2017 Budget Overview: Specific Tax Provisions for Business

New 2017 federal budget includes business tax provisions addressing tax changes for business income.

PROFESSIONAL – WORK IN PROGRESS - For business years that begin after March 21, 2017, professional tax payers may no longer exclude from income their work in progress.  As a transitional provision, in the first business year that begins after March 21, 2017, 50% of the less of the cost and fair market value of work in progress must be included in income of the professional.  These professionals include Accountants, dentists, lawyers, medical doctors, veterinarians and chiropractors.

For business years that begin after March 21, 2017, professional tax payers may no longer exclude from income their work in progress.  As a transitional provision, in the first business year that begins after March 21, 2017, 50% of the less of the cost and fair market value of work in progress must be included in income of the professional.

MEANING OF FACTUAL CONTROL

A person can have factual control of a corporation without having legal control.  As per the budget document Legal control generally entails the right to elect the majority of the board of directors of the corporation where as factual control of a corporation exists where a person has “directly or indirectly in any manner whatever” influence that would result in control in fact of the corporation.

As per the Budget document “A recent court decision held that, in order for a factor to be considered in determining whether factual control exists, it must include “a legally enforceable right and ability to effect a change to the board of directors or its powers, or to exercise influence over the shareholder or shareholders who have that right and ability”.  This requirement limits the scope of factors that may be taken into consideration in determining whether factual control of a corporation exists.”

The Income Tax Act will be amended to clarify that taxpayers do not inappropriately access certain preferences in determining whether factual control of a corporation exists and factors are not limited to the requirement set out above.   The objective is to test whether companies are associated for the purposes of the multiplication of the Small Business Deduction and specifically in cases where an owner of a separate corporation has an enforceable right in certain cases over another.  Effective on or After Budget Day.

EI PREMIUMS ARE GOING UP – A deficit is expected in the EI Operating Account in 2017 – to the tune of $2.7 billion – after a surplus of $1.1 billion in 2016, when the premium rate was 1.88.  The 2017 rate had been reduced to $1.63, but due to a weaker economy, a deficit occurred.  The rate is now poised to increase to 1.68 per $100 of insurable earnings, from the 2017 premium rate of 1.63.

TAX BENEFITS TO SMALL BUSINESS CORPORATIONS TO GO UNDER THE MICROSCOPE – The government is planning to review the tax planning strategies common to small business corporations in the release of a paper over the next several months to review:

• The sprinkling of income amongst family members via dividends and capital gains
• The benefits of holding a passive investment portfolio inside a private corporation
• The converting of salary or dividend income into capital gains

ELECTRONIC DISTRIBUTION OF T4 SLIPS.  For the 2017 and future tax years, employers will be allowed to distribute T4 slips electronically, without express consent, as long as there are adequate privacy safeguards, to active employees.  The safeguards will be specified later by CRA and employers will be required to provide hard copy if employees want this.

MINERAL EXPLORATION TAX CREDIT FOR FLOW-THROUGH SHARE INVESTORS - Announced in early March, this provision was extended to flow through agreements entered into on or before March 31, 2018.  This is a benefit extended to individuals who invest in mining flow-through shares, equal to 15% of specified mineral exploration expenses incurred in Canada.

CLEAN ENERGY GENERATION EQUIPMENT:  GEOTHERMAL ENERGY

Effective On or After Budget Day:

• Eligible geothermal energy equipment under Class 43.1 and 43.2 is proposed to be expanded to include geothermal equipment that is used primarily for the purpose of generating heat or a combination of heat and electricity; as well as the cost of completing a geothermal well and for systems that produce electricity.
• Geothermal heating will be made an eligible thermal energy source for use in a district energy system.
• Canadian renewable and conservation expenses will include those expenses incurred for the purpose of determining the extent and quality of a geothermal resource and the cost of geothermal drilling.

CANADIAN EXPLORATION EXPENSE: OIL AND GAS DISCOVERY WELLS

Effective in 2018, expenditures related to drilling or completing a discovery well (or in building a temporary access road to, or preparing a site in respect of, any such well) should be classified as Canadian development expense (CDE) instead of the current classification of Canadian exploration expense (CEE). Expenditures associated with a discovery well are typically related to success and should be deducted gradually over time as development expenses.

This will apply to expenses incurred after 2018, however will not apply to expenses where the taxpayer has entered into a written commitment before budget day to incur those expenses.

RECLASSIFICATION OF EXPENSES RENOUNCED TO FLOW-THROUGH SHARE INVESTORS

Eligible small oil and gas corporations will no longer be able to treat the first $1 million of CDE as CEE.  Currently, flow-through share agreements allow an eligible small oil and gas corporation to treat up to $1 million of CDE as CEE when renounced to shareholders.  Flow-through agreements also allows a corporation to renounce CEE or CDE that is incurs after the agreement date to investors, who can then deduct the expenses in calculating their own taxable income.  This measure will apply in respect to expenses incurred after 2018 (including expenses incurred in 2019 that could have been deemed to be incurred in 2018 because of the look-back rule).  Expenses incurred after 2018 and before April 2019 that are renounced under a flow-through share agreement entered into after 2016 and before budget day are excluded.

CONSULTATION ON CASH PURCHASE TICKETS

With the deregulation of the grain market regime and commercialization of the Canadian Wheat Board in Manitoba, Saskatchewan and Alberta, the delivery of the listed grains is now the responsibility of a private business rather than the federal government.  As per the budget document, “any interested parties are invited to submit comments by May 24, 2017 to the government. Please send your comments to consultation_tax_2017@canada.ca.”

FEE SETTING FOR GOVERNMENT SERVICES USED BY BUSINESS – The government plans to implement an automatic inflation escalator on existing business fees.

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