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INTRODUCTION
Minister of Finance James M. Flaherty tabled the 2008 federal budget today. The following is a summary of the more significant tax and related measures.
MEASURES AFFECTING INDIVIDUALS
Tax-Free Savings Account
The Budget proposes a TFSA, which is a registered account that individuals will be able to utilize for their savings. Commencing in 2009, Canadian residents, age 18 or over, will be able to contribute up to $5,000 annually (indexed annually after 2009) to a TFSA. Any portion of this $5,000 annual contribution limit not utilized in one year can be carried forward indefinitely to a future year. Any amounts withdrawn from the TFSA in a year will be added to the individual's limit in the following year. Any excess contributions over the available limit will be subject to a penalty tax of one per cent per month.
Although contributions to the TFSA will not be deductible for income tax purposes, the investment income earned within the TSFA will not be taxable. Withdrawals can be used for any purpose and will not be subject to tax or taken into account in determining eligibility for income benefits or credits such as the age credit or Old Age Security benefits/clawback.
Interest on money borrowed to invest in a TFSA will not be tax deductible. However, unlike RRSPs, individuals will be allowed to use their TFSA assets as collateral for a loan.
The income attribution rules will not apply to funds borrowed by a spouse or common-law partner to invest in his/her TFSA.
A TFSA will lose its tax-exempt status upon the death of the individual. Consequently, investment income and gains that accrue after the individual's death will be taxable unless the individual names his/her spouse or common-law partner as the successor account holder, in which case the account will maintain its tax-exempt status. Alternatively, the assets of the deceased's TFSA may be transferred to a TFSA of the surviving spouse or common-law partner.
An individual who becomes a non-resident of Canada will be allowed to maintain his/her TFSA, which will continue to be exempt from tax. However, contributions will not be allowed while the individual is a non-resident and contribution room will not accrue for any year throughout which the individual is a non-resident.
The Canada Revenue Agency (CRA) will determine TFSA contribution room based on tax returns filed. Individuals who have not filed tax returns in prior years will be permitted to establish their entitlement by filing such returns or by other means acceptable to CRA.
Financial institutions eligible to issue RRSPs will be permitted to issue TFSAs.
A TFSA will generally be permitted to hold the same investments as an RRSP. Unfortunately, a TFSA will not be allowed to hold investments in any entity with which the individual does not deal at arm's length, including an entity of which the individual is a "specified shareholder" (generally a 10 per cent or greater interest).
Registered Education Savings Plan
A RESP must currently be terminated by the end of the year that includes the 25th anniversary of the opening of the plan unless the beneficiary of a single-beneficiary RESP qualifies for the Disability Tax Credit. In addition, contributions may not be made to a family plan for a beneficiary who is 21 years of age or older.
The Budget proposes to increase the above time limits by an additional 10 years for 2008 and subsequent taxation years.
RESP beneficiaries are currently eligible to receive Educational Assistance Payments (EAPs) from the plan if they are enrolled in a qualifying program at the time. The Budget proposes to allow RESP beneficiaries to receive EAPs for six months after ceasing to be enrolled in a qualifying program after 2007.
Registered Disability Savings Plans
If a RDSP beneficiary ceases to be eligible for the Disability Tax Credit, the current RDSP rules require that the proceeds of the plan be paid out to the beneficiary and the plan collapsed. There is a concern that this requirement could, contrary to the wishes of the parent, enable the beneficiary to rescind his/her Disability Tax Credit certification and gain full access to the funds.
Consequently, the Budget proposes to provide instead for a mandatory collapse of the plan only when the beneficiary's condition has factually improved to the extent that the beneficiary no longer qualifies for the Disability Tax Credit. This proposal will be effective for 2008 and subsequent taxation years.
Dividend Tax Credit (DTC)
The Budget proposes to adjust the dividend gross-up and DTC for eligible dividends to reflect the corporate tax rate reductions. The gross-up of eligible dividends will be reduced from 45 per cent to 44 percent effective January 1, 2010, 41 per cent effective January 1, 2011, and 38 per cent effective January 1, 2012. The enhanced DTC will also change, on the same schedule, from 11/18 of the gross-up amount to 10/17, 13/23 and 6/11.
Medical Expense Tax Credit
The Budget proposes to expand the list of medical expenses eligible for the tax credit to reflect new technologies and other disability-specific or medically related developments.
Northern Residents Deduction
Individuals who live in prescribed areas in northern Canada for at least six consecutive months may claim the northern residents deduction. The deductible amount varies depending upon where the individual lives. The Budget proposes to increase this deduction by 10% for 2008 and subsequent taxation years.
