The Liberal government’s second federal budget has several measures affecting the tax system, including proposed changes in how certain lawyers recognize income.
Currently, taxpayers in certain “designated professions,” including lawyers, may elect to exclude unbilled work in progress in computing their income for tax purposes. This permits those taxpayers to defer recognition of income (as compared to full accrual) while being able to deduct the related expenses in the year they are incurred.
“Subject to transitional provisions,” Adrienne Oliver, a tax lawyer at Norton Rose Fulbright Canada in Toronto, explains, “for taxation years beginning on or after Mar. 22, 2017, the budget proposes to eliminate the ability of such designated professionals to elect to use billed-basis accounting. This will affect law firms that do not use the full accrual method of determining their income.”
Gregory Wylie, a tax lawyer at Osler Hoskin & Harcourt LLP in Toronto, also highlights the elimination of bill-based tax accounting for purposes of computing income, but says “the Budget is best described as fairly light on tax measures. There are no major policy announcements or changes.”
“The government continues to modestly pursue its agenda announced in the 2016 budget to focus on perceived fairness issues,” says Wylie, “including closing so-called loopholes, and targeting perceived inefficient or ineffective tax measures. In this regard, it is notable that Budget 2017 announces the government will in the next few months release a paper on tax planning using private corporations to reduce personal taxes. We may see future changes announced with the pending October 2017 federal government economic statement.”
Oliver describes this as a “a wait and see budget, reflective of the government’s concern about U.S. tax reform and the potential border adjustment tax, as well as its limited spending capacity.”
Other changes to the tax system include measures to:
• prevent the avoidance or deferral of income tax through the use of offsetting derivative positions in straddle transactions;
• extend to Registered Education Savings Plans and Registered Disability Savings Plans anti-avoidance rules similar to the ones applicable in connection with Tax-Free Savings Accounts and Registered Retirement Savings Plans,
• clarify the intended meaning of "factual control" under the Income Tax Act for the purpose of determining who has control of a corporation in order to prevent inappropriate access to supports such as the small business tax rate and the enhanced refundable 35-per-cent Scientific Research and Experimental Development Tax Credit for small businesses.
• prevent the avoidance of tax on income from the insurance of Canadian risks by extending the foreign-affiliate base erosion rules to foreign branches of Canadian life insurers.
• replace the Caregiver Credit, Infirm Dependant Credit and Family Caregiver Tax Credit with a single new credit — the Canada Caregiver Credit — non-refundable credit
• modify the tax treatment of successful oil and gas exploratory drilling to maintain their effectiveness.
• Increase excise duty rates on alcohol products by two per cent effective the day after Budget Day, 2017.
• amend the definition of a taxi business under the Excise Tax Act to level the playing field and ensure that ride-sharing businesses are subject to the same GST/HST rules as taxis.
For more information go to Taxnet Pro’s summary of the budget with analysis from tax lawyers from McCarthy Tétrault LLP.