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INTRODUCTION
Minister of Finance James M. Flaherty tabled the 2007 federal budget today. The following is a summary of the more significant tax and related measures.
MEASURES AFFECTING INDIVIDUALS
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 small business corporation shares and qualified farm and fishing property, subject to transitional rules for 2007. This proposal can benefit individuals who own qualifying property, whether or not they have previously utilized any of the $500,000 exemption.
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 years of age to 71 years of age. This proposal will benefit individuals who turn 69 in 2007 or in a subsequent year. The measure will also benefit individuals who turn 70 or 71 years of age in 2007. If contribution room is available, RRSP contributions will be permitted to be made in 2007 and 2008 for the former (age 70 in 2007), and in 2007 for the latter (age 71 in 2007).
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.
Amendments will be permitted to existing registered plan annuities to reflect the later conversion age. Employers will also be allowed to amend their RPPs to allow benefits to accrue and contributions to be made in respect of employees who are 71 or younger at the end of 2007.
Phased Retirement
The Income Tax Regulations will be amended to allow an employee to receive pension benefits from a defined benefit RPP of up to 60% of their accrued defined benefit pension, while accruing additional pension benefits on a current service basis in respect of their employment after their pension has commenced. Qualifying employees must be at least 55 years old and eligible to receive a pension without incurring an early retirement reduction.
Employment after the commencement of the pension can be either full- or part-time. The prohibition on accruing additional benefits while receiving a pension will still apply to designated plans as well as to persons who are “connected” with their employer, as would generally be the case with an Individual Pension Plan (IPP).
It is proposed that this measure be effective for 2008 and subsequent taxation years.
Registered Education Savings Plans (RESPs)
The Budget proposes to eliminate the maximum annual contribution of $4,000 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 recognize qualifying part-time programs which do not meet the current 10 hour per week requirement. Educational Assistance Payments (EAPs) from the RESP will be allowed where the program requires at least 12 hours per month of courses. Students aged 16 or over will be able to receive up to $2,500 of EAPs for each 13-week semester of part-time study.
Quebec’s recent budget proposed to introduce an education savings incentive program similar to the CESG program. The government supports this initiative and will make any federal legislative changes that may be necessary to ensure that the proposed program is treated in a manner consistent with the CESG program.
Registered Disability Savings Plan (RDSP)
The Budget proposes a new RDSP program, generally based on the principles of the existing Registered Education Savings Plan (RESP). The Government will work with financial institutions to put the necessary administrative mechanisms in place to allow RDSPs to be offered commencing in 2008.
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 tax deductible and 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 years of age.
RDSP contributions will qualify for Canada Disability Savings Grants (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. Families with a net income of up to $74,357 will qualify for a 300% grant on the first $500 of contribution and a 200% grant on the next $1,000 of contribution. Families with a net income over $74,357 will qualify for a 100% grant on the first $1,000 of contribution.
Independent of contributions by or on behalf of the beneficiary, and any CDSGs that the RDSP receives, Canada Disability Savings Bonds (CDSBs) of up to $1,000 will be paid annually to an RDSP until the end of the year in which the beneficiary reaches 49. The maximum of $1,000 is payable where family net income does not exceed $20,883 and a portion of the $1,000 is payable where family net income does not exceed $37,178. CDSBs are not contingent on contributions to an RDSP. There will be a lifetime limit of $20,000 on CDSBs.
Payments from an RDSP will be required to commence by the end of the year in which the beneficiary reaches 60 and will be subject to an annual maximum determined by reference to life expectancy and the value of the property of the plan. Only the beneficiary or their legal representative will be allowed to receive payments. Contributors will not be entitled to a refund of contributions.
Where the beneficiary ceases to qualify for the DTC or dies, an RDSP will be required to repay to the government all CDSGs and CDSBs (and associated investment income) paid in the ten preceding years. 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.
Working Income Tax Benefit
Commencing in 2007, a new refundable credit will be available to 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 eligible for the disability tax credit of 20% of earned income in excess of $1,750 to a maximum of $250.
