In brief, the 2019 Budget includes $22.8 billion in new spending over the next five years. There are no changes to personal and business tax rates, any substantive effort to improve the efficiency of the Income Tax Act or significant spending cuts intended to reduce the deficit.

Based on these growth and spending assumptions, the government expects the federal deficit to increase to nearly $20 billion in 2019-2020 and 2020-21 and then decline to $9.8 billion at the end of the next five years.

Specific provisions that may be of interest to our clients include:

BUSINESS INCOME TAX MEASURES

Scientific Research & Experimental Development (SR&ED)

Canadian-controlled private corporations (CCPCs) or associated groups of such corporations, are entitled to an enhanced (35 per cent vs 15 per cent) federal tax credit based on up to $3,000,000 of current SR&ED expenditures incurred in a taxation year (the "expenditure limit"), based on the following criteria:

• A full enhanced credit is available if the taxable income in the previous taxation year of the particular corporation or the associated group is $500,000 or less.
• $10 of the expenditure limit is lost (thereby eroding the enhanced credit) for every dollar of taxable income in the previous taxation year in excess of $500,000. The expenditure limit is reduced to zero if that taxable income exceeds $800,000.

The enhanced credit is also eroded if the corporation's (or the group's) "taxable capital employed in Canada" (essentially the aggregate of equity and debt) exceeds $10,000,000 and is eliminated if that taxable capital exceeds $50,000,000.

The Budget proposes to remove the erosion that is based on taxable income.

This proposal would apply to taxation years that end on or after March 19, 2019.

Zero-Emission Vehicles

The Budget proposes to introduce a temporary enhanced first-year CCA rate of 100 per cent in respect of eligible zero-emission vehicles. These vehicles will be classified under one of two new CCA classes.

Class 54 will include zero-emission vehicles that would otherwise be included in Class 10 or 10.1. The amount on which CCA can be claimed is limited to a maximum of $55,000 plus sales taxes, per vehicle.

Class 55 will include zero-emission vehicles that would otherwise be included in Class 16 (rental cars and heavy trucks).

This measure will apply to eligible zero-emission vehicles acquired on or after March 19, 2019, and that become available for use before 2028, subject to a phase-out for vehicles that become available for use after 2023. The taxpayer must claim the enhanced CCA for the taxation year in which the vehicle first becomes available for use.

The Budget proposes to amend the GST/HST rules to ensure consistency with these measures.

PERSONAL TAX MEASURES

Employee Stock Options

Employee stock options can receive preferential tax treatment. The employee has a taxable employment benefit equal to the excess of the fair market value of the shares acquired at the exercise date over the price paid under the option. If certain conditions are met, the employee will be eligible for deduction of half the benefit effectively making the benefit half-taxable.

The Budget indicates the government's intention to limit this preferential treatment (presumably the deduction for half the benefit). Specifically, the preferential treatment will only be available on shares acquired that fall under a cap for the year of grant. An annual cap of $200,000 has been set based on the fair market value of the shares that are the subject of the option. The Budget is silent on the date that the FMV is determined. It is intended that these changes would apply to employees of "large, long-established, mature firms." Employees of start-up and rapidly growing businesses would be exempt from these rules.

The Budget indicates that further details would be released before the summer. The Budget papers do not include a proposed implementation date but do indicate that any new measures would not apply to options granted before the announcement of legislative proposals to implement any new regime.

RRSP Home Buyer's Plan

Under the RRSP Home Buyer's Plan (HBP), a first-time home buyer can borrow up to $25,000 from their RRSP to help finance the purchase or construction of a home. In order to qualify as a first-time home buyer, neither the individual nor their spouse can have owned a home in the year or any of the four preceding years. The four-year requirement is waived where the purchase is for a more accessible or suitable home that will be occupied by an individual eligible for the disability credit.

The Budget proposes to increase the maximum withdrawal per individual to $35,000 effective for withdrawals made after March 19, 2019.

The Budget also modifies the HBP rules to better accommodate marital breakdowns. The individual must be living separate and apart from their spouse, including a common-law partner, for a period of at least 90 days. The individual will be eligible to make a HBP withdrawal if the spouses live separate and apart at the time of the withdrawal and began to live separate and apart in the year of withdrawal or at any time in the four preceding years. However, if the individual is living in a home owned by a new spouse, they will not be able to use the HBP. This measure is effective after 2019.

