Federal Budget Report
Highlights
- $9.2 Billion Debt Repayment in 2006/07
- Capital Gains Exemption Increased to $750,000
- New Child Tax Credit
- RRSP Age Limit Raised to 71
- Major International Tax Changes
Overview
“Aspire to a Stronger, Safer, Better Canada"
Today, the Honourable Jim Flaherty tabled his second budget as Minister of Finance. With the possibility of a federal election this spring, the Conservatives introduced an election-ready budget to bolster their chances of winning a majority should an election be called. The projected surplus for the 2006-07 fiscal year, originally forecast to be $600 million after a $3 billion planned debt reduction, is now expected to be $9.2 billion - all of which will go to debt reduction. A small surplus is forecast for 2007-08 and a balanced budget is forecast for 2008-09, after budgeted debt reductions of $3 billion each year.
As expected, the centerpiece of the budget was the increase in annual funding to the provinces, to address the "fiscal imbalance". Approximately $2.1 billion has been budgeted for larger equalization payments over the next two years to eligible provinces and territories. Additional funding was provided for post-secondary education, health care and the environment. Municipalities will applaud the government's move to extend the existing gas tax transfer to them until 2013-14, in an effort to provide cities with stable and predictable funding for infrastructure projects.
The budget also contained tax relief for both individuals and businesses. The government did guarantee tax relief for Canadians in the future when benefits are realized from federal debt reductions paid for by future surpluses. Surprisingly, however, there was no general capital gains tax relief as had been anticipated. A registered disability savings plan will help families save for the long-term financial security of a disabled child. Families with children and a stay-at-home parent will benefit from a new child tax credit and improvements to the spousal credit. Seniors will benefit from an increase to the age limit requiring conversion of maturing RRSPs to RRIFs or qualifying annuities.
Tax breaks for businesses were targeted. The lifetime capital gains exemption for small business owners, farmers and fishers was increased to $750,000. Changes to the tax depreciation rules will align write-off rates more closely with the useful lives of certain assets and allow new accelerated depreciation rules for manufacturing and processing equipment. However, in a major international tax change, restrictions will be put on the deductibility of interest on loans used to finance foreign affiliates of Canadian companies.
The following is a summary of the more important items of interest to our clients.
Key Economic Statistics
Surplus (in billions $) |
2006-2007 Revised |
2007-2008 Projected |
2008-2009 Projected |
| Budgetary Revenue |
232.3 |
236.7 |
243.5 |
| Program Spending |
189.0 |
199.6 |
206.8 |
| Operating Balance |
43.3 |
37.1 |
36.7 |
| Public Debt Charges |
34.1 |
33.8 |
33.7 |
| |
9.2 |
3.3 |
3.0 |
| Planned Debt Reduction |
9.2 |
3.0 |
3.0 |
| Remaining Surplus |
-- |
0.3 |
-- |
| Net Public Debt |
472.3 |
469.3 |
466.3 |
Personal Tax Measures
Spousal/Equivalent Credit
Families earning one income will get a tax break for 2007 and subsequent years. The non-refundable personal tax credit for the spouse or common law partner or wholly dependant relative amount, which is currently $7,581, will be increased to match the basic personal amount, which is $8,929 for 2007. Also, the income of the spouse/equivalent will reduce the credit amount (previously, the reduction was based on the dependant's income in excess of a threshold). Both credits will increase equally in the future.
New Child Tax Credit
Beginning in 2007, a new non-refundable tax credit is available for parents with children under the age of 18. The non-refundable child tax credit will be based on an amount of $2,000 for each child under the age of 18 years old at the end of the taxation year. The amount of the credit will be indexed. Either parent may claim the credit if the child resides together with the child's parents throughout the year. In other cases, the parent who is eligible to claim the wholly dependent person credit will make the claim. The full amount of the credit is available in the year of birth, death, or adoption of a child.
RRSP Changes
Currently RRSPs, RPPs and DPSPs mature by the end of the year in which the taxpayer turns 69. This means that no further contributions or benefit accruals are permitted and that benefits under the plans must begin to be paid. The budget proposes to increase the conversion age to 71 for individuals who turn 69 in 2007 or subsequent years. Individuals who turn 70 or 71 in 2007 will also benefit by being allowed to make RRSP contributions if they have RRSP contribution room available. These individuals will also be able to waive RRIF withdrawals until the year after they turn 71 or they can reconvert a RRIF to an RRSP.
