On February 27, 2018, Finance Minister Bill Morneau presented the government’s 2018-2019 federal budget. This tax alert provides a summary of the tax measures proposed in the budget.
As expected, included in this year’s budget is the draft legislation to address the perceived tax advantage enjoyed by business owners when investments are made through their private corporations instead of personally. The government’s concerns around this matter were originally brought forward in the July 18, 2017 consultation paper, Tax Planning Using Private Corporations. Due to significant push-back from the business and tax communities in relation to this specific concept, the government assured effected taxpayers that any legislative response would include grandfathering. As discussed further below, the Budget 2018 proposals in relation to passive income revolve around a grind of the small business deduction based on associated company investment income and a new refundable tax pool concept. Other specific matters addressed in the July 18, 2017 consultation paper, specifically around income splitting, were previously addressed by way of draft legislation issued in December 2017.
There are no additional changes to the corporate tax rates from those previously announced in the fall economic statement for small business corporations. The budget also did not include any changes to the personal tax rates and tax brackets.
Despite speculation over the last couple of years, the government did not increase the capital gains inclusion rate or provide any specific measures related to the Scientific Research and Experimental Development (SRED) program.
The budget, however, did include measures to combat aggressive international tax avoidance (i.e., the use of so called “tracking arrangements” and the use of transactions involving partnerships and trusts to distribute tax-free distributions to non-resident shareholders). The government also indicated that it will continue to work with its international partners to improve international dispute resolution, and to ensure a coherent and consistent response to fight cross-border tax avoidance.
Proposed consultations on tax measures
Consultations on the GST/HST holding corporation rules
The government indicated in its budget that it intends to consult on a Goods and Services Tax/Harmonized Sales Tax (GST/HST) rule, commonly referred to as the “holding corporation rule,” which generally allows a parent corporation to claim input tax credits to recover GST/HST paid in respect of expenses that relate to another corporation. More specifically, where a parent corporation is resident in Canada and is related to a commercial operating corporation (i.e., all or substantially all of the property of the corporation is for consumption, use, or supply in commercial activities) and the parent corporation incurs expenses that can reasonably be regarded as being in relation to shares or indebtedness of the corporation, the expenses are generally deemed to have been incurred in relation to commercial activities of the parent corporation.
The government intends to consult on the limitation of the rule to corporations and the required degree of relationship between the parent corporation and the commercial operating corporation. The government also intends to clarify which expenses of the parent corporation are incurred in relation to shares or indebtedness of a related commercial operating corporation, and therefore qualify for input tax credits under the rule.
Consultation documents and draft legislative proposals regarding these issues are expected to be released for public comment in the near future.