2005 Federal Budget Report
February 23, 2005
Highlights
- Personal Tax Credits Increased RRSP Limits Increased RRSP Foreign Investment Limits Eliminated Corporate Tax Rates to Fall in 2008
- CCA Rates Increased on Certain Assets
Overview
"Delivering on Commitments"
Today, Ralph Goodale tabled his second budget as Finance Minister and the first minority government budget in 25 years. Not surprisingly, the budget was designed to have something for everyone and to ensure that the government does not fall, precipitating an election that no party seems to want.
The projected surplus for the 2004-05 fiscal year, originally forecast to be $4 billion before contingency and prudence reserves, is now expected to be $3 billion before these reserves. This will be used to pay down government debt. In November 2004 the government had projected a surplus of $8.9 billion - it appears that $5.9 billion of this has now been targeted at new spending and revenue initiatives announced today. Balanced budgets are forecast for 2005-06 and 2006-07 with contingency and economic prudence reserves totalling $4 billion and $5 billion respectively.
As expected, today's budget contained a number of new spending initiatives but most will be paid for over a number years. The Canadian military will receive a huge cash injection of $13 billion over five years. Child care programs will benefit from $5 billion over 5 years. There was also substantial new money targeted at an environmental package designed in part to meet Canada's commitments under the Kyoto accord, cash for the CBC and more money for foreign aid. The budget also contained the first payout of a promise to give cities a share of federal gas tax revenues. Some of these spending initiatives will be financed from the results of the recent expenditure review program, which is expected to produce $11 billion in savings over 5 years.
The budget also contains some targeted tax relief for all Canadians but most will benefit in future years and not today. The basic personal exemption will be increased to at least $10,000 by 2009 - this is expected to remove up to 860,000 Canadians from the federal tax rolls. Corporations will benefit from future corporate tax reductions and from targeted changes to capital cost allowance rules to allow businesses to write-off certain capital investments at a faster pace.
The following is a summary of the more important items of interest to our clients.
Key Economic Statistics |
Surplus (in billions $) |
2004-2005
Revised |
2005-2006
Projected |
2006-2007
Projected |
Budgetary Revenue |
195.8 |
200.4 |
210.1 |
Program Spending |
158.1 |
161.3 |
169.5 |
Operating Balance |
37.7 |
39.1 |
40.6 |
Public Debt Charges |
34.7 |
35.1 |
35.6 |
Contingency and Prudence Reserves |
3.0 |
4.0 |
5.0 |
Surplus |
-- |
-- |
-- |
Net Public Debt (with contingency reserve applied) |
498.5 |
495.5 |
492.5 |
Personal Tax Measures
RRSP/RPP Limits Increased
The budget proposes increases to the RRSP and registered pension plan (RPP) contribution limits. For RRSPs, the annual maximum contribution limit will be increased beginning with contributions for 2007. Proposed increases to RRSP contribution limits are set out in the chart below which highlights the contribution limit for RRSPs both before and after today's proposed changes. The limits will be indexed to average wage growth starting in 2011.
RRSP Contribution Limits |
Year
|
Existing Rules |
Proposed Changes |
Maximum
contribution allowed for year
|
Earned income required in preceding year to make maximum contribution |
Maximum
contribution allowed for year
|
Earned income required in preceding year to make maximum contribution |
2005 |
$16,500 |
$91,667 |
$16,500 |
$91,667 |
2006 |
18,000 |
100,000 |
18,000 |
100,000 |
2007 |
Indexed |
Indexed |
19,000 |
105,556 |
2008 |
Indexed |
Indexed |
20,000 |
111,111 |
2009 |
Indexed |
Indexed |
21,000 |
116,667 |
2010 |
Indexed |
Indexed |
22,000 |
122,222 |
2011 |
Indexed |
Indexed |
Indexed |
Indexed |
The limit for money-purchase retirement pension plans (RPPs) will be increased by a similar amount each year. The money-purchase RPP limit will be $19,000 for 2006, $20,000 for 2007, $21,000 for 2008 and $22,000 for 2009 with increases being indexed beginning in 2010. For defined-benefit retirement pension plans, the maximum pension benefit per year of service will be $2,111 for 2006, $2,222 for 2007, $2,333 for 2008 and $2,444 for 2009 (indexed thereafter).