Mineral Exploration Tax Credit
The mineral exploration tax credit is a benefit, in addition to the deduction of Canadian exploration expenses, equal to 15 per cent of specified mineral expenses incurred in Canada and renounced to the shareholders. The Budget proposes to extend eligibility for this credit to flow-through share agreements entered into by March 31, 2009, which can support eligible exploration until the end of 2010.
MEASURES AFFECTING BUSINESSES
Scientific Research and Experimental Development
Under the current system, Canadian-controlled private corporations (CCPCs) are entitled to a tax credit or a cash refund of investment tax credits (ITCs) based on the following formula:
| Amount of expenditure |
ITC Rate |
Refund of ITC |
| First $2,000,000 |
35% |
100% |
| Amount over $2,000,000 |
20% |
40% |
Eligibility for the 35% rate is phased out according to a formula should the corporate group's taxable capital exceeds $10 million and/or if the corporate group's taxable income exceeded $400,000 in the preceding taxation year.
The Budget proposes to increase both the expenditure limit eligible for the 35% rate and the phase-out ranges for taxation years that end on or after February 26, 2008 (subject to proration for straddle years):
| |
Current |
Proposed |
| Taxable income from $400,000 to |
$600,000 |
$700,000 |
| Taxable capital in excess of $10 million |
$15 million |
$50 million |
Due to the increase in the expenditure limit to $3,000,000, a corporation may now receive a $1,050,000 refund versus the current maximum of $700,000.
A taxpayer cannot currently claim an ITC for SR&ED expenditures carried on outside Canada. The Budget proposes that certain salaries or wages incurred outside of Canada ("foreign salaries") on or after February 26, 2008, (subject to proration for straddle years) will be eligible for ITCs. More specifically:
- The taxpayer must directly undertake the activities outside of Canada solely in support of SR&ED that the taxpayer carries on in Canada.
- Foreign salary eligibility is limited to 10% of the total salaries and wages incurred.
- Foreign salaries will not include salaries and wages based on profits or bonus or salary or wages subject to tax in the foreign country.
Manufacturing and Processing - Accelerated Capital Cost Allowance
Generally, qualifying M&P equipment would be included in Class 43, which permits tax depreciation rate of 30% calculated on a declining balance basis. The 2007 Budget provided that qualifying equipment acquired before 2009 would go into Class 29, a 50% straight-line class.
In addition, Budget 2008 proposes to extend accelerated capital cost allowance treatment for manufacturing and processing equipment for three more years. For eligible assets acquired in 2009, a 50% straight-line rate will be provided. Eligible assets acquired in 2010 will be eligible for a 50% declining balance rate in the first year, 40% the following year and 30% thereafter. Eligible assets acquired in 2011 will be eligible for a 40% declining balance rate in the first year and 30% thereafter.
All the above measures are subject to the half-year rule.
Remittance of Source Deductions
Currently, there is a penalty of 10 per cent for any late remittance of source deductions. This penalty is increased to 20 per cent when the failure to remit is made knowingly or in circumstances amounting to gross negligence. The Budget proposes to enact a graduated penalty regime for remittances due after February 26, 2008, as follows:
- 3 per cent if the remittance is one to three days late;
- 5 per cent if the remittance is four or five days late;
- 7 per cent if the remittance is six or seven days late, and
- 10 per cent if the remittance is more than seven days late.
Currently, withholdings must be remitted directly to a financial institution in order to avoid late remitting penalties. The Budget proposes to allow withholdings due on or after February 26, 2008, to be remitted directly to the CRA, without penalty, as long as the remittance is received at least one full day before the due date.
Publicly traded trusts
Publicly traded income trusts and partnerships (SIFTs) are generally subject to a special tax on distributions. The tax is comprised of a federal element (reduced to 15% by 2012 in step with the federal corporate rate reduction) and a provincial element (currently 13%).
For 2009 and subsequent taxation years, the provincial element will be computed differently. Distributions allocated to Quebec will not be subject to this provincial element because Quebec imposes its own tax.
Donations of Exchangeable Securities
The existing capital gains tax exemptions for donations of publicly traded securities will be extended to capital gains realized on the exchange of certain exchangeable securities where specific conditions have been met and the listed securities are donated within 30 days. Private Charitable Foundations
Private foundations are restricted regarding the percentage of the shares of any class of a corporation that they can own.
The foundation can own up to 2% without restriction.