The budget proposes to extend the definition of investments that are eligible for RRSPs to include any debt obligation that has an investment grade rating from a recognized credit rating agency and that is part of a minimum $25 million issuance, and any security (other than a futures contract) this is listed on a designated stock exchange (which will have a broader definition than prescribed stock exchanges). The changes will be effective after
March 18, 2007.
Lifetime Capital
Gains Exemption
Currently, up to $500,000 of capital gains realized on the disposition of qualified small business corporation shares and qualified farm and fishing property qualify for the lifetime capital gains exemption (LCGE). The budget proposes to increase the LCGE to $750,000 for dispositions of property that occur on or after March 19, 2007.
Registered Disability
Savings Plan
Beginning in 2008, the budget proposes to assist parents and others save for the long-term financial security of a child with a severe disability. The budget introduces a new Registered Disability Savings Plan (RDSP) with a Canada Disability Savings Grant (CDSG) program. A Canada Disability Savings Bond (CDSB) program is also planned to assist low-income families.
The RDSP and CDSG programs are modeled on the Registered Education Savings Plan (RESP). A plan can be established for any resident in Canada who qualifies for the disability tax credit. Contributions will be limited to a lifetime maximum of $200,000 and will not be tax deductible. The investment income earned will accrue tax-free and will be included in the beneficiary's income when paid out of an RDSP. The government will match a specified amount of RDSP contributions made in a year with a CDSG.
Working Income Tax Benefit
Effective for the 2007 tax year, the budget proposes to improve incentives to work for low-income Canadians by introducing the Working Income Tax Benefit (WITB). The WITB will provide a refundable tax credit equal to 20% of each dollar of earned income in excess of $3,000 to a maximum credit of $500 for single individuals and $1,000 for families (couples and single parents). The credit will be reduced when net family income exceeds certain thresholds. The WITB will include additional supplements for those with disabilities. WITB maximum benefit levels and thresholds will be indexed. Prepayment mechanisms of the WITB will be put in place beginning in 2008 (prepayments will be similar to the way one receives the goods and services tax credit).
Other Personal Changes
Several other personal tax changes were announced (effective for 2007 unless otherwise noted):
- Elementary and secondary school scholarships and bursaries - Scholarships and bursaries that are provided to attend elementary and secondary schools will be fully exempt.
- Meal expenses of truck drivers - The budget proposes to increase the deductible portion of the cost of food and beverages consumed by long-haul truck drivers during eligible periods of travel to 80%, over 5 years. This measure will also apply to employers that pay, or reimburse, such costs incurred by long-haul truck drivers that they employ.
- Northern Residents Deduction - The District Municipality of Mackenzie, British Columbia will be added to the eligible zones for the purposes of the northern residents deduction.
- Phased retirement - To provide more flexibility to employers to offer phased retirement programs, the budget proposes to allow an employee to receive up to 60% of their defined benefit pension while further benefits continue to accrue, beginning in 2008.
- Public transit credit - The public transit credit will be expanded to include payments for electronic payment cards and weekly passes where an individual purchases passes for 4 consecutive weeks (provided certain conditions are satisfied in each case).
- Mineral exploration tax credit - The mineral exploration tax credit will be extended to apply to agreements entered into on or before March 31, 2008.
- RESP Changes - The Registered Educations Savings Plan (RESP) rules will be amended as follows for contributions made after 2006:
- the annual contribution limit of $4,000 will be eliminated;
- the lifetime limit will be increased to $50,000 from $42,000;
- the maximum annual RESP contribution qualifying for the 20% grant from the government (Canada Education Savings Grant) will be increased to $2,500 from $2,000; and
- many students pursuing post-secondary education on a part-time basis will now be able to draw from their RESPs.
Business Tax Measures
Capital Cost Allowance
(CCA) Rates
Temporary Incentive for Manufacturing and Processing Machinery and Equipment - The budget proposes to temporarily increase the 30% CCA rate for manufacturing and processing machinery and equipment that would otherwise be included in Class 43, to a 50% straight-line deduction. The increased rate will apply to eligible machinery and equipment acquired on or after March 19, 2007 and before 2009. The half-year rule will continue to apply in the year of acquisition.
