What�s New In Tax?

Brian Quinlan Canada has a new minority Liberal government! Its coming tax policies need to appease the other parties so it can stay in power. Here are some of the “what’s new in tax” items we currently know about!

Tax Rates

Personal

There were no changes to the federal personal tax rates in 2019. The 2019 tax brackets were adjusted to take into account inflation. The Liberal government announced it will follow through with its plan to reduce personal tax for the middle class. The basic personal tax credit threshold is to be increased to $15,000 by 2023. The increased threshold for 2020 will be $13,229. The tax savings from this increased threshold will be reduced when an individual’s income exceeds $150,473 in 2020 and eliminated where income exceeds $214,368. High income earners will continue to claim the current 2020 threshold of $12,298.

Corporate

The federal corporate income tax rate on the first $500,000 of annual active business income earned by a Canadian controlled private corporation (CCPC) decreased 9 percent in 2019 from 10% in 2018. The federal rate remained at 15% on active business income in excess of $500,000. Each province/territory adds its own corporate tax to determine the overall tax payable by a corporation.

Home Buyers

RRSP Home Buyers’ Plan

Individuals can now borrow up to $35,000 (previously $25,000) from their RRSPs to buy a home. The loan repayment term continues to be 15 years. Beginning in 2020, the definition of a “first time home buyer” will be relaxed to permit greater access to the Home Buyers’ Plan after a breakdown of marriage or common-law relationship.

Stock Options

Employee – potential increase in tax on stock option benefit

Beginning with stock options granted in 2020, an employee – on the exercise of these stock options - may find themselves paying more tax than under the current tax rules. The current tax rules provide that the benefit received from a stock option (e.g., difference between the market price of the stock when the option is exercised and the exercise price paid) is not fully taxed as the employee can often claim a stock option deduction of 50% of the benefit. This means that only 50% of the benefit is subject to personal tax – like the taxation of capital gains. The new proposals provide that the stock option deduction will now not always be 50% of the stock option benefit - in fact, it can be zero! This will result in more than 50% - or all - of a stock option benefit being subject to personal tax. The cap on the stock option deduction is $200,000 per year. The new rules are not to apply to stock options granted by CCPCs or non-CCPC options granted by “start-ups”, “emerging” and “scale-up” corporations. (Definitions to come!)

Employer – deduction for employees denied stock option benefit deduction

As part of the proposed stock option rule changes, to the extent an employee is denied a partial or full stock option deduction, the employer can claim a deduction in calculating its taxable income. The employer is responsible for the reporting of an employee’s stock option benefit and available stock option deduction. The reporting is done on the employee’s T4 – statement of remuneration paid.

Investors

Tax free savings account (TFSA)

The annual contribution limit is $6,000 for both 2019 and 2020 (up from $5,500 in 2018). As of January 1, 2020, the cumulative TFSA contribution limit is $69,500 for an individual that was at least 18 when TFSAs were introduced in 2009.

Lifetime capital gains exemption.

The exemption on a sale of shares of a qualified small business corporation is increasing to $883,384 in 2020 from $866,912 in 2019. The exemption remains at $1,000,000 in respect of sales of eligible farm and fishing properties.

Retirement

Old Age Security (OAS)

The 2019 net income threshold for OAS repayment – “clawback”- to begin is $77,580. A 100% clawback occurs when 2019 net income is $126,058 or greater. The 2020 clawback begins at $79,054.

Canada Pension Plan (CPP)

Automatic enrollment to receive CPP payments now occurs for individuals eligible to receive CPP but did not apply before their 70th birthday. In 2019, the CPP enhancement plan began to be phased in. CPP payments increased to 33% of pensionable earnings in 2019 from 25% in 2018. The CPP contribution rate in 2019 was 5.1% - up from 4.95% in 2018. In 2020, the rate is 5.25% and is to be increased to 5.95% of salary/wages up to the year’s maximum pensionable earnings by 2025. The maximum pensionable earnings for 2019 is $57,400, $58,700 for 2020 and is expected to be $79,400 in 2025.

Registered Retirement Savings Plan (RRSP)

The maximum RRSP contribution limit is $26,500 for 2019 (achieved when 2018 earned income was at least $147,222) and $27,230 for 2020 (achieved when 2019 earned income was at least $151,278). Where an individual is a member of a registered pension plan, their RRSP contribution limit is reduced by the prior year’s pension adjustment (PA).

Professionals and WIP

In 2017 and prior years, work-in-progress - WIP - (i.e., unbilled fees) of a professional (e.g., medical doctor, dentist, veterinarian, chiropractor, lawyer, accountant) did not need to be included in the calculation of taxable income. New income tax rules – introduced in 2018 and being phased in over five years – require WIP to be included in taxable income.
- For 2018, a professional had to include 20% of their year-end WIP in their taxable income. In 2019 the amount has increased to 40% and annual 20% increases will occur to arrive at a 100% inclusion of WIP in 2022 taxable income.

Private Corporations

Restrictions on claiming the small business deduction tax credit.

Beginning in 2019, a CCPC’s use of the federal small business deduction tax credit is reduced when the corporation’s investment income exceeded $50,000 in the prior year. The reduction to the small business deduction tax credit threshold of $500,000 is $5 for every one dollar of investment income earned in excess of $50,000. The small business deduction tax credit is reduced to $nil once investment income exceeds $150,000.

Changes to refundable corporate income taxes

Changes – effective in 2019 – were made to a corporation’s refundable dividend tax on hand (RDTOH) account to limit a corporation’s ability to recover corporate income taxes paid on investment income through the payment of dividends to its shareholders. This change reduces the income tax deferral advantage when a corporation is used to earn investment income.

Other

Canada training credit

A new refundable tax credit is available for eligible tuition and fees incurred by an individual. Starting in 2019, qualifying individuals can accumulate annual amounts of $250. Beginning in 2020, the amount eligible to claim for a credit will be the lower of the accumulated amount and 50% of the eligible tuition and fees paid.

Digital news subscription tax credit

For 2020 to 2024, the first $500 paid by an individual for qualifying digital news subscriptions will be eligible for a federal 15% non-refundable tax credit.

Donations

Beginning in 2020, “Qualifying Canadian Journalism Organizations” will be able to issue official donation receipts for gifts received.

Registered disability saving plans (RDSPs)

It is proposed, that, as of 2021, relief will be available in respect of when an RDSP beneficiary ceases to be disabled in terms of closing of the RDSP and keeping past government contributions. The government’s plans also include providing RDSPs with protection from seizure by creditors in a bankruptcy filing (except for contributions made in the 12 months before a filing).

Income tax reporting by trusts

Beginning in 2021, certain trusts, in completing a trust tax return, will need to provide information on the trustees, beneficiaries and settlors of the trust. This may result in some trusts being required to file a tax return where there was no previous requirement to do so.

Brian J. Quinlan, CPA, CA, CFP, TEP, Campbell Lawless LLP, Chartered Professional Accountants email: bjq@clcpa.ca