Changes to Income Tax Rules for 2017

TAXATION

Be aware of changes to the income tax rules that will affect your 2017 filing.

For those already thinking about their 2017 income taxes, the following summarizes some of the changes from 2016.

Tax Credits

The child tax credit for arts and fitness is gone. Since this tax credit was capped at a maximum of $500 for fitness and $250 for arts per child in 2016, its removal will not likely have a major impact on most people’s 2017 return.

Education

The tax credit for education and textbooks for full- or part-time students was eliminated effective December 31, 2016. Taxpayers with unused tax credits from 2016 or prior years will be able to carry them forward and apply them against future taxes.

The tuition tax credit is, however, still in effect.

In recognition of the need to support education in technical skills, the number of courses eligible for the tuition tax credit will be increased. Occupational courses provided by post-secondary institutions within Canada will be granted the tax credit. If a bursary is provided, the amount will likely qualify for either the full or basic scholarship exemption. Examination fees paid to take an occupational, trade, or professional examination to obtain a professional status recognized by federal or provincial statute, or to be licensed or certified as a tradesperson, to allow you to practise in Canada, may also be eligible for the tuition tax credit. However, if your fees were paid by your employer or the employer of one of your parents, or by a government program and not included in your income, you cannot claim the credit.

Labour-Sponsored Funds

Those who invested in labour-sponsored venture capital corporations will no longer be able to apply for the federal tax credit. Prior to 2017, a taxpayer would receive a federal tax credit of 15% of the investment up to a maximum of $750. Taxpayers should confer with their Chartered Professional Accountants (CPAs) to determine whether a provincial tax credit will be available in 2017 should they choose this investment vehicle.

Income splitting is gone.

Indexing

RRSP contributions, tax brackets, and various tax credits will increase in 2017 to reflect the adjustment for inflation as measured by the Consumer Price Index (CPI). The percentage increase for 2017 has been pegged at 1.4% (i.e., the 2017 personal exemption will increase to $11,635 from $11,474 in 2016). To capture information on the new levels for all tax credits and other deductions that have been indexed, you should visit the CRA website page: “Indexation adjustment for personal income tax and benefit amounts” http://www.cra-arc.gc.ca/tx/ndvdls/fq/ndxtn-eng.html

The notable exception to the inflationary increase is the Tax Free Savings Account that will continue to have a $5,500 per annum maximum contribution limit.

Work in Progress

Prior to March 22, 2017, unbilled work in progress was allowed to be deferred until billed to clients. This deferral allowed certain designated professionals (i.e., lawyers, dentists, doctors, and accountants) to delay the recognition of income until the year when the work was invoiced to clients. Effective March 22, 2017, this deferral of work in progress was eliminated, resulting in an immediate income inclusion of work in progress. A transitional relief will be available over a two-year period to help mitigate the tax impact of this change.

Caregiver Amounts

Prior to 2017, three credits were available for those in need of assistance:

• caregiver credit
• infirm dependant credit
• family caregiver tax credit.

To simplify the process and to recognize the need to provide financial support to caregivers, a new Canada caregiver credit will provide a 15% non-refundable tax credit maximizing at $6,883 of expenses for the care of parents, brothers and sisters, adult children and other specified relatives who have infirmities. An additional tax credit up to $2,150 on expenses is available for the care of a dependent spouse, a common-law partner, or a minor child with infirmities. The tax credit will be calculated using a formula that reduces the credit dollar for dollar once the dependant’s net income exceeds $16,163.

Intangibles

Prior to 2017, any gain from the disposition of intangibles such as goodwill or trademarks, was treated as regular business income and was not subject to the capital cost allowance rules. Now, any gain from the disposition of goodwill and trademarks will become fully taxable as investment income. Companies will now be required to transfer the cumulative eligible capital pool as at December 31, 2016, to a new capital cost allowance class 14.1. This pool will be depreciated at 7% annually on the declining balance for the first 10 years, then at 5% annually thereafter. For the expenditures incurred after December 31, 2016, a 5% depreciation rate will apply.

T4s

Prior to 2017, employers were able to supply employees with their T4 information slips electronically if the employee gave permission. Effective 2017, the employer will not need permission. The employer must, however, have safeguards in place to ensure confidentiality and provide paper copies to former employees or employees on leave or upon request. Employees must ensure the information received is correct in order to avoid penalties and interest if they file an incorrect T1 tax form.

Possible Changes Ahead

While the changes noted in the 2017 Federal Budget were not as significant as those in the Liberals’ first budget introduced in 2016, it signalled the government’s intention to review the tax planning techniques that are currently available to the owners of private corporations. Specifically, the review will include the tax advantages provided to the business owners by:

• income sprinkling
• holding passive investments via a corporation
• converting regular income into capital gains.

Unfortunately, the budget did not include much detail. The government is expected to issue policy papers on this topic sometime during the summer of 2017, however. Any changes could impact the business owners significantly.