Budget tinkers with tax breaks but avoids upheaval

For individual investors and consumers, the 2017 federal budget is more noteworthy for what it didn't do than for any tax breaks that were introduced or eliminated.

Investors could breathe a sigh of relief that, contrary to rumours fuelled by media reports and the Twitterverse, there were no changes in capital-gains taxes. The inclusion rate remains at 50%, which is what it has been since October 2000, when it was lowered from 66 2/3%.

Investors who took profits before budget day on March 22 may well have had good non-tax-related reasons to do so, apart from pre-budget fears, since North American equity markets reached record highs in recent weeks. But if the reason for selling was primarily in expectation of a tax hike, the result was a taxable capital gain that could have been deferred to a future year.

Also absent from the budget, for a second straight year, was the Liberals' 2015 election-campaign pledge to cap the amounts that can be claimed through the stock-option deduction.

Another significant non-event for individual taxpayers -- specifically homeowners -- was the government's decision to leave untouched the exemption from capital-gains tax on the sale of a principal residence. There are new reporting requirements, announced in October, which took effect starting with the 2016 tax year, but that's nothing more than paperwork. There had been pre-budget speculation that the principal-residence exemption would be capped.

While avoiding major tax changes in his deficit budget, Finance Minister Bill Morneau pledged to close tax loopholes and eliminate tax breaks that primarily benefit the wealthy, and to crack down on tax evasion.

Morneau took no immediate action regarding tax-planning strategies using private corporations. But he said the government will review them on the grounds that they can result in high-income individuals gaining unfair tax advantages that are not available to other Canadians. A policy paper will be issued in the coming months, the finance minister said.

The strategies that will be reviewed include: sharing dividend income and capital gains with family members who are in lower tax brackets; holding non-business investment assets inside a private corporation to take advantage of corporate tax rates that are lower than personal tax rates; and conversions of income payouts into tax-advantaged capital gains. The budget noted that income paid out of a private corporation in the form of salary or dividends to the principals are taxed at rates that are higher than for capital gains.

In the meantime, the government is stepping up efforts to collect all amounts owing under existing tax laws. The budget calls for spending an additional $523.9 million over five years to prevent tax evasion and improve tax compliance. This spending will include hiring additional auditors and specialists "with a focus on the underground economy."

Morneau forecasts that the crackdown will bring in $2.5 billion over five years, or $5 in revenue for every $1 of new spending on administration and enforcement.

Among the tax loopholes that the budget will address is preventing the avoidance or deferral of income tax through the use of offsetting derivative positions. These are known as straddle transactions.

In what the budget characterizes as another loophole being closed, anti-avoidance rules will be applied to registered education savings plans and registered disability savings plans. These provisions, which penalize non-qualified or prohibited investments, would resemble rules that already apply to tax-free savings accounts and RRSPs.

Tax relief for caregivers

A significant budget measure directly affecting many individuals and families is the Canada caregiver credit, simplifying the tax relief provided to people who care for disabled relatives. This new credit allows caregivers to obtain tax relief worth of up to $1,032 this year, which is based on 15% of expenses of up to $6,883 for care of dependent relatives with disabilities who are parents, brothers and sisters, adult children or other specific relatives. In the case of a disabled person who is a spouse, common-law partner or minor child, up to $323 in tax relief is available, or 15% of caregiving expenses of up to $2,150.

Indexed to inflation after this year, the Canada caregiver credit begins to be reduced when the dependant's net income is above $16,163 (in 2017) and is eliminated for dependant incomes of $23,046 or more. The new credit will replace the existing caregiver credit, infirm dependant credit and family caregiver tax credit, each of which have different eligibility rules.

For students in occupational skills courses, the budget extends the eligibility for the tuition tax credit to courses that are taken at a post-secondary institution but are below the post-secondary level. Examples of these courses include training in a second language or in basic literacy and numeracy to improve job skills. Currently, tuition tax credits can be claimed only if these courses are taken at a non-post-secondary institution.

Budget eliminates some tax breaks

Along with new tax-relief measures, the budget ends some tax breaks for individuals. Among them is the 15% public transit tax credit, which applies to transit passes and frequently used electronic payment cards. The credit will be eliminated for transit use after June 30.

Resources flow-through shares will lose the tax break that allows small oil and gas companies to reclassify Canadian development expenses as immediately deductible exploration expenses. Instead, these expenses will need to be deducted gradually over time.

The first-time donor's super credit will expire in 2017. This credit provides additional tax relief for donations of up to $1,000.

The tax deduction for employee benefits in the form of home-relocation loans that are low-interest or interest-free will be eliminated. The budget said this deduction disproportionately benefits the wealthy.

Ride-sharing services, of which Uber is the best known, will be subject to the same GST/HST rules as taxis, raising costs to consumers.

EI changes aimed at caregivers, parents

In proposed changes to employment insurance, the government will provide more flexibility for caregivers, and for parental benefits. A new caregiving benefit of up to 15 weeks will be provided to individuals who are providing care to an adult family member who has a critical illness or injury. Parents of critically ill children will continue to have access to up to 35 weeks of benefits, the budget said, with additional flexibility to share these benefits with more family members.

The budget also proposes to allow parents to choose to receive EI parental benefits for up to 18 months at a lower benefit rate of 33% of average weekly earnings. The parental benefit will continue to be available at the existing rate of 55% of earnings over a period of up to 12 months. The budget will also allow pregnant women to claim EI maternity benefits up to 12 weeks before their due date, up from the current standard of eight weeks.