Grant Thornton: 2016 federal budget pledges to strengthen middle class while extending forecasted deficits until 2020

Federal government focuses spending on job creation, re-energizing the economy and fortifying Canada's social fabric

TORONTO, March 22, 2016 /CNW/ - As widely expected, today Finance Minister Bill Morneau presented a deficit budget. While promising to grow the middle class through an array of widespread investments in Canada's future economic and social well-being, the federal budget offers hopeful measures within the government's well-known financial constraints.  With some of the budget's key deliverables leaked in advance, no real surprises were revealed.

The government forecasts a deficit of $5.4 billion for 2015–16, and projects additional deficits of $29.4 billion (2016-17), $29 billion (2017-18), $22.8 billion (2018-19), $17.7 billion (2019-20) and $14.3 billion (2020-21).

On a positive note, Canada is starting from a relatively strong fiscal position in 2016, with the lowest total government net debt-to-GDP ratio of all G7 countries. This ratio is projected to decline beginning in 2017-18 to the end of the fiscal horizon.

"Today's budget was interesting for what wasn't there," said Keith MacIntyre, National Leader, Tax, Grant Thornton LLP. "The campaign promise of a small business deduction did not come to fruition, nor were other incentives offered in its place. As well, the government's planned infrastructure spending does not appear to target innovation or commercialization of technologies, which would create employment and new businesses for millennials. We were pleased to see that there were no changes to stock options."

One of the more significant personal tax measures in the federal budget is the elimination of the Universal Child Care Benefit (UCCB) and the Canada Child Tax Benefit (CCTB).  They will be replaced with a new non-taxable Canada Child Benefit where the payments will be based on income.  First payments under this new program will begin in July 2016.

From a business perspective, although last year's budget announced a reduction in the small business rate from 11% to 9% over a four year period, this year's budget proposes that the small business tax rate remain at 10.5%. The budget also introduces changes to address concerns about partnerships and corporate structures that multiply access to the small business deduction. 

Grant Thornton has released a detailed summary of the tax measures that were announced in this budget. Below are some of the highlights:

Personal measures

• Repeal of the Universal Child Care Benefit and Canada Child Tax Benefit and introduction of a new Canada Child Benefit, which will vary based on household income.
• Repeal of the Family Tax Cut, which could reduce a couple's tax liability by up to $2,000 provided that the couple had at least one child under the age of 18. This Family Tax Cut credit is eliminated for 2016 and subsequent tax years.
• Increases to the Northern Residents Deduction from $8.25 to $11 per day for individuals, and from $16.50 to $22 per day for households, where no other member of the household claims under the individual deduction.
• Reinstatement of the Labour-Sponsored Venture Capital Corporations tax credit, which was scheduled to be eliminated for 2017 and subsequent tax years.
• Teachers who purchase eligible supplies for use in the classroom will receive a 15% credit (on a maximum of $1,000 in spending).
• Income tax exemption of amounts received under the Ontario Electricity Support Program. These amounts will also be excluded from an individual's income when determining whether a person qualifies for income-tested federal or provincial benefits, such as the Canada Child Benefit.
• Extension of the mineral exploration tax credit by another year (to flow-through share agreements entered into, on, or before March 31, 2017)
• Elimination of the federal education and textbook credits – effective January 1, 2017. The tuition credit will remain unchanged. Unused education and textbook credits carried forward can continue to be utilized. This change is part of the planned enhancements to the student grant program.
• Reduction of the children's fitness and arts tax credit for the 2016 tax year. Both of these credits will be eliminated for the 2017 and subsequent taxation year.

Business measures

• The budget introduced a number of measures to expand tax support for clean energy, including accelerated capital cost allowance (CCA) for the clean energy sector.
• The small business tax rate will remain at 10.5%. It was originally planned to be reduced from 11% to 9% over a four-year period.
• There were also a number of measures to put a stop to tax strategies, including:
  • Initiatives to remedy concerns about partnerships and corporate structures that multiply access to the small business deduction. These actions are intended to address the following structures:
    • Partnership structures designed to circumvent specified partnership income rules.
    • Corporate structures (in which active business income is earned from providing services or property to a private corporation) will now be ineligible for the small business deduction where, at any time in the year, the Canadian Control Private Corporation (CCPC), one if its shareholders, or a person who does not deal at arm's length with such a shareholder has a direct or indirect interest in the private corporation.
    • Corporate structures where investment income is derived from an associated corporation's active business will be ineligible for the small business deduction and be taxed at the general corporate rate.
• Changes to the rules involving life insurance proceeds to prevent an artificial increase in a company's capital dividend account balance. Changes are also proposed to ensure that amounts are not inappropriately received tax-free by a policyholder as a result of a disposition of an interest in a life insurance policy.
• As of January 1, 2016, amendments will be made to the eligible capital property rules (originally introduced for consultation purposes in the 2014 Budget), such as the transfer of Cumulative Eligible Capital (CEC) pool balances to a new CCA class, on which depreciation will be calculated at 5%.

Sales tax measures

• Amendments to limit the Canada Revenue Agency's ability to define what qualifies as a "de minimus" financial institution.
• Amendments to tighten how organizations can qualify for the "closely related test"
• Change in the rules for charities and not-for-profits to allow for GST splitting for income tax purposes

International tax measures

• Amendment to strengthen transfer pricing documentation by legislating country-by-country reporting requirements for large multinationals.
• Amendments to cross-border surplus stripping.
• Amendments to Back to Back Loans.

Phase One infrastructure spending offers near-term relief; Phase Two to include bigger projects

The budget proposes to invest over $120 billion in infrastructure over 10 years. The plan includes a first phase of $11.9 billion over the next five years to upgrade and improve public transit systems, invest in water, wastewater and green infrastructure projects. It also offers a number of crucial social infrastructure investments including affordable housing, early learning, and child care. Phase two of the plan will include broader projects designed to reduce urban transportation congestion, improve and expand trade corridors, and produce a cleaner low-carbon national energy system.

"This budget implements traditional infrastructure spending," explained Lynne Zulian, Partner, Tax Services. "It also recognizes the urgent need to address Canada's past infrastructure under-investment but acknowledges that the government cannot fully remedy these issues in the near term. That said, the government has dedicated sizeable resources to a number of priority areas for the provinces and cities that can deliver a positive impact." 

Nurturing innovation and growth through partnerships and increased financing

The government will also redesign and redefine how it supports innovation and growth. It will do so through its 'Innovation Agenda' in partnership and coordination with the private sector, provinces, territories, municipalities, universities, colleges, and the not-for-profit sector. This will include increased financing for fundamental research by $95 million annually and the investment of up to $2 billion over three years in a new Post-Secondary Institutions Strategic Investment Fund to modernize on-campus research, commercialization and training facilities. 

About Grant Thornton LLP in Canada
Grant Thornton LLP is a leading Canadian accounting and advisory firm providing audit, tax and advisory services to private and public organizations. We help dynamic organizations unlock their potential for growth by providing meaningful, actionable advice through a broad range of services. Together with the Quebec firm Raymond Chabot Grant Thornton LLP, Grant Thornton in Canada has approximately 4,000 people in offices across Canada. Grant Thornton LLP is a Canadian member of Grant Thornton International Ltd, whose member and correspondent firms operate in over 100 countries worldwide. A listing of Grant Thornton offices and contact information can be found at: www.GrantThornton.ca.

SOURCE Grant Thornton LLP

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