On March 19, 2019, Finance Minister Bill Morneau tabled the 2019 Federal Budget. The Budget did not contain any changes to the personal or corporate income tax rates or to the taxation of capital gains. Instead, the Government continued its commitment to investing in the middle class with new tax measures aimed at assisting young working Canadians and seniors. The Budget also confirms the Government will proceed with certain measures announced in previous budgets and the 2018 Fall Economic Statement.
Our highlights of this year's Budget are summarized below.
Personal Income Tax
Permitting additional types of annuities in registered plans
An RRSP must mature by December 31 of the year in which an individual turns 71. On maturity, the funds must be withdrawn, transferred to a registered retirement income fund (RRIF), or used to purchase an annuity. In exchange for a lump-sum amount of funds, an annuity provides a stream of periodic payments, generally for a fixed term, for an individual's life, or for the joint lives of individuals and their spouses or common-law partners.
To provide Canadians with greater flexibility in managing their retirement savings, the Budget proposes to permit two new types of annuities for certain registered plans:
- "advanced life deferred annuities" will be permitted under an RRSP, RRIF, deferred profit sharing plan (DPSP), pooled registered pension plan (PRPP), and defined contribution registered pension plan (RPP)
- "variable payment life annuities" will be permitted under a PRPP and a defined contribution RPP
These measures will apply to the 2020 and subsequent taxation years. The proposed measures will be released for public comment at a later date. Further details on these two new types of annuities are provided below.
Advanced Life Deferred Annuities (ALDA)
An ALDA is a life annuity the commencement of which may be deferred until the end of the year in which the annuitant turns 85. Individuals can use ALDAs to defer up to 25% of their retirement holdings for a maximum lifetime dollar value of $150,000. There are other requirements for an annuity to be considered an ALDA and penalties related to non-compliance that are not discussed in this summary.
The value of the ALDA would not be included in the calculation of the minimum withdrawal amount from an individual's RRIF.
This proposed measure allows individuals to keep more money in their RRIF for longer and reduce their annual taxable income.
Variable Payment Life Annuities (VPLA)
The current tax rules generally require that retirement benefits from a PRPP or defined contribution RPP be provided by means of a transfer of funds from an individual's account to an RRSP or RRIF, variable benefits paid from the individual's account, or an annuity purchased from a licensed annuities provider. However, in-plan annuities (annuities provided to members directly from a PRPP or defined contribution RPP) are generally not permitted under the current tax rules.
The Budget proposes to amend the tax rules to permit PRPPs and defined contribution RPPs to provide a VPLA to members directly from the plan. A VPLA will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants. There are other VPLA requirements under these proposed rules that are not discussed in this summary.
Stock Option Benefit Limitation
Employee stock options are used as an alternate means of compensation to increase employee engagement and vest them in the growth of the company. They are common in start-ups where cash flow may be a challenge and companies look at these equity benefits to attract & retain talent. Under the current Canadian tax regime, employees enjoy a 50% deduction on the stock option benefit provided certain other conditions are met.
The Budget proposes to change these rules governing the taxation of employee stock options by imposing a cap on the preferential tax treatment. The proposed rules would entail imposition of an annual cap of $200,000 on employee stock option grants taxed effectively at a 50% rate. The rules will apply "for high-income individuals employed at large, long-established, mature firms" but should not change for "start-ups and rapidly growing Canadian businesses." However, these terms have not yet been defined. Further, the $200,000 limit will be based on the fair market value of the underlying shares at the time the options are granted. It is also not clear if a distinction will be made for Canadian-controlled private corporations where the 50% deduction is based under a different provision of the Income Tax Act.
To clarify the workings of the proposed rules, here is an example – an employee is granted 50,000 options to purchase shares of their employer at a time when the fair market value of the shares is $100. Since the value of the shares represented by the options at the time of grant is $5,000,000, the stock option deduction will only apply to 2,000 ($200,000/$100) options granted in the year. Assuming the shares are exercised when the share price is $120, this will result in a taxable benefit of $980,000 (50,000 X $20 minus 2,000 X $10) under the proposed regime as opposed to $500,000 (50,000 X $10) under existing legislation.
It is believed that the proposed changes target executives at large mature companies who are compensated with stock options currently taxed at the preferential rate. The Budget indicates that the public policy rationale for preferential tax treatment is to support younger and growing Canadian businesses as opposed to employees of established large companies. Under the proposed rules, corporations that do not qualify as "startups or rapidly growing Canadian businesses" will need to also track each stock option grant to determine the amount of the grant that will be eligible for the stock option deduction which could be an administrative challenge.
Further details on these proposed measures will be released before the summer of 2019, and changes will apply on a go-forward basis, therefore not affecting employee stock options granted before the announcement of the legislative proposals. Larger organizations may now wish to explore ways of providing incentive compensation other than stock options because there may not be much tax benefit anymore.
Canada Training Benefit
The Budget proposes to introduce a new Canada training benefit with two key components – a new, non-taxable Canada Training Credit, and a new Employment Insurance (EI) Training Support Benefit.
