It is budget time in Ottawa and the federal government decided to leave two critical areas of Canadian tax policy unchanged:
- Principal residence exemption still remains
- Capital gains inclusion rate will stay at 50%
Below we outline some other key areas of the budget that financial planners will need to be aware of:
Profit on sale of residential property held for less that 12 months would be taxed as business income
Canadians who sell a home or rental residential property that they have held for less than 12 months will be considered flipping and will see profits from a sale taxed as business income. The idea is to protect the current and important principal residence exemption for Canadians who use their houses as their homes. Under current rules, the CRA had to prove that your intention was to flip. The CRA no longer has to prove it anymore. Exemptions will apply due to certain life circumstances, such as death, disability, the birth of a child, a new job, or a divorce.
New Home Savings Account
A new measure for first-time home buyers
The Tax-Free First Home Savings Account (FHSA) would allow first time homebuyers to save up to $40,000. Similar to an RRSP, contributions would be tax-deductible and like a TFSA, withdrawals to buy a first home – including investment income – would be non-taxable. Individuals will still be able to withdraw from an RRSP to purchase a home, so they can now take advantage of both options to buy a home. The FHSA will have an $8,000 annual maximum contribution limit, and unused contribution room cannot be carried forward. There is no age limit. If after 15 years, the individual still doesn’t own a home, the funds can be transferred to a RRSP or a RRIF. To open an FHSA, the individual needs to be over the age of 18 and they have not owned a home in the current year or the previous four years.
Better Access to the Small Business Rate
Increasing the level of taxable capital at which business can still access the small business tax rate
The small business tax rate (federal) is 9% on the first $500,000 of taxable income, versus a general corporate tax rate of 15%. This rate is proportionately reduced once a business has taxable capital between $10 million and $15 million. The rate ends completely above $15 million. This has now been changed to $50 million. This will help capital-intensive businesses who are often not eligible for the small business rate. However, many are complaining that the passive income rules still prevent the savings of large reserves in a corporation for future expansion. The small business deduction limit starts to be reduced once investment income passes $50,000 and hits zero at $150,000.
New Minimum Tax on Top Earners
New measure targets the top 0.5% of earners
Tax filers with income above $400,000 – the top 0.5% of earners – make significant use of deductions and tax credits and find ways to have large amounts of their income taxed at lower rates. Canada already has an alternative minimum tax (AMT), but the new approach will be outlined at a later date to ensure that all wealthy Canadians pay their fair share of tax.