2019 Beard Winter LLP Canada Federal Budget Highlights

March 20, 2019

Brandon D. Tigchelaar, Business and Finance Lawyer and Andrea Tratnik, Estate Planning Lawyer, Beard Winter LLP

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Introduction

Budget 2019, tabled by the Liberal Government on March 19, 2019, has many of the hallmarks of a pre-election budget. Titled Investing in the Middle Class this budget is focussed less on businesses and more on middle-class voters.

Changes affecting business were incremental and not likely to create controversy for the most part.  There are some goodies for manufacturers and media companies, as well as those investing in transitioning to green alternatives in their business.

Accelerated Capital Cost Allowance

Accelerated capital cost allowance will be the biggest development in this budget for capital intensive businesses, especially in the manufacturing and processing space.  It should be noted that these provisions were already announced by the government in its Fall Economic Statement in November 2018, and are being confirmed in Budget 2019.

To encourage companies to invest in growth, the government has allowed full costing on manufacturing and processing equipment in the year acquired, rather than depreciation of such equipment over time.

Additionally, for all other capital expenditures, capital cost allowance (CCA) will be tripled during the next five tax years with a view to stimulating investment in growth.

Finally, Budget 2019 provides that investments in zero-emission vehicles (up to $55,000 per vehicle) purchased after March 19, 2019, and delivered before 2024, will be fully depreciated in their first year.

Reducing Means Testing for SR&ED Grants

While the CCA item above is primarily for old economy businesses, this change to the Scientific Research and Experimental Development (SR&ED) tax incentive regime is the biggest benefit to new economy businesses in Budget 2019.

Historically, eligibility for SR&ED credits was based on a business (i) having made eligible expenditures in the year; (ii) having income below $500,000, or between $500,000 and $800,000, subject to a SR&ED phase-out; and (iii) having total capital below $10 million, or between $10 and $50 million, subject to a phase-out.

Budget 2019 eliminates the income limitations to SR&ED eligibility.  This is a fair and appropriate step by the government, as businesses should not be penalized because their research and development had a fast payback cycle.

The capital limits on SR&ED eligibility remain in effect.

Stock Option Deduction Limitations

The government has been telegraphing its intention to restrict the benefit that employees see from stock options since before it was elected in 2015.  In its 2015 election platform, the Liberal Party of Canada promised to protect the first $100,000 in stock option gains, but indicated its suspicion of benefits accruing to “very high-income Canadians”, 8,000 of whom deducted more than $400,000 from their taxable income using stock options in 2014.

Restrictions on the stock option deductions have been anticipated in each of the government’s first three budgets, and have finally arrived, at least in principle, in Budget 2019.

The expected restrictions, which are still in draft, will be targeted at options issued by “large, long-established mature firms,” and will restrict the deduction to gains on the first $200,000 of optioned shares.  There is little guidance on what the test for firm size and maturity will look like in practice, but what it will mean, to use the government’s language, is that employees of “startups and rapidly growing Canadian businesses” will continue to enjoy the upside in their options that they have historically.

Additionally, the restrictions, somewhat counterintuitively, will focus on the aggregate strike price of the options, rather than on the benefit actually enjoyed by an employee.  For example, where an employee receives 25,000 options with a strike price of $20, or an aggregate strike price of $500,000, in a year, 40% of the option shares will be entitled to the historical deduction of 50% of the realized growth when exercised, and the balance will not enjoy the historical deduction.  The $200,000 limit will refresh in each year and will apply to options issued, rather than exercised, in a given year.

The thinking on this appears to be that the government is taking a belt and suspenders approach to ensuring that these restrictions do not hit small firms.

Further guidance on the final framework for these changes have been promised before summer 2019.

Updates to the RDSP Regime

Currently, where a beneficiary of a registered disability savings plan (RDSP) ceases to qualify for the disability tax credit (DTC), it is generally required that the RDSP be closed within a certain period of time, and grants and bonds be repaid to the Government of Canada. An extension to keep the RDSP open after the beneficiary ceases to qualify for the DTC is only available if a certain medical certification is produced.

Budget 2019 proposes to remove the time limitation on the period that an RDSP may remain open after a beneficiary ceases to qualify for the DTC and to eliminate any requirement for medical certification.

This change was introduced in response to concerns that the RDSP closure and repayment requirements do not appropriately recognize periods of severe but episodic disability. This change will apply after 2020, though transitional rules will apply after March 19, 2019, and before 2021.

Charitable Giving

1. Canadian Journalism

Budget 2019 proposes to add registered journalism organizations as a new category of tax-exempt “qualified donees” to which Canadians may donate and claim a charitable donation tax credit or deduction.

Such organizations must be corporations or trusts having purposes that exclusively relate to journalism. Any business activities carried on by these organizations must be related to their purposes (such as, for example, the sale of news content and advertising). The organizations will not be allowed to distribute their profits or permit their income to be available for personal benefit of certain connected individuals.

They will also be required to disclose the names of any donors who make donations of over $5,000 and the amount donated. Many other criteria and requirements will apply. This measure will take effect as of January 1, 2020.

2. Cultural Property

Budget 2019 also proposes to remove the requirement that property be of “national importance” to qualify for the tax incentives that apply to donations of cultural property. This proposal was introduced to reverse the impact of a recent court decision that interpreted the “national importance” test as requiring that cultural property have a direct connection with Canada’s cultural heritage.

Additional Benefits in Budget 2019 for Individuals

Some of the handouts to individuals in Budget 2019 may also impact their children.  These include:

• the First-Time Home Buyers Plan limit – a plan under which taxpayers can borrow from their RRSPs to finance a down payment on a home – has been raised from $25,000 to $35,000;

• student loan interest rates have been lowered from the current bank prime rate + 2.5% (for most loans) to prime for all new and existing student loans;

• new zero-emission vehicles with retail prices of less than $45,000 will be eligible for federal incentives of up to $5,000 to buyers (note that if these incentives are used, they cannot be combined with the CCA acceleration for zero-emission vehicles contemplated above);

• current tax rules provide for a deemed disposition of real property by a taxpayer when there is a change in the use of that property (i.e., rental property to personal use); an election by a taxpayer to opt out of this deemed disposition, which election has historically been available only to owners of single unit dwellings, will be extended to apply to owners of multi-unit residential properties (i.e., duplexes or triplexes);

• a new program for refundable tax credit accounts for skills retraining accruing at $250 per year, and capped at $5,000 per taxpayer; and

• allowing the investment of RRSP funds into two new types of annuities: (i) “variable payment life annuities”, which are vehicles whose payments are tied to the underlying return on the invested capital and the rate at which participants in the plan pool die; and (ii) “advanced life deferred annuities”, which may start at age 85 rather than age 71 like other annuities purchased with registered funds.

Brandon Tigchelaar focuses on private mergers and acquisitions, general commercial matters, and assisting with planning and implementation of tax efficient reorganizations of private entities.

Andrea Tratnik practises estate and trust planning and administration, acting for domestic and international companies, small businesses, and individuals.

Do you have questions about this topic? Email Brandon at btigchelaar@beardwinter.com or call him at 416-306-1742. You can email Andrea at atratnik@beardwinter.com or call her at 416-306-1815.