Other CCA Changes - The chart below lists current and revised CCA rates announced today (generally for assets purchased on or after March 19, 2007):
| |
Current Rate |
Proposed Rate |
| Building used for manufacturing and processing |
4% |
10% |
| Other non-residential buildings |
4% |
6% |
| Computer equipment (hardware) |
45% |
55% |
| Natural gas distribution pipelines |
4% |
6% |
| Liquefied Natural Gas Facilities |
4% |
8% |
Note on Non-Residential Buildings - The budget proposes to increase the CCA available for buildings used in manufacturing or processing to 10%. All other non-residential buildings will be eligible for a CCA rate of 6%. To be eligible for the additional allowances, a building must be placed into a separate class and at least 90% of the building (measured by square footage) must be used for the designated purpose at the end of the taxation year. Buildings used for manufacturing or processing that do not qualify for the additional 6% allowance will be eligible for the additional 2% allowance if at least 90% of the building is used for non-residential purposes at the end of the taxation year.
Accelerated CCA for Oil Sands - The budget proposes to phase out the accelerated CCA for oil sands projects - both mining and in-situ. The regular 25% CCA rate will remain in place. However, the accelerated CCA will continue to be available in full for assets acquired before March 19, 2007, and assets acquired before 2012 that are part of a project phase on which major construction began before March 19, 2007. For other assets, the additional accelerated allowance will be gradually phased down over the period from 2011 to 2015 (when it will be eliminated).
ITC for Child Care Spaces
The budget proposes a non-refundable investment tax credit (ITC) equal to 25% of eligible expenditures, to a maximum credit of $10,000 per licenced child care space created, to eligible taxpayers that carry on a business in Canada. The tax credit will be available in respect of eligible expenditures that are incurred on or after March 19, 2007.
International
Elimination of Withholding
Tax on Interest
The Canada-US Tax Treaty is currently being renegotiated and a conclusion is expected in the near future. Under the proposed agreement, cross-border interest payments will no longer be subject to taxation by the source country. Once an exemption from withholding tax on both arm's length and non-arm's length interest is implemented in the Canada-US Tax Treaty, it is proposed that Canadian withholding tax be eliminated on interest paid to all arm's length nonresidents, regardless of their country of residence. This will take effect as of the first calendar year following the entry into force of the treaty changes.
For non-arm's length interest payments, the maximum withholding rate will be reduced in three stages; for interest payments made in the first year following the entry into force of the US treaty, the withholding rate will be reduced to 7%; for the second year following the entry into force of the treaty, the rate will be reduced to 4%; and for the third and subsequent years following the entry into force of the treaty, the rate will be reduced to 0%.
International Tax
Fairness Initiative
The budget proposes significant changes to the system for the taxation of foreign affiliates of Canadian companies. The changes will include:
- restricting the deductibility of interest paid on debt used to invest in foreign affiliates;
- enhancing Canada's ability to collect tax information from other jurisdictions, through revised tax treaties and Tax Information Exchange Agreements (TIEAs) with non-treaty countries;
- modifying the exemption from Canadian tax for foreign-source active business income, (which is currently limited to income earned in countries with which Canada has a tax treaty), to also include income earned in a non-treaty jurisdiction which has signed a tax information exchange agreement with Canada;
- providing additional funding for auditing and enforcement by the Canada Revenue Agency (CRA); and
- the foreign affiliate technical amendments proposals that have previously been released for public comment will be reviewed and evaluated in the light of the measures proposed in the International Tax Fairness Initiative.
Interest Deductibility for Foreign Active Business Income - Existing rules permit Canadian corporations to deduct interest expense on debt that is incurred for the purpose of financing foreign affiliates even if the income generated in those affiliates may never bear Canadian tax. Interest expense on debt incurred to acquire debt or shares of a foreign affiliate will be pooled and deferred for deduction (net of exempt surplus received) if and as the foreign affiliate's shares generate non-exempt income for the corporation. The restriction will be phased-in. The restriction will apply to all new debt incurred on or after March 19, 2007. Existing non-arm's-length debt will be subject to restriction only for interest payable after 2008 or the expiry of its current term, whichever is sooner. The restriction will apply to all existing arm's-length loan for interest payable after 2009 or after the expiry of its current term whichever is sooner.
