Budgets from minority governments can usually be described as “pre-election,” and federal Finance Minister Jim Flaherty’s second Budget, tabled March 19, generally warrants this description. In a Budget speech entitled “Aspire to a stronger, safer, better Canada,” the Minister proposed a variety of tax-reduction measures along with substantially higher payments to the provinces and increased spending on environmental programs and health care, while still reducing the federal debt. The budget also proposes to fulfill an election campaign promise by legislating the direction of debt interest savings to ongoing personal income tax reductions.
PERSONAL TAX MEASURES
Lifetime Capital Gains Exemption
The lifetime capital gains exemption will be increased from $500,000 to $750,000 for gains realized on dispositions after March 18, 2007 of qualified farm property and qualified small business corporation shares.
Age Limit for Maturing RPPs And RRSPs
The Budget proposes to increase the age at which Registered Pension Plans (RPPs) and Registered Retirement Savings Plans (RRSPs) mature from the end of the year in which the RRSP annuitant or RPP member turns 69 to age 71. This proposal will benefit individuals who turn 69, 70 or 71 in 2007 or subsequent years in that they will be able to make contributions in 2007 and 2008 where contribution room is available.
The minimum annual withdrawal from a Registered Retirement Income Fund (RRIF) will be waived for 2007 and 2008 for annuitants who turn 70 in 2007 and for 2007 for annuitants who turn 71 in 2007. A RRIF annuitant who is 71 or younger at the end of 2007 will be able to reconvert the RRIF to an RRSP, as long as this RRSP is converted back into a RRIF before the end of the year in which the annuitant turns 71.
Registered Education Savings Plans (RESPs)
The Budget proposes to eliminate the maximum annual contribution and increase the lifetime limit from $42,000 to $50,000. In addition, the maximum annual RESP contribution qualifying for the 20% Canada Education Savings Grant (CESG) will be increased from $2,000 to $2,500 for 2007 and subsequent years. Consequently, the annual CESG will be increased from $400 to $500 for each qualifying child. However, the lifetime CESG limit of $7,200 will not be increased.
The RESP rules will be expanded for 2007 and subsequent years to allow qualifying part-time programs which currently do not meet the 10 hour per week requirement and Educational Assistance Payments (EAPs) from the RESP where the program requires at least 12 hours per month of courses. Under this proposal, students 16 or over will be able to receive up to $2,500 of EAPs for each 13-week semester of part-time study.
Registered Disability Savings Plan (RDSP)
The Budget proposes a new RDSP commencing in 2008, generally based on the existing Registered Education Savings Plan (RESP), combined with a Canada Disability Savings Grant (CDSG) program and a Canada Disability Savings Bond (CDSB) program.
Any person resident in Canada eligible for the disability tax credit (DTC), or their parent or other legal representative, will be eligible to establish an RDSP. Contributions to an RDSP will not be deductible but the investment income earned in the RDSP will not be taxed while the funds are retained within the RDSP. Funds paid out of the RDSP will be taxable to the extent that they exceed the contributions to the plan.
Contributions are limited to a lifetime maximum of $200,000 for the disabled beneficiary, with no annual limit. There will be no restriction on who can contribute. Contributions can be made until the end of the year in which the beneficiary reaches 59.
RDSP contributions will qualify for CDSGs, to a lifetime limit of $70,000, until the end of the year in which the beneficiary reaches age 49, at matching rates of 100%, 200% or 300%, depending upon family net income and the amount contributed.
Independent of contributions by or on behalf of the beneficiary, and any CDSGs that the RDSP receives, CDSBs of up to $1,000 will be paid annually to an RDSP for low income families to a maximum lifetime limit of $20,000.
Payments from an RDSP will be required to commence by the end of the year in which the beneficiary reaches 60. Where the beneficiary ceases to qualify for the DTC or dies, an RDSP will be required to repay all CDSGs and CDSBs, along with the related investment income earned in the ten years prior to a payment from the plan. The remaining funds in the RDSP, net of contributions, will then be taxable to the beneficiary or their estate.
Truck Drivers’ Meal Expenses
Long-haul truck drivers will be entitled to a larger deduction for meal expenses. Currently, their deduction is limited to 50% of the costs incurred. This deduction will be increased to 60% for expenses after March 19, 2007 and before 2008, 65% in 2008, 70% in 2009, 75% in 2010 and 80% thereafter. To be eligible the truck driver must be away for at least 24 hours and be transporting goods to or from a location at least 160 km from the employer’s location or the self-employed trucker’s residence. In addition, a long – haul truck is considered to be a truck designed for, and primarily used for, hauling freight and have a gross vehicle weight rating in excess of 11,788 kg. The increased deduction will also be available to employers who reimburse costs incurred by long-haul truck drivers.
