Federal Finance Minister Jim Flaherty tabled his sixth Budget in the House of Commons on Tuesday, March 22, in a political atmosphere that was perhaps more tense and confrontational than at any time in recent Canadian history.
As expected based on pre-Budget statements, immediately following the Minister’s speech both Liberal leader Michael Ignatieff and Bloc Quebecois leader Gilles Duceppe said their parties would reject the proposed Budget in Parliament. Somewhat less expected was that NDP leader Jack Layton also said his party would not support the Budget “as presented”. Failing some compromise, Prime Minister Stephen Harper will likely be obliged to call a federal election, perhaps as early as within the next few days, in which case the Budget’s proposals will not be enacted into law.
Most commentators characterized the Budget as a pre-election document aimed at demonstrating the government’s ongoing fiscal prudence and ”stay the course” approach to spending restraint and long-term deficit reduction. It predicted declining deficits from fiscal 2009 – 2010 through 2013 – 2014, leading to an essentially balanced budget in 2014 – 2015 and a budget surplus in 2015 – 2016.
The Budget does not propose any new taxes for individuals, and it reflects the government’s continuing commitment to previously announced corporate tax reductions. Nor does it propose any major new programs or spending initiatives — in fact it proposes a comprehensive review of government program spending aimed at increasing efficiency and effectiveness. It does, however, propose numerous tax and non-tax benefits to both individuals and businesses that could be interpreted as “pre-election goodies”. In addition, the political posturing may obscure the fact that the Budget proposes significant technical changes intended to eliminate tax loopholes.
Proposed benefits for individuals under the Budget include an enhancement of the Guaranteed Income Supplement (GIS) for low-income seniors; a new Family Caregiver Tax Credit; a new Children’s Art Tax Credit; and a one-year extension of the ecoEnergy Retrofit — Homes Program, at an estimated cost of some $870 million over the next two years. Also, doctors and nurses who practice in rural areas will be forgiven substantial student loans, while volunteer firefighters who perform at least 200 hours of service will receive additional tax credits.
Significant tax-related and other proposals are discussed below.
Where a partnership of corporations is established, it is common to set the year-end of the partnership on a date that is after the year-ends of the corporate partners. For example, if the corporate partners have March 31 year-ends, the partnership would generally be given an April 30 year-end in order to defer 11 months of income. This deferral opportunity will no longer be available. Henceforth, each corporate partner will be required to include stub period income in its current fiscal period rather than in the subsequent period. The new rules apply to all corporate partners (other than professional corporations) even if other members of the partnership are individuals or professional corporations.
The requirement to suddenly include 23 months of income in March 31, 2011, can be burdensome. Therefore, a transitional reserve is available to allow the stub period income to be brought into income over five years. The maximum reserve in the first fiscal period is 100%. The maximum reserves available in subsequent fiscal periods are 85%, 65%, 45%, 25% and 0%.
Partnerships, all of the members of which are corporations other than professional corporations, will be allowed a one-time election to change the partnership year-end if it desired to align the year-end of the partnership with that of one or more of its partners. The transitional relief described above will apply if this election is made.
STOP LOSS RULES
There are circumstances where a corporation can receive a tax-free intercorporate dividend and realize a capital loss on a redemption of shares even though there is no economic loss on the redemption. The Budget limits the situations in which this may apply. The new rules will not apply to private corporations that receive redemption proceeds on other private corporation shares.
ACCELERATED CAPITAL COST ALLOWANCE (CCA)
M&P equipment acquired before 2012 included in Class 29, is eligible for a 50% straight-line CCA rate, subject to the half year rule. The Budget has extended Class 29 treatment to eligible M&P equipment acquired before 2014. Eligible clean energy generation and conservation equipment, included in Class 43.2, is subject to a 50% declining balance CCA rate. The Budget expands Class 43.2 to include equipment that generates or conserves energy by using a renewable energy source (such as wind or solar), using fuels from waste, or making efficient use of fossil fuels.
EMPLOYEE PROFIT SHARING PLANS (EPSPs)
The government is undertaking a review of EPSPs and will have consultations to ensure that EPSPs are being used appropriately and the tax rules are also appropriate.
