2017 Saskatchewan and Federal Budgets: Major Highlights

On March 22, 2017, both the Saskatchewan and Federal Governments tabled their respective 2017-18 budgets. The purpose of this blog post is to provide a general summary of the measures taken in both of those budgets.

Federal Budget Highlights

Tax Changes – As an initial comment, there were no changes to the capital gains inclusion rate (currently at 50%) although it appears this is still subject to re-evaluation in future. The primary domestic tax changes in the budget included:

  • Private Corporation Review – The Budget identified that the following strategies involving private corporations will be examined in more detail as to whether they give rise to unfair tax advantages and a paper will ultimately be published on the government’s findings:
    • Dividend Sprinkling: redirecting income from a high-income earning individual to a low income-earning individual (e.g. through dividends or capital gains);
    • Portfolio Investments: the holding of earnings and investments in holding corporations which are taxed at corporate tax rates (being lower than personal tax rates); and
    • Conversion of Regular Income to Capital Gains: causing income that would normally be paid as a salary or dividend to instead be converted to capital gains (which are taxable at a lower rate).
  • Factual Control – Under the tax legislation, two forms of control are recognized: de jure (or legal) control and de facto (or factual) control. Factual control is broader than legal control and is particularly relevant to certain corporate tax advantages such as the small business deduction and scientific research and experimental development credits. Legal control is generally determined with reference to whether someone has the right to elect a majority of the board of directors of a corporation. Conversely, factual control examines whether a person can exercise influence to control a corporation. A recent court decision (McGillivray Restaurant Ltd. v. The Queen, 2016 FCA 99) has held that for a factor to be considered in determining whether factual control exists, it must include a “legally enforceable right and ability to effect a change to the board of directors or its powers, or to exercise influence over the shareholder or shareholders who have that right and ability.” The Budget ultimately proposes, for tax years ending after March 21, 2017, that a determination of factual control not be limited in the manner contemplated by this recent court decision.
  • Derivatives – For taxation years beginning after March 21, 2017, taxpayers can elect to use the “mark-to-market” accounting method on all of their eligible derivatives held on income account. The election will remain effective until it is revoked with the consent of the Minister of National Revenue. Generally, an eligible derivative will be any derivative held on income account that meets certain conditions, including that the derivative is valued in accordance with accounting principles at its fair value in a taxpayer’s audited financial statements or otherwise has a readily ascertainable fair market value. For eligible derivatives that were previously subject to tax on a realization basis, the recognition of any accrued gain or loss at the beginning of the first election year will be deferred until the derivative is disposed of.
  • Straddles – Related to the derivative changes noted above, the Budget targets so-called “straddle” transactions. These transactions are effectively transactions where a taxpayer concurrently enters into two or more positions (often derivative positions) that are expected to generate equal and offsetting gains and losses on account of income. The taxpayer then may attempt to benefit from a deferral of recognition of income on the “gain leg” or through a shifting of that gain to a tax-indifferent investor. To address these types of transactions, the Budget proposes introducing a new stop-loss rule which will effectively defer the realization of any loss on the disposition of a position to the extent of any unrealized gain on an offsetting position. A gain in respect of an offsetting position would generally be unrealized where the offsetting position has not been disposed of and is not subject to mark-to-market taxation. For the purposes of the stop-loss rule, a position will generally be defined as including any interest in actively traded personal properties (e.g. commodities), as well as derivatives and certain debt obligations. An offsetting position with respect to a position held by a taxpayer will generally be a position that has the effect of eliminating all or substantially all of the taxpayer’s risk of loss and opportunity for gain or profit in respect of the position. The stop-loss rule will be subject to a number of exceptions and will apply to any loss realized on a position entered into after March 21, 2017.
  • Billed Basis Accounting – Certain professionals (e.g. doctors, lawyers, accountants, dentists, veterinarians and chiropractors) are permitted to elect to exclude the value of work in progress (WIP) in computing their income. For taxation years that begin after March 21, 2017, the Budget proposes to restrict the ability to deduct the cost of WIP, subject to a transitional period. For the first taxation year that begins after March 21, 2017, in computing income, 50% of the lesser of the cost of the WIP and its fair market value will be allowed as a deduction. For subsequent taxation years, 100% of the lesser of the cost of WIP and its fair market value will be required to be included in income.
  • Flow-Through Shares – Eligible small oil and gas corporations can no longer treat the first $1 million of Canadian Development Expenses as Canadian Exploration Expenses. This applies to expenses incurred after 2018 (including expenses incurred in 2019 that are deemed to be incurred in 2018 because of the “look-back” rule), except for expenses incurred after 2018 and before April 2019 that are renounced under a flow-through share agreement entered into after 2016 and before March 22, 2017.
  • Farming and Fishing Property Insurers – For taxation years beginning after 2018, the Budget eliminates the tax exemption for insurers of farming and fishing property that is based on the proportion of their (and their affiliated insurers’) gross premium income earned from insuring property used in farming or fishing (including residences of farmers or fishers).
  • Disability Tax Credit – Effective March 22, 2017, nurse practitioners will be permitted to certify for disability tax credit eligibility for impairments that are within the scope of their practice.
  • Medical Tax Credit – Beginning in 2017, the medical expense tax credit will be extended so that individuals requiring medical intervention in order to conceive a child are eligible to claim the same expenses that would be eligible for individuals on account of medical infertility. The taxpayer will be entitled to elect for this to apply for any of the immediately preceding 10 tax years.
  • Caregiver Credits – Beginning in 2017, a new Canada Caregiver Credit will replace the existing caregiver credit, infirm dependant credit and family caregiver tax credit. The amounts are consistent with the existing credits and will be reduced dollar-for-dollar by the dependant’s net income above $16,163 (in 2017). The dependant will not be required to live with the caregiver to claim the credit. The Canada Caregiver Credit will no longer apply in respect of non-infirm seniors who reside with their adult children
  • Eliminated Tax Credits – Public transit credit, employee home relocation loans, charitable gifts of medicine inventory, and child care space construction amounts will be eliminated.

