On March 22, 2016, the new Liberal Government’s first federal budget, Growing the Middle Class (“Budget 2016”), was tabled and includes measures that will grow the economy.
According to the federal government, “[a] strong economy starts with a strong middle class. That is why building an economy that works for Canadians and their families is the top priority of this government.”
The federal government maintains that Budget 2016 will create 100,000 by 2017-18 and raise the level of real GDP by 0.5 percent in the first year and by 1.0 percent by the second year.
For 2016-17, the deficit is set at $29.4 billion, which is much higher than the Liberal’s election campaign promise of $10 billion. Deficits are expected to decline gradually from $29.0 billion in 2017-18 to $14.3 billion in 2020-21, which is after the next federal election. This is despite the Liberal’s election campaign promise to balance the books by 2019-20.
The corporate income tax measures include revisions to the taxation of small-business income, life
insurance policies and eligible capital property.
The following is a brief overview of measures that would be of interest to businesses.
1. Business income tax measures
General corporate tax
No changes are proposed to the general corporate income tax rate. The general corporate income tax rate remains at 15 percent at the federal level for 2016.
Small business and tax rates
The budget proposes that reductions in the small business tax rate currently legislated for 2017, 2018 and 2019, be deferred. For small businesses, a reduced income tax rate of 10.5 percent on their first $500,000 of active business income. This reduced rate allows small businesses to keep more earnings that can then be reinvested to support growth and job creation. However, at this point, based on the Budget 2016, it is uncertain whether the government intends to consider further reductions.
To help address a concern, on the domestic front, of the ability of high-net-worth individuals to use private corporations to inappropriately reduce or defer tax, Budget 2016 proposes measures to:
- Prevent business owners from multiplying access to the $500,000 small business deduction using complex partnership and corporate structures;
- Ensure that investment income derived from an associated corporation’s active business is ineligible for the small business deduction (and taxed at the general corporate income tax rate) in certain circumstances;
- Ensure that associated corporations cannot avoid the $15-million taxable capital limit in certain circumstances; and
- Close loopholes that allow private corporations to use a life insurance policy to distribute amounts tax-free that would otherwise be taxable.
Repeal the eligible capital property (ECP) regime and new capital cost allowanc
The budget includes proposal to repeal the eligible capital property (ECP) regime, replace it with a new capital cost allowance (CCA) class available to businesses and provide rules to transfer taxpayers’ existing cumulative eligible capital (CEC) pools to the new CCA class. ThIs proposal is not intended to affect the application of the Goods and Services Tax/Harmonized Sales Tax (GST/HST) in this area.
Reviewing the tax system
In the coming year, the government will undertake a review of the tax system to determine whether it works well for Canadians, with a view to eliminating poorly targeted and inefficient tax measures. In particular, the government is concerned with “the ability of high net worth individuals to use private corporations to inappropriately reduce or defer tax.”
2. Other business measures
The Government’s confirms their intent to maintain a rule that allows income earned from property to qualify as active business income where a business has more than five full-time employees. In addition,
- Clean technologies: According to the Government, the global clean technology market presents a promising opportunity for Canadian businesses, a source of new clean jobs for the middle class, and a driver of prosperity for us all. More than $1 billion over four years to support future clean technology investments, including in the forestry, fisheries, mining, energy, and agriculture sectors. In addition, over $130 million over five years to support clean technology research, development and demonstration activities.
- Enhancing food safety in Canada – $38.5 million over two years, on a cash basis, to further strengthen and modernize Canada’s food safety system. According to the Government, an effective and reliable food safety system protects the health of Canadians and supports foreign consumer confidence and demand for Canadian agri-food products.
- Enhancing the safety of railways and the transportation of dangerous goods – Up to $143 million over three years to sustain existing measures and support new and expanded activities to strengthen oversight and enforcement, and to enhance prevention and response capabilities related to rail safety and the transportation of dangerous goods.
- International re-engagement – Committed to strengthening Canada’s place in the world by re-energizing its efforts to engage with the United Nations and other international partners. According to the Government, this will lead to improved trade, economic growth and support for those who need it most such as the middle class.
- Canadians with disabilities – Chapter 5 of the budget – An Inclusive and Fair Canada discusses the government’s commitment to eliminate systemic barriers and deliver equality of opportunity to all Canadians living with disabilities. The government will consult with provinces, territories, municipalities and stakeholders to introduce a Canadians with Disabilities Act. This budget allocates $2 million over two years, starting in 2016–17, to support the full participation of Canadians with disabilities in this process.
3. Employment and payroll related measures
Several measures related to personal income tax, Employment Insurance, Canada Pension Plan. Old Age Security and job creation among others are also included in the budget. An overview of these HR and payroll budget measures can be found on our First Reference Talks blog.