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In the weeks leading up to the release of Canada’s 2017 federal budget, there was much speculation that Finance Minister Bill Morneau might raise the capital gains inclusion rate, make changes to dividend tax credits and more. Were the experts right? Here’s everything that may impact investors and their portfolios in the newly created budget:
1. Capital gains inclusion rates – Good news, there are no changes here! At least for now, the 50% inclusion rate remains unchanged in this budget.
2. Canadian Savings Bonds – These investments will be withdrawn in 2017.
3. Investment funds – Investment funds may be structured as a trust or corporation. Switching companies are defined as mutual fund companies that have multiple classes of shares, with each class typically being a separate mutual fund. Mergers of two mutual funds into a unit trust or a unit trust with a company can be done on a tax-deferred basis; this treatment will continue. Notwithstanding the budget date, a reorganization of a mutual fund company into multiple mutual funds will also be permitted on a tax-deferred basis in respect of each share class if all or substantially all of the assets of that class are transferred. Also, all shareholders must be unitholders of the trust.
4. Mergers of segregated funds – Tax-deferred mergers will be allowed to run alongside the above mutual fund rules for post-2017 mergers.
5. Derivatives – The timing of recognizing capital gains and losses will change. The election will allow taxpayers to “mark to market” all qualifying derivatives. In addition, a detailed anti-avoidance rule will apply to straddle transactions. The stop loss rule will defer the realization of any losses resulting from the disposal of a position until the unrealized gain resulting from the offsetting reserve.
6. Anti-tax avoidance provisions for RESPs and RDSPs — There are already rules for investing in certain registered accounts – RRSPs, RRIFs and TFSAs – prohibiting certain benefits such as shifting taxable income to a registered fund, swaps, arm’s length portfolio investments and making prohibited asset investments under a registered scheme. These benefit rules will be extended to RDSPs and RESPs after Budget Day, and the transitional provisions will be extended into 2018.
Evelyn Jacks is president of Knowledge Bureau and author of 52 books on personal taxes and estate planning, including Family Tax Essentials. She tweeted @evelynjacks
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