In late March, the federal government came down with a much-anticipated budget – especially for investors. The rumours were all over the web about the potential of higher capital gains tax. This resulted in stories of investors selling their positions to reduce any potential future increased tax burden.
Thankfully, the budget was very tame this year without any big news – more specifically, no mention of changes to the capital gains inclusion rate. For some background information, here is how capital gains tax works, and why the inclusion rate is important.
There are fresh rumours that the federal finance department is investigating private corporations and some tax strategies that are often used to reduce taxation. Specifically, using a private corp for dividend sprinkling, and creating a passive income portfolio.
Essentially, dividend sprinkling is a strategy where two spouses (and possibly children) hold shares in a private corporation but under different share classes. The directors (can be both spouses) of the corporation can then decide which share class receives a dividend, which is typically the spouse in the lower tax bracket (there is a kiddie tax for children under the age of majority receiving dividends from a private corp). This results in lower overall taxation than if the income flowed directly to the spouse in a higher tax bracket.
So the next strategy under the microscope is holding a passive portfolio within a private corporation. Generally, distributions from an investment account within a private corporation are taxed at a high rate, so it’s preferable not to hold distributions within the corporation, but flow them out to shareholders. This is fine and dandy as the tax works out to be about the same as holding investments personally. The issue is that corps are taxed at a low rate (~15%) for the first $500k in revenue, which could mean that a business owner could have more money to work with initially compared to if the money was made through employment (up to 50%). However, one aspect that I haven’t seen mentioned is that corporations with investment portfolios are subject to double taxation from an estate planning perspective. Capital gains tax when the securities are sold, and capital gains on the value of the corporation itself.
Perhaps the finance department is reading this blog because I’ve written about both of these strategies (as per the links above) in the past.
Anyways, onto the topic at hand – The 2017 Federal Budget. Although there were very few big announcements, there were some notable changes from a personal finance perspective.
Here are some of the highlights from the Federal Budget:
- Elimination of the Public Transit Tax credit (effective July 1, 2017). This is not great news for commuters out there who use public transit exclusively. In this tax credit, commuters would essentially get a 15% discount off their monthly fares. So someone spending $100/month on a subway pass would get $15 back when they file their taxes (non-refundable tax credit).
- Elimination of Canada Savings Bonds. Did anyone really use these? When I looked into them, the interest rates were uncompetitive relative to high-interest savings accounts.
- Elimination of the First-Time donors Super Credit. Under this credit, first-time charity donors would receive an extra $250 tax credit on the first $1,000 donated. Not a huge loss in my opinion. Here is how the donation tax credit works in general.
- Higher prices for booze and cigarettes. Sin taxes are always an easy target. This time around cigarette taxes on cartons are increasing 2.5% while alcohol is increasing 2% ($0.01/bottle of wine and $0.05 on 24 case of beer).
- UBER Tax. For those of you who use the UBER taxi service, your fare’s are about to go up! Effective July 1, 2017, GST/HST will be added to fares.
- An increase in employment insurance (EI) premiums. This regular deduction from our paychecks will increase 3% from $1.63 to $1.68 per $100 of insurable earnings.
- Startup company funding. $400 million over three years to start a venture capital initiative.
- Teaching kids to code. The government will spend $50 million over two years to start programs to teach children to code.
- Longer parental leave. Parents will be allowed to take up to 18 months parental leave at a lower benefit rate of 33%. 12-month leave will remain at retain the benefit rate of 55%. Although lower earnings over the 18 months, it will allow parents to stay at home a little longer, and perhaps offset the super high rates of daycare for babies between 12 and 24 months.
Looking for more info?
These websites did a great job of summarizing the budget:
- The official “budget in brief” by the Govenrment of Canada.
- Advisor.ca’s summary of the budget, one of the better summaries that I’ve read.
- CBC’s version of the budget with video.
- Globe and Mail’s top 10 list from the budget.