Working Income Tax Benefit
Commencing in 2007, a new refundable credit will be available to certain low-income persons with either employment or business income. The credit will be 20% of earned income in excess of $3,000 to a maximum of $500 ($1,000 for couples and single parents). The credit will be reduced by 15% of net family income in excess of $9,500 ($14,500 for couples and single parents).
An additional credit will be allowed, for a person with a disability, of 20% of earned income in excess of $1,750 to a maximum of $250.
Commencing in 2007, a new credit may be claimed for children under the age of 18. The credit is based on $2,000 and will result in a reduction in income tax payable of $310 per child in 2007.
The base for the credit which may be claimed for a spouse or wholly-dependent person will be increased by $1,348 to the same amount as the basic personal credit.
Public Transit Tax Credit
Effective January 1, 2007, the public transit tax credit will be extended to cost-per-trip electronic payment cards if the cards are used for at least 32 one-way trips in a 31-day period. In addition, four consecutive weekly passes providing unlimited transit use for a period of 5 to 7 days will also qualify for the credit.
Trust T3 Income Tax Returns
Many taxpayers and tax professionals have concerns about the existing due-date for T3 slips. The Government is proposing to develop a process that will have commercial trusts, including income trusts, prepare their T3 returns in sufficient time for taxpayers to prepare their tax returns.
BUSINESS TAX MEASURES
Capital Cost Allowance (CCA)
The following highlights some of the CCA rate changes:
|Manufacturing and processing (M&P) machinery and equipment (1)||30%||50%|
|Buildings used for M&P (2)||4%||10%|
|Other non-residential buildings (3)||4%||6%|
- The proposed 50% rate is straight-line and subject to the half-year rule. The increase is temporary and applies to M&P machinery and equipment acquired after March 18, 2007 and before 2009.
- The building (or the new portion) must be acquired after March 18, 2007. The asset must be placed in a separate class to get the new rate and at least 90% of the square footage must be used for M&P by the end of the taxation year.
- The building (or the new portion) must be acquired after March 18, 2007. The building must be placed in a separate class to get the new rate.
Investment Tax Credit for Child Care Spaces
To encourage businesses to invest in child care, businesses will be entitled to a 25% investment tax credit on eligible expenditures to a maximum credit of $10,000 per licensed child care space created.
There will be provisions to recapture the investment tax credit if the property is disposed of within 60 months or there is a change in the use of the property.
INSTALMENTS AND TAX FILINGS
The threshold requiring an individual to make quarterly instalments will be increased from $2,000 to $3,000 for the 2008 taxation year.
The instalment threshold for corporations will be increased from $1,000 to $3,000 for taxation years commencing after 2007 with certain Canadian-controlled private corporations being allowed to make quarterly instalments instead of monthly instalments.
For fiscal years that begin after 2007, the taxable supplies threshold at or below which registrants can file a GST/HST return annually is increased from $500,000 to $1,500,000, and the net tax threshold before being required to make quarterly instalments of GST/HST is increased from $1,500 to $3,000.
OTHER TAX MEASURES
The zero capital gain for donations of qualifying publicly-listed marketable securities will be extended to donations after March 18, 2007 to private foundations with certain ownership restrictions
In 2006, scholarships and bursaries received by students qualifying for the education credit were fully exempted from tax. Generally, these were students in post-secondary programs. This Budget extends the exemption to students in elementary and secondary schools.
Withholding Tax on Interest
Canada and the US have both agreed to eliminate withholding tax, currently 10%, on interest payments to residents of the other jurisdiction. For non-arms length payments this measure will be phased in over three years. The rate of withholding will be 7% for the first calendar year after the treaty amendment comes into force and 4% the second year.
Canada will unilaterally eliminate Canadian withholding tax on all interest paid or credited to arm’s length residents of all other countries on or after the date the changes to the Canada-US tax treaty come into effect.
48 Hour Travelers’ Exemption
Travelers returning to Canada after March 19, 2007 will be allowed to bring back goods valued at up to $400 (previously $200) without having to pay duties or taxes, including customs duty, GST/HST and federal excise tax, provided they have been out of Canada for 48 hours or more.
The dollar limits that apply to 24-hour and 7-day travel remain unchanged, as do the limits on alcohol and tobacco.
“Gas Guzzlers” & Fuel Efficient Vehicles
A tax on fuel inefficient vehicles is being introduced for certain new vehicles delivered to dealers or imported after March 19, 2007. On the other side of the ledger, the government is introducing a program to provide rebates of $1,000 to $2000 on the purchase or lease (minimum 12 months) of fuel efficient vehicles after March 19, 2007. The vehicles eligible for rebate will be listed on Transport Canada’s website (www.tc.gc.ca). The rebate payments are expected to begin in the fall of 2007.
Overall, the budget provided some significant benefits to individual Canadians and businesses, although it did not include broad based tax rate cuts. We are available at your convenience to discuss the impact of these new provisions on your business or personal affairs. Your local DJB professionals can help you develop a plan to implement any changes that may be warranted to minimize your income tax expense.