Taxes…A Different Perspective
What’s new in tax? Here is a summary of some recent income tax and some non-income tax changes.
Tax rates
• Personal. No changes in federal personal income tax rates for 2018. 2018 tax brackets have been adjusted to take into account inflation.
• Corporate. The federal corporate income tax rate on the first $500,000 of annual active business income earned by a Canadian-Controlled Private Corporation (CCPC) decreased from 10.5% in 2017 to 10% in 2018 and further decreases to 9% in 2019.
New anti income splitting tax rules.
• Tax on Split Income (TOSI). Beginning in 2018, an individual can find themselves taxed at the top personal income tax rate (federal tax rate of 33% plus applicable provincial top tax rate)—rather than at their regular personal income tax rate—when they receive “split income”. These new rules take away the tax minimization benefits of income splitting.
• Split income includes many sources of income: e.g., dividends from private corporations, partnership income, rental income, trust income, interest on loans made to a private corporation and certain capital gains. There are exclusions that, when applicable, an individual will not be taxed at the top tax rate on split income received.
Investors
• Tax free savings account (TFSA). The annual contribution limit for 2018 is $5,500 and $6,000 for 2019. As of January 1, 2019, the cumulative TFSA contribution limit is $63,500 for an individual that was at least 18 or older when TFSAs were introduced in 2009.
• Lifetime capital gains exemption. The capital gains exemption on a sale of shares of small business corporation increased to $848,252 in 2018 (from $835,716 in 2017) and is $866,912 in 2019. The capital gains exemption remains at $1,000,000 in respect of sales of eligible farm and fishing properties.
Retirement
• Old Age Security (OAS). The 2018 net income threshold for OAS repayment or “clawback” to begin is $75,910. A 100% clawback occurs when an 2018 net income is $123,386 or greater. The clawback threshold in 2019 is $77,580.
• Enhanced Canada Pension Plan (CPP). Phase-in begins in 2019! CPP payments are increasing from 25% of pensionable earnings to 33% and higher CPP contributions start on January 1, 2019. The CPP contribution rate is being increased, over a period of 2019 to 2025, to 5.95% (from 4.95%) of salary/wages up to the year’s maximum pensionable earnings. Maximum pensionable earnings are $55,900 for 2018 and $57,400 in 2019. Maximum pensionable earnings are expected to be $82,700 in 2025.
• Registered Retirement Savings Plan (RRSP). The maximum RRSP contribution limit for 2018 is $26,230 and $26,500 for 2019. Where an individual is a member of a registered pension plan their RRSP contribution limit is reduced by the prior year’s Pension Adjustment (PA).
Raising children
• Canada Child Benefit (CCB). Payments will be indexed to inflation beginning July 2019.
• Employment Insurance (EI) Parental Sharing Benefits. Extra weeks of parental leave will be available to two-parent families (including same-sex and adoptive parents) when children are born or adopted on or after March 17, 2019. Under the standard parental leave an extra 5 weeks is available and for the extended parental leave an extra 8 weeks is available.
Professionals and WIP
• Prior to 2018, Work-in-Progress (WIP) (i.e., unbilled fees) of a professional (e.g., medical doctor, dentist, veterinarian, chiropractor, lawyer, accountant) did not need to be included in the calculation of taxable income. New income tax rules being phased in over five years now require WIP to be included in taxable income.
• For 2018, a professional must include 20% of their year-end WIP in their taxable income. In 2019 the amount becomes 40% and then annual 20% increases occur to arrive at a 100% inclusion of WIP in 2022 taxable income.
Income tax reporting requirements for trusts
• Beginning in 2021, when completing a trust tax return, certain trusts will need to provide information on the trustees, beneficiaries and the settlors of the trust. This may result in some trusts being required to file a tax return where there was no previous need to do so.
• Trusts that will be exempt from this requirement include Graduated Rate Estates (GREs), qualified disability trusts, mutual fund trusts, trusts governed by registered plans and lawyers’ general trust accounts.
Private corporations
• Restrictions on claiming the Small Business Deduction Tax Credit. A Canadian-controlled private corporation’s use of the Small Business Deduction Tax Credit can be reduced when the corporation earns investment income. The reduction to the Small Business Deduction Tax Credit threshold of $500,000 is $5 for every $1 of investment income earned in the prior year in excess of $50,000. The Small Business Deduction Tax Credit is reduced to $nil once investment income exceeds $150,000. These rules apply to corporate taxation years beginning in 2019. Ontario will not mirror these federal income tax changes.
• Changes to refundable corporate income taxes. Changes—beginning in 2019—are being made to a corporation’s Refundable Dividend Tax on Hand (RDTOH) account to limit a corporation’s ability to recover corporate income taxes paid on investment income through the payment of dividends to its shareholders. This change reduces the income tax deferral advantage when a corporation is used to earn investment income.
Other
• Medical Expense Tax Credit. Expenses eligible for the Medical Expense Tax Credit now include certain expenses incurred for animals specially trained to perform specific tasks to help an individual with a severe mental impairment (i.e., post-traumatic stress disorder).
• Working Income Tax Benefit (WITB). Starting in 2019, the WITB and the WITB disability supplement will be enhanced and renamed the Canada Workers Benefit (CWB) and CWB Disability Supplement.
• Employee Home Relocation Loans. The deemed interest benefit on the first $25,000 of a loan became taxable in 2018.
• Employment Insurance (EI) premiums. The EI rate in 2019 reduces to $1.62 from $1.66 per $100 of insurable earnings. However, the maximum insurable earnings amount increases to $53,100 from $51,700.
Brian J. Quinlan, CPA, CA, CFP, TEP
Campbell Lawless LLP, Chartered Professional Accountants