Foreign Property Rule and Qualified Investments
The Foreign Property Rule limits the amount of foreign property that pension funds, RRSPs and other tax-deferred retirement plans can hold. Foreign property generally consists of shares, units and debt issued by non-resident entities, investments in trusts that hold excess foreign property and investments in certain partnerships. The budget proposes to remove the current limit of 30% effective for 2005, allowing unlimited investment in foreign property within tax-deferred retirement plans.
The rules governing RRSPs and certain other tax-deferred income plans also provide that these plans must invest only in "qualified investments". For investments made on or after February 23, 2005, the budget proposes to add investment-grade gold and silver bullion coins and bars, and certificates on such investments to the list of qualified investments.
Personal Credits Increased
Since 2000, when full indexation was restored to the federal personal income tax system, most tax credit amounts (including the personal credit and the credit for spouses/common-law partners) have increased annually due to inflation. For 2005, the credit amounts stood at $8,148 and $6,919 for the basic personal credit and spousal/partner credit respectively. Today, the Finance Minister announced there will be increases to both credits in addition to the annual inflation adjustment, to ensure the credit amounts will be at least $10,000 and $8,500 respectively for the 2009 taxation year. The actual increases (not including annual inflation increases) are set out below:
The actual federal tax credit is obtained by multiplying the credit amount by 16%. The spousal/partner credit is subject to a reduction when the spouse/partner's income exceeds a threshold. This threshold will be adjusted to reflect the above increases.
Adoption Expense Tax Credit
There are significant costs attached to the decision to adopt a child. The budget proposes to introduce a 16% non-refundable tax credit for eligible adoption expenses (to a maximum of $10,000) for the adoption of a child under the age of 18 years, beginning in 2005. The credit is claimed in the year the adoption is completed.
EMS Vehicles
Employees who have the personal use of an employer-provided automobile are required to include a formula-based taxable benefit in their income. Currently certain vehicles, including ambulances and clearly marked emergency-response fire and police vehicles, are excluded from the definition of automobile. Beginning in 2005, the budget proposes to extend the exclusion rules to clearly marked Emergency Medical Services (EMS) vehicles, used for the purpose of providing emergency paramedic services.
Refundable Medical Expense Supplement
The refundable medical expense supplement provides assistance for above-average medical and disability-related expenses to low-income working Canadians. The budget proposes to increase the maximum supplement from $571 to $750 in 2005. The maximum amount will continue to be indexed.
Changes for the Disabled
The Technical Advisory Committee on Tax Measures for Persons with Disabilities was established in April 2003, with a mandate to advise the Ministers of Finance and National Revenue on how to address issues related to tax measures for persons with disabilities. Based on the recommendations of the Committee, the budget proposes a number of income tax changes which focus on three key areas:
- Eligibility for the disability tax credit (DTC);
- Reducing barriers to employment and education; and
- Measures for caregivers and children with disabilities.
Eligibility for the DTC
The Disability Tax Credit (DTC) is the primary tax measure concerned with those non-discretionary disability-related expenses that are difficult to quantify. The budget proposes to clarify and broaden the eligibility for the DTC in a number of areas. In addition, for the 2005 and subsequent taxation years, eligibility is extended to include individuals with multiple restrictions where the cumulative effect of those restrictions is equivalent to a marked restriction in a single basic activity of daily living.
Disability Supports Deduction
The 2004 budget introduced the "disability supports deduction" for persons with disabilities for the cost of disability supports (e.g. sign-language interpretation services, talking textbooks, etc.) incurred for the purposes of employment or education. The 2005 budget proposes to greatly expand the list of expenses eligible for the disability supports deduction.
Children with Disabilities
The budget proposes to increase the maximum annual Child Disability Benefit for the 2005-06 benefit year to $2,000 from $1,681.
