On March 4, 2010, The Honourable Jim Flaherty, Minister of Finance, delivered his government’s budget. Billed as “Leading the Way on Jobs and Growth,” the budget is forecasting a deficit of $53.8 billion for 2010, decreasing to $49.2 billion in 2011, and ultimately to $1.8 billion in 2015. There were not many significant tax changes, although this budget did manage to close a number of tax ‘loopholes.’
Employee Stock Options
Elimination of tax deferral election
Currently, employees of publically-traded companies can elect to defer tax on up to $100,000 of employee stock option benefits vesting in a particular year. The budget proposes to repeal this tax deferral election for employee stock options exercised after March 4, 2010, at 4pm EST.
The budget now clarifies that employers are required to withhold and remit an amount for income tax on the employment benefit associated with the issuance of a security. This requirement does not apply to options granted before 2011 under a written agreement entered into before March 4, 2010, at 4pm EST, where the agreement included restrictions on the disposition of the optioned securities.
Relief for tax deferral election
In recognition of the fact that the elimination of the deferral may cause difficulty for employees where the value of the optioned securities has declined below the amount of the deferred tax liability on the underlying stock benefit, this budget proposes a special election to ensure that the tax liability on the deferred stock option benefit does not exceed the proceeds from the shares’ disposition. This election will also take into account the tax relief from the use of capital losses on the shares against capital gains realized from other sources.
Stock option cash-outs
As of March 4, 2010 at 4pm EST, the employee stock option deduction of 50% of the employment benefit, in certain conditions, can now only be claimed where the employee exercises his or her options by actually acquiring securities from his or her employer. Previously, it was possible for an employee to dispose of his or her stock option rights directly for cash. The employee could then still claim the stock option deduction while the cash payment was fully deductible to the employer. Employers may continue to allow employees to cash out their stock option rights and continue to claim the 50% stock option deduction, however in these cases, the employer must make an election to relinquish the deduction for the cash payout.
The employee stock option rules are proposed to clarify that a disposition of rights under a stock option agreement to a non-arm’s length person will result in an employment benefit at the time of the disposition, including cash-outs.
Medical Expense Credit
Medical expenses that are for a cosmetic purpose, aimed solely to enhance one’s appearance, are no longer eligible for the medical expense credit. The budget clarifies that GST/HST on these types of procedures and equipment will apply if made after March 4, 2010. Cosmetic procedures will continue to qualify for the tax credit if it is required for medical or reconstructive purposes.
The 2006 Budget introduced a full exemption granted for post secondary scholarships, fellowships, and bursaries. This year’s budget proposes to clarify that a post-secondary program that consists principally of research will be eligible for the Education Tax Credit and the scholarship exemption, only if it leads to a college or CEGEP diploma, a bachelor, masters or doctor degree (or an equivalent). As a result, post-doctoral fellowships will now become taxable.
Additionally, if the scholarship fellowship or bursary amount is provided in connection with a part-time program, the scholarship exemption will be limited to the amount of tuition paid for the program plus the costs of the program-related materials. The amount eligible for the scholarship exemption must be considered reasonable in connection with enrolment in an eligible educational program for the duration of the study period related to the scholarship.
U.S. Social Security Benefits
Commencing in 2010, the budget proposes to reinstate the 50% inclusion rate for U.S. Social Security benefits received by Canadian residents, their spouses and common-law partners, where those residents have received these benefits since prior to 1996. Canadians who commenced receiving U.S. Social Security benefits after 1995 will continue to use the existing 85% inclusion rate.
The budget proposes to allow two eligible individuals to each receive half of the Canada Child Tax Benefits, Universal Child Care Benefits (UCCB) and the GST/HST credit on a child where the child lives with both individuals, who live apart. This proposal applies to benefits payable beginning July 2011.
Commencing in 2010, a single parent will have the option of including the aggregate UCCB received in their income or the income of a child for whom they are receiving the UCCB or claiming as an ‘eligible dependant’.
Registered Disability Savings Plan (RDSP)
Under the current legislation, RRSP distributions paid to a surviving spouse or partner or a disabled dependent child may be transferred to a recipient’s RRSP, resulting in a tax deferral. On or after March 4, 2010, the budget allows for this tax deferred rollover rule to apply to an RDSP of a financially dependent infirm child or grandchild. The beneficiary of the RDSP or their legal representative must make an election for the tax deferred rollover to apply. The transfer is subject to the beneficiary’s lifetime contribution limit of $200,000. The transferred amount will not attract the Canada Disability Savings Grant (CDSG).
In addition, starting in 2011, the government proposes to amend the law to allow for a 10-year carry-forward of unused entitlements to the CDSG and the Canada Disability Savings Bonds.
Under the current legislation, registered charities are required to spend a certain amount annually (disbursement quota) to ensure that a significant portion of a registered charity’s resources are devoted for charitable purposes. For fiscal years ending on or after March 4, 2010, the budget relaxes these requirements by:
- Repealing the ‘charitable expenditure rule’ that required charities to spend 80% of their previous year’s tax-receipted donations and certain other amounts on charitable activities;
- Modifying the ‘capital accumulation rule’ for assets not used in charitable programs or administration. The budget proposes to increase the exemption threshold from $25,000 to $100,000 for charitable organizations (not including charitable foundations). This change will allow charities greater ability to maintain reserves to deal with contingencies;
- Strengthening the anti-avoidance rules on transactions that delay or avoid the application of the disbursement quota.
- There were no new rate cuts, but the Minister confirmed previously announced tax measures will remain.
- The interest rate paid on overpaid taxes will be reduced to the average yield of three-month Government of Canada T-Bills. This change will be effective July 1, 2010, and is expected to be at least 2 percentage points lower than the current rate. The interest rate with respect of non-corporate taxpayers will not change.
- The government will begin exploring the tax rules on the taxation applied to corporate groups and the possibility for a formal system to allow for loss transfers between corporate groups or consolidated reporting.
- CCA rate changes were proposed on heat recovery equipment and distribution equipment of a district energy system along with television set-top boxes.
- The government strengthened the reporting requirements for potentially abusive tax-avoidance transactions.
- The previously announced rules for GST/HST for direct sellers were clarified.
- Tariffs on a range of manufacturing machinery and equipment are proposed to be eliminated.
- The specified investment flow-through (SIFT) rules were tightened regarding reverse takeovers and the trading of losses.
- Various changes to international tax rules including non-resident trusts, foreign investment entities and tax credit generator schemes were proposed.
- Eligibility for the mineral exploration tax credit is extended for one year to flow-through share agreements entered into before April 1, 2011.
- Amendments to the Income Tax, GST/HST and other tax rules to allow for electronic issuance of various notices of assessment.