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Update

Tuesday, March 19, 2019

In the worst kept secret since “who shot J.R.?”, the federal Liberal Government’s budget released on March 19, 2019 (“Budget 2019”) focused on investing in the middle class, a.k.a the promise to spend millions on the largest voter groups - millennials and seniors.  Trying to distract such voters from the SNC-Lavalin affair and recent resignations, the Government’s pre-election budget involves millions of dollars in promises to the middle class. Here are three things everyone needs to know about Budget 2019:

1. Spend, Spend, Spend

Budget 2019’s first objective is to increase housing affordability and proposes a “First-Time Buyer Incentive” which is a shared equity mortgage.  Eligible buyers would receive funding–5% or 10% of the home purchase price—from the Government designed to increase the down payment on the home and lower monthly mortgage costs.  The 10% is for newly constructed homes, designed to encourage construction to address housing supply shortages.  The funding would not need to be paid back until a re-sale (query if the Government will also want a piece of the increase in the equity of the home). In addition, Budget 2019 increases the “Home Buyers’ Plan” to $35,000, which allows first-time home buyers to withdraw amounts from their RRSP without paying tax on the withdrawal.  Budget 2019 also provides money for an expansion of the rental construction financing initiative and provides more money to the Canada Revenue Agency to ensure tax compliance in the real estate sector. 

Further measures aimed at the middle class include the “Canada Training Benefit” to help retrain Canadians in new skills. This will include a training credit to help with the costs and a new employment insurance training support benefit to provide income support when an individual requires time to take off work while retraining.  Spending aimed at seniors includes a council on National Pharmacare, the creation of the Canadian drug agency designed to help lower the costs of prescription drugs and make improvements to the Canada Pension Plan. 

2. Changes to Employee Stock Options

Recall that when the Liberal Government was elected in 2016, it promised to cap the value of stock options that would be eligible for preferential tax treatment. The response from the Canadian business community was severe and the Liberal Government backed off. 

Budget 2019 proposes to restart this conversation and implement a $200,000 annual cap on employee stock option grants (based on the fair market value of the underlying shares) that may receive tax-preferential treatment for employees of “large, long-established, mature firms.” Budget 2019 states that this cap will not apply to “start-ups and rapidly growing” Canadian businesses. A corporate tax deduction would be available for benefits that do not get the preferential personal tax treatment.

Further measures will be released before summer 2019 and changes will only apply on a go-forward basis. The devil will be in the details, as the definitions of “large-long-established, mature firms” and “start-ups” will be key. See article here.   

3. Technical Tax Changes

Buried in the back of the budget is a set of amendments to the Income Tax Act (Canada) aimed at closing tax loopholes.  This has been a theme since election day to ensure that people do not pay “less than their fair share.”  Specifically, Budget 2019 proposes to prevent the use by mutual fund trusts of allocating capital gains/income to redeeming unitholders in a way that defers tax or converts ordinary income into capital gains and proposes to improve the existing rules on character conversion transactions. See article here. In addition, Budget 2019 expands the “foreign affiliate dumping” rules (always a favourite for tax practitioners) to now apply to Canadian corporations controlled by non-resident individuals or non-resident trusts, where previously they only applied to Canadian corporations controlled by non-resident corporations.

Time will tell if Budget 2019 saves the Liberal Government in the fall of 2019. 

If you have any questions with respect to the matters discussed above, please contact Katy Pitch by email at kpitch@wildlaw.ca.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.