Revisions to the Definition of Active Business Income - Under current rules, Canadian companies can in, certain circumstances, ensure that their foreign affiliates' passive income (royalties, interest, lease revenue, etc.) is recharacterized as active business income with the result that:
- the rules which tax passive income of controlled foreign affiliates in the hands of the Canadian corporation do not apply to that recharacterized income; and
- the income may be eligible to be repatriated to Canada free of Canadian tax.
The budget proposes that a Canadian taxpayer be required to have a direct or indirect economic interest of at least 10% in the paying entity in order to have these payments treated as active business income. Previously, the paying entity needed only to be related to the Canadian corporation.
Improving Tax Information Exchange - Under current rules, dividends received out of active business income earned by foreign affiliates resident in treaty countries are exempt from Canadian tax. This exemption will be extended to include active business income earned by a foreign affiliate residing in a country that has agreed to a TIEA. Income earned in non-TIEA countries will now be taxed in Canada as Foreign Accrual Property Income, as the income is earned on an accrual basis.
For TIEA negotiations that begin after March 19, 2007 the accrual treatment will apply if those negotiations are not successfully completed within five years of the earlier of the commencement of negotiations and the date on which Canada proposed the negotiations. In the case where TIEA negotiations are already in progress, the accrual rules will apply if the negotiations are not completed before 2014.
Goods and Services Tax Measures
A number of proposals were introduced on GST, duties and excise taxes, as follows:
Foreign Conventions and Tour Packages - A new Foreign Convention and Tour Incentive Program is proposed to replace the GST Visitor Rebate Program effective April 1, 2007. The program will provide a GST rebate to a sponsor or non-registered organizer in respect of convention facilities and supplies related to conventions in Canada where at least 75% of the participants are nonresidents and the sponsor of the convention is a nonresident. Similarly, there will be a rebate for the accommodation portion of tour packages for nonresident individuals.
Exports of Intangible Personal Property - Subject to certain conditions, supplies of intangible personal property made after March 19, 2007 to a nonresident that is not registered for the GST will be zero-rated. The change will also apply to supplies made on or before that date, if GST was neither charged nor collected in respect of the supply.
48 Hour Travellers' Exemption - Returning residents that have travelled currently receive an exemption from customs duties, GST and federal excise taxes (as well as matching exemptions from provincial sales and product taxes). The budget proposes to double the exemption to $400 from $200 for Canadian residents returning after March 19, 2007 that are out of the country for more than 48 hours. The 24-hour and 7-day exemption dollar amounts will remain unchanged at $50 and $750, respectively.
Removal of Excise Tax Exemption for Renewable Fuels - Currently, renewable fuels are exempt from federal excise tax of 10 cents per litre for gasoline and 4 cents per litre for diesel fuel. The budget proposes to eliminate these exemptions for fuel delivered on or after
April 1, 2008
New Rebate for Fuel-Efficient Vehicles - Effective for purchases and leases after
March 19, 2007, fuel-efficient vehicles will be eligible for a rebate, which begins at $1,000 and increases to a maximum of $2,000.
Green Levy on Fuel-Inefficient Vehicles - The budget proposes a new green levy on fuel-inefficient passenger vehicles (but not pick-up trucks) in accordance with the vehicle's fuel efficiency rating. The tax applies to vehicles delivered or imported after March 19, 2007. It will not apply to dealers' inventories on March 19, 2007 or to vehicles sold under a written agreement prior to March 20, 2007.
Other Measures
New Agricultural Funding
On March 9, the Prime Minister announced new funding of $1 billion for the agricultural sector. This funding was described as the next step in terms of fulfilling a previous promise to replace the Canadian Agriculture Income Stabilization (CAIS) program. The $1 billion is actually divided into two parts:
- The federal government is negotiating with provincial governments to create contributory-style producer accounts (which appear to be similar to the former Net Income Stabilization Account system). It seems that producers would contribute to these accounts and the funds would be matched by the federal and provincial governments. Funding of $600 million will be made available to kick start these accounts (the provinces specifically do not have to match this amount).
- Direct payments of $400 million will be made to producers this year to help address the high costs of production over the past four years.
We will provide more information to clients in a Fast Fact once the details are announced.
