Tax Highlights from the 2017 Federal Budget
On March 22, 2017 (“Budget Day”), federal Finance Minister Bill Morneau tabled the Liberal government’s second budget since the October 2015 election. The budget, titled “Building a Strong Middle Class,” focused primarily on innovation with the goal of building a nation that is both inclusive and innovative.
As for the country’s projected financial position, after accounting for Budget 2017 proposals, the budgetary balance is expected to show a deficit of $23.0 billion in 2016-17 and $28.5 billion in 2017-18. Over the remainder of the forecast horizon, the deficit is expected to decline gradually from $27.4 billion in 2018-19 to $18.8 billion in 2021-22. The federal debt-to-GDP ratio is projected to decline gradually after 2018-19 to the end of the fiscal horizon, reaching 30.9% in 2021-22.
The Government’s projection for budgetary revenues includes a 4.3% increase in projected revenues in 2017-18, up from a 1.1% decline in 2016-17. Budgetary revenues are projected to grow at an average of 4.0% per year from 2018-19 to 2021-22, in line with the outlook for nominal GDP.
From a tax perspective, there were no changes to personal or corporate income tax rates. The budget did propose changes to certain deductions and credits, and signaled the Government’s intention to consult on other matters such as the taxation of private corporations.
To the relief of Canadian investors and contrary to widespread speculation, the Government did not increase the capital gains inclusion rate, which remains at its current level of 50%.
The following is a summary of changes announced in the budget that we feel are relevant to financial advisors and their clients. Please note that these changes are still proposals until passed into law by the Government.
Tax Highlights from the 2017 Saskatchewan Budget
Finance Minister Kevin Doherty tabled the 2017 Saskatchewan provincial budget on March 22, 2017. The budget forecasts total revenue of $14.17 billion and a total expense of $14.80 billion for a projected deficit of $685 million for 2017-18. A smaller deficit of $304 milion is proejcted for 2018-19. The government is planning a return to balanced budgets by 2019-20 projecting a modest surplus of $15 million in 2019-20 and an increased surplus of $183 million for 2020-21. The budget states that the deficit is largely a result of resource revenues having declined by more than $1 billion over the past three years - mainly due to oil and potash prices remaining low.
On the tax side,effective July 1, 2017, all three personal income tax rates will be decreased by half a percentage point with a further half-point reduction effective July 1, 2019. The budget also announced a reduction in the corporate income tax rate of half a percentage point effective July 1, 2017 and another half-point reduction on July 1, 2019.
The budget announced a shift in taxation away from income and productivity to consumption. As a result there were a number of increases in consumption taxes. Effective immediately tobacco rates and liquor mark-ups both increased.
The most significant increase was that, effective immediately, the Provincial Sales Tax (PST) is being increased by one point, from 5% to 6% and the PST base is being expanded.
Tax Free Savings Accounts
The Tax Free Savings Account Limit for 2016 is $5,500. The lifetime limit is $46,500.
Key Factors to Know
The lifetime limit for a TFSA is $46,500. A very attractive $93,000 for a two-person household of eligible contributors.
Unlike RRSPs, TFSA withdrawals are not taxed. The capital growth and the income earned inside the TFSA is not taxed at any time.
The Bottom Line
Make sure you have topped up all of your available TFSA room in a portfolio of securities to shelter the growth from all future taxation!
Snowbirds and US Tax
Politicians are constantly searching for new tax revenue. Not wanting to upset national residents and ultimately voters, officials often include non-voting, foreign owners of domestic property as a key component to increasing tax revenue.
Canadian Snowbirds who own real estate in the U.S. are prime candidates for paying increased taxes. Since the taxation rules are complicated and can change frequently, it is vital to stay informed and in-the-know.
What you need to know
In order to be exempt from filing IRS forms or a U.S. tax return, three conditions must be met:
1. You do not earn any U.S. source income (interest, dividends, capital gains, rent) AND
2. You are not physically present in the U.S. for more than 182 days AND
3. You score less than 183 on the Substantial Presence Test:
o To calculate your Substantial Presence score add together
§ Number of days spent in the U.S. in the current tax year
§ One-third of the days spent in the U.S. from the prior tax year
§ One-sixth of the days spent in the U.S. the year prior to that
· An example:
2014: Days in U.S. = 140
2013: Days in U.S. = 93
2012: Days in U.S. = 120
Add together 140 (days spent in 2014)
+ 31 (1/3 of 93 days spent in 2013)
+ 20 (1/6 of 120 days spent in 2012)
191 (Your Substantial Presence Score)
These calculations can be further complicated by the fact that the IRS follows the calendar year, and typically Snowbirds stay six to eight weeks in one year and then another eight weeks or more in January, February and March of the following year.
Additionally, it is important to understand the IRS’ definition of ‘day.’ The IRS counts any time spent during a calendar day, as a full day. If, for example, you cross into the U.S. at 11:55 pm, and return ten minutes later at 12:05am, the IRS would consider this two full days since you spent time during two different calendar days, even though it was only ten minutes in total time!
Also important to note that the IRS includes all of your visits to the U.S. throughout the year, not just your winter holiday. Daytrips for shopping or sporting events, for example, must also be included in your Substantial Presence calculations and determination of total days in the U.S.
If you frequently travel to and from the U.S, you may want to keep a small journal in your car where you can write down the date, time and occupants for each time you enter and exit the United States. Currently, a credible journal is sufficient proof for the IRS.
Point #1, above, is not as straight-forward as it sounds. If the income is ‘rent’, then IRS forms, and likely a 1040-NR, are necessary.
Interest income is ‘zero-rated’ for Canadians, so technically the income should be declared, but the tax rate is zero, so no U.S. tax is levied.
U.S. dividends are taxed at a flat rate of 15% for Canadians, and if the proper filings are made from your broker (either Canadian or U.S. based) to the company paying the dividends, then the 15% should be withheld, and no further declarations in the U.S. is required. This withholding should be verified and included on Canadian tax filings.
If the capital gain is the sale of the U.S. real estate, it is best to consult a Canadian-based U.S. tax expert before you contemplate selling to anticipate the necessary steps and filings to repatriate your capital back to Canada.
Further complicating the declaration of income is converting U.S. payments to Canadian dollars. The requirement is that the Bank of Canada exchange rate for the date of the transaction be used. If multiple payments occur, an average annual exchange rate is acceptable to CRA and can be found at http://www.bankofcanada.ca/rates/exchange/annual-average-exchange-rates/
Some key factors to know
· Canadians who earn U.S. source income subject to U.S. tax must file a U.S. tax return using IRS form 1040NR (non-resident)
· When U.S. property is sold by a foreign owner, the buyer is required by law to withhold ten percent of the purchase price and remit it to the IRS when the transaction is concluded (i.e. ‘closed’))
o The buyer’s lawyer when releasing funds withholds this money, because if it is overlooked, the IRS could require the buyer or the buyer’s lawyer to remit the 10% while any tax implications are calculated
o Filing a 8288-B can reduce this 10% withholding amount all the way down to the anticipated tax amount, even if the tax is zero
§ To file an 8288-B, a Tax Identification Number (TIN) like a U.S. Social Security Number or Canadian Social Insurance Number is needed
· Obtaining a TIN requires 6 to 8 weeks, and must be in-hand prior to contract signing to facilitate the reduction of the 10% withholding
· If a Canadian stays in the U.S. for 183 days or more, he or she must file a full return or a non-resident return