If the foundation, along with non-arm's-length persons, owns more than 20% (the "20% limitation"), the foundation must divest itself of shares so that either its own shareholdings fall to 2% or less or the 20% limitation is met. For shares held on March 18, 2007, the 20% limitation is subject to an exemption for shares that the donor required the foundation to retain and are subject to grandfathering rules.
Generally, for taxation years commencing on or after March 19, 2007, the Budget proposes to exempt unlisted shares held on March 18, 2007, from these restrictions. The Budget also proposes to broaden certain anti-avoidance rules to make it more difficult to avoid the restrictions.
Donation of Medicines
The 2007 Budget introduced an incentive for corporations to donate medicines for international use by providing for an additional special deduction. In order for the corporation to qualify for this deduction currently, the donee must be a registered charity that has received a disbursement under the Canadian International Development Agency (CIDA) and the gift is made for activities outside Canada. The Budget proposes to change the definition of an eligible charity to one that, in the opinion of the Minister of International Cooperation, meets the conditions prescribed by regulation.
SALES AND EXCISE TAX MEASURES
GST/HST Health Measures
Effective February 27, 2008, the Budget will extend GST/HST exempt /zero-rated status to a range of health care services, prescription drugs and medical devices.
GST/HST exempt status will apply to the services of specially designed training to assist individuals to cope with a disability or disorder if:
- the training is supplied by a government;
- the cost of training is fully or partially reimbursed under a government program, or
- a health professional whose services are GST/HST exempt prescribes the training to allow the patient to better cope with the disability or disorder.
Effective February 27, 2008, nursing services rendered to a patient by a registered nurse, a registered nursing assistant, a licensed or registered practical nurse or a registered psychiatric nurse will be exempt from GST/HST regardless of where the service is performed.
All supplies of medical drugs to final consumers will be zero-rated when they are prescribed by health professionals who are authorized to prescribe such drugs under provincial or territorial legislation. The zero-rating is effective for all supplies made after February 26, 2008, as well as supplies made on or before February 26, 2008, if the GST/HST was neither charged nor collected.
GST/HST Treatment of Long-Term Care Facilities
The Budget clarifies the GST/HST treatment of long-term residential care facilities to ensure the GST New Residential Rental Property Rebate and GST/HST exempt status will apply to such facilities on going forward basis.
The current exemption for residential units supplied to individuals will be replaced with a requirement that possession or use of the residential units be given to individuals for the purpose of their occupancy as a place of residence. This relieving provision may also apply to transactions on or before February 26, 2008, when specific legislative requirements have been met.
GST/HST Treatment of Property Leases for Wind and Solar Power Equipment
Effective February 27, 2008, GST/HST will not apply on payments for a supply of a right of entry or use to generate or evaluate the feasibility of generating electricity from the sun or wind. This proposal also applies to supplies made under such arrangements before February 26, 2008, but only with respect to amounts that become payable subsequent to February 26, 2008.
Tobacco Excise Duties
The Budget proposes a number of changes to enhance tobacco taxation enforcement and compliance:
- possession and importation of tobacco manufacturing equipment will be limited to persons holding a licence to manufacture tobacco products;
- all manufactured tobacco of 50 grams or less will be subject to duties applicable to 50 gram packages;
- the rate of duty on tobacco sticks will be increased effective February 27, 2008, to equate to the rate applied on cigarettes, and
- the current rule allowing Canadian producers of tobacco products to pre-pay the duty on tobacco intended for sale at duty free shops will be extended to foreign producers.
Section 116 Certificates
When a non-resident who has not obtained a certificate under section 116 of the Act disposes of "taxable Canadian property" (TCP), the purchaser must withhold and remit a portion of the proceeds to the CRA on account of the non-resident's possible Canadian income tax liability. If the purchaser fails to follow these procedures, the purchaser then becomes liable for the tax. The current system is cumbersome, inefficient and does not take into account gains that are exempt under tax treaties. The Budget proposes to eliminate the need for a Section 116 Certificate after 2008 if:
- the disposition of the TCP by the non-resident is a treaty-protected property, or
- the purchaser, after reasonable inquiry, concludes that the TCP is treaty-protected and that the vendor was resident in that treaty country.
In the first instance, a related purchaser must report the transaction to the CRA within 30 days of the disposition. In the second instance, all purchasers must report the transaction to the CRA within 30 days after the disposition.
If no Canadian taxes are payable by the non-resident, the vendor may not have to file a Canadian tax return to report the disposition.
As always, readers are reminded that while budget proposals are customarily given the effect of law immediately, the amending legislation, when ultimately adopted by Parliament, may be altered to some degree.
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