Tax Time – Fall Economic Updates – December 2018

The Federal, Ontario and Quebec governments have all issued Fall Economic Updates over the course of the last several weeks. We have summarized the key items from each update below.


FEDERAL ECONOMIC UPDATE

On November 21, 2018, Finance Minister Bill Morneau released the Liberal government’s Fall Economic Statement projecting continuing spending deficits into the 2022-2023 fiscal years. The government is proposing three immediate changes to Canada’s tax system, in order to enhance business confidence in Canada.

  1. Allowing businesses to immediately deduct the cost of machinery and equipment used for the manufacturing and processing of goods.
  2. Allowing businesses to immediately deduct the full cost of specified clean energy equipment.
    Both of these measures will allow businesses to claim an immediate tax deduction for the full cost of qualifying assets acquired after November 20, 2018. These measures will be phased out between 2024 and 2027.
  3. The third measure is the introduction of the Accelerated Investment Incentive, an accelerated capital cost allowance (i.e. depreciation) for businesses of all sizes, across all sectors of the economy, which are making capital investments.

Under this Incentive, capital investments will generally be eligible for a first-year tax deduction for capital cost allowance equal to up to three times the amount that would otherwise apply in the year an asset is put in use. This accelerated depreciation claim will allow businesses to recover the initial cost of their investment more quickly. The Incentive will apply to all tangible capital assets, including assets such as buildings and computer equipment, as well as intangible assets such as patents and other intellectual property.

Below is an illustrative impact of the proposed measures on selected assets in the year of acquisition:

Type of Asset Current CCA Regime Proposed Accelerated Investment Incentive Regime
Computer software 50% 100%
Computer hardware 27.5% 82.5%
Trucks and tractors for hauling freight 20% 60%
Motor vehicles 15% 45%
Office equipment 10% 30%
Non-residential buildings 3% 9%
Goodwill 2.5% 7.5%

ONTARIO FALL ECONOMIC OUTLOOK AND FISCAL REVIEW

On November 15, 2018, the Ontario government presented their Fall Economic Statement which included several tax changes.

  • The government abandoned planned changes to personal tax rates, brackets and surtax which were proposed by the previous government. The structure of the current five personal tax brackets and the two surtax rates will be maintained;
  • The government introduced legislation to decrease the Ontario dividend tax credit on non-eligible dividends by 1% which is consistent with the previous government’s reduction in the small business tax rate. As a result, the top marginal tax rate on non-eligible dividends will be 47.4% in 2019;
  • The Low-income Individuals and Families Tax Credit is a new non-refundable tax credit available for taxpayers earning less than $30,000 a year. The tax credit would be effective January 1, 2019 and will be worth up to a maximum of $850 per individual;
  • The government will not follow the Federal government’s measure to phase out the $500,000 small business deduction limit for Canadian-controlled private corporations that earn passive investment income ranging from $50,000 to $150,000. As a result, all eligible Ontario small businesses will be eligible to receive the Ontario small business deduction, regardless of the amount of passive investment income that they earn;
  • Enhancements to the Ontario Research and Development (ORDTC) and Ontario Innovation Tax Credits (OTIC) will not be implemented as proposed by the previous government. The ORDTC will continue to be a 3.5% non-refundable tax credit and the OITC will be maintained as an 8% refundable credit;
  • The Employer Health Tax (EHT) exemption will increase from $450,000 to $490,000 as of January 1, 2019.

QUEBEC FALL ECONOMIC UPDATE

On December 3, 2018, Quebec’s Minister of Finance provided a fall economic update which included measures to put money back in the pockets of Quebec families and seniors.

  • The government proposed the introduction of a more generous family allowance which will raise the maximum amount for the second and third children by $500 per year as of January 2019;
  • A new senior assistance amount of up to $200 for a single senior and $400 for a senior couple has been proposed to support low-income seniors aged 70 and over;
  • The government also proposes to freeze the additional contribution for subsidized childcare in 2019 to the rate from 2018;
  • Quebec proposed their own measures in response to the Federal government’s Accelerated Investment Incentive for capital investments:
    • Immediate expending of computer hardware, manufacturing and processing equipment, clean energy generation equipment and intellectual property until 2024;
    • Enhanced depreciation in respect of all other types of capital investments not covered by the 100% depreciation rate. Businesses will be able to claim up to three times the amount of the capital cost allowance normally applicable in the first year for property acquired after November 20, 2018 and before 2028;
  • Implement a new permanent additional capital cost allowance of 30% applicable to acquisitions of computer hardware, manufacturing and processing equipment, clean energy generation equipment and intellectual property. Together with the increase in the depreciation rate to 100%, the new additional capital cost allowance will allow businesses to deduct 130% of the value of their eligible investments in these types of assets.

Illustrative example of Quebec changes to capital investments:

Asset Year of Acquisition Year 2
Cost of eligible asset $100 $-
Accelerated capital cost allowance $100 $-
Additional deduction $- $30
Total deduction in the year $100 $30
Total cumulative deduction $100 $130

OTHER TAX MATTERS OF INTEREST

  • The annual Tax Free Savings Account contribution room for 2019 has been increased from $5,500 to $6,000;
  • The CPP contribution rate has been increased from 4.95% to 5.10% for 2019. The maximum annual pensionable earnings for 2019 has been set at $57,400. Therefore, the maximum annual employee contribution to the CPP has increased from $2,593.80 to $2,748.90;
  • The EI contribution rate has decreased from 1.66% to 1.62% for 2019. The maximum annual insurable earnings for 2019 has been set at $53,100. Therefore, the maximum annual employer contribution to the EI has been increased from $858.22 to $860.22.
Type of Asset Current CCA Regime Proposed Accelerated Investment Incentive Regime
Computer software 50% 100%
Computer hardware 27.5% 82.5%
Trucks and tractors for hauling freight 20% 60%
Motor vehicles 15% 30%
Non-residential buildings 3% 9%
Goodwill 2.5% 7.5%

For more information on this topic, please contact your McCay Duff advisor.

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