Now that the dust has settled on the federal election, we thought we would revisit some of the specific tax proposals from the Liberal election platform—including some outstanding items from the 2021 federal budget—that may affect our client base.
Overview
Under the ‘no changes proposed’ heading, we have: personal income tax rates in general, the rules around capital gains (except a proposal to tax short-term ownership of a principal residence), and the rules concerning tax on split income (TOSI).
Items on the table include: a minimum effective tax rate of 15% for individuals with taxable income above the top tax bracket, a proposal to remove access to the principal residence exemption when a property is sold within 12 months of purchase, a significant increase in funding to the CRA to combat aggressive tax planning and tax avoidance, a possible course adjustment that could assist with succession planning, and a few changes regarding corporate taxes.
Minimum effective tax rate of 15% for individuals
A new minimum tax rate of 15% has been proposed for individuals with taxable income above the top bracket threshold ($216,511 for 2021 and $222,661 for 2022). This would replace the net federal tax where net federal tax is lower than the minimum tax. The intention is to limit a high earner’s “ability to artificially pay no tax through excessive use of deductions and credits.”
The proposed minimum tax would limit the benefit of any tax credits used to reduce taxable income, so that an individual’s federal tax would always be at least 15% of their taxable income. This tax credit approach means that the impact of the proposed minimum tax would most likely be felt by individuals with some combination of large donations, medical expenses, or large dividend receipts relative to their taxable income.
Note: to avoid double-taxation, any foreign income taxes paid would be used to reduce the minimum tax payable.
Housing/residential real estate investment
This “anti-flipping” tax on residential properties is a carry-over from the 2021 Federal Budget. Starting in the 2022 tax year, the government proposes to remove the principal residence exemption when a property is sold within 12 months of purchase or transfer of title—excluding specified changes in life circumstances such as pregnancy, death, new job, divorce, or disability. Any gain would be treated as a capital gain for income tax purposes, with deductions permitted for the costs of refurbishments.
CRA funding
The federal government proposes to significantly increase funding to the CRA—to the tune of $2.5 billion over four years—to help the agency combat “aggressive tax planning and tax avoidance” through additional tax compliance and enforcement actions. The Liberal election platform also included a plan to “modernize the general anti-avoidance rule regime in order to … restrict the ability of federally regulated entities … to use tiered structures as a form of corporate tax planning that flows Canadian-derived profit through entities in low-tax jurisdictions in order to reduce taxes back in Canada.”
Succession planning
There is a proposal (in Bill C-208) to amend Section 84.1 of the Income Tax Act. Section 84.1 is currently viewed as unfairly limiting the use of the Lifetime Capital Gains Exemption (LCGE) to fund the succession of a family business. The proposed legislation would limit the application of Section 84.1 in the case of certain intergenerational transfers of shares. Currently, under Section 84.1, the sale of qualified small business corporation shares (QSBC) to a related party can result in less favourable tax treatment than the sale to an arm’s length party—as it treats what would otherwise be considered (and taxed as) a capital gain, as a dividend.
Corporate tax
There are a few notable proposed changes regarding corporate tax:
- A reduction of federal tax from 15% to 7.5% for zero emissions technology companies (9% to 4.5% for small business)
- The implementation of a 3% Digital Services Tax effective January 1st, 2022
- The immediate expensing of up to $1.5 million per taxation year of capital property acquisitions by Canadian-controlled private corporations
- A limit on the interest deduction for large corporations, trusts and partnerships to 30% of tax-basis EBITDA
- The development of an investment tax credit of up to 30% for a range of clean technologies
What this may mean to you
With a continued minority government, the Liberals will need the support of another federal party in order to pass the legislation required to implement these proposals. Some may end up modified, and others may not move forward at all. Regardless, it is always advisable to keep an eye on the horizon and start planning now for any potential changes that may impact you or your business down the road.
S+C Partners is committed to helping you
Our dedicated team is here to support you. Please call us at 905-821-9215 or email us at info@scpllp.com if you have any questions or require any assistance.