Finance’s draft legislation tightens Budget 2016 changes

You probably left work early on the Friday before the Civic Holiday long weekend. If you did, you missed the Department of Finance releasing draft legislation to implement measures from the 2016 federal budget.

Granted, the documents may not have been your dockside reading of choice, but they will affect your clients: the legislation covers multiplying the small business deduction, corporate-class fund taxation changes, eligible capital property, life insurance changes and more.

More importantly, “there are key differences between the draft legislation and what was released in the [March 2016] budget material,” says Kim Moody, director, Canadian Tax Advisory at Moodys Gartner in Calgary.

For one, there’s been “a further tightening of the ability to multiply small business deductions,” he says. Specifically, Budget 2016 materials left the door open for “certain entities” to still be able multiply the deduction, he explains. The draft legislation, however, adds a paragraph that both broadly and explicitly outlines the entities that cannot multiply the deduction. (If you’re wondering, the new bit is subsection 125(7), paragraph (c).)

“The Department of Finance probably took a breath and thought, [the tax community] is probably going to think of [using certain entities], so let’s tighten this down. […] In the absence of paragraph (c), that’s where the planning was [pre-July 29]. But not anymore.”

Main takeaway: if you thought your clients could get around the new rules, they probably can’t.

Read: Essential reads on the federal budget

Positives for ECP

On the other hand, the draft legislation fixes two problems the tax community noticed regarding the new rules for eligible capital property (ECP), Moody says.

To understand the problems, first you need to know that as of Jan. 1, 2017, increases in eligible capital property will go from being included in income at 50% to being treated as capital gains. The new regime is meant to simplify matters, but it actually disadvantages small business owners (for the full details, read this article and this article). To ease that pain, Finance created transitional rules. One such rule lets a Canadian-controlled private corporation that disposed of ECP in 2016 but that has a fiscal year ending in 2017 – i.e., a fiscal year that straddles 2016 and 2017 — elect to treat any ECP increase as regular income, not as a capital gain.

Still with us? Here’s problem number one. Budget 2016 materials did not account for a capital dividend account (CDA) addition when the corporation elected to treat the increase as regular income. The draft legislation fixes that – there will now be a CDA addition.

And here’s problem number two. Budget 2016 materials didn’t let a corporation take advantage of the transitional rule we mentioned if it was out of business in 2017. Again, the draft legislation fixes that – this time by removing the requirement that the business be ongoing after Jan. 1, 2017.

If you’re confused, don’t worry. “These rules are complicated,” says Moody. The main message is that Finance proactively addressed two technical concerns with this draft legislation, and tax folks say that’s good news for small business owners.

More time for corporate-class funds

Finance has changed the effective date for corporate-class fund taxation changes. In Budget 2016, the effective date was implied to be October 1, 2016. Now, the draft legislation extends the date to January 1, 2017. Read more details here.

Make your voice heard

Moody says the joint taxation committee of the Chartered Professional Accountants of Canada and the Canadian Bar Association, of which Moody is co-chair, will be submitting its formal position to the government within the next few weeks. Other industry groups will be doing so as well.

If you have an opinion, the comment period closes September 27, 2016. Send your thoughts to fin.legislation-taxation-legislation-taxation.fin@canada.ca or to:

Tax Policy Branch Department of Finance 90 Elgin Street Ottawa, Ontario K1A 0G5

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.