Talking Tax for Friday, March 17, 2017
Karen Slezak, partner at Tax Group, Crowe Soberman LLP
Focus: Tax planning
FEDERAL BUDGET: MARCH 22, 2017
Speculation is again running high about whether the government will be increasing capital gains taxes. Currently 50 per cent of a gain is taxable. We may return to a two-thirds or three-fourths taxable portion that used to apply in the years before 2000. If this happens, there could be a significant increase in the tax rates on capital gains.
If you are planning to sell something later in the year or in the next few years, consider whether you can accelerate the disposition to occur before March 22. There are some transactions that taxpayers can engage in where they will have time to decide if a gain will be realized. Take for example the situation where you transfer your marketable securities to a corporation you own. If you do the transfer before March 22, you will have a year to decide whether you moved them at their cost base (by filing a special section 85 election) or whether you had a fair market value disposition — to get the 50 per cent capital gains rate. It’s also possible to obtain the same results with a transfer to a spouse. Time is running out and you should speak with an advisor as soon as possible to take advantage of this strategy.
NEW CHANGES FOR 2016 TAX YEAR
PRINCIPAL RESIDENCE EXEMPTION
A new change for 2016 is the requirement to file the principal residence claim forms when you dispose of your principal residence. Over-simplifying the rules, a principal residence is typically the home that you have owned, alone or together with another person (such as your spouse) and that you ordinarily inhabited during the year. The claim is determined by multiplying the capital gain by the number of years that the property qualifies as a principal residence plus one, and dividing the total by the total number of years of owned. Previously, if all of the years of ownership qualified for the exemption, it was not necessary to file details about the sale or to actually claim the exemption. New for 2016 — if you do not disclose the sale and file form T2091, the gain on your principal residence will be taxable! Also, the gain will not become statue-barred until the forms are filed, so the CRA could come back and assess the tax in a later year when they learn that you never filed the forms. If you miss filing the form, you will be able to late file but a penalty of up to $8,000 will apply. Make sure you report sales of your principal residence!
CHANGE OF USE OF A PRINCIPAL RESIDENCE
If you purchase a principal residence and then at a later time use it to earn income (e.g., you convert to a rental property), you have a change in use of the property. In the absence of any tax planning, this is a deemed disposition that must be reported. Capital gains tax may arise on the difference in value from the date of purchase to the date of the change in use unless you are claiming the principal residence exemption. Rather than pay the tax, a better course of action is to file an election known as a “section 45(2) election” to defer the change in use until the time of an actual sale. Thus the tax is paid when you have actual proceeds from a sale. Also, by filing the election, you will also be able to count up to four years of rental of the property as years qualifying for the principal residence exemption. There is no prescribed form to make a section 45(2) election. It is done by sending a letter to the CRA indicating that you are electing under this provision to defer the change in use on the property. Note that you cannot e-file or net file the election. You will have to send it by mail to the CRA.
Following all of the publicity with the Panama Papers, the CRA is reviewing its Voluntary Disclosure Program and has announced that it is going to tighten up the program. We don’t know exactly what they have in mind but they may make it more difficult for a taxpayer to obtain penalty and interest relief. Currently, if a disclosure is made ahead of any enforcement action by the CRA, if it is complete and if it is the first disclosure made by the taxpayer, then the CRA will waive all penalty charges and provide interest relief on taxes for older years (i.e. beyond four years). Examples of penalty charges are the 17 per cent late filing penalty. Changes are going to be announced by March 31 that may limit the penalty or interest relief. Our advice is to submit a voluntary disclosure before the end of the month to hopefully be grandfathered into the old program.
CHANGES TO TAX CREDITS FOR 2016 RETURNS
2016 is the last year for the Children’s Fitness Tax Credit. Eligible fees for enrollment in sport programs and fitness camps for children have been reduced from $1,000 to $500 unless the child is disabled. Consequently, the maximum credit is reduced to $75 from $150 in prior years.
Also for 2016, the Children’s Art credit is being phased out. Eligible fees for art and music programs have been reduced from $500 to $250 unless the child has a disability. The maximum credit is therefore $37.50 instead of $75.