2019 Federal Budget Update
The Federal Budget was released on March 19, 2019 with minimal tax updates. While there were no crazy changes like we have seen in the last few years (i.e. TOSI and passive income), there were no real improvements either. The main thing you need to know – there are no changes to the corporate or personal tax rates for 2019. We’ve highlighted a few of the relevant tax items that may apply to you.
Change of use rules on real estate property – partial dispositions
For anyone who has more than one home or who has rented out a portion of their home, you may have been subject to a deemed disposition of the property when changing its usage from a principal residence to a rental or income earning property.
While an election could be filed to defer this capital gain on the deemed disposition until the actual sale of the property in the future, there has previously been no option to defer this gain if part of a property was deemed to have changed in use.
The new budget has introduced a measure which allows a taxpayer to file an election if part of their home changes use, potentially preventing a large unexpected tax bill.
Taxation of employee stock options
When stock options are exercised 100% of the benefit is included in the employee’s income. If various criteria are met a deduction equal to 50% of the benefit is allowed. This results in similar tax treatment to a capital gain (with 50% of the benefit being taxable).
The budget has outlined changes to this practice which would only allow the first $200,000 of stock options granted to an employee to be eligible for this favorable treatment. Any benefit from options above this limit would be taxed as regular income.
The government has also indicated there will be an exception for small businesses from this rule. Details regarding the government’s definition of a “small business” will be announced before summer 2019. The rules will apply on a go-forward basis only.
Taxation of business income in a tax-free savings accounts
The tax-free savings account (“TFSA”) is an excellent savings tool and many investors have taken advantage of the tax-sheltered gains as a part of their retirement planning. However, some investors have done this a little too well for CRA’s liking! When the TFSA appears to be “carrying on a business” (or generating investment income like it’s their job), the trustee can be held liable for the income tax on the income from business.
The budget proposes to have the income tax liability related to the income from business be extended to the TFSA holder.
Accelerated deductions for zero emission vehicles
In an effort to encourage Canadian businesses to invest in zero emission vehicles the government has introduced two new Capital Cost Allowance (“CCA”) classes which allow for accelerated rates of depreciation on zero emission vehicles.
Qualifying vehicles, including battery powered electric, plug in hybrid or hydrogen fuel cell vehicles will be able to be fully written off in the year of purchase up to a limit of $55,000 plus applicable sales taxes, for vehicles acquired between 2019 and 2023. Any amount paid above this threshold would be depreciated at 30% or 40% per year, depending on the type of vehicle and the business usage.
Excise tax changes relating to marijuana products
Prior to the legalization of edible cannabis in October, the federal government has provided additional clarification on the related excise taxes. Edibles, cannabis oils and other marijuana extracts will be taxed based on the level of THC in the product.
While this will ease the burden on marijuana producers, as they will only be required to assess the level of THC in the product at the end of the production cycle, Canadians who use cannabis oil for medical purposes may end up facing a larger bill for their marijuana-based treatments.