Each year there are a large number of changes to the Income Tax Act (“ITA”) of Canada as well as points of clarification provided by the Canadian Revenue Agency (“CRA”) and the Tax Court of Canada. This article will discuss some of the more important points related to the 2016 tax year.
Legislative Changes to the ITA
Principle Residence Exemption
While Canadian Residents are exempt from paying capital gains tax on their principle residence there have been changes in 2016 both in requiring reporting from tax payers and limiting principle resident exemptions from being claimed by certain groups. Specifically:
- Reporting: In the past Canadians did not need to report the sale of their principal residence to the CRA. Starting in 2016 Canadians must not the disposition of a principal residence on their personal tax return (Schedule 3) and provide certain information related to the disposition. Failure to do so will result in a penalty being applied by the CRA.
- Non-Residents: The principle residence exemption has a mechanism that allows Canadians to sell a principle residence in a tax year and purchase a new one, with both qualifying for the principle residence exemption that year. This ‘plus-one’ rule adds one year to the total time spent in a principle residence. From October 2016 onwards the ‘plus-one’ rule can no longer be used by individuals who acquire a home while they are a non-resident for tax purposes.
Federal Budget 2016 – Tax Changes
The first federal budget of the Liberal government has provided numerous points of tax change from a legislative perspective.
- Personal Tax Rates: The second tier of federal personal tax rates was reduced from 22% to 20.5% (on income of $44,701 to $89,401). Additionally a new top personal tax rate was created of 33% on income over $200,000. Additional changes to reflect the new top tax rate include:
- The 33% top marginal rate is now applied to excess employee profit sharing plan contributions
- Personal service business income earned by corporations increased from 28% to 33%
- Additional changes were made increasing trust tax rates on certain credits to 33% also
- Canada Child Benefit: Meant to replace the Universal Child Care Benefit the new CCB will issue a tax free payment starting at $6,400 for children under 6 and $5,400 for children between the ages of 6 and 17. The amount is reduced as a family’s income increases until it is completely phased out for high income families.
- An additional $2,730 per child is also available for parents of children with disabilities, though this is also reduced as a family’s income increases.
- Income Splitting Credit: Previously the family income splitting credit was available for couples with a child under 18 years of age, whereby up to $50,000 of income could be transferred from one spouse to another to reduce the family tax burden by up to $2,000. This credit has been eliminated for 2016 and later years.
- Business Income Taxes: No changes were made to the 11.5% corporate income tax rate in Ontario though reductions in specific tax credits have been proposed. The tax credits that have been reduced include the Ontario Research and Development Tax Credit and the Ontario Innovation Tax Credit.
- Reductions in the Workplace Safety and Insurance Board premiums were also reduced starting in 2017
- Personal Income Tax: No personal income tax rates were changed in Ontario, however, with the new Federal changes the top combined marginal rates on income over $220,000 are:
- Salary or other income 53.53%
- Capital Gains 26.76%
- Eligible Dividends 39.34%
- Non-Eligible Dividends 45.30%
- Academic Tax Credits: As of September 2017 the Ontario tuition and education tax credits will be replaced by a new Ontario Student Grant. The Ontario Student Grant is intended to provide a free education for students from families with income less than $50,000 and also provide tuition relief for middle-class families.
- Ontario Electricity Support Program: As of January 2016 Ontario will provide monthly assistance of $30 to $50 to low-income households, with the credit being eligible for households making up to $52,000 a year. A higher-level assistance package is available for First Nation and Metis households, as well as those with electrical heating or those who have medical devices that require a high level of electricity. This assistance is also non-taxable and exempt from income tax.
CRA Interpretations and Clarifications
- Proof of Payment for US Tax Credits: To support payments made related to US taxes it is now required that tax payers need to maintain additional documentation to support their claim, including:
- Federal, State, and Municipal Returns
- All associated schedules and forms
- A copy of their federal and state account transcripts
- Proof of payment to the applicable tax authority
Taxpayers must also provide a breakdown of income type, country and the recipient of the income when filing with a spouse or common-law partner.
CRA Audit Initiatives
- Real Estate Sector: The CRA has stated that it will continue to focus on the real estate market when it comes to tax compliance. Specifically non-compliance areas that will be focused on include:
- Unreported GST/HST,
- Capital gains,
- Unreported income on flipped properties,
- Unreported worldwide income, and
- The questionable source of some real estate transactions’ funding.
During the past tax years these transactions netted significant collections for the CRA, with $11.6m in penalties collected. During this period unpaid taxes in Ontario recovered $156.9m in unpaid taxes while British Columbia saw collections of $25.3m.
- Simplified T1135: A simplified version of the form to report foreign income has been released for taxpayers holding less than $250,000 in foreign property subsequent to the 2014 tax year, though the simplified form can also be submitted now for earlier years.