Donations of Cultural Property

When cultural property is donated to a qualifying institution, the donor receives a charitable donation tax receipt for the full fair market value of the property but is exempt from tax on the capital gain that would otherwise be taxable on the disposition of the property.

In order to qualify for this treatment, the property must be certified under the Cultural Property Export and Import Act. In order to qualify, the property must be of "national importance" to such a degree that its loss to Canada would significantly diminish the national heritage. A recent court case interpreted this test to mean that a direct connection of the property with Canada's cultural heritage must exist. As a result, there is a concern that significant works of art of foreign origin, such as an "old masters" painting, would not be certified and thus not eligible for the preferential donation treatment. To address this concern, the Budget proposes to eliminate the national-importance requirement for donations made on or after March 19, 2019.

Digital Subscriptions Tax Credit

The Budget proposes a 15 per cent non-refundable tax credit on up to $500 of costs for eligible digital subscriptions per annum, resulting in a maximum $75 annual credit. To be eligible, the amounts must be paid to a Qualified Canadian Journalism Organization (QCJO) for a subscription to digital form content of a QCJO. The QCJO must be primarily engaged in producing written content. A subscription with a broadcaster will not qualify. The credit will be available for amounts paid after 2019 and before 2025.

Change in Use Rules for Multi-Unit Residential Properties

A taxpayer is deemed to have disposed of a property, or a part thereof, when its use is converted from income-earning to personal use, or vice versa. Under current rules, where the use of an entire property is converted to income-earning, or an income-earning property becomes a taxpayer’s principal residence, the taxpayer may elect to not have the deemed disposition occur in order to defer the taxation of any accrued capital gain until the time that the property is sold. In cases where only part of a property is converted, this election is unavailable.

The Budget proposes to extend the above-mentioned election to situations where only part of a property undergoes a change in use. For example, where a taxpayer owns a multi-unit residential property such as a triplex, if the taxpayer begins to live in one of the units previously rented, or vice versa, he or she can elect to not have the deemed disposition occur to that unit.

This measure will apply to changes in use that occur on or after March 19, 2019.

Medical Expense Tax Credit

Amounts paid for cannabis products may be eligible for the medical expense tax credit where such products are purchased for a patient for medical purposes in accordance with the regulations under the Controlled Drugs and Substances Act. As of October 17, 2018, cannabis is no longer regulated under this Act, but rather is subject to the Cannabis Regulations under the Cannabis Act.

The Budget proposes to amend the Income Tax Act to reflect the current regulations for accessing cannabis for medical purposes. This measure will apply to expenses incurred on or after October 17, 2018.

Carrying on Business in a Tax-Free Savings Account

A Tax-Free Savings Account (TFSA) is liable to pay tax under Part I of the Income Tax Act (at the top personal rate) on income from a business carried on by the TFSA or from non-qualified investments. Under the current rules, the trustee of the TFSA (i.e., a financial institution) is jointly and severally liable with the TFSA for Part I tax.

The Budget proposes to extend the joint and several liability for that tax owing on income from carrying on a business in a TFSA to the holder of the TFSA. The joint and several liability of a trustee of a TFSA at any time in respect of business income earned by a TFSA will be limited to the property held in the TFSA at that time plus the amount of all distributions of property from the TFSA on or after the date that the notice of assessment is sent.

This measure will apply to the 2019 and subsequent taxation years.

INTERNATIONAL TAX MEASURES

Transfer Pricing

Order of application of transfer-pricing rules

Transfer-pricing rules in the Income Tax Act generally provide that, where a Canadian taxpayer transacts with non-arm's-length parties outside Canada, the price used for the transaction must be established using the arm's-length principle. That is, the parties must establish a price that is within the range that arm's-length third parties would have used had they transacted under the same terms and conditions.

The Income Tax Act contains other provisions which may require adjustment to the income reported on a transaction. Questions arose regarding whether adjustments were made pursuant to general transfer-pricing rules or other more specific provisions. In these situations, it was not clear whether transfer-pricing penalties were applicable.

The Budget proposes that the transfer-pricing adjustments shall apply in priority to any other adjustments required under the Act. Presumably, any applicable transfer-pricing penalties will apply in these situations.

Current exceptions to the transfer-pricing rules (for example subsection 17(8) which permits certain zero or low interest loans made to controlled foreign affiliates) are retained.

This measure applies to taxation years commencing after March 19, 2019.

Reassessment period for transfer-pricing "transactions"

The definition of "transaction" for transfer-pricing purposes is expanded beyond the normal meaning of that word.