The Budget proposes a number of measures relating to charities, including: the requirement that qualified donees be included on a publicly available list maintained by the CRA; the potential suspension of receipting privileges, revocation of qualified donee status or monetary penalties associated with improper issuance of receipts; the extension of monetary penalties associated with the failure to file information returns to registered Canadian amateur athletic associations (RCAAAs); the extension to RCAAAs of other key regulatory requirements that apply to registered charities; and the ability of the Minister of National Revenue to refuse or revoke the registration of an organization if certain offenses are committed by certain members of the organization.
DONATIONS OF PUBLICLY LISTED FLOW-THROUGH SHARES
The current legislation provides that when a taxpayer makes a gift of publicly listed shares, the taxpayer will receive a donation receipt equal to the value of the shares and will not be required to include any resultant capital gain in the computation of income. In the case of a donation of publicly traded flow-through shares, the tax cost of the shares is often reduced to nil by virtue of the flow-through of deductions and credits. Therefore, the resultant capital gain, which is equal to the value of the share, is not taxed under the existing rules. The combination of the flow-through deduction and the elimination of the capital gain significantly reduce the after-tax cost of the donation. The Budget proposes that only the capital gain in excess of the original cost of the flow-through share will be exempt from tax. The rules will apply to flow through shares issued pursuant to an agreement entered into after Budget Day.
CHILDREN’S ARTS TAX CREDIT
For 2011 and subsequent taxation years, a Children’s Arts Tax Credit was introduced to provide a 15% non-refundable credit, based on an amount of up to $500 of eligible expenses per child paid in a year. An eligible expense includes artistic, cultural, recreational or development activities. However, in order to avoid duplication of claims, expenses which are eligible for purposes of the Child Care Expense Deduction, the Children’s Fitness Tax Credit or the Medical Expense Tax Credit will not be eligible for this tax credit. The credit will be available for the enrolment of a child, who is under 16 years of age at the beginning of the year, in an eligible program. A credit will also be available for a child who is eligible for the Disability Tax Credit and who is under 18 years of age at the beginning of the year. The credit may be claimed on an additional $500 disability supplement amount when a minimum of $100 is paid in eligible expenses.
VOLUNTEER FIREFIGHTERS TAX CREDIT
For 2011 and subsequent taxation years, a Volunteer Firefighters Tax Credit was introduced to provide a 15% non-refundable credit based on a flat amount of $3,000. A volunteer firefighter will qualify for this credit if they perform at least 200 hours of volunteer firefighting services in a taxation year for one or more fire departments. Eligible volunteer firefighting services consist primarily of responding to and being on call for firefighting, attending meetings held by the fire department and participating in required training. However, such eligible services do not include firefighting services provided to the fire department otherwise than as a volunteer.
A volunteer firefighter who claims this credit will not be eligible for the existing tax exemption of up to $1,000 for honoraria paid by a government, municipality or public authority in respect of firefighting duties. In addition, such payments must be reported to the CRA as part of the annual reporting of remuneration paid.
FAMILY CAREGIVER TAX CREDIT
For 2012 and subsequent taxation years, a Family Caregiver Tax Credit was introduced to provide a 15% non-refundable credit, based on a flat amount of $2,000. This credit will assist caregivers of dependants with a mental or physical infirmity, including spouses, common-law partners and minor children. Caregivers will be able to claim an enhanced amount for an infirm dependant under one of the existing dependency-related credits. Consequently, this enhancement would apply to one of the following credits: Spousal or Common-Law Partner Credit, Child Tax Credit, Eligible Dependant Credit, Caregiver Credit or Infirm Dependant Credit.
MEDICAL EXPENSE TAX CREDITS
Individuals may generally claim a Medical Expense Tax Credit in respect of eligible expenses paid for themselves, their spouse or common-law partner or their children under age 18. Caregivers may also claim this credit for a dependant relative if the caregiver pays their medical or disability-related expenses. Currently, the maximum claim by a caregiver for such a dependant is limited to $10,000 for a year. The Budget proposes to remove this $10,000 maximum for 2011 and subsequent taxation years.
