Canadian Tax Changes for 2016

(2017 Filing Season)

Canada Revenue Agency (CRA) has ramped up measures to encourage and enforce compliance with tax laws, and has issued information indicating the following areas of concentration:

  1. High Risk Personal Returns:  On December 4, 2013, CRA has indicated that it will send about 33,000 letters to Taxpayers who show rental or business losses, and who claim employment expenses.  This will significantly increase the chance of an audit in these areas.
  2. International Tax Evasion and Aggressive Tax Avoidance:  CRA has increased scrutiny of international transactions and their related tax reporting requirements.  As part of this initiative, the statute of limitations for certain international transactions and specifically as required for reporting on form T1135 will be increased to six years from three.
  3. As of January 7, 2015 Canada Revenue Agency has launched the Electronic Funds Transfer initiative, which requires banks and financial intermediaries to report to the CRA incoming and outgoing international EFT's of $10,000 or more.  This move has been made to identify high risk taxpayers who engage in aggressive international tax avoidance and who attempt to conceal assets offshore.

During the current tax preparation season, we will be requesting additional information for reporting in these areas to ensure compliance.

As a result of the likelihood for increased government scrutiny of all returns filed, we have this year implemented our "Prepaid Audit Assurance Program" .Under this Program, we cover the costs of representation in the event you are audited.

New Provisions Affecting 2016 Personal Income Tax Returns:

  • Principal Residence Exemption:  Capital gains which arise on the disposition of a principal residence are exempt from tax to the extent that the property was occupied for the entire time owned as a principal residence.  Where the property was occupied for only part of the time it was owned, the exempt portion of the capital gain on disposition was determined by the use of a formula where the number of years occupied plus one is divided by the number of years owned.  For 2016 returns, the "plus one" year has been removed, thus making the exempt portion of the gain equal to:

                       Number of years occupied as a principal residence divided by the  Number of years own

This will potentially cause some of the capital gain on sale to be taxable in a case where one moves out of the home prior to its sale.

Further, for 2016 and future tax years, all dispositions of a principal residence must now be reported on a revised schedule 3, even if no gain is reportable. 

Although only the proceeds are reportable if the entire gain is exempt from tax, a late filed election to treat a property as a principal residence will be subject to a penalty under subsection 220(3.5) of up to $8,000.  (For 2016 CRA has indicated that they will only assess the penalty in the most excessive cases.  CRA has eliminated the statutory three year limitation for the examination of a return where the disposition of real estate has not been reported.

This new provision also applies to deemed dispositions (ie on death, departure from Canada, or change of use).

  • Home Accessibility Tax Credit:  This nonrefundable tax credit of 15% of expenditures of up to $10,000 to improve accessibility, safety or security for a senior or person with a disability. This credit was announced in the 2015 federal budget and is reportable on new Schedule 12. 
  • Dividend Tax Credit (DTC):   The taxable amount of "other than eligible dividends" is equal to the actual amount time 117%. The taxable amount of eligible dividends is 138% of the amount received. For eligible dividends, the federal dividend tax credit for 2016 will be 15.0198% of the taxable amount of eligible dividends and for "other than eligible dividends", the federal dividend tax credit for 2016 is 10.5217% of the taxable amount.
  • Labour Sponsored Funds Tax Credit:  The tax credit for the purchase of provincially registered labour-sponsored venture capital corporations has been set at 15% for 2016.  The tax credit for the purchase of federally registered labout-sponsored venture capital corporations has been set at 5%, and will be eliminated for 2017.
  • Canada Child Benefit (CCB): Effective July 2016 this new tax free credit, intended to defray the cost of raising children under 18 years of age, will replace the Canada Child Tax Benefit (CCTB), the national child benefit supplement (NCBS) and the Universal Child Care Benefit (UCCB).
  • Tax Free Savings Account (TFSA): The amount which may be contributed to a TFSA has been reduced to $5,500 per year.  (Caution for U.S.citizens:  Investment in a TFSA will cause additional tax reporting in the U.S.)
  • Eligible Educator School Supply Tax Credit: A new refundable credit of up to $150 is available for teachers and early childhood educators that purchase supplies out of their own pocket for use in the classroom or regulated day care.  This credit parallels a similar credit which has been available in the United States for some time.
  • Tax Credits Reduced or Eliminated:  The following tax credits have been reduced or eliminated for 2016:
    • Family Tax Cut:  This credit has been eliminated for 2016;
    • Children's Arts Amount:  The maximum fees eligible for credit have been reduced from $500 to $250 for 2016 (and will be eliminated for 2017 returns);
    • Children's Fitness Tax Credit:  The maximum expenditures eligible have been reduced from $1,000 to $500 (and will be eliminated for 2017 returns);
    • The Overseas Employer Tax Credit has been eliminated entirely for 2016.
  • Tax Rates and Charitable Donations: There is a new federal tax bracket of 33% for taxable income in excess of $200,000.  Consistent with this change the tax credit for charitable donations has also been increased to 33% for donations over $200, but only to the extent that a taxpayer is subject to the new 33% rate.  Although rates vary for each province, the combined federal and provincial top marginal rates for residents of Ontario for 2016 are:
    • Regular income: - 53.53%
    • Capital gains: - 26.76%
    • Canadian eligible dividends: - 39.34%
    • Canadian ineligible dividends: - 45.3%
  • Electronic Filing News:  The following changes to electronic filing policy will be implemented for 2016:
    • Starting February 2017 multiple jurisdiction returns with income from more than one province or jurisdiction can be electronically filed;
    • Amended T1 returns will be eligible for electronic filing starting February 2017.
  • Form T1135:  The reporting method for individuals who have specified foreign property with a cost of less than $250,000 has been simplified.

Please contact us to review the impact of these or other changes as they may apply to your specific situation.