To qualify for the credit the individual must be resident in Canada throughout the year and have attained age 19 by the end of the year. However, persons who are full-time students for more than three months will not qualify unless they have a dependent child.
Scholarships 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.
Non-Refundable Credits
Commencing in 2007, a new credit may be claimed for children under the age of 18. The credit is based on $2,000 per child and will result in a reduction in income tax payable of $310 per child in 2007.
The base for the credit that may be claimed for a spouse or wholly-dependent person will be increased, also effective in 2007, to the same amount as the basic personal credit. This base will be reduced by the net income of the dependant.
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. To be eligible, the transit authority must record the usage and the cost of the trips and provide receipts to the individual with this information.
Four consecutive weekly transit passes will also qualify for the credit. The weekly passes must provide for unlimited transit use for a period of 5 to 7 days.
Mineral Exploration Tax Credit
The 15% mineral exploration tax credit has been extended for another year. This will apply to flow-through share agreements entered into before March 31, 2008 if the expenditures are incurred before the end of 2009.
Trust T3 Income Tax Returns
Many taxpayers have expressed concerns about the existing due-date for T3 slips. The Government is proposing to develop a process that will enable commercial trusts, including income trusts, to prepare their T3 returns in sufficient time for taxpayers to prepare their tax returns.
Instalments
The threshold requiring an individual to make quarterly instalments will be increased from $2,000 to $3,000 for the 2008 taxation year. For residents of Quebec the threshold will be increased to $1,800 from $1,200.
Donations to Private Foundations
The zero capital gain inclusion rate for donations of qualifying publicly-listed marketable securities to public charities will be extended to donations made after March 18, 2007 to private foundations. Private foundations will be subject to special excess business holdings rules, which can limit the foundation’s holdings of shares, including unlisted shares. Such rules will take into account the holdings of persons not dealing at arm’s length with the foundation.
MEASURES AFFECTING BUSINESSES
Capital Cost Allowance (CCA)
The rate of CCA for certain assets acquired after March 18, 2007 will be changed as follows:
- Buildings used for manufacturing or processing, from 4% to 10%
- Other non-residential buildings, from 4% to 6%
- Computer equipment, from 45% to 55%
- Natural gas distribution pipelines, from 4% to 6%
- Liquefied natural gas facilities, from 4% to 8%
- Manufacturing and processing machinery and equipment (class 43) acquired prior to 2009, from 30% to 50% straight-line
Investment Tax Credit for Child Care Spaces
Businesses will be entitled to a 25% investment tax credit on eligible expenditures incurred on or after March 19, 2007 to a maximum credit of $10,000 per child care space created. The primary business of the taxpayer must be other than the provision of child care. The new spaces can be in a new or existing licensed facility and can be for the benefit of children of employees or of other children.
Instalments and Remittances
The instalment threshold for corporations will be increased from $1,000 to $3,000 for taxation years commencing after 2007.
Certain Canadian-controlled private corporations will be allowed to make quarterly instalments instead of monthly instalments. To qualify for this measure the company must be entitled to the small business deduction, the taxable income of the associated group must not exceed $400,000 and the taxable capital of the associated group must not exceed $10 million, all in either the current or previous year. In addition, within the past 12 months, the company must have had no compliance irregularities under the Income Tax Act or GST portions of the Excise Tax Act. This measure will apply to taxation years commencing after 2007.
Employers with annual source deduction remittances of less than $1,000 and a perfect compliance history can remit source deductions on a quarterly basis. Commencing in 2008, the threshold will increase to $3,000. The CRA will advise an employer if they are eligible for quarterly remittances.
SALES AND EXCISE TAX MEASURES
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.
Green Levy on “Gas Guzzlers”
A tax on fuel inefficient vehicles is being introduced for new vehicles delivered to dealers or imported after March 19, 2007. The Green Levy, ranging from $1,000 to $4,000, will apply to new automobiles (and imported used vehicles) designed primarily to carry passengers including station wagons, vans and SUVs, but not pick-up trucks.
