2018 federal budget facts&tax

1. IN THIS ISSUE
2018 Federal Budget
Impact on Businesses
Impact on Individuals
Impact on Trusts
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2018 FEDERAL BUDGET
On February 27, 2018 Finance Minister Bill Morneau presented his third budget in
the House of Commons. The budget revised the deficit for the year just ended to
$19.4 billion and forecasts a deficit of $18.1 billion for the current year. The deficit
is projected to decline gradually, reaching $12.3 billion by 2022-2023.
Budget measures that will impact many of our clients include the following:
IMPACT ON BUSINESSES
Taxation of Small Business Income in Canadian Controlled Private
Corporations (CCPCs)
As previously announced, the government will proceed with changes to the small
business tax rate, which will result in a reduction in the combined small business
rate over the next two years.
The combined rates in Ontario will be as follows:
Ontario Federal Total
2017 4.5% 10.5% 15.0%
Effective January 1, 2018 3.5% 10.0% 13.5%
Effective January 1, 2019 3.5% 9.0% 12.5%
For corporations with off-calendar year end dates, the rate applied will be prorated
accordingly.
Passive Investment Income
Much anticipated feedback was provided on the measures to tax investments that
have accumulated in private corporations. Two measures have been proposed to
penalize the accumulation of investment assets in a corporate group.
Reduced Access to Small Business Tax Rates
The small business tax rate discussed above is available for the first $500,000 of
active business income earned each year. Prior to this budget, access to the small
business tax rate would only be reduced when the taxable capital of the
corporation and associated corporations exceeded $10 million.
This budget proposes to also reduce the access to the small business tax rate for
CCPCs or their associated corporations that have significant income from passive
investments.
Under this proposed measure access to the small business tax rate will be
reduced on a straight-line basis for CCPCs having investment income between
$50,000 and $150,000 as illustrated in the following table:
FEBRUARY 2018

2. Refundable Taxes on Investment Income - Cont’d.
 The new account (eligible RDTOH) will track
refundable taxes paid under Part IV of the Income
Tax Act on eligible portfolio dividends. Any
payment of taxable dividends will entitle the
corporation to a refund from its eligible RDTOH
account, subject to the ordering rule described
below.
 The current RDTOH account (non-eligible
RDTOH) will track refundable taxes paid under
Part I of the Income Tax Act on investment income
as well as under Part IV on non-eligible portfolio
dividends (i.e., non-eligible dividends from non-
connected corporations). Refunds from this
account will be obtained only upon the payment of
non-eligible dividends.
RDTOH Refunds – Ordering Rule
Upon the payment of a non-eligible dividend, a private
corporation will be required to obtain a refund from its
non-eligible RDTOH account before it obtains a refund
from its eligible RDTOH account.
This measure will apply to taxation years that begin
after 2018.
A review of the RDTOH balances and the ability to pay
eligible dividends should be done before the
application of the new measures.
It is interesting to note that the impact of these
proposals on existing holding companies that do not
earn active business income is nominal.
Income Sprinkling
The Government confirmed its intention to proceed
with the previously announced tax measures released
on December 13, 2017 to address income sprinkling.
Foreign Affiliates - Reporting Requirements
The budget proposes to bring the information return
deadline in respect of a taxpayer’s foreign affiliates
(T1134) in line with the taxpayer’s income tax return
deadline by requiring the information returns to be filed
within six months after the end of the taxpayer’s
taxation year.
In order to give taxpayers time to adjust to this change,
this measure will apply to taxation years of a taxpayer
that begin after 2019.
FEBRUARY 2018
2018 FEDERAL BUDGET COMMENTARY
Passive Investment Income
Reduced Access to Small Business Tax Rates
- Cont’d.
Investment Income
Maximum Active
Business Income
Subject to
Small Business Tax
Rate
$ 50,000 $500,000
$ 75,000 $375,000
$100,000 $250,000
$125,000 $125,000
$150,000 $0
The budget proposes a complex definition of items that
will be considered as investment income for this
purpose.
This measure will apply to taxation years that begin
after 2018.
Corporate structures that rely on current legislation and
court cases to keep corporations from being associated
should be reviewed in light of this new legislation.
Refundable Taxes on Investment Income
The second measure to increase the tax burden on
passive investments is to modify the rules that apply to
Refundable Dividend Tax on Hand (“RDTOH”).
RDTOH is a portion of the corporate tax paid on
investment income that is refunded when the
corporation pays dividends to its shareholders.
The budget proposes to restrict situations where a
corporation can claim a refund of its RDTOH.
This budget proposes that the RDTOH will be available
only in cases where a private corporation pays non-
eligible dividends.
An exception will be provided in respect of RDTOH that
arises from eligible portfolio dividends received by a
corporation, in which case the corporation will still be
able to obtain a refund of that RDTOH upon the
payment of eligible dividends.
The different treatment proposed regarding the refund
of taxes imposed on eligible portfolio dividend income
will require a corporation to have two RDTOH
accounts:

3. FEBRUARY 2018
2018 FEDERAL BUDGET COMMENTARY
IMPACT ON INDIVIDUALS
Canada Worker Benefit
The budget proposes that, for 2019, the amount of the
benefit be equal to 26 per cent of each dollar of earned
income in excess of $3,000 to a maximum benefit of
$1,355 for single individuals without dependents and
$2,335 for families (couples and single parents). The
benefit will be reduced by 12 per cent of adjusted net
income in excess of $12,820 for single individual
without dependants and $17,025 for families.
This measure will apply to the 2019 and subsequent
taxation years. Indexation of amounts relating to the
Canada Workers Benefit will continue to apply after the
2019 taxation year.
IMPACT ON TRUSTS
Reporting Requirements
Currently, a trust that does not earn income or make
distributions in a year is generally not required to file a
T3 return.
Where the new reporting requirements apply, the
trustee will be required to report the identity of all
trustees, beneficiaries and settlors of the trust, as well
as the identity of each person who has the ability to
exert control over trustee decisions regarding the
appointment of income or capital of the trust (e.g., a
protector).
These proposed new reporting requirements will apply
to returns required to be filed for the 2021 and
subsequent taxation years.
To support these new reporting requirements, Budget
2018 proposes to introduce new penalties for a failure
to file a T3 return, including a required beneficial
ownership schedule, in circumstances where the
schedule is required (existing penalties will continue to
apply).
The new reporting requirements will impose an
obligation on most trusts to file a T3 return where one
may not currently exist.
The Government proposes to require certain trusts to
provide additional information on an annual basis.
Hilborn LLP and its Tax Group will be pleased to answer any questions you may have on these or any other tax
matters.
Hilborn LLP
401 Bay Street, Suite 3100
P.O. Box 49
Toronto, Ontario
M5H 2Y4
Telephone: (416) 364-1359
Fax: (416) 364-9503
www.hilbornca.com
Facts & Tax is published and distributed by the partners and staff of Hilborn LLP, Chartered Professional
Accountants, as information for our clients and other interested parties. Readers should consult their professional
advisors before acting on the basis of material contained in this publication.