On November 21, 2018 the federal and Ontario governments released Economic and Fiscal Update Statements. The various economic and tax measures address the competitive concerns that Canadian businesses currently face and will assist in keeping pace with the United States. The federal government will be conducting a detailed report on US tax reform, to determine if there any potential impacts on Canada. Finance Minister Bill Morneau has noted corporate and personal tax rates will in fact remain the same. The proposed tax measures will address deductions for capital investments to recent US tax reform measures. In addition, the federal government has proposed targeted measures to aid the news organizations who are currently struggling to adapt to the new digital marketplace and decreased demand for traditional print media.
The tax changes, discussed below, will ultimately result in much larger deficits in the coming years. There has not yet been an announcement as to when the Canadian federal government will balance the books – one may question whether or not this is a sound approach to fiscal management at the federal level.
1. Full Expense for Manufacturing and Processing (M&P) Machinery and Equipment
Finance proposes an increase to the Capital Cost Allowance (CCA) rate to 100%, as opposed to CCA Class 53 which provides for a 50% rate. Thenew rate will apply to manufacturing equipment acquired before 2024. The enhanced CCA rate will then be gradually phased out from 2024 to 2027.
2. Accelerated Investment Incentive Program
Finance proposes an Accelerated Investment Incentive Program (“the incentive”),which suspends the current half-year rule for CCA purposes. This new incentive rule applies during the year of a depreciable asset purchase by a business and effectively triples the CCA in the year that depreciable property is acquired, however then leads to a concurrent reduction to CCA in subsequent years. Stated another way: these proposed rules will not affect the total amount that is eligible to be deducted for tax purposes. Instead, this increases the tax deduction available to companies in the year of acquisition.
This incentive applies to businesses provided that two conditions are met:
- Neither the taxpayer nor a non-arm’s length person previously owned the property; and
- The property has not been transferred to the taxpayer on a tax-deferred basis (i.e., “rollover” transactions).
3. Clean Energy Expenses for Full Equipment
Clean energy equipment has been subject to a CCA rate of 50% since 2005. The update provides companies with a first-year CCA deduction for the assets included in Class 43.2 as long as the assets mentioned were acquired after November 20th of this year and are available to be used before year 2028. 100 percent of the cost of 43.2 assets are deductible for businesses, with a phase-out for assets that have obtained by said companies, and have become available for use after 2023. This is closely similar to the incentive program as discussed above in regards to the half-year rule.
4. Important Questions
Are you currently questioning whether to defer your company’s purchase of a major capital asset? Or expecting rising tax profits in 2018? You need to consider the merits of accelerating the purchase to occur before the end of 2018. Regardless of the asset being owned for a small period of time, the half-year rule explained above will not limit CCA deductions to Canadian businesses. This will result in a possibility of material deduction that could reduce taxable income and tax payable in 2018. The Ontario government has proposed the following tax related measures:
Low Income Families and Individuals
As of year 2019, the government will be introducing non-refundable tax credits to low-income individuals and families. This will assist in eliminatingOntario personal income tax for the low-income Ontario taxpayers with employment income. The tax credit has been calculated as the lesser of $850 and a 5.05 per cent of income from employment. Said amount will also then be reduced by 10 per cent of the family income of $60,000 and individual’s net income of $30,000.
Tax Health for Employers
Increase to the current Employer Health Tax exemption from from $450,000 to $490,000 starting January 1st, 2019.
2018 Budget Announcements
The Ontario government confirmed that it would not move forward with the following measures previously announced March 28th 2018:
- Rates, surtax, rackets and credits for Ontario’s Personal Income Tax adjustments
- Amendments to parallel a federal measure to phase out the $500,000 business limit for corporations that earn between $50,000 and $150,000 of passive investment income in a taxation year.
- Ontario Research and Development Tax Credit and the Ontario Innovation Tax Credit changes
- Employer Health Tax exemption adjustments
Ontario Technical Amendments
Lastly, the Ontario government has promised to make the technical requirements listed below.
- Adjustments to the non-eligible dividend tax credit calculation. This will aid in maintaining the rate at 3.2863 per cent. ( Taxation act, 2007);
- Removal of spent provision which has provided one use support to Canadian businesses during transitions to the Harmonized Sales Tax in year 2010. ( Taxation act, 2007);
- Federal changes that allow taxpayers on split income could apply a disability tax credit against said tax ( Taxation act, 2007);
- Federal changes that will modify pension income taxes to include any additional benefits for Canadian veterans. ( Taxation act, 2007);
A Welch LLP tax advisor can assist you with any questions or concerns you may have to the new updates.