Deficit –  $28.5 billion, up from $25.4 billion projected in the fall. There will be higher deficits for the next 3 years before dipping to $18.8 billion in 2021-22.

Housing – $11.2 billion over 11 years (already budgeted) will go to a National Housing Strategy.

Child care – $7 billion over 10 years (already budgeted) for new spaces starting in 2018-19.

Indigenous – $3.4 billion in new money over 5 years for infrastructure, health, education.

Defence – $8.4 billion in capital spending for equipment pushed off to 2035.

Skills Development – A new agency will be created to research and measure skills development, starting 2018-19.

Innovation and Start-Ups – $950 million over 5 years to support business-led “superclusters” (being tech business hubs that will attract anchor companies from around the world). The government proposes to establish Innovation Canada, a new platform to co-ordinate and simplify support available to Canadian entrepreneurs. In addition, $400 million over 3 years will be made available through the Business Development Bank in a new Venture Capital Catalyst Initiative to increase last-stage venture capital available to Canadian entrepreneurs who submit proposals. Finally, $14 million over 2 years will be made available to Futurpreneur Canada to match investments with funding from departments and private sector.

Families – Families will have the option to either (i) continue with the current 12 months of parental leave and receive employment insurance on 55% of their average weekly earnings (subject to statutory maximums), or (ii) extend parental leave out to 18 months and receive 33% of their average weekly earnings (subject to statutory maximums).

Uber tax – Goods and Services Tax is to be collected on ride-sharing services.

Sin taxes – Tax increases of 1 cent on a bottle of wine and 5 cents on 24-case of beer.

Canada Savings Bonds – These are being eliminated.

Saskatchewan Budget Highlights

Provincial Sales Tax – Provincial Sales Tax (PST) will increase to 6% effective March 23, 2017 along with the following other tax changes:

  • Food and Clothing – Effective April, 2017, PST exemptions will be removed for (and PST will now be applicable to) (i) children’s clothing, (ii) construction services, and (iii) restaurant meals and snack foods.
  • Real Property – Effective April, 2017, contracts for the repair, renovation or improvement of real property will bear PST on the total contract price to the purchaser. However, contractors will now be eligible to acquire tax-free building materials for use in fulfilling a contract.
  • Insurance – Effective July 1, 2017, PST will apply to insurance premiums effective for premium payment dates on or after July 1, 2017. This includes all life, accident and health insurance; all property, vehicle, liability and casualty insurance; as well as all agricultural insurance.
  • Fuel Tax – Effective April, 2017, there will no longer be a partial fuel tax exemption for bulk purchases of gasoline. In addition, there will be a reduction to the exemption for bulk purchases of diesel fuel to 80% of purchases, also effective April 1, 2017.