Provincial Capital Taxes
To encourage provinces to reduce or eliminate capital taxes (many of which already are in the process of doing just that), a temporary financial incentive was proposed. To qualify for the incentive, on or before January 1, 2011 a province must eliminate its general capital tax or restructure an existing capital tax on financial institutions so that the tax is a minimum tax.
Trust T3 Information Returns
Commercial trusts have until 90 days after year-end to provide unit holders with T3 information slips. As these trusts have a December year-end, this can leave a relatively short time for taxpayers to prepare personal income tax returns. The government is working with the investment funds industry to develop a process that balances trusts' needs (in terms of calculating their income and preparing T3 slips) and the desire of individuals for sufficient time to prepare their returns. The government announced it expects to release draft regulations soon that will make the process for 2007 T3s more efficient.
Donations to Private
Foundations
Donations of publicly-listed securities to public charities have been eligible for a reduced inclusion rate on capital gains since 1997 and a complete exemption since May 2, 2006. The budget proposes to extend the zero inclusion rate for gains in respect of gifts of publicly-listed securities to private foundations made on or after March 19, 2007.
The budget also proposes to introduce an excess business holdings regime for private foundations, which will place limits on foundation shareholdings that take into account the holdings of persons not dealing at arm's length with the foundation. No reporting or divesture of shares will be required if the foundation holds 2% or less of a class of shares. When the ownership by the foundation exceeds 2% of any class of shares, reporting to Canada Revenue Agency (CRA) will be required and if the ownership, together with non-arm's length persons, exceeds 20%, a divesture of shares will be required. Transitional rules are provided for existing holdings.
Remittance and
Filing Thresholds
The budget proposes to ease the paperwork burden by reducing the frequency of tax remittances and filings for small businesses.
Increasing Corporate Income Tax Instalment Threshold to $3,000 - The budget proposes to triple, to $3,000 from $1,000, the threshold amount above which corporations are required to pay corporate income tax by instalment. This threshold change will apply in respect of corporate taxation years that begin after 2007. The balance-due day for the final payment of corporate tax for a taxation year will remain unchanged. The budget also proposes that the frequency of instalment payments by CCPCs be reduced from monthly to quarterly if:
- the taxable income of the corporation for either the current or previous year does not exceed $400,000;
- the corporation qualified for the small business deduction for either the current or previous year;
- the taxable capital employed in Canada of the corporation does not exceed $10 million in either the current or previous year; and
- the corporation has no tax compliance irregularities during the preceding 12 months.
These changes will apply for corporate taxation years that begin after 2007. The quarterly instalments will be due on the last day of each quarter of the corporation's taxation year. The CRA will mail instalment reminders to eligible corporations.
Increasing Personal Income Tax Instalment Threshold to $3,000 - The budget proposes to increase the personal instalment threshold amount to $3,000 ($1,800 for individuals resident in Quebec). These changes to the instalment threshold amounts will apply to the 2008 and subsequent taxation years. The CRA will continue to notify individuals who are required to remit instalments of the amount of each instalment, determined on the basis of tax information that is available to the CRA.
Increasing Quarterly Remittance Threshold for Source Deductions to $3,000 - The budget proposes to increase the average monthly threshold amount from $1,000 to $3,000 by which an employer is entitled to remit on a quarterly versus monthly basis. These changes will apply to calendar years beginning with 2008.
Increasing GST/HST Annual Filing and Annual Remittance Thresholds - The budget proposes to:
- triple the taxable supplies threshold, at or below which registrants can file a GST/HST return annually, to $1,500,000 from $500,000; and
- double the net tax threshold, below which annual GST/HST filers can make one tax remittance, to $3,000 from $1,500.
These measures will apply to fiscal years that begin after 2007.
Donation of Medicines for the
Developing World
In addition to a donation deduction equal to the fair market value of the property gifted, the budget proposes allowing corporations that make donations of medicines from their inventory to claim a special additional deduction equal to the lesser of 50% of the amount, if any, by which the fair market value of the donated medicine exceeds its cost and the cost of the donated medicine. This additional deduction will be available only when the donee is a registered charity that has received a disbursement under a program of the Canadian International Development Agency and the gift is made in respect of activities of the charity outside of Canada. This measure will apply to gifts made on or after March 19, 2007.
Federal Budget Report 2007 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.