Tax Relief for Caregivers
Taxpayers paying medical or disability-related expenses on behalf of a dependent relative may claim those expenses under the medical expense tax credit. It is proposed that the eligible maximum amount be increased to $10,000 from $5,000 for 2005 and subsequent years.
Medical Expense Tax Credit
The budget proposes to clarify the medical expense tax credit provisions regarding the eligibility of home renovation expenses. The list of eligible medical expenses will also be expanded to include equipment to treat psoriasis or other skin disorders, operating costs of an oxygen concentrator and certain drugs, including medical marihuana.
RESPs
A registered education savings plan (RESP) is a tax-assisted vehicle designed to help families accumulate savings for the post-secondary education of their children. Students with disabilities often have special needs that must be accommodated in order to pursue post-secondary education. Beginning in 2005, the budget proposes to extend the time limits during which contributions may be made to an RESP and the maximum period during which an RESP can remain in existence for students with disabilities to 25 years and 30 years respectively.
Business Tax Measures
Corporate Tax Rates Cut
Currently, the basic Canadian corporate income tax rate is 29.12% for income earned in Canada. Where a corporation earns income other than investment income, this tax rate is subject to a 7% reduction, which reduces the effective tax rate to 22.12%.
The Finance Minister has proposed two changes today. First, effective January 1, 2008, the corporate surtax (which has an effective tax rate of 1.12% of income) will be eliminated. In addition, the general federal tax rate on business income will be reduced from 21% to 20.5% on January 1, 2008, to 20% on January 1, 2009 and to 19% on January 1, 2010.
Current and proposed rates are set out below:
Capital Cost Allowance (CCA)
The budget proposes CCA rate increases for the following types of assets.
- Hydrocarbon transmission pipelines for petroleum, natural gas or related hydrocarbons will increase from 4% to 8%.
- Pumping and compression equipment related to a transmission pipeline for petroleum, natural gas or related hydrocarbons will increase to 15%.
- Combustion turbines that generate electricity will increase from 8% to 15%.
- Electricity transmission and distribution equipment and structures of a distributor of electricity will increase from 4% to 8%.
- Non fibre-optic cable used for telephone, telegraph or data communications will increase from 5% to 12%.
- Certain highly fossil-fuel efficient and renewable energy generation equipment will increase from 30% to 50%.
Taxpayers will also be able to file an election to include transmission pipelines and related pumping and compression equipment in a separate CCA class so that a terminal loss can be claimed in the year of disposition.
These changes will generally apply for acquisitions on or after February 23, 2005.
SR&ED Investment Tax Credit
The budget proposes to extend the definition of Canada for purposes of the SR&ED incentives to include expenditures incurred within 200 nautical miles of the Canadian coastline, an area commonly referred to as Canada's Exclusive Economic Zone. This measure will apply to expenditures incurred on or after February 23, 2005.
Agricultural Cooperatives
It is proposed to permit eligible members of eligible agricultural cooperatives to defer the inclusion in income of all or a portion of any patronage dividend received as an eligible share until the disposition of the share. Agricultural cooperatives that are eligible for this measure must be resident in Canada and have, as their principal business activity, farming or the provision of goods or services required for farming (other than financial services) which must be carried on in Canada. The member of the cooperative must generally meet these same criteria.
In general, an eligible agricultural cooperative will be allowed to deduct the amount of eligible shares issued in respect of a taxation year as a patronage dividend up to a maximum amount of 85% of its income for that taxation year attributable to business done with members. The share must be issued after 2005 and before 2016, and must not, except in the case of death, disability or ceasing to be a member, be redeemable or retractable within five years of its issue. In addition, if the share is pledged as collateral security or the paid-up capital of the share is reduced (other than by way of a redemption) a disposition of the share will be deemed to have occurred.
Other Measures
Excise Tax on Jewellery
An excise tax of 10% is imposed on jewellery. The tax is payable by manufacturers on the sale price of domestically-produced items and by importers on the duty-paid value. The budget proposes that the excise tax on jewellery be phased-out through a series of rate reductions over the next four years. The rate will be reduced to 8% effective February 24, 2005 and will be reduced an additional 2 percentage points in each of the next four years.
