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Know the tax changes that will affect you and your business

Here’s how new rules for personal and corporate taxes will impact returns for the 2018 income year and plans for 2019

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young girl in a wheelchair, hugging a service dogStarting in 2018, people who suffer from a severe mental impairment will be allowed to claim the costs of caring for a service animal that helps them cope with issues such as disorientation and anxiety (Shutterstock/Africa Studio)

Canadians should be aware of how changes to federal rules could affect their 2018 tax returns and 2019 planning.

PERSONAL INCOME TAX

Two new credits announced for the 2018 tax year—the climate action incentive rebate and medical expense credits—will have an effect for a number of taxpayers, depending on the province where they live.

New climate change credit

This year, the Government of Canada’s climate change plan will start to affect taxpayers in New Brunswick, Ontario, Manitoba and Saskatchewan—provinces that do not meet the federal standard for carbon pollution pricing—through the Climate Action Incentive rebate. 

When taxpayers in the four affected provinces file their 2018 tax returns, they will receive credits based on their family compositions and where they live. The Department of Finance estimates the credit will add up to $339 for a family of four in Manitoba, $256 in New Brunswick, $307 in Ontario and $609 in Saskatchewan.

Those who live in small towns and rural areas are expected to get 10 per cent more than those in cities, since they have fewer public transportation options to reduce their fuel consumption.

New medical expense credit

Starting in 2018, people who suffer from a severe mental impairment will be allowed to claim the costs of caring for a service animal that helps them cope with issues such as disorientation and anxiety. Only animals that have been specially trained as service animals will be eligible. (See the CRA’s guide for more information.)

Tax on Split Income

The much-discussed Tax on Split Income (TOSI) may now also apply to amounts received by adult individuals from a related business beginning January 1, 2018 (in addition to applying to certain types of income of a child born in 2001 or later). As of this year, people need to start including TOSI in individual returns (if applicable). 

CHANGES IMPACTING PRIVATE CORPORATIONS

In addition to the much-discussed changes to rules around income splitting, which tax preparers have been advising clients on for the past year, a few new changes to tax laws will affect tax filings for 2018 and planning for 2019.

“Overall, some corporations will benefit from the changes, while others will see their taxes go up,” says Bruce Ball, FCPA, FCA, vice-president of taxation at CPA Canada.

Limiting access to small business tax rate

“This measure was designed to limit the deferral advantages from holding passive savings in a corporation,” says Ball, explaining that passive income is earned from investment, rather than regular business activity. 

For tax years that begin after 2018, the business limit of Canadian-controlled private corporations (and their associated corporations) will be phased out on a straight-line basis where income from passive investments is between $50,000 and $150,000 for the previous year.

Currently, the business limit is phased out based only on the taxable capital employed in Canada. For tax years that begin after 2018, the reduction of the corporation’s business limit will be the greater of its taxable capital business limit reduction and its passive income business limit reduction for the year.

Changes to refundability of taxes on investment income

Another measure designed to limit deferral advantages from holding passive savings, this change ends the tax advantage for larger corporations by paying out lower-taxed dividends from active income taxed at the general corporate rate, and still claiming refunds of taxes paid on their investment income, which is intended to be taxed at a higher rate.

For tax years that begin after 2018, the dividend refund rule will be changed so that a private corporation will get a refund of its refundable dividend tax on hand (RDTOH) only where it pays non-eligible dividends, or eligible dividends that are derived from portfolio dividends it received from non-connected corporations. 

“A transitional rule will preserve the refundability of a corporation’s pre-existing RDTOH,” says Ball.

Small business deduction increase

The small business deduction increases to 18 per cent starting Jan. 1, 2018, and to 19 per cent starting Jan. 1, 2019, resulting in small business tax rates of 10 per cent and 9 per cent, respectively.

Immediate expensing for certain equipment acquisitions

With the goal of allowing Canadian businesses to remain competitive with the U.S., the government has proposed new rules that will allow immediate expensing of certain equipment purchases. The cost of machinery and equipment for manufacturing, processing and clean energy will be eligible for a full tax write-off the year they are put in use.

Qualifying assets will be eligible for immediate expensing if they were acquired after Nov. 20, 2018. The measure will be gradually phased out for assets available for use after 2023 and before 2028.

Accelerated investment incentives for other acquisitions

In addition to the immediate write off of certain equipment, the government has introduced a measure called the Accelerated Investment Incentive to support businesses that make capital investments. Under this incentive, capital investments acquired after November 20, 2018 and available for use before 2024 will generally be eligible for a first-year deduction for depreciation equal to as much as three times the amount that would otherwise apply in the first year an asset is put in use.

Tripling the current first-year rate will allow businesses to recover the initial cost of their investments more quickly—reducing risk and providing businesses in Canada with a true incentive to make capital investments.

The incentive will apply to all tangible capital assets, including long-lived investments such as buildings. It will also apply to intangible capital assets such as patents and other intellectual property. The incentive will be gradually phased out for capital assets available for use after 2023 and before 2028.

INTERESTED IN DEVELOPING YOUR TAX KNOWLEDGE? 

Check out CPA Canada’s Lifelong Learning in Tax brochure for a complete list of practical and relevant tax training. The courses are built to support general practitioners who advise their clients on tax matters to comprehensive programs for those planning a career in tax.