Sch.), CSA is an enticing financial incentive. CSA payments are in 9-digit figures and are rising every year

(CSA, a tax-free monthly federal payment made to service providers of the child protection industry such as agencies, institutions and foster parents who are responsible for the care and education of children under 18 who physically reside in Canada and who are not in the care of their parents). Since all Indians under the Indian Act qualify for the new tax-free Canada Child Benefit proposed in the Budget, this new benefit may become money that could be seized by child protection agencies or foster parents after First Nation children are removed. Elimination of these incentives will not only reduce the budget deficit but will also mitigate costs to deal with the huge social problems created by state-sponsored child removal.

There are compelling reasons to believe that modern child protection is a derivative of the now renounced residential school system. Empirical evidence suggests that Native foster children reached 27,000 in 2006 and surpassed the number of children removed during the height of the residential school era. Both residential schools and modern child protection involve state-sponsored child removal, which is a powerful tool of cultural assimilation that could be used for political purposes under the pretext of child welfare.