Heading into the 2019 federal budget, many Canadian businesses were hoping the Liberal government would backpedal on several years of restrictive tax measures. It started when they took office and promised to review the Income Tax Act, eliminating unnecessary tax deductions and credits – but it didn’t stop there. They also took a look at private corporations and the perception that individuals were using private corporations to avoid paying their fair share of taxes. Starting in July 2017, this resulted in a great deal of new tax complexity and compliance issues for private corporations.
For example, dividend income-splitting rules – arguably the most complicated piece of legislation this government has introduced – is one area where many see a need for simplification. It is currently more than 10 pages of complex legislation. The business community was hoping for a formal review of the Income Tax Act that would simplify the dividend income-splitting rules, not to mention other complex and administratively burdensome legislation. CPA Canada has been pushing for this, as have many other organizations, which offered hope the government might change course in this year’s budget.
The other big hope for businesses going into Budget 2019 was a reduction in corporate taxes, as this would encourage more foreign companies to invest in Canada, rather than take their investment dollars to a country with lower taxes. But when it came time to create the budget, the government elected not to make these changes. Instead, they introduced a series of pointed measures targeting specific groups, rather than the Canadian business community as a whole.
For example, the budget addresses a major concern of millennials: housing affordability (the First-Time Home Buyer Incentive) and another concern resulting from the fear of losing jobs through automation (the Canada Training Benefit). Similarly, the budget elaborates on a very specific measure for the journalism industry – introduced in the 2018 Fall Economic Statement – that benefits a select group of people. Although support for the Canadian journalism industry is welcome, it does not provide any benefit for groups such as restaurant owners, manufacturers, plumbers or construction workers.
In fact, a closer look at the federal budget reveals there’s virtually nothing there for the broader business community. There are specific targeted measures, but the business community was denied both of their major demands: (1) a reduction of corporate tax rates and (2) a simplified tax act that lowers the cost of compliance. While nobody expected the budget to announce overnight solutions to these problems, many were expecting an announcement, explaining the government recognizes – and intends to solve – them, either through a royal commission or a formal review over the next several years. Unfortunately, none of this was mentioned in the budget, suggesting the government either doesn’t see a problem or doesn’t see a solution.
In spite of some concerns, Budget 2019 does have at least one highlight: the decision to eliminate one of the Scientific Research & Experimental Development (SR&ED) thresholds. If your taxable income is too high, you start to lose one of the benefits of getting a higher refundable tax credit through the SR&ED program, as your expenditure limit gets ground down and you lose 20 percentage points and the refundability of this tax credit. For some clients, that’s a huge problem because they rely on that credit to further finance SR&ED in future years. Eliminating that threshold allows companies to utilize their profit to expand operations without worrying about losing government funding through the SR&ED program that is often used for further investment in research and development.
Overall, the tax measures put in place in the federal budget are neither negative nor destructive, but they’re not broad enough. In addition to being very isolated and specific, many of the measures introduced in the budget function more like legislative corrections than real transformative changes. This will subtly improve the lives of some Canadians, but it’s not the radical overhaul the Income Tax Act needed.
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