2004 FEDERAL BUDGET COMMENTARY
BUDGET HIGHLIGHTS
On March 23, 2004, the Honourable Ralph Goodale delivered his first Federal Budget and the seventh consecutive balanced budget for the government. For those expecting a plethora of pre-election goodies, there will be disappointment. Paul Martin’s government had very little surplus cash due to the costly promises made in the 2003 Federal Budget. The biggest winner in 2004 is Canadian cities, who were already informed in the speech from the Throne that they would be free of the GST burden. There are no changes to tax rates, but small business will experience an accelerated increase in the small business deduction and all businesses will have a longer period of time over which losses can be used to reduce taxable income. Low and middle income families will benefit from measures to encourage saving for education. The budget also included spending announcements in areas such as health care, research and agriculture.Highlights of the budget pronouncements include:
CORPORATE TAX MEASURESSmall Business Limit
The small business deduction currently reduces the federal portion of corporate income tax to 13.12% of qualifying active business income for a Canadian-controlled private corporation (CCPC). This provision helps small CCPC’s retain more of their earnings for reinvestment and expansion.
The 2003 budget implemented a phased increase of the small business limit, from $200,000 in 2002 to $300,000 in 2006, with annual increases of $25,000. The 2004 budget accelerates the increase in the small business limit. The $300,000 limit will now be available in 2005.
Extension of Loss Carry-forward Period
Taxpayers can currently apply non-capital (business) losses to reduce their tax liability in either the 3 previous years or the 7 subsequent years, subject to certain limits and conditions. The budget extends the loss carry-forward period for non-capital losses from 7 to 10 years. The new 10 year carry-forward period will also apply to unused foreign tax credits and to non-capital losses applied under Part IV of the Income Tax Act. These measures apply to losses and credits arising in taxation years ending after March 22, 2004.
Increased Capital Cost Allowance Rates
Computer technology and equipment can quickly become obsolete. In response to this, the government proposed to allow faster write-offs of certain assets. Specifically, the capital cost allowance (CCA) rates for computer equipment will rise from 30% to 45% and rates for data network infrastructure equipment go to 30%, up from 20%. These changes will apply for equipment purchased after March 22, 2004.
Restricted Trading in Charitable Donations
The Income Tax Act contains provisions that restrict the deductibility of accumulated losses and other special tax attributes after control of a corporation has been acquired. The budget proposes similar rules, to prevent trading of unused charitable donations, such that amounts unused at the time control of the corporation was acquired will expire.
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Tax Measures for Persons with Disabilities
The budget proposes, for 2004, to replace the current attendant care deduction with a new Disability Supports Deduction. Currently, the cost of attendant care to allow an individual access to employment and education is deductible. Alternatively, these expenses are allowed as a medical expense tax credit. In addition to the expenses already allowed, the new initiative will permit a deduction for disability-related support expenses incurred for education or employment purposes, including:
- Sign-language interpretation services
- Teletypewriters
- Devices designed exclusively for the blind
- Electronic speech synthesizersIn addition, 25% of the Disability Supports Deduction will be allowed as a refundable medical expense supplement, to a maximum of $562 in 2004.
Medical Expense Changes
In another measure, taxpayers paying medical expenses on behalf of minor children will no longer be restricted by a threshold based on the child’s income. Taxpayers will also be able to claim medical expenses for other dependent relatives such as grandparents, parents, nieces and nephews, where those expenses exceed the lesser of 3% of the dependant’s net income and $1,813. The maximum eligible amount that can be claimed under this initiative will be $5,000.
Education Initiatives
The education tax credit has been extended to post-secondary education which is related to a student’s current employment. The credit is available if costs are not reimbursed by the employer. The credit is based on a maximum of $400 per month for full-time education study and $120 per month for part-time study.
The government has introduced Canada Learning Bonds (CLB) for children of low-income families (incomes less than $35,000). Children born after 2003 will be eligible for a CLB in each year that the child’s family is entitled to the National Child Benefit supplement, up to and including the year the child turns 15. The CLB will be $500 in the first year of eligibility and $100 for each subsequent year of eligibility and will be paid to an RESP for the child. Once the child reaches the age of 21, any CLB not utilized will be lost.
Currently, contributions to an RESP are matched at the rate of 20% by the government in the form of a Canada Education Savings Grant (CESG). This rate will be increased to 40% on the first $500 contributed by families with incomes less than $35,000 and to 30% for families with incomes between $35,000 and $70,000.
CHARITY SECTOR MEASURESMany changes to the regulation of charities are proposed in the budget. Included in the new framework is a strengthened compliance regime, a more accessible appeals system, a greater accessibility to information and improvements to the disbursement quota rules.
Currently, the only sanction against a registered charity that does not comply with the requirements of the Income Tax Act is the revocation of its status as a registered charity, a penalty that is seldom imposed for minor infractions. The budget proposes more appropriate sanctions for relatively minor breaches of the Income Tax Act, effective for taxation years that begin after March 22, 2004. These sanctions will increase in severity for repeat infractions and will provide for financial penalties to be reinvested in the charitable sector.
Some of the proposed sanctions include:
- The taxation of gross revenue generated by a registered charity from prohibited income earning activities.
- Suspension of a registered charity’s receipting privileges for one year for using donated funds for other than charitable purposes.
- Monetary penalties for failure to file a charity’s annual information return (T3010A) on time and public disclosure of non-filers or late-filers.Another new proposal will allow charities to object to a CRA decision, and to appeal taxes and assessed penalties to the Tax Court of Canada.
Along with these measures, the budget also proposes relieving changes to the calculation of the disbursement quota and an increase in the amount of information about a charity that will be made available to the public
OTHER MEASURESAffiliated Person Rules
The affiliated person rules in the Income Tax Act generally apply to restrict a person’s ability to realize a tax loss on transferring a property to a controlled (or affiliated) corporation. The budget proposes to extend the application of these rules to trusts, thereby limiting the ability to realize losses on certain transfers to trusts.
Fines and Penalties
Based on current legislation, administrative practice by the CRA and on recent jurisprudence, some fines and penalties have been considered to be deductible. This budget proposes to deny the deductibility of any fine or penalty imposed by law, whether by government, government agency, regulator, court or other tribunal or any person with statutory authority to levy fines or penalties. This denial is effective after March 22, 2004. Fines and penalties imposed by a foreign country will also be non-deductible. These rule changes will not apply to penalty interest imposed under the GST/HST portions of the Excise Tax Act and some other specific Acts.
A Note From Durward Jones Barkwell & Company LLP
We regularly assess tax changes and review other matters, with the objective of helping you take maximum advantage of opportunities presented and avoiding pitfalls which may arise. Please call your local DJB professionals to discuss more fully how these measures may impact both your personal and business affairs.