Rebate for Fuel Efficient Vehicles
To complement the Green Levy a program to provide rebates on the purchase of fuel efficient vehicles will be introduced. The basic rebate amount of $1,000 to a maximum of $2,000 is applicable for vehicle purchases or leases (minimum 12 months) after March 19, 2007. The vehicles eligible for rebate will be listed on Transport Canada’s website (www.tc.gc.ca).
Excise Tax on Renewable Fuels
Effective for fuel delivered on or after April 1, 2008 the excise taxes of 10 cents per litre on gasoline and 4 cents per litre on diesel fuel will also apply to renewable fuels used as motive fuels including biodiesel and alcohol-based fuels.
Exports of Intangible Personal Property (IPP)
Effective March 20, 2007 supplies of IPP, such as computer software, made to non-residents who are not GST/HST registrants will be zero rated for GST/HST purposes. Certain exceptions will apply.
Foreign Convention and Tour Incentive Programs
The GST/HST Visitor Rebate Program will end on March 31, 2007 as previously announced. In order to ensure foreign convention organizers and tour operators remain competitive, a number of new measures are being introduced:
- for foreign conventions (where at least 75% of participants are non-residents and the sponsor is a non-resident), beginning after March 31, 2007 the organizer will be eligible for a rebate of the GST/HST in respect of the convention facility or supplies relating to the foreign convention;
- sponsors of foreign conventions will not be required to charge GST/HST on any admission fee to the convention;
- for Canadian conventions non-resident attendees will enjoy a GST/HST exemption on the portion of the admission fee related to the convention facility and related supplies and 50% of the admission fee that is attributable to food and beverage;
- non-resident exhibitors at Canadian or foreign conventions will not be required to pay GST/HST nor be eligible for GST/HST rebates in respect of the convention facility or other related supplies;
- non-GST/HST registered organizers of foreign conventions will be entitled to file a rebate claim with CRA for GST/HST paid in respect of a convention facility or related supplies;
- GST/HST registered suppliers to foreign conventions will be able to credit the amount of the GST/HST rebate directly to non-GST/HST registered organizers and claim a deduction equal to that amount on their GST/HST return for supplies related to foreign conventions which become payable after March 31, 2007; and
- non-resident tour packages where the first night of accommodation in Canada is after March 31, 2007 will be eligible for a rebate of the GST/HST on the accommodation portion of the tour package.
GST/HST Filing and Remittance Thresholds
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.
INTERNATIONAL
Foreign Affiliates
The Budget has targeted the interest deductibility on borrowed funds used to invest in a foreign affiliate. Subject to certain grandfathering rules, the interest deduction is restricted on new debt incurred after March 19, 2007. The restricted deduction will apply to existing non-arm’s length debt after 2008 and to existing arm’s length debt after 2009.
The restricted interest will be tracked and carried forward. It will be deductible only if and when the foreign affiliate’s shares produce taxable income in Canada. An anti-avoidance rule will ensure that indirect financing cannot be used to avoid the new restrictions.
The Budget has also introduced a new advantage. Prior to the Budget, exempt surplus included only after-tax active business income earned in a treaty country. Henceforth, exempt surplus will also include after-tax active business income earned in a country with which Canada has entered into a tax information exchange agreement. On the other hand, if the country in which the income is earned has not entered into such an agreement with Canada, the income will now be taxed on the accrual basis (FAPI) as it is earned by the foreign affiliate. In the past, such income has been taxed in Canada only when distributed to the Canadian holding company as a dividend.
Canada-US Tax Treaty
Canada and the US have both agreed to eliminate withholding tax, currently 10%, on interest payments to residents of the other jurisdiction.
Where the interest is paid or credited to an arm’s length party, the withholding tax will be eliminated in the first calendar year following the entry into force of the amendment to the Canada-US tax treaty. Where the interest is paid or credited to a non-arm’s length party, the elimination of withholding tax will be phased in. It will be reduced to 7% in the first calendar year after the treaty amendment comes into force, to 4% in the second year and will be eliminated in the third 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
Canada and the US have agreed in principle to extend benefits under the treaty to US-resident Limited Liability Companies.
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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