March 18, 2016 by Scott Dupuis
Tax Series | 

Budget 2016: Hot-button tax issues to watch for

Those of us in financial services in Canada are holding our breath for March 22, when Trudeau’s Liberal government is set to unveil the 2016 federal budget.

The budget comes on the heels of two major tax bracket changes already in motion and amid buzz of the deficit potentially ranging in the tens of billions.

Accordingly, Canadians are eager to know how they’ll be affected, so we took a look at three hot-button budget issues to watch that could influence your finances and tax planning.

A loss for capital gains recipients?

There’s a lot of concern within the tax community about an increase to the inclusion rate for capital gains. Right now, if you were to incur a capital gain on a stock, for instance, you would pay taxes on half of it. In the forthcoming budget, there’s a possibility that rate could leap to two-thirds or even three-quarters.

This presents an opportunity for proactive planning. Consider taking advantage of the current capital gains rates prior to the budget’s release, as we do anticipate a change of some sort. In particular, those who incur large capital gains stand to benefit from strategic planning, but new measures would likely affect any business owner or individual with a stock portfolio.

Much ado about the small business deduction eligibility

This is another area that has attracted attention, and although I’m cautiously skeptical, it’s certainly one to watch as the potential changes could be radical. Currently, the small business deduction (SBD) entitles eligible corporations, including professional corporations such as those owned by dentists, doctors and lawyers, to a lower tax rate on the first $500,000 of active business income. But there’s concern the budget could shake this up and target high-income earners.

For instance, there is a question around why the SBD is available to a doctor with only a receptionist and a nurse, as this does not really fit the bill of a “small business.” Keep in mind the ability for professionals to legally incorporate (and thus be eligible for the SBD) is fairly recent, and CRA has expressed concerns over the impact.

To this end, there has been speculation the federal government might follow in Quebec’s footsteps, adopting a model for eligibility which considers the number of employees in the corporation.

Unlike capital gains, there’s not much to be realized by preparing for a potential change to the SBD qualifications; however, you can employ strategies to mitigate adverse tax consequences if changes are implemented. 

Shifting incentives

In the vein of the recent Ontario budget, expect to see the federal government reduce legislated tax incentives to increase discretionary incentives. New grants would likely focus on areas such as job creation, clean technology and pre-commercialization in targeted regions like Alberta, Southwestern Ontario and Quebec.

For instance, I can foresee a reduction in the Scientific Research and Experimental Development (SR&ED) Program or the Apprenticeship Job Creation Tax Credit, with funds diverted to one or two new political funds to encourage job creation in a specific industry. (If there is a clawback to SR&ED, the manufacturing sector would likely be most affected.)

Be sure to stay on top of the changes coming out of the federal budget and consult your tax professional to adjust your financial plan accordingly. In the interim, consider taking advantage of current capital gains rates prior to the budget release and get ahead of the curve. 

Scott Dupuis, CPA, CA, is a tax partner at Collins Barrow Windsor LLP. For more than 20 years he has provided a full range of tax services to both public and private corporations across numerous industries.

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Scott Dupuis Scott Dupuis
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