The Canada Training Credit is a new refundable tax credit that allows eligible individuals to accumulate $250 each year in a notional account starting in 2019, up to a lifetime limit of $5,000. The credit amount that can be claimed will be equal to the lesser of:
- half of the eligible tuition and fees paid in respect of the taxation year; and
- the individual's notional account balance for the taxation year.
The credit can be claimed for the 2020 and subsequent taxation years.
The new EI Training Support Benefit will allow eligible workers to receive up to four weeks of income support for training and up to $1,000 to help pay for the training. This benefit is expected to be launched in late 2020.
Home Buyers' Plan and The First-Time Home Buyer Incentive
The Budget proposes to increase the registered retirement savings plan (RRSP) withdrawal limit for a first-time home purchase from $25,000 to $35,000 applicable to 2019 and subsequent calendar years in respect of withdrawals made after March 19, 2019. Furthermore, extended access to the Home Buyers' Plan will be provided to individuals who experience a breakdown of a marriage or common-law partnership, even if they do not meet the requirement to be a first-time home buyer. This measure will be effective for RRSP withdrawals made after 2019.
The Budget also introduced a new Canada Mortgage and Housing Corporation ("CMHC") shared equity mortgage program for first-time home buyers. The program should be available to first-time home buyers with household incomes under $120,000 per year. At the same time, a participant's insured mortgage and the Incentive amount cannot be greater than four times the participant's annual household income, an amount up to $480,000.
Under the new program, the CMHC will offer qualified first-time home buyers a 10% shared equity mortgage for a newly constructed home or a 5% shared equity mortgage for an existing home. The shared equity mortgage will be repayable when the property is sold. More information on this program is expected to be released later this year.
Business Income Tax
Capital Cost Allowance (CCA)
Although not new to this Budget, an important item for business owners to note is the new Accelerated Investment Incentive, which applies to certain capital property subject to depreciation that is acquired after November 20, 2018, with the exception of Classes 43.1, 43.2 (both related to clean energy) and 53 (manufacturing & processing equipment).
The general rule works as follows:
- The half-year rule on additions of new property during the year no longer applies. A full year claim is allowed in the year of acquisition.
- The addition is multiplied at one-and-a-half times before applying the prescribed CCA rate.
Effectively, this new rule results in three times the normal first-year deduction for new additions of capital property. Note that this is only for the year of addition, the remaining life of the asset will be depreciated at the normal CCA rate times the remaining undepreciated capital cost.
This program is effective November 20, 2018 until 2028. However, after 2023, the one-and-a-half times multiple rule is phased out and only the removal of the half-year rule remains.
For the Classes of 43.1, 43.2 and 53, which are not included in the general rule, these classes are eligible for a 100% first year write-off until 2023, before being phased-out to 75% in 2024/2025 and 55% in 2026/2027. Similar to the general rule, these rules are not applicable for 2028 onwards.
In terms of changes introduced by this Budget, two new CCA classes have been created for zero-emission vehicles acquired after March 19, 2019. These classes (54 for vehicles otherwise included in 10 or 10.1 and 55 for vehicles otherwise includes in 16) are eligible for a 100% first-year write-off and a maximum cost of $55,000 plus sales tax as opposed to the $30,000 limitation for gas vehicles. The enhanced write-off will be phased-out at the same rate as the new Class 53 rate as discussed above.
Scientific Research & Experimental Development (SR&ED)
Effective March 19, 2019, the 35% enhanced credit on up to $3,000,000 of qualifying SR&ED expenditures is now available for all Canadian-controlled private corporations with taxable capital below $10 million, regardless of the previous year's taxable income. The Budget proposes a change in the calculation of the annual SR&ED expenditure limit for the enhanced 35% tax credit. Where previously the SR&ED credit was reduced down to the base federal rate of 15% when taxable income was between $500,000 to $800,000, the taxable income limit is now repealed.
Measures involving Cannabis
The Budget proposes to amend the Income Tax Act to reflect the current regulations for accessing cannabis for medical purposes. Eligible expenses for the medical expense tax credit will now include expenses for cannabis products purchased for a patient for medical purposes in accordance with the Cannabis Regulations, under the Cannabis Act. This measure will apply to expenses incurred on or after October 17, 2018.
The Budget proposes that edible cannabis, cannabis extracts (including cannabis oils) and cannabis topicals be subject to excise duties based on the quantity of total tetrahydrocannabinol (THC) contained in a final product. The THC-based duty will be imposed at the time of packaging of a product and become payable when it is delivered to a non-cannabis licensee (e.g. a provincial wholesaler, retailer or individual consumer). The combined federal-provincial-territorial THC-based excise duty rate is proposed to be $0.01 per milligram of total THC. The proposed changes to the excise duty framework will come into effect on May 1, 2019.
The current excise duty regime and associated rates for fresh and dried cannabis, and seeds and seedlings, will be unaffected by this proposed change.
For further details on these and other proposals in the Budget, please follow the link below for a full commentary.
Looking for more information on specific sections? We have provided some quick links for you:
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