2018 Federal Budget Highlights: 12 Changes Related to Taxation, the CRA, and you, the Canadian Taxpayer

The Federal Liberal government has just unveiled their 3rd budget, and in doing so will be increasing spending by roughly $20 billion dollars, bringing the federal deficit to roughly $670 billion dollars.

Looking at the tax issues, here are the main items which come from the budget this afternoon;

  1. 5-Week “Take-it-or-leave-it” Paternity Leave.

The government implemented a 5-week “take it or leave it” parental leave, pretty much like what Quebec has, in order to entice more dads to take paternity leave.  This would begin June 2019 (not sure why it takes this long to implement) and the Liberals expect it to cost taxpayers $1.2 billion dollars.

What this does not do is change the corporate culture which deters dads from taking time off, nor does it entice more moms to join the workforce.

What might have helped, would be more available daycare spaces, or fixing the Live-in Caregiver program which worked very well until it didn’t.

2.  Throwing bad money after bad money – Phoenix Pay system

If you have been following the Phoenix payroll fiasco that has been going on in the CRA, you would know that the CRA has already spent a lot of money on a payroll system which didn’t work, and then a ton of money to try and fix it.

Now, the Liberals have announced that it intends to eventually move away from Phoenix and explore the “next generation of the federal government’s pay system, but before doing so, the Liberals provided $16 million over the next 2 years to “research” a new pay system.

I’ll do that on my own, for half that amount.!

While “researching,” the CRA will now have $431.4 million over 6 years to try to fix the existing Phoenix system.

When you add the hundreds of millions of dollars that the Liberal government has already invested in fixing the Phoenix pay system, and the researching costs, and the budgeted costs, you will come to a figure of roughly $900 million on a system that this government will move away from.

This system was supposed to save the government roughly $70 million per year, starting in the 2016-17 fiscal year, and the Auditor General even said that scrapping the pay system would be the worst thing the government could do because if they start from scratch, they could have the same issues with another system!

3.  Help for the CRA to answer their phones!

The Liberal government is providing $206 million over 5-years to the CRA to help the Agency answer their phones.  This issue came up in November when the Auditor General noted that the CRA’s call centre only picked up the phone about one-third of the time.

The money will be used to improve the CRA’s telephone service, improve their online services and increase the number of community-based programs which help low-income people prepare their tax forms.  Ideally the call centre hours will also be expanded, and more training will be provided to ensure that more correct answers are provided.

4.  Private Company Passive Investment Income

Beginning taxation year 2019, there will be a phasing out of access to the small business deduction for Canadian Controlled Private Corporations (CCPC’s) which earn more than $50,000 of investment income.  The current rules for the refundable tax on dividends paid by CCPCs will also be amended.

CCPC’s are entitled to a preferential tax rate on up to $500,000 of qualifying active business income – the “small business deduction.”

Going forward, CCPC’s who earn income or net capital gains from property (not properties used in an active business) will be treated as follows; For each $1 of investment income earned over $50,000, the small business deduction limit will be reduced by $5, so once a CCPC has investment income greater than $150,000, they will lose their small business deduction entirely.

The government has decided that Canadians who earn income passively, ie/ rental income, deserve to pay more tax because either;

a. It’s not fair to Canadians who have to “work” to earn income

b. The Liberals got elected taxing the “rich” and by earning money this way – damn you – you are on their list, or,

c. The Liberals would tax a tax if they could because they need tax revenue to pay for all their promises.

5. New Tax Rules for Trusts to begin in 2021.

The government needs more taxes, hence the new tax reporting requirements for trusts which were unveiled in the budget.  The intention of these new rules is to provide the CRA with information related to beneficial owners, or potential beneficial owners of trusts.

Currently, trusts which do not earn income or make distributions in a taxation year are generally not currently required to file a T3 trust return.  (Trusts are required to file T3 returns if there is tax payable in the year or if the trust distributes income or capital to its beneficiaries.)

These new rules apply to express trusts which are resident in Canada as well as to non-resident trusts currently required to file T3 returns.  Each trust will have to provide the CRA with the identity of all of its trustees, beneficiaries and settlors, as well as each person who has the ability – through the trust terms or related agreements – to exercise control over trustee decisions regarding the appointment of income or capital of the trust, such as a protector.

The budget currently grants an exemption to mutual fund trusts, segregated funds, trusts governed by registered plans, graduated rate estates and qualified disability trusts, non-profit organizations and registered charities, and certain trusts that have been in existence for less than three months or that hold less than $50,000 in specified passive assets.

6. Tiered Partnerships Losses and At-Risk Rules

Essentially, partnerships wanted to use losses from one partner to lower the income of another partner, but the CRA disagreed.  The matter went to court and the CRA lost.  This budget reverses the CRA’s loss, making it a win, and worse than that, it is effective the date of the budget, which was February 27, 2018.  Losses are now lost.

7. Increased Assessment Period for CRA on Foreign Interests

Effective February 27, 2018, the CRA will have an extended reassessment period of taxpayers in respect of income arising in connection with foreign corporations in which they have at least a 10% interest in because it’s a long, often difficult process for the CRA to audit these foreign affiliates.

