Budget Steals From Rich And Not So Rich

Federal Budget 2013 is much like the budgets of 2012 and 2011 in that it represents an ongoing effort to reduce the deficit, say Tim Cestnick, president, and Heather McGeorge, director of family office services, at WaterStreet Family Offices, a Canadian multi-family office advisory firm. However, in an article distributed to its clients, ‘Federal Budget 2013: Even Robin Hood Would Disapprove,’ they say this “budget can best be described as one that even Robin Hood would disapprove of. As a fictional character, Robin Hood took pride in stealing from the rich to give to the poor. Budget 2013 steals from the rich, and some who aren’t so rich, and gives little to nothing to the poor.”

The economic action plan outlined in the budget focuses on job creation and the economy. For example, a new Canada Job Grant is designed to help the private sector hire more people by paying for training of employees, investing more in job-creating infrastructure projects, offering tax relief on certain manufacturing equipment, and supporting advanced research projects. However, the authors “find it interesting that the Canadian economy has created more than 950,000 new jobs since July 2009 – overwhelmingly in the private sector – yet a number of tax measures introduced in the Budget 2013 will penalize business owners and wealthier Canadians who have created many of those jobs.”

As well, the government is still on track to return to a balanced budget by 2015/16. But this budget will produce an additional $8.4 billion for the federal coffers between now and 2018 – $4.3 billion of this coming from tax measures and $2.35 billion coming from increased tax compliance programs.

Tax ‘Loopholes’

In Budget 2013, the government has continued its focus on closing perceived ‘loopholes’ to stop tax leakage. As a result, there is “little to celebrate from a tax perspective” in this budget, they say.

For example, it targets transactions where a taxpayer enters into any agreement that has the effect of substantially eliminating the risk of loss and opportunity for gain regarding a property. Where this occurs, the taxpayer will be deemed to have disposed of the property for proceeds equal to its fair market value which triggers an immediate gain. He will also be deemed to have immediately reacquired the property at a cost equal to that fair market value. The taxpayer would be considered not to own the property unless circumstances arise in respect of the property such that it is no longer the case that the risk of loss and opportunity for gain lies with someone other than the taxpayer. This change impacts common equity monetization strategies that have been used in the past to reduce exposure to concentrated stock positions, say Cestnick and McGeorge.

This budget changes the taxation of certain investments that convert interest income into favorably taxed capital gains. If these investments were made separately, for example as a purchase and sale of a capital property and a cash-settled derivative financial instrument, any income from the derivative investment would be taxed as ordinary income instead of both components being taxed as a capital gain. This change could impact certain investments where interest is being converted to capital gains so it is worth a careful review of one’s portfolio to see if there are investments which could now result in more tax than expected.

The government intends to consult on possible measures to eliminate the tax benefits that arise from taxing certain trusts at graduated tax rates. Cestnick and McGeorge say that the plan indicates that taxing ordinary trusts at a high flat rate of tax helps to prevent tax-motivated use of these trusts so it appears likely that the government is considering taxing testamentary and grandfathered inter vivos trusts in a similar manner. They say that the use of trusts in tax and estate planning will not disappear and there will still be opportunities to sue trusts for tax savings, asset protection, and other objectives. They do, however, recommend reviewing your planning.

Non-resident Trusts

However, some non-resident trusts could be treated as Canadian under a budget proposal. Currently there are rules in the Income Tax Act that prevent taxpayers from using non-resident trusts to avoid Canadian taxes. A related rule prevents a tax-deferred distribution of property from a trust where property of the trust is, or has been, subject to the trust attribution rule. The current budget intends to amend the deemed residence rule where a Canadian resident taxpayer has effective ownership of property held by a trust such that the Canadian resident taxpayer will be treated as having made a contribution to the trust with the result that the trust will be deemed to be resident and subject to tax in Canada. Cestnick and McGeorge advise that if you currently have a connection to a non-resident trust, it is time to review how you interact with that trust each year. As well, you will want to avoid contributions to that trust, even if you’re not the settlor.

When there is a change of control of a corporation, restrictions apply to the pre-acquisition losses preventing them from being carried forward for use by a corporation after a change of control. Budget 2013 extends these rules to trusts when they are subject to a loss restriction event. It is important to avoid triggering the loss restriction rules by making significant changes to the beneficiaries of trusts, say Cestnick and McGeorge.

The dividend tax credit will be subject to the same tax as income earned directly by an individual. Budget 2013 adjusts the gross-up factor from 25 per cent to 18 per cent and the credit from 13.33 per cent to 11 per cent. This change would cost business owners who receive non-eligible dividends about 0.5 per cent in additional personal taxes. This change will mean revisiting your compensation planning to ensure you are not paying more tax than necessary, say Cestnick and McGeorge. They add that it makes sense to explore all avenues for extracting money from your corporation.

This budget also shuts down both leveraged insured annuities and 10/8 arrangements. Although these are no longer viable, Cestnick and McGeorge say there are still a number of very effective insurance ideas that can be used to shelter investment growth from tax, enhance rates of return, and provide income and asset protection.

Safety Deposit Box

The budget even calls for the elimination of the tax deduction for the cost of renting a safety deposit box from a financial institution.

On the positive side, the lifetime capital gains exemption (LCGE) realized on the disposition of qualified shares of a small business corporation and qualified farm and fishing property will increase to $800,000 from $750,000. This means it can make sense to utilize the LCGE today, say the authors. This can be done without giving up control over the corporation. Using the LCGE today protects against a possible repeal of the exemption later.

The budget also enhances the current adoption expense tax credit and allows the deduction for costs that adoptive parents incur prior to being matched with a child – costs which previously were ineligible.

The article is at Robin Hood