2003 FEDERAL BUDGET COMMENTARY BUDGET HIGHLIGHTS Corporate Tax Measures Personal Income Tax Measures Other Tax Matters Cynics will presume that Mr. Manley's budget has been primarily constructed to either (a) assist in his upcoming leadership bid or (b) leave a lasting legacy for the outgoing Mr. Chretien. And they may be right! The document is full of new spending initiatives for health care, education, research and development, defense, the homeless, etc., along with concessions to taxpayers including increased RRSP limits, an expanded small business deduction and the phase out of the federal capital tax. The next Prime Minister will have to balance these significant commitments, with the possibility of inadequate resources to fund all of these initiatives, particularly if economic performance declines over the implementation period. Highlights of the budget pronouncements include: CORPORATE TAX MEASURES Small Business Limit The small business deduction currently reduces the basic federal corporate income tax rate to 12% on the first $200,000 of active business income earned by a Canadian-controlled private corporation (CCPC). The budget proposes to increase the annual amount of active business income eligible for this low rate by $100,000 over the next 4 years, as follows: • $225,000 for 2003 • $250,000 for 2004 • $275,000 for 2005 • $300,000 for 2006 and later years These small business limits will be prorated for non-calendar tax years. Combining the above changes with the projected Ontario rates and small business income thresholds, the applicable calendar year rates for small business corporations in Ontario will be as follows: Year Income Level Combined Rate 2003 up to $225,000 18.62% 2004 up to $250,000 18.12% 2005 up to $275,000 17.12% 2006 up to $300,000 17.12% Another benefit of this increased limit is that the threshold at which a company's entitlement to the 35% investment tax credit (ITC) on qualifying research and development expenditures has increased. The entitlement to the enhanced credit now begins to erode at income levels in excess of $300,000, as compared to the previous amount of $200,000. Eligibility for the 35% ITC will now be eliminated where taxable income exceeds $500,000. Federal Large Corporations Tax The Federal Large Corporations Tax is a tax on a corporation's capital employed and has been identified as a significant impediment to new investment in Canada. In keeping with the government's goal of promoting investment, this tax will be eliminated over a five year period commencing January 1, 2004. Currently, this tax applies where a corporation's capital exceeds $10 million. Effective for taxation years ending after 2003, this threshold is increased to $50 million. In addition, the rate at which the tax applies will be reduced over a five year period commencing in 2004, until the tax is completely eliminated in 2008. Automobile Standby Charge The automobile standby charge is a taxable benefit related to the personal use of an employer-provided vehicle. The regular standby charge is set at 2% per month of the original cost of the vehicle or 2/3 of the monthly lease payment. Currently, the benefit can be reduced where personal driving totals less than 12,000 kilometres per year and at least 90% of the driving is for business purposes. These limits have been enhanced in that the reduced standby charge will now be available where annual personal driving does not exceed 20,000 kilometres and where 50% or more of the automobile's use is for business purposes. This measure will apply for 2003 and subsequent taxation years. ^- top of this page PERSONAL INCOME TAX MEASURES Increased RRSP Limits The contribution limit for RRSPs has been frozen at $13,500 since 1996. As part of the government's strategy to encourage savings and assist Canadians in planning and funding their retirement, the budget proposes to increase the RRSP limits as follows: Year Exisiting Limits Proposed Limits 2003 $13,500 $14,500 2004 $14,500 $15,500 2005 $15,500 $16,500 2006 indexed $18,500 2007 and beyond indexed indexed Capital Gains Rollovers The small business capital gains rollover measure was originally introduced in 2000. In its current form, an individual is allowed to defer the taxation of capital gains realized on the disposition of common shares held by the individual in an eligible small business corporation. This deferral is available for investments up to $2 million, but is effective only to the extent that the proceeds are reinvested in newly issued common shares of other eligible small business corporations within 120 days of the disposition. New proposals will expand the availability of this rollover by: eliminating the $2 million limit on the amount of the original investment on which deferral is allowed; eliminating the $2 million limit on the amount that can be reinvested in shares of eligible small business corporations; and allowing a reinvestment to be made at any time in the year of disposition or within 120 days after the end of that year. These changes will apply to dispositions that occur after February 18, 2003. Tax Assistance for Low-Income Families With Children To combat the increase in child poverty in Canada, tax assistance is set to increase for low-income families with children. The budget proposes to increase the supplement to the Canadian Child Tax Benefit (CCTB) for families with a total income of $33,487 or less. The maximum benefits for a family with a total income of $21,529 or less are $2,632 for the first child, $2,423 for the second child and $2,427 for the third and subsequent children, effective July 2003. Child Disability Benefit (CDB) There is a new $1,600 Child Disability Benefit introduced in the budget to help alleviate some of the financial burden experienced by families caring for children with severe disabilities. This benefit will be administered as a supplement to the CCTB and becomes effective July 2003. The first payment will not be issued until March 2004. (It will be a retroactive payment). The full benefit will be available to families having a 2002 income of less than $33,487. The benefit for one disabled child will be lost once family income reaches $46,602. Eligible Expenses for the Medical Expense Tax Credit Eligible medical expenses have been expanded to include: the cost of real-time captioning, note-taking services, voice recognition software and other similar devices used by persons with an impairment; and the incremental cost of purchasing gluten-free food products for individuals with celiac disease who require a gluten-free diet. The allowance of the medical expense claim for this condition appears to be a concession. Some individuals with celiac disease have recently been denied the Disability Tax Credit. ^- top of this page OTHER TAX MATTERS Some of the more significant miscellaneous items are summarized as follows: Interest on refunds will begin to accrue 30 days (previously 45 days) after the later of the balance-due date and the day the return was filed. Currently, interest begins to accrue to the taxpayer the day an application is filed to request a carry-back of a tax loss. The budget proposes that interest will not start to accrue until 30 days after the application is made. The Employment Insurance (EI) contribution rate for 2004 is reduced from 2.1% to 1.98% of insurable earnings. (The employer contribution will therefore be 2.772%). The Film and Video Production Services Tax Credit is increased from 11% to 16% of qualified Canadian labour expenditures, applicable to expenditures incurred after February 18, 2003. The definition of tax shelter has been expanded to include plans which involve obtaining tax benefits from the use of charitable donations or other tax credits. Therefore, "art flips" are now considered to be a tax shelter. This will now require the plan to be registered with CCRA and to obtain a Tax Shelter Identification Number. The government plans to review and consult further to determine if Tax Pre-Paid Savings Plans (TPSPs) are an appropriate investment vehicle for Canadians. These plans are similar to RRSPs in that the funds can grow tax-free within the plan. However, no deduction will be available for contributions to the plan, and withdrawals will not be taxable. Legislative amendments clarifying the rules regarding interest deductibility and reasonable expectation of profit are expected in the future. Public input will be sought prior to instituting any changes. The government will encourage the use of renewable fuels (fuel cells, bio-oil) by allowing faster write-offs through the use of accelerated capital cost allowance on the purchase of energy efficient equipment. A Note From Durward Jones Barkwell & Company LLP We keep abreast of changes in tax and other matters to help you take the maximum advantage of them. Please call your DJB professional for more detail on these and other budget measures and how they may affect you in your personal and business affairs. ^- top of this page