The Income Tax Act provides an extended three-year reassessment period beyond the usual reassessment period for transfer-pricing adjustments. However, the definition of "transaction" for reassessment purposes was not the expanded definition used for transfer-pricing purposes.

The Budget proposes to use the expanded definition of “transaction” in determining whether that transaction can be reassessed in the extended three-year reassessment period.

This measure applies to taxation years for which the normal reassessment period ends on or after March 19, 2019, meaning it applies to most transactions that have occurred in the last three to four years.

SALES TAX AND EXCISE TAX MEASURES

Multidisciplinary Health-Care Services

Health-care services may be provided by a multidisciplinary health team of licensed health-care professionals consisting of a physician, an occupational therapist and a physiotherapist. When supplied separately, the services rendered by these health-care professionals would generally be exempt from GST/HST. Currently, there is no GST/HST provision that explicitly relieves the service of a multidisciplinary team that combines elements of the various practices.

The Budget proposes to exempt from the GST/HST, the supply of a service rendered by a team of health professionals, such as doctors, physiotherapists and occupational therapists, whose services are GST/HST-exempt when supplied separately. The exemption will apply where all or substantially all of the service is rendered by such health professionals acting within the scope of their profession.

This measure applies to supplies of multidisciplinary health services made after March 19, 2019.

PREVIOUSLY ANNOUNCED INCOME TAX MEASURES

Budget 2019 confirms the government’s intention to proceed with previously announced income tax measures. Some of the key measures are summarized below.

Measures from the Fall Economic Statement

In its November 21, 2018, Fall Economic Statement, the government announced several income tax measures.

Accelerated Investment Incentive

The Accelerated Investment Incentive was introduced to allow businesses in Canada that acquire capital property on or after November 21, 2018, but before 2028, to be eligible for an enhanced first-year CCA deduction. This incentive will not apply to Classes 53, 43.1, and 43.2, which will instead be eligible for full expensing as discussed below.

To qualify for the incentive, the property cannot have been previously owned by the taxpayer or a non-arm’s-length person, nor can it be transferred to the taxpayer on tax-deferred "rollover" basis.

In the year that a capital asset becomes available for use, the taxpayer will be able to deduct three times the CCA that would have been deductible in the absence of this measure. The mechanics to achieve this result entail the suspension of the half year rule and the application of 1.5 times the CCA rate that would have otherwise applied (i.e., twice the CCA base multiplied by 1.5 times the CCA rate is equal to 3 times the CCA deduction). The larger deduction in the first year is ultimately offset by smaller deductions in the future years.

This measure will be phased out for capital assets that become available for use after 2023, as follows.

For capital property that would normally be subject to the half-year rule and becomes available for use between 2024 and 2027, the half-year rule will still be suspended, but the normal CCA rate will apply. The result is twice the CCA deduction in the first year.

For capital property that would not normally be subject to the half-year rule, the enhanced CCA deduction will be equal to 1.25 times the normal first year deduction.

Full expensing for manufacturing and processing equipment

Canadian businesses will be able to deduct 100 per cent of the cost of machinery and equipment acquired on or after November 21, 2018, that is used to manufacture and process goods in Canada.

A phase-out will begin for assets that become available for use in 2024, where the first-year deduction is reduced to 75 per cent. In 2026, the first-year deduction is further reduced to 55 per cent. For assets that become available for use after 2027, this measure will not apply.

To qualify for the enhanced write-off, the asset cannot have been previously owned by the taxpayer or a non-arm’s-length person, nor can it be transferred to the taxpayer on tax-deferred "rollover" basis.

Full expensing for clean energy equipment

Specified clean energy equipment acquired on or after November 21, 2018, will be eligible for a 100 per cent deduction in the year that the asset becomes available for use in a business.

This measure will phase out in the exact same manner as the phase-out of the full expensing for manufacturing and processing equipment discussed above.

To qualify for the enhanced write-off, the asset cannot have been previously owned by the taxpayer or a non-arm’s-length person, nor can it be transferred to the taxpayer on a tax-deferred "rollover" basis.

Trusts Reporting Requirements

Budget 2018 proposed extensive new reporting requirement for most family trusts, effective for returns required to be filed for 2021 taxation years.

Intergenerational Business Transfers

The government will continue its initiative to develop new proposals to ensure that intergenerational transfers of businesses are better accommodated under the tax system. Budget 2019 specifically mentions Canadian farmers and fishers, but adds that this initiative also applies to other types of business owners.