8. Reduced Filing Deadline to 6 Months for T1134.

Effective 2020, Taxpayers who currently had 15-months to file Form T1134, now have 6-months to do so.

9. Fighting Aggressive International Tax Avoidance

The Liberal government committed to fight international tax avoidance by strengthening rules related to controlled foreign corporations, addressing issues of treaty abuse, adopting the OECD revised Transfer Pricing Guidelines, and of greatest significance is the pledge to abide by tax reporting requirements of countries which Canada bilateral exchange agreements – and providing information to the tax authorities of these countries.

The acceptance of the OECD multilateral competent authority agreement now increases the countries which Canada can provide information to, and get information from.

Additionally, the CRA will be able to participate in what was called a “spontaneous exchange of information” on certain tax rulings with other tax administrations as part of a coordinated international effort to counter harmful tax practices.

The CRA also gets $38.7 million to expand its offshore compliance activities through the use of improved risk assessment systems and business intelligence, and to facilitate the hiring of additional auditors.

The anticipation is that the CRA will need these auditors to act on the new information they will be receiving as a part of the OECD/G20 Common Reporting Standard participation.

Another key tax issue relates to reassessment periods and non-residents of Canada to address a scenario where the CRA reassesses a taxpayer in order to reduce or eliminate a loss in a taxation year which results from a non-arm’s length transaction with a non-resident.  Currently, the CRA cannot reassess the taxation year to which that loss was carried back because the reassessment period has elapsed, but going forward, the CRA will have 6 years after the normal reassessment period to reassess the year to which the loss was carried back in such circumstances.

Another change impacts a scenario where a taxpayer contests a requirement for information (RFI) or an application for a compliance order – as this period will not be included when computing the time limit for the CRA to reassess.

This “stop-the-clock” rule is similar to the existing rule that applies for purposes of requirements for foreign-based information.

10. GST/HST

GST/HST is applicable on the fair market value of the management and administrative services provided by the general partner to an investment limited partnership where consideration becomes due or is paid before September 8, 2017.

GST/HST now applies to management and administrative services rendered by the general partner on or after September 8, 2017, unless GST/HST was charged by the general partner before that date.

The GST/HST is generally payable on the fair market value of management and administrative services in the tax year in which these services are rendered (however rules to calculate FMV, and what constitutes FMV were not provided at this time).

11. Excise – Cannabis Tax

A new excise duty framework for cannabis products under the Excise Act, 2001 applies to all products available for legal purchase, including fresh and dried cannabis, cannabis oils, and seeds and seedlings for home cultivation.

The cannabis taxation program will be administered by the federal government on behalf of most provincial and territorial governments on a coordinated basis. 75% of the taxation revenues from a combined $1 per gram / 10% of the price of the product, whichever is higher, excise duty rate will flow to participating provinces and territories, with the federal government receiving the remaining 25%.

12. Increased Funding to CRA and Tax Court of Canada

The budget provided money to the CRA and the Tax Court of Canada to:

  • $79 million over 5 years and then $15 million per year going forward in order to develop an electronic platform for processing trust returns;
  • $90.6 million over 5-years to help the CRA pursue domestic and international cases which have been identified as high-risk potential danger of loss through enhanced risk assessment systems;
  • $30 million over 5-years to enhance security measures aimed at better protecting the confidentiality of taxpayer information; and
  • $41.9 million over 5-year, and $9.3 million annually going forward to provide support for new front-line registry and judicial staff, most of whom are expected to support the Tax Court of Canada.

And so much more…

 

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CRA Convictions: Former Senior Liberal Adviser Convicted of Failure To Report Income and Benefits

The CRA has reported that Herb Metcalfe, a former senior adviser to Stephane Dion and Liberal lobbyist has received a conditional sentence of two years less a day – including 12 months house arrest – for failing to report $1.4-million in payment and benefits between 2002 and 2006.

Mr. Metcalfe pled guilty to one count of income-tax evasion and was fined $396,259, which represents 100% of the total taxes evaded.

A CRA investigation focused on Mr. Metcalfe’s work as a director and employee of the Capital Hill Group Ottawa Inc., which the agency describes as “a political lobbying business.”  He is no longer a member of this group – having stepped aside from the business.

The agency states that Mr. Metcalfe prepared his tax returns each year by hand and either knew, “or was willfully blind to the fact,” that the income he received was required to be reported on his returns.

“The Canada Revenue Agency pursues tax evaders to maintain public confidence in the integrity of the tax system,” said my former Director of the Toronto North Tax Services Office, Vince Pranjivan, who is now the CRA’s assistant commissioner for the Ontario Region.

The CRA issued a news release dated Nov. 18, 2015, outlining the fine and conviction. However the release did not immediately receive media attention due to public-service rules related to communicating during an election.  Mr. Metcalfe was sentenced on September 30th, 2015 which was during the Federal election campaign, which meant the CRA posted the conviction on November 18th and at that time was able to notify the media.