New Taxation Regime on Passive Investments
Finance Minister Bill Morneau delivered the government's 2018 federal budget today. The budget expects a deficit of $19.4 billion for fiscal 2017-2018, and forecasts deficits of $18.1 billion for 2018-2019 and $17.5 billion for fiscal 2019-2020.
Below are the tax highlights. Details can be found in KPMG in Canada's TaxNewsFlash.
As expected, the budget introduces the new taxation regime for holding passive investments inside a private corporation, originally contemplated in July 2017. Under these proposals, if a corporation and its associated corporations earn more than $50,000 of passive investment income in a year, the amount of income eligible for the small business tax rate would be reduced. Thus, the business limit would be reduced to zero at $150,000 of investment income.
As in previous years, the budget focuses on tax-tightening measures. Specifically, the budget legislates that the at-risk rules apply to a partnership that is itself a limited partner of another partnership. The budget also proposes to tighten certain synthetic equity arrangements and securities lending arrangements, and expands the stop-loss rules on certain share repurchase transactions. In the area of international tax, the budget reduces the ability of non-resident shareholders to enter into transactions to extract Canadian corporate surplus in excess of the paid-up capital (PUC) of its shares. The budget also indicates that Finance will proceed with released draft legislative measures for the GST/HST for investment limited partnerships, with certain changes.
The budget does not include any changes to the personal or corporate tax rates, or any enhanced capital cost allowance in response to U.S. tax reform. However, Finance did reiterate that it intends to conduct a detailed analysis of the U.S. federal tax reforms to assess any potential impacts on Canada.
Although the budget provides a deduction for employee contributions to the enhanced QPP and requires certain trusts to file a T3 return to provide additional information, it did not include any changes to the capital gains inclusion rate or stock option deductions. Further, there were no measures related to changing the taxation of intergenerational family transfers. Finance reiterated that it will proceed with the tax on split income measures released on December 13, 2017 but did not include any changes in the budget.
As expected, the budget invests in innovation and skills training and also advances the business interests of women. The budget announced $2.6 billion in incremental support over five years for new innovation programs and new initiatives to make business regulations more efficient and less costly and also introducing a digital research infrastructure strategy. The budget targets $700 million to the industrial research assistance program and also makes investments in a new women's entrepreneurship strategy.
About KPMG in Canada
KPMG LLP, an Audit, Tax and Advisory firm (kpmg.ca) and a Canadian limited liability partnership established under the laws of Ontario, is the Canadian member firm of KPMG International Cooperative ("KPMG International"). KPMG member firms around the world have 200,000 professionals, in 154 countries and territories.
The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss entity. Each KPMG firm is a legally distinct and separate entity, and describes itself as such.
Senior Manager, National Communications
KPMG in Canada