Budget 2016: Highlights for Physicians, Residents and Medical Students
March 23, 2016
Changes to CCPCs not as restrictive as anticipated
On March 22, 2016, Federal Finance Minister Bill Morneau tabled the Government of Canada’s budget in the House of Commons. As expected, there were many tax proposals included in Budget 2016 which focused on helping the middle class, including the introduction of a new Canada Child Benefit program (to replace the current Universal Child Care Benefit) and the elimination of both the education and textbook tax credits. Interestingly, two anticipated items – an increase in the taxes paid on capital gains and changes to Canadian Controlled Private Corporation (CCPCs) – were left intact.
This summary highlights areas of the budget that may be of particular interest to physicians, residents and medical students, and provides an overview of some of the budget’s non-tax measures in the health sector.
A number of proposals from the 2016 federal budget may be of particular interest to incorporated and practicing physicians. These include:
Changes to the Small Business Tax Rate
While the Liberal electoral platform indicated their intention to preserve the currently legislated decrease of the Federal small business tax rate to 9% by 2019, the Federal small business tax rate of 10.5%, applicable to the first $500,000 of active business income earned by a Canadian Controlled Private Corporation (CCPC), will remain unchanged for the foreseeable future.
There are no proposed changes to the current non-eligible dividend gross-up and tax credit factors.
Multiplication of the Small Business Deduction
Budget 2016 proposes tax amendments that will limit the benefits of certain corporate and partnership structures which currently allow for the small business tax rate to apply to multiple instances of $500,000 of active income. This has historically been accomplished through the use of more complex structures that use a combination of multiple corporations, partnerships and/or contracts for services. The intention is to limit the ability of high-net-worth individuals to use private corporations to inappropriately reduce or defer tax.
Below are two examples of how a physician could be impacted by this:
- Example 1: Dr. Jones is the sole shareholder of a medical professional corporation (MPC) earning $1M of active business income. Ordinarily, the MPC would be eligible to pay the small business tax rate on the first $500,000 of active business income and would pay the general corporate tax rate on the remaining $500,000. However, in order to have the full $1M taxed at the small business rate, Dr. Jones’ spouse, Mr. Jones, incorporates his own corporation and provides services to Dr. Jones’ professional corporation for a fee of $500,000. The end result is that each corporation would end up with $500,000 of active business income and each could benefit from the small business tax rate on this income. Budget 2016 proposes to eliminate this advantage in situations where one corporation, its shareholder or a person who is not at arm’s length with the shareholder, has a direct or indirect interest in the other CCPC from which it is deriving its services/property revenue.
- Example 2: Where a CCPC is a member of a partnership, the CCPC is entitled to its pro-rata share of the $500,000 small business deduction based on its share of active business income allocated to it. Therefore multiple corporate partners would have to share one instance of the $500,000 small business limit. To avoid this, structures have been implemented where an individual owns a partnership interest. The individual partners then incorporate CCPCs which, in turn, provide services or property under contract to the partnership. Each corporation would claim the small business deduction in respect of the income earned through their services contract with the partnership effectively allowing multiple partners to access the small business deduction. The new proposals would eliminate this advantage by having the corporations deemed to be direct partners of the partnership.
Keep in mind, there are situations that will not be impacted by these changes, such as:
- Dual physician families with two corporations, each owned by one spouse, will be unaffected by these changes as long as these corporations provide little or no services to each other.
- The proposed incorporation measures are intended to address very specific situations where partnerships or multiple corporations are involved in the structure. Many physicians operate their medical practices as part of a cost sharing arrangement with other physicians. It is important to note that these arrangements are not the same as partnerships.
Consultation on Active vs. Passive Investment Income
In 2015, the previous government announced plans to undertake a consultation on active vs. passive income earned by a corporation to consider whether certain CCPCs that are not currently eligible for the Federal Small Business Deduction should become eligible. The consultation process was completed and no changes are being proposed in this area.
