Even before the March 22 budget, federal changes could impact your 2016 income taxes
It’s tax time again and there are a number of new or imminent personal and corporate income tax changes which could have implications for farm families on their 2016 tax return, or need to be discussed with the accountant to plan for this year.
When the federal government announced tax changes in its 2016 budget last March it wasn’t aiming them directly at farmers, but many farm business corporations and farm families are feeling the impact.
Personal income tax changes are affecting many. The tax rate for people in the middle-income tax bracket (with taxable annual earnings of $44,700 to $89.401) is now 20.5 per cent, down from to 22 per cent. The highest tax rate for people earning in excess of $200,000 has increased four per cent to 33 per cent. “Most of our producer clients will see a net decrease in their overall tax this year but those who in a higher income bracket will definitely see an increase in their taxes,” says Matt Bolley, a tax specialist with MNP.
1. What’s my tax rate?
Another change that could affect farm businesses is the freezing of the small business tax rate at 10.5 per cent. “The previous government had announced that they were going to reduce the small business rate eventually down to nine per cent from the original 11 per cent, however, in the recent budget, the Liberal government went down to 10.5 per cent for 2016, and have announced it will not go down any further,” says Bolley. “So the rate will be 10.5 this year on active income up to $450,000 inside a corporation, but there won’t be any further rate reduction.”
Changes to rules around the small business deduction could also have an effect on some farm business corporations, especially if multiple family members own different enterprises.
2. Can I transfer that income?
The small business deduction allows corporations to pay a lower tax rate on business income up to $450,000. “There have been some changes in the rules regarding setting up structures where you’re trying to access multiple small business limits using other family members,” says Bolley. “For example, if a husband owns a farm corporation and his wife owns a custom work corporation, and the husband’s corporation has income over $450,000, in the past he could keep his income at the lower taxable level by paying custom work fees to his wife’s corporation, which has its own, separate small business limit.”
Canada Revenue Agency (CRA) has put a stop to this practice. Under the new rules, if the husband’s corporation has business income that is taxable at the higher corporate rate, it will still be taxed at the higher rate if he transfers that income over to his wife’s corporation. “They are targeting people who basically only have one business but are trying to use family members to create multiple small business deductions,” says Bolley.
There is some concern among some agricultural practitioners, adds Bolley, on some of the far-reaching consequences of these new rules.
“There’s some concern that bonafide transactions that would otherwise be acceptable could get caught by these rules, so legitimate transactions where say, maybe Dad runs a farm and son runs a seed plant. Transactions between the son and the dad could get caught by these rules even though it’s a typical business transaction that’s not meant to be a tax reduction measure, it’s just strictly operating business,” says Bolley.
The new rules could also adversely affect producers who sell to only one customer, like a co-operative. “There is some concern for people who earn all their income from one source, but also own an interest in that source,” says Bolley. “I’ll use honey as an example. If a producer sells all of his honey to a co-op, and he owns a percentage of the co-op as an equity member, the way that the rules are structured currently, he could have to share one $450,000 limit with all the members of the co-operative. That wasn’t the intention of the rules but because the rules have been written quite broadly, that’s a situation that could inadvertently happen.”
Bolley says accountants and tax advisors are waiting for CRA to provide more clarity on these new rules, which will take effect for 2017, but it’s still important for producers to be aware of them and that reporting for the small business deduction could be more complicated in the future.
“It is going to make reporting for the small business deduction much more difficult if you’ve got multiple corporations with family members that do business together or if you have situations where you’re selling all of your crop or cattle to one entity,” he says. “We don’t want producers, especially those who are selling to a co-operative to panic because we believe that CRA at some point will provide administrative relief, given that the rules were not intended to catch these situations, and it’s impossible to administer because how are you supposed to know who’s claimed what for the small business deduction when you’re dealing with 50 or 100 farmers in a co-operative.”
3. Will I still get child benefits?
Some farm families with kids and teenagers are already feeling changes to child tax benefits implemented in 2016, which is also the last year parents can claim the child fitness and art tax credits.
The Liberal Government replaced the old Universal Child Care Benefit and Canada Child Tax Benefit with a single, non-taxable Canada Child Benefit, based on household income. “If parents hit a certain income threshold they won’t receive anything,” says Bolley. “Some people will get more money under this program, because the child tax benefit isn’t reported on their tax return so they get the full amount of whatever they receive. Other will receive less or will be phased out completely.”
Anyone interested in knowing if they do qualify for the new Canada Child Benefit can go to CRA’s website and see, based on their children’s ages and their estimated household income, how much they will receive.
4. What about tuition credits?
Young people in university will have fewer tax deductions in 2017 when the textbook credit and education tax credits end. “The tuition tax credit will still be in place, but instead of offering the textbook and education credits they’re going to be offering increased Canada Student Grants for students who have financial needs to go to school,” says Bolley. “If you’re in that middle lower income bracket, you will be able to apply through the university for a Canada Student Grant, but the unfortunate part is that it’s based on parents’ income. So if you’re household has a higher income you are not eligible for those grants. So if parents that decided for their personal reasons that they want their children to fund their own education, and they happen to be better off income-wise, the child can get hurt because that child won’t have access to these Canada Student Grants even though they don’t have their parents’ income supporting them.”
5. What else has changed?
There are a lot of tax changes for 2016 and 2017, and with the federal government’s March 22, 2017, budget added to the mix, there may be even more implications for farmers coming up in the years ahead. Bolley advises farmers and all taxpayers to have discussions with their accountants or tax preparers on how some of these changes will affect them.
“None of these changes are specific to agriculture but there are lots of farm families who are putting kids through university or have younger children in sports or arts, so changes on that horizon will impact them this year,” says Bolley.
“If they do have multiple corporations and are doing business with immediate relatives, children, or spouses, they need to get the right advice to know if they’re going to have issues with the small business deduction. Unfortunately, it’s become very complicated, so we are encouraging people to talk to their accountants so they can ensure that if there are any issues with the new rules that they identify them now and identify whether changes need to be made, or whether they just need to ensure they are reporting correctly next year so that they don’t lose out on a small business limit that they should receive.”