On January 27th, 2009 Finance Minister Jim Flaherty delivered his government’s highly anticipated budget. Billed as “Canada’s Economic Action Plan”, the budget included a number of new spending initiatives designed to stimulate Canada’s struggling economy, along with the following income tax measures:
PERSONAL TAX MEASURES
Personal Amount and Income Tax Brackets
The Budget proposes to increase the basic personal tax credit from $9,600 for 2008 to $10,320 in 2009.
In addition, the upper limit of the first personal income tax bracket will be increased from $37,885 for 2008 to $40,726 in 2009, and the upper limit for the second personal income tax bracket will be increased from $75,769 for 2008 to $81,452 in 2009. For an Ontario taxpayer with at least $81,000 of taxable income, savings will amount to $530 as a result of these changes.
After 2009, the increased personal amounts and bracket thresholds will continue to be indexed to the rate of inflation.
Canada Child Tax Benefit/National Child Benefit Supplement
The income levels for the phase-out of the Canada Child Tax Benefit (CCTB) and the National Child Benefit supplement (NCB) will be increased to parallel the increase in the upper limit of the first personal income tax bracket. For the majority of families in the 2009-10 benefit year, the CCTB will now begin to be phased out and the NCB will be completely phased out for incomes over $40,726.
For 2009, the maximum amount of the Age Credit will be increased by $1,000 to $6,408. The net income level at which the Age Credit begins to be phased out however will remain unchanged at $32,312. With this enhancement, the Age Credit will now be fully phased out for incomes over $75,032.
Home Renovation Tax Credit (HRTC)
The budget proposes a measure to encourage Canadian homeowners to make improvements to their property. Individuals will be eligible to claim a 15% non-refundable tax credit for eligible expenditures made in respect of improvements made to eligible dwellings. The credit will apply to expenditures in excess of $1,000 but not more than $10,000, resulting in a maximum credit of $1,350 ($9,000 x 15%). Family members (spouse, common-law partner, minor children) must share the available expenditure limit. The HRTC is only applicable on expenditures for work performed or goods acquired after January 27, 2009 and before February 1, 2010. The credit is not available for work performed or goods acquired in that period if the expenditure is made pursuant to an agreement that was entered into before January 28, 2009.
An eligible dwelling refers to a principal residence of a taxpayer. This can include your house, cottage and condominium. Eligible expenditures will quality for the HRTC if they are incurred to complete a renovation or alteration to an eligible dwelling, provided that the renovation or alteration is of an enduring nature and is integral to the dwelling. Examples of eligible expenditures will include the cost of labour and professional services, building materials, fixtures, equipment rentals and permits. Examples of acceptable renovations will include new furnaces, windows and decks. The cost of routine repairs, furniture, appliances, audio visual electronics and financing costs of the renovation will not be eligible for the credit. An eligible expenditure must be supported by receipts.
Home Buyers’ Plan (HBP)
The HBP allows first-time home buyers to withdraw amounts from an RRSP to purchase or build a home without having to pay tax on the withdrawal. This budget proposes to increase the HBP withdrawal limit to $25,000, from $20,000. The increase in the available limit will apply to withdrawals made after January 27, 2009.
First-Time Home Buyers’ Tax Credit
The budget also introduces a new non-refundable tax credit of up to $5,000 for first-time home buyers who acquire a qualifying home after January 27, 2009. A qualifying home is one that is currently eligible for the HBP withdrawal. The credit can be claimed by the individual who acquires the home or by the individual’s spouse or common-law partner and will save up to $750, where applicable.
RRSP/RRIF Losses After Death
Unless a spousal transfer is available, the fair market value of a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) at the time of the annuitant’s death is generally included in the income of the deceased for the year of death. Any subsequent increase in the value of the RRSP or RRIF is included in the income of the estate or the beneficiaries upon distribution. Currently, there is no existing income tax provision to recognize a decrease in the value of the RRSP or RRIF that is realized subsequent to the annuitant’s death and before the plan is distributed from the estate.
The 2009 Budget proposes to allow, upon final distribution of property from a deceased annuitant’s RRSP or RRIF, the amount of the post-death decreases in value. These will now be able to be carried back to reduce the RRSP or RRIF income that was reported in the deceased’s final return for distributions made by the end of the year following the year of death. This provision will begin to apply where the final distribution from the RRSP or RRIF occurs after 2008.
BUSINESS TAX MEASURES
Small Business Limit
Effective, January 1, 2009, the federal government has proposed to increase the Small Business Limit from $400,000 to $500,000 which will then match the limit available from the Province of Ontario. The combined Federal and Ontario tax rate on active business income earned by a qualifying Canadian Controlled Private Corporation will now be 16.5%, on the first $500,000 of taxable income. The increase in the limit will be prorated for corporations that do not have a calendar year end. In addition, associated corporations will continue to be required to share the Small Business Limit.
Concurrent with this change, the $3,000,000 expenditure limit for Scientific Research and Experimental Development expenses eligible for the 35% Investment Tax Credit will not be reduced until taxable income exceeds $500,000 and will be eliminated where taxable income exceeds $800,000.
Capital Cost Allowance (CCA)
Manufacturing and processing equipment purchased before 2012 will continue to be eligible for the current 50% straight-line CCA rate, claimed on a 25%, 50%, 25% basis and thus can be fully written off over 3 years. Prior to the budget announcement this treatment was to expire at the end of 2009.
Computer equipment described as general purpose electronic processing equipment and systems software will be eligible for a temporary 100% CCA rate and will not be subject to the normal half-year rule. This will apply to all purchases made after January 27, 2009 and before February, 2011.
For taxation years that end after 2009 the government will require most corporations with annual gross revenues exceeding $1,000,000 to file their corporate tax returns electronically. Penalties will be levied for failure to file in the prescribed format. The penalty will be $250 for returns required to be filed in 2011, $500 in 2012 and $1,000 for subsequent years.
For information returns such as T4s and T5s that are filed after 2009, corporations will be required to file electronically where the number of slips exceeds 50. Penalties will be levied where these returns are either late filed or are submitted in an incorrect format. Prescribed penalties can be as high as $7,500, depending on the number of slips and the number of days late.
Acquisition of Control
There are a number of provisions contained in the Income Tax Act that deal with the results of an acquisition of control of a corporation. Access to certain beneficial provisions, such as the Capital Gains Exemption (CGE) on a disposition of Qualifying Small Business Corporation shares, may be limited depending on the particular time that control is deemed to be acquired.
In response to a 2006 Federal Court of Appeal decision, this budget includes measures to preserve access to the CGE in situations where the timing of the change of control may have otherwise put it at risk.
Employment Insurance (EI)
The maximum benefit duration for regular employment insurance benefits will be increased by five weeks to fifty weeks during the next two years. EI premium withholding rates will be frozen at the current rate of $1.73 per $100 of income, until the end of 2010.