Medical Students and Residents
Several changes were proposed to help make post-secondary education more affordable for all students. The following changes could impact medical students and residents, including:
Elimination of the Education and Textbook Tax Credits
All students are currently eligible to claim a 15% non-refundable education tax credit based on $400 per month of full-time enrolment in a qualifying program, or $120 per month for part-time enrolment. Further, the textbook tax credit currently offers $65 per month of full-time attendance, and $20 for part-time. Budget 2016 proposes to eliminate both of these tax credits, a change which will be effective as of January 1, 2017. This measure DOES NOT eliminate the tuition tax credit.
Unused education and textbook credit amounts carried forward from years prior to 2017 will remain available to be claimed in 2017 and subsequent years.
Enhancing Canada Student Grants amounts
Budget 2016 proposes to increase Canada Student Grant amounts by 50% - from $2,000 to $3,000 per year for students from low-income families; from $800 to $1,200 per year for students from middle-income families, and from $1,200 to $1,800 per year for part-time students.
Budget 2016 also noted that we can expect further enhancements to expand eligibility for Canada Student Grants, which will be in place for the 2017–18 academic year.
Increasing the threshold for loan repayments of student debt
The loan repayment threshold under the Canada Student Loans Program’s repayment Assistance Plan will increase under Budget 2016. The proposed change will have students repay their student debt once they earn a minimum of $25,000 (up from $20,210).
Tax Initiatives that benefit the Middle Class
A number of proposals from Budget 2016 will be of particular interest to families, including:
The new Canada Child Benefit
Starting in July 2016, the new Canada Child Benefit (CCB) will replace the current Universal Child Care Benefit (UCCB) and Canada Child Tax Benefit (CCTB). Depending on the family’s adjusted net income, the proposed CCB will offer tax-free monthly payments to Canadian households. It will provide a maximum benefit of $6,400 per child under the age of 6, and a maximum of $5,400 per child aged 6 through to 17. The benefits will be gradually eliminated at phase-out rates, which vary depending on the number of children under the age of 18 and the family’s adjusted net income. The CCB will be fully eliminated for households with income of $200,000 or more.
A tool for calculating estimating monthly CCB payments is available at the following this link.
Elimination of the Family Tax Cut Credit
The Family Tax Cut Credit provided yearly tax savings of up to $2,000 to Canadian families by allowing parents with a child under the age of 18 to allocate (for tax purposes only) up to $50,000 of taxable income from a high income earning spouse to a lower income earning spouse. Budget 2016 will eliminate this credit for 2016 and subsequent tax years.
Elimination of the Children’s Fitness and Arts Tax Credit
Currently, the Children’s Fitness Tax credit provides a tax savings equal to 15% on up to $1,000 of eligible fitness expenses. Budget 2016 proposes to decrease the maximum expenses eligible for the fitness credit from $1,000 to $500 in 2016, and to entirely eliminate the credit for 2017 and the subsequent taxation years.
Similarly, the Children’s Arts Credit provides a non-refundable tax credit of 15% on up to $500 of eligible expenses. The maximum eligible expenses will decrease from $500 to $250 for 2016, and will also be eliminated for 2017 and the subsequent taxation years.
Budget 2016 proposes to cancel the provisions in the Old Age Security Act that would have, starting in April of 2023, gradually increased the age of eligibility from 65 to 67 for both Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). Budget 2016 also proposes that seniors are eligible to collect allowance benefits until the age of 60 (under the former government, this would have been until the age of 62).
Other notable proposed changes that would affect seniors are the following:
Guaranteed Income Supplement
For seniors who rely almost exclusively on OAS and GIS, the top-up benefit will be increased by up to $947 annually.
Canada Pension Plan (CPP)
Further to recent discussions regarding the enhancement of the CPP, Budget 2016 announced that the government will launch public consultations shortly, which will give Canadians the opportunity to provide input on improving the CPP.
Increased support for senior couples living apart
Amendments to the Old Age Security Act have been made to ensure that couples who receive both GIS and Allowance benefits, and have to live apart for reasons such as a requirement for long term care, will receive higher benefits based on their individual incomes.
