The 2014 federal budget will get mixed reviews from the wealthy.
The government cracked down on income-splitting strategies and trusts, but also offered more flexible charitable tax rules.
The latter change will likely encourage wealthy families to continue to donate, as well as inspire average Canadians to consider giving on death, says David Ablett, director of tax and retirement planning at Investors Group. If someone has substantial savings and no family, he may decide to bequeath funds.
Cynthia Kett, principal at Stewart & Kett Financial Advisors, expected the pullback of graduated tax rates for testamentary trusts. Clients will need to revisit their tax and estate plans, as well as trust structures. Nonetheless, trusts have non-tax benefits—they’re often used to control how inheritances are delivered, for example, especially when minor children are involved.
Taking a broader view, she notes average families won’t be affected by the budget. Both she and Ablett agree the government introduced few significant changes because it wants to make more impact next year, when there’s an election.
But if your clients are considering aggressive tax strategies or make donations, offer insight on the following four items.
1. Treaty shopping consultation updates (See page 347 of the budget)
Canada has tax treaties with most countries, and Budget 2013 hinted some taxpayers are abusing these arrangements through so-called treaty shopping.
That’s when someone establishes an entity in another country to obtain access to treaty benefits that reduce their tax burdens.
Kett says the government will likely review these structures to determine whether they’re truly Canadian- or foreign-owned. That’s because “Canada is tired of losing its tax base through planning schemes,” she says, but adds the government has yet to develop rules that will help properly distinguish between legitimate operations and those meant to abuse tax treaties. They’ve tried working through the courts, but haven’t had success.
If a client’s offshore company is deemed Canadian-owned, she notes, that business would face 15% in federal taxes, and between 10% and 16% in provincial taxes.
2. Changes to Ecological Gifts Program (see page 159 of the budget)
Clients who donate ecologically sensitive land can take advantage of specific tax credits and deductions. Before now, however, people could only claim donation amounts equal to 75% of their incomes, for up to five years, says Ablett. For example, if someone donated land worth $200,000 but made $100,000 a year, she could only claim $75,000 per year. It would take about three years to fully realize the full tax benefit.
Now, people can stretch their claims over ten years, he says, which will help those who donate land worth millions.
3. New treatment of cultural property donations (see page 333 of the budget)
Clients who plan to donate cultural property—paintings by famous Canadian artists, for example—will have to be more careful about what they’re giving away and how they value it.
According to Budget 2014, those who acquire cultural property through tax-shelter gifting arrangements won’t be given the full fair market value for the items when they’re donated. Instead, they or their families will receive the amount the buyer actually paid for the item.
4. New remittance thresholds for employers (see page 97 of the budget)
Each year, business owners withhold and remit employee income tax, CPP and EI. Since it’s expensive to file remittances frequently, the government has raised the thresholds so they don’t have to file and pay taxes as often. There will also be a consultation regarding the Capital Cost Allowances for businesses.