Tax rates will probably not be reduced, but reforms that will lead to more pain are also unlikely
As the world gets set to round the corner into a new year, Canadian financial professionals are starting to look out for forecasts to inform their tax-planning efforts for 2019. And while they may have every reason to expect many changes, those adjustments will probably not be as painful as they expect.
“2019 is a Canadian federal election year which likely means any dramatic and controversial changes will be pushed to post-election,” wrote Kim G.C. Moody of Calgary-based firm Moodys Gartner Tax Law.
When it comes to tax rates, Moody noted that the creation of a new tax bracket for high-income earners (those earning more than $200,000 as of 2016, indexed for each year thereafter) has been less-than-effective at generating new revenue, and has impacted companies’ ability to attract skilled labour from abroad. Still, given the current government’s apparent lack of interest in reducing tax rates, he predicted that there will be no personal or corporate tax-rate reductions in the November 21 economic update and year 2019.
On the new tax on split income (TOSI) provisions, he made the not-so-fearless forecast that owners and shareholders of corporations will struggle to apply the rules that “are practically incomprehensible and apply to a very broad audience.” But with a change in government, he said, there’s a possibility of some modifications or even a repeal of such rules. A new government might also move to implement a comprehensive tax review or reform, he added, though he predicted a greater chance of the status quo being maintained: no introduction of a “Royal Commission” on taxation next year.
“In advance of many of the recent federal budgets, there is usually common concern and questions … as to whether or not capital gains inclusion rates will rise from its current 50% rate,” Moody said. “Given that it's an election year in 2019, I don't think our current government wants to be associated with a capital gains inclusion rate increase.”
Moving on to the subject of surplus stripping proposals — which would have made it hard to withdraw after-tax surplus from corporations without having the amounts taxed as a dividend — Moody noted that the amendments have been scrapped, but new and better-thought-out proposals may come after 2019.
“Currently, business succession plans to non-arm's length parties can be at a disadvantage compared to transfers of businesses to arm's length parties,” he said. “It would not surprise me if proposals to improve non-arm's length transfers were released in 2019.”
He also noted the possibility of changes being made to the principal residence exemption on taxation of capital gains. Citing the 2018 Report on Federal Tax Expenditures, Moody said that the exemption is forecast to cost the federal government $6.1B in 2019. But since many Canadians view the exemption as sacred, he predicted that it wouldn’t be touched during an election year.
“But it wouldn't surprise me if a future government tackles this sacred tax exemption to restrict it,” he added.