Personal Tax – For individuals, Saskatchewan personal tax rates will decrease by 0.5% in 2017 and 2019. With regard to tax credits, the following changes have been made:

  • Labour-Sponsored Venture Capital Tax Credit – This will be reduced from 20% to 15%, effective for the 2018 tax year. The maximum individual annual tax credit that can be earned will decline from $1,000 to $750.
  • Employee Tools Tax Credit – This will be eliminated effective for the 2017 tax year.
  • Graduate Retention Program – This is being maintained by the Government.
  • Education and Tuition Tax Credits – Effective July 1, 2017, this will be eliminated. Unused amounts carried forward from previous taxation years will remain available to be claimed, but new credits cannot be earned after June 30, 2017.
  • Saskatchewan Low-Income Tax Credit – Effective July 1, 2017, low-income individuals will be eligible for a new tax credit which (i) increases the maximum basic adult component and the spousal/equivalent component by $100, from $246 to $346, (ii) increases the child component by $40 per child, from $96 to $136, to a maximum of $272 per family, and (iii) increases the benefit clawback rate from 2% to 2.75%. By way of example, individuals with annual income up to $32,643 will receive the maximum benefit of $346 while those with incomes between $32,643 and $45,225 will receive a partial benefit, based on their level of income. As a further example, a family of four with annual family income of up to $32,643 will receive the maximum benefit of $964 while those with incomes between $32,643 and $67,697 will receive a partial benefit, based on their level of family income.

Corporate Tax – In the same vein as Saskatchewan personal tax rates, corporate tax rates will decrease by 0.5% in each of 2017 and 2019. Once fully implemented, the general Saskatchewan corporate tax rate will be 11%.

Innovation – The Budget introduces the Saskatchewan Commercial Innovation Incentive (SCII), which will reduce the Saskatchewan corporate income tax rate to 6% on taxable income earned from the commercialization of qualifying intellectual property in the province for a period of 10 years. This can be extended to 15 years if the qualifying intellectual property is substantially developed in Saskatchewan. The SCII will be available to any corporation operating in any sector provided it is solely engaged in the commercialization of qualifying intellectual property and it meets the eligibility requirements. Applicants will be required to successfully complete both a scientific eligibility test and an economic eligibility test to qualify for the tax incentive. The incentive is not available in respect of incremental innovations to existing products.

Research and Development – The current research and development tax credit will be reformed. Effective April 1, 2017, a new refundable 10% R&D Tax Credit will be introduced for the first $1 million in annual qualifying expenditures incurred in Saskatchewan by qualifying Canadian-controlled private corporations. Qualifying expenditures in excess of this annual limit, as well as qualifying expenditures incurred by other corporations, will remain eligible for the existing 10 per cent non-refundable R&D Tax Credit. The total of the refundable and non-refundable R&D Tax Credits that may be claimed by a corporation will be capped at $1 million per year.

Cigarettes and Liquor – Cigarettes will carry an additional 2% tax and liquor will carry an additional 4-6% tax.

Saskatchewan Transport Corporation – STC will no longer be in operation.

Saskatchewan School Boards – School boards will remain locally elected. However, there will be $115 million less going toward Kindergarten to Grade 12 funding, due largely to decreases in capital projects. Operating funding will also decrease by 1.2% to $1.86 billion.

Universities, Colleges, Technical Institutes – Provincial operating funding will decrease by 5% ($450 million, down from $475 million last year).

Health – Health budget will see an increase of 0.7% to their budget.

Social Services – Social services will see an increase of $73 million to their budget.

About the author:

Joe is an associate in the Saskatoon office where he practices in the areas of corporate finance, securities, mergers & acquisitions, and taxation.

About McKercher LLP:

McKercher LLP is one of Saskatchewan’s oldest, largest law firms with offices in Saskatoon and Regina. Our deep roots and client-first philosophy have made us a top ranked firm by Canadian Lawyer magazine (2011, 2013). Innovation, experience and capacity provide innovative solutions for our clients’ diverse legal issues and complex business transactions.

This post is for information purposes only and should not be taken as legal opinions on any specific facts or circumstances.  Counsel should be consulted concerning your own situation and any specific legal questions you may have.