2017 Federal Budget Overview

The Devil Is in The Details:  Budget 2017 Gives to Some, But Small Business Pays More Again.

The theme of the 2017 Federal Budget announced on March 22 forged a positive message towards  an era of incredible change in “Building a Strong Middle Class” in which innovation, skills, and partnerships must be forged to prepare Canadians with the skills need for the new jobs that will come with a rapidly advancing new economy.   Unfortunately, the document itself is short on specific tax incentives to address the new economy, and in fact continues to make significant changes to cash flows of certain small business owners.

It may be a budget that is remembered for what it doesn’t contain in relation to the theme: there are no tax credits to offset income taxes paid by employers who hire people with “new economy” skills or to encourage investments by new entrepreneurs with great ideas to invest in new capital as they build forward in a new economy.

Further, the document predicts tepid growth in the economy going forward to the end of the forecast period ending in 2022, while it raises personal taxes significantly:  personal tax revenues will increase faster than the growth in nominal GDP (3.5%) and GDP inflation (1.8%) to average 4.5% annual growth.  This budget also raises EI premiums.  The rate-setting mechanism that ensures EI premiums are no higher than needed to pay for the program over time is estimated to increase in 2018, not just because the forecast for the economy is weaker than in 2017, but because this budget calls for new spending under the EI program.  All of that means higher premiums for business and taxpayers around the time that CPP premiums are also set to rise dramatically.

Specifically, the Employment Insurance Act will be broadened to provide eligibility to more workers including under-represented groups to access EI funded skills training and employment supports.    The Act will also be broadened to provide eligibility to more workers including under-represented groups to access EI funded skills training and employment supports.

This budget also continues its focus how to close legitimate tax preferences previously extended to  small business corporations.  Included here are changes to work-in-progress rules for professionals including medical doctors, accountants and lawyers, and new scrutiny on associated corporations for the purposes of minimizing access to the Small Business Deduction when factual control can be linked to the enforceable rights of two related people.

Those who provide training, may see a spike in enrolments, though.  Certain prospective students will be very happy with today’s budget news: if you are an honorably discharged veteran, you will be happy about generous new education benefits for you.

But, unfortunately, there is no new support for parents who help their adult kids who are students: the budget does not index the $5000 tuition transfer to supporting individuals, despite the fact that 2017 will be the year in which the monthly education and textbook amounts will disappear.

Also, there is a tweak in the tuition fee credit:  those who pay for skills training that is not at a post-secondary level will be able to claim their tuition.

Further, there will be an increase in the Canada Student Grants available for part time students and adult learners, with new eligibility thresholds for non-repayable grants for students with dependent children. Therefore, employers should be able to find more skilled employees soon.

Investors will be happy that the capital gains inclusion rate remains at 50% and there are no new changes to dividend taxation or the capital gains exemption rules for those who sell a qualifying small business, farming or fishing enterprise.

However,  small business owners should confer with their tax professional about the prospect of further change in common  tax planning strategies.   Specifically, income splitting with family members, the tax rates applied to passive investments held in a private corporation, and the conversion of salary or dividends into capital gains will be reviewed shortly, as the government plans to release a paper on how to eliminate or curtail these opportunities.

Finally, tax provisions relating to the caregiving of a sick family member have been reorganized and notably no longer claimable for parents who are over age 65 and not infirm.  Certain tax measures have been eliminated because they have been deemed inefficient or no longer effective – the public transit amount stands out, for example.  Others have been enhanced; specifically, new provisions enhance claims for medical expenses allowed for couples who are infertile.

Here are more specific details about the most salient pieces of news that will affect personal and corporate tax planning after the budget:

THE ECONOMY BY THE NUMBERS: The forecast for the period ending 2021-22 is best described as “tepid” in terms of economic growth; taxes, meanwhile, will continue to grow with previously announced measures:

• Income tax revenues are projected to increase to $178.6 Billion
• Corporate tax revenues will increase by $50.1 Billion
• Net debt is projected to be $757 Billion by the end of the reporting period
• Cost of servicing the debt is expected to rise to over $30 Billion annually  starting in 2021
• GDP growth rate is projected to average only 1.7%  over the period
• Nominal GDP growth rate is projected to average 3.5%
• The Consumer Price Index will average 1.9%
• The Canadian to US dollar exchange rate is expected to average 77.4
• Crude oil prices will average US $56 per balance
• The three month treasury bill rate will average 1.2%
• The 10 year government bond rate will average 2.4%
• The unemployment rate will average 6.7%

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