Products – Mutual Fund Switch Corporations
According to the current income tax provisions, Canadian mutual funds can be in the legal form of a trust or a corporation, commonly referred to as corporate class mutual funds. MD does not carry these in our MD group of funds. In some cases, mutual fund corporations are structured as “switch funds”, where the corporation has different classes of shares, and where each class represents a different fund. The goal of a “switch fund” is to provide investors with the ability to have exposure to different assets, and when investors want to exchange shares to another class, they are able to do so without immediate tax consequences. Worthy to note: this deferral is not available when investors hold units of mutual fund trusts.
Budget 2016 proposes to amend the Income Tax Act so that this deferral is no longer available. When the investor switches between classes, this will be considered a disposition for tax purposes at Fair Market value, resulting in a capital gain or a capital loss. This measure will apply to dispositions of shares that occur after September 2016.
Charitable Giving - the donation of private company shares
Where the previous government proposed a capital gains exemption for individual and corporate donors on the sale of private company shares or real estate to an “arms’ length party” if the proceeds were donated to a registered charity within 30 days, Budget 2016 announced its intention to cancel these tax measures.
International Tax Reporting
The Government of Canada will adopt certain measures recommended by the Organization for Economic Co-Operation and Development (OECD) to strengthen both international and domestic tax integrity. In the fall of 2015, Canada reaffirmed its commitment to cooperate with the automatic exchange of information with respect to financial accounts held by non-residents, under the framework of the Common Reporting Standard developed by the OECD. Canada intends to implement the standard starting on July 1, 2017, allowing for first exchanges of information with other countries in 2018.
There are two noteworthy proposed changes to insurance:
Transfer of Life insurance policies
Budget 2016 addresses certain scenarios involving the transfer of an interest in a life insurance policy to a “non-arms’ length” party. Currently, there are scenarios in which an individual can sell their life insurance policy and the proceeds are received tax-free. In applying the policy transfer rule, Budget 2016 proposes to include the fair market value (FMV) of any consideration given for an interest in a life insurance policy in the policyholder’s proceeds of disposition and the acquiring person’s cost. These proposals may reduce the amount added to the capital dividend account, paid-up capital and/or adjusted cost base where a policy was transferred to a corporation or a partnership prior to March 22, 2016. An example of this is included below:
Example: A physician sells his personally owned life insurance policy to his medical professional corporation for its appraised fair market value. There are circumstances under which the physician could receive the proceeds from the corporation, tax-free. These proposals have been included in Budget 2016 to ensure amounts are not inappropriately received tax-free by the policyholder.
Life Insurance Proceeds
Currently, life insurance proceeds received as a result of the death of an individual insured under a life insurance policy are generally not subject to income tax. When a corporation or a partnership receives insurance proceeds, those proceeds are added to the capital dividend account, or the adjusted cost base of the partnership respectively. Budget 2016 proposes amendments, effective March 22, 2016, to provide that the “insurance benefit limit” (the portion of the policy benefit received by the corporation or partnership that is in excess of the policyholder’s ACB of the policy) applies regardless of whether the corporation or partnership that receives the policy benefit is a policyholder of the policy. Further, there will also be an information-reporting requirement where an entity is not a policyholder but is entitled to receive insurance proceeds.
Non-Tax Measures Related to the Health Sector
The 2016 federal budget recognized the need to strengthen Canada’s health care system “to better meet the needs of patients as changes in demographics, disease patterns, and technology continue to shift the delivery of care into homes and communities.”
The budget documents confirmed ongoing discussions between the Minister of Health and her provincial and territorial counterparts “to enhance the affordability and accessibility of prescription drugs, improve access to home care and mental health services, and support pan-Canadian innovation in the delivery of health services.”
For more information
In the coming months, and as further details are made available, MD Financial Management Inc. will continue to monitor any new developments with respect to changes proposed in the 2016 federal budget. If you have questions about how you or your individual financial plan may be affected, please contact your MD Advisor for more information.
The full 2016 federal budget, including additional proposals and economic developments, is available online.
About MD Financial Management
MD Financial Management, with more than $40 billion in assets under administration, is a wholly owned subsidiary of the Canadian Medical Association. MD is dedicated to serving physicians and their families. MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies. For a detailed list of these companies, visit md.cma.ca.