GST/HST Health Care Rebate
Charities and government-funded non-profit organizations are currently eligible for a 50% rebate of the GST and the federal component of the HST. The budget proposes to increase the rebate to 83% for charities and non-profit organizations that provide health care services similar to services provided in hospitals, effective January 1, 2005. Under this proposal, provincially funded non-profit public health care facilities established and operated for the medical or surgical treatment of individuals will be entitled to the enhanced rebate. Government funded charities and non-profit organizations that supply ancillary support services to hospitals and eligible health care facilities or provide therapeutic or palliative care to individuals in their homes will also be entitled to the 83% rebate.
The proposed measure will benefit ambulatory care hospitals, cancer clinics, community health centres, regional health authorities and entities that provide ancillary support to health care facilities such as laboratory and diagnostic services and centralized laundry and in-patient meal services.
Eligible entities are entitled to the 83% rebate on purchases used in fulfilling their medical mission. Where all or substantially all of their GST/HST during a rebate claim period are incurred on qualifying health care expenditures, eligible entities will qualify for the 83% rebate on all GST/HST incurred during that period.
Directors' Liability for GST/HST Refunds
A director of a corporation can be held liable for the corporation's unremitted net GST/HST amounts if the director has not exercised due diligence in ensuring that the remittances are made. The budget proposes to extend a director's liability to GST/HST tax refund amounts to which the corporation is not entitled for amounts paid on or after Royal Assent.
GST/HST Web Registry
Registrants are required to ensure that input tax credits are claimed only where GST/HST has been paid to suppliers who are registered for GST/HST purposes. The budget proposes to establish a publicly accessible Web-based GST/HST registry to facilitate the verification of a supplier's GST/HST registration. It is intended that this Registry be operational within 12 months of this measure receiving Royal assent.
International Tax Enforcement
The budget proposes to invest $30 million annually in enhanced audit and collection activities to combat international tax evasion and aggressive international tax planning. These resources will be used to increase audit and compliance capacity with respect to cross-border and international transactions using a risk-based approach.
Update on Outstanding Tax Issues
Deductibility of Interest and Other Expenses
In October 2003, the Department of Finance released for public consultation a package of legislative proposals regarding the deductibility, for income tax purposes, of interest and other expenses. These proposals are commonly referred to as the REOP or reasonable expectation of profit rules and have been the subject of an extended period of public consultation with many commentators expressing concerns with the proposals, in particular the codification of a "reasonable expectation of profit" test. The Department of Finance is developing a more modest legislative initiative to respond to the concerns raised while still achieving the Government's objectives, which are to be released shortly for public consultation.
Cross-Border Share-for-Share Exchanges
Prior budgets indicated the Government's intention to develop rules that would provide an explicit rollover for cross-border share-for-share exchanges. A discussion draft of proposed income tax amendments to implement this initiative will be released in the near future.
Other Outstanding Legislative Proposals
The Government intends to introduce legislation to implement outstanding legislative proposals concerning foreign investment entities and non-resident trusts, draft income tax technical amendments and a number of previously announced sales tax technical measures.
Income Trusts
To deal with a perceived risk to tax revenue posed by business income trusts and other flow-through entities, the 2004 budget proposed to limit the level of pension fund investment in business income trusts. However, in the spring of 2004, the Government suspended implementation of these measures to engage in further consultation. This year's budget eliminates the foreign property rule restriction that applies to investments in limited partnerships. Limited partnerships have many of the same characteristics, from a tax policy perspective, as business income trusts and other flow-through entities, and correspondingly pose many of the same policy issues. The Government will consult stakeholders on tax issues related to business income trusts and other flow-through entities and a consultation paper will be released by the Department of Finance in the near future.
Taxation Agreements with First Nations
The Government confirmed its willingness to discuss and put into effect direct taxation arrangements with interested First Nations. The Government of Canada is also prepared to facilitate the entering into of taxation arrangements between provinces/territories and interested First Nations.
Federal Budget Report 2005 is a publication of BDO Dunwoody LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. For additional information, contact your BDO advisor or visit us at www.bdo.ca.