For 2011 and subsequent taxation years, amounts eligible for the Tuition Tax Credit will include fees paid to an educational institution, professional association or provincial ministry to take an examination that is required to obtain a professional status or to be licensed or certified in order to practice a profession or trade in Canada.
The Budget proposes to reduce the minimum course duration requirement to a Canadian student in full-time attendance at a university outside Canada to three consecutive weeks, from 13 consecutive weeks, for purposes of claiming the Tuition, Education and Textbook credits. In addition, for EAP purposes, the minimum course duration is proposed to be reduced to three consecutive weeks when the student is enrolled at a university in a full-time course.
RESPs — ASSET SHARING AMONG SIBLINGS
For 2011 and subsequent taxation years, the Budget proposes to allow for transfers between individual RESPs for siblings, without tax penalties and without triggering the repayment of Canada Education Savings Grants, provided the beneficiary of the plan receiving the transfer of assets had not attained age 21 when the plan was opened. This Budget proposal will provide subscribers of separate individual plans with the same flexibility to allocate assets among siblings as currently exists for subscribers of family plans.
REGISTERED DISABILITY SAVINGS PLANS (RDSPs) —SHORTENED LIFE EXPECTANCY
The current RDSP tax rules require the repayment of all Canada Disability Savings Grants and Canada Disability Savings Bonds received in the 10 years prior to a withdrawal or termination of the plan. However, subject to specified limits and certain conditions, the Budget proposes to allow RDSP beneficiaries with a life expectancy of five years or less to withdraw more of their RDSP savings by permitting annual withdrawals without triggering the 10 year repayment rule.
RRSPs — ANTI AVOIDANCE RULES
The Budget proposes to enhance the current RRSP anti-avoidance rules to address concerns regarding the use of RRSPs in tax planning schemes, including “RRSP strips”, by introducing rules similar to the anti-avoidance rules which currently apply to Tax-Free Savings Accounts (TFSAs). This proposal deals with the advantage rules, the prohibited investment rules and the non-qualified investment rules.
INDIVIDUAL PENSION PLANS (IPPs)
The Budget has proposed two new measures with respect to IPPs. The first proposal will require annual minimum withdrawal amounts, similar to the current rules for RRIFs, once a plan member reaches age 72. The minimum withdrawal rules will apply to the 2012 and subsequent taxation years. For those IPP members who reached age 72 in 2011 or earlier, the required withdrawals will commence in 2012. For those IPP members who reach age 72 after 2011, the required withdrawals will commence in the year they reach age 72.
“KIDDIE TAX” ON CAPITAL GAINS
The tax on split income (the “kiddie tax”) applies to certain income received by a minor child with a parent resident in Canada. Split income currently includes taxable dividends received in respect of unlisted shares of Canadian and foreign corporations and partnership or trust income derived from providing property or services to a business carried on by a person related to the minor child. However, split income does not currently apply to capital gains realized by the minor child.
The Budget proposes to extend the kiddie tax to capital gains realized by a minor from a disposition of shares of a corporation to a person who does not deal at arm’s length with the minor, if taxable dividends on the shares would have been subject to the kiddie tax. Such capital gains will be treated as dividends, included in the minor’s split income and subject to the kiddie tax. In addition, because the gains are treated as dividends, they will not qualify for the capital gains exemption.
This proposal will apply to capital gains realized after March 22, 2011.
CANADA CHILD TAX BENEFIT (CCTB)
The CCTB is a non-taxable amount paid monthly to assist eligible families with the cost of raising children under age 18. Under the existing rules, an individual is not required to notify the Minister of National Revenue of a change in marital status. The Budget proposes to require an individual who receives the CCTB to notify the Minister of National Revenue of a change in marital status before the end of the month following the month in which the change in status occurs.
EXCISE TAX ACT MEASURES
This Budget introduces the measures to provide for GST/HST relief on the purchase of poppies and wreaths by Royal Canadian Legion branches and their Dominion or Provincial Command. The tax will be recovered by way of rebate and will apply to purchases after 2009.