2010 Federal Budget Report
Highlights
- Revised Deficit of $53.8 Billion for 2009-10
- Projected Deficit of $49.2 Billion for 2010-11
- Major Changes to Stock Options Rules Announced
- Revised Foreign Investment Entity and Non-Resident Trust Rules Released
- Tax Avoidance Transaction Reporting Rules Introduced
Overview
“Leading the Way on Jobs and Growth"
On March 4, 2010, the Honourable Jim Flaherty tabled his fifth budget as Minister of Finance. With signs that an economic recovery is underway, today's budget focused on ensuring the recovery continues while having a strategy to get the country's books back in balance. The government plans to substantially eliminate the deficit by the 2014-15 fiscal year. This will be accomplished by capping spending on foreign aid, limiting increases in the defense budget and freezing the budgets of government departments. The spending increases proposed for the fiscal year ending March 31, 2011 is $1.1 billion, the lowest year over year increase since 1997. Spending on seniors, health care and innovation will not be affected.
The deficit for the 2009-10 fiscal year is projected to be $53.8 billion, up from the original forecast of $33.7 billion. The projected deficit for the 2010-11 fiscal year is $49.2 billion.
The government will continue with the full implementation of the stimulus package, as announced in last year's budget, in an effort to continue to generate jobs and growth in the economy. This spending should be completed by March 31, 2011.
The budget did contain tax measures to close what are perceived as unfair tax loopholes. The stock option rules will be amended to ensure that when an employee is eligible for the stock option deduction as a result of a "cash out" of their stock option rights, the employer cannot get a deduction for these payments. In addition, current rules allowing a deferral of the recognition of stock option benefits of up to $100,000 annually are being repealed. Certain loss trading activities involving income trusts and partnerships have now been blocked. And the government has put the tax community on notice that a consultation process will be started with the goal of introducing disclosure rules for tax avoidance transactions entered into after 2010. The budget also saw the reintroduction of revised proposals designed to prevent Canadians from using foreign entities to avoid paying Canadian tax on investment income (the Non-Resident Trust and Foreign Investment Entity rules).
The following is a summary of the more important items of interest to our clients.
Key Economic Statistics
|
|
2009-2010
Revised
|
2010-2011
Projected
|
2011-2012
Projected
|
|
Budgetary Revenue
|
213.9
|
231.3
|
249.0
|
|
Program Expenses
|
237.8
|
249.2
|
241.4
|
|
|
-23.9
|
-17.9
|
7.6
|
|
Public Debt Charges
|
29.9
|
31.3
|
35.2
|
|
Budgetary Balance
|
-53.8
|
-49.2
|
-27.6
|
|
Federal Debt
|
517.5
|
566.7
|
594.3
|
PERSONAL TAX MEASURES
Employee Stock Options
The 2010 budget proposes three significant changes to the employee stock option rules.
Stock Option Cash Outs
If an employee acquires a security of his or her employer under a stock option agreement in the course of his or her employment, the difference between the fair market value of the security at the time the option is exercised and the amount paid by the employee to acquire the security is treated as a taxable employment benefit. If certain conditions are met, the employee is entitled to a deduction equal to one-half of the employment benefit (the stock option deduction).
The tax rules currently ensure that when an employee acquires securities under a stock option agreement, only one deduction (at the employee level) is provided. This is because employers are generally prevented from claiming a tax deduction for the issuance of a security. It is possible, however, to structure employee stock option agreements so that if employees dispose of their stock options rights for a cash payment from the employer, the employment benefit is eligible for the stock option deduction while the cash payment is fully deductible by the employer. The budget proposes to prevent both the stock option deduction and a deduction by the employer from being claimed for the same employment benefit in respect of transactions occurring after 4 pm EST on March 4, 2010.
Tax Deferral Election and Remittance Requirement
The benefit arising when an employee acquires securities under a stock option agreement is treated as employment income for tax purposes. Any subsequent change in the value of the optioned securities is treated separately as a capital gain or loss upon disposition of the securities. Under certain conditions, an employee of a publicly-traded company may elect to defer the recognition of the employment benefit for tax purposes until the disposition of the optioned securities. If an employee elects to defer recognition of the employment benefit and the value of the optioned securities subsequently decreases, the employee may not have sufficient proceeds from the disposition of the securities to satisfy his or her tax obligation on the employment benefit. The budget proposes to repeal the tax deferral election for employee stock options exercised after 4 pm EST on March 4, 2010. The deferral of stock option benefits for most Canadian-controlled private corporation options will continue to be allowed.
In addition the budget proposes to ensure that an amount in respect of tax on the value of the employment benefit associated with the issuance of a security is required to be remitted to the government by the employer. This measure will prevent situations in which an employee is unable to meet his or her tax obligation as a result of a decrease in the value of these securities. The effective date of this measure varies depending on the circumstances.
Special Relief for Tax Deferral Elections
Some taxpayers who took advantage of the tax deferral election on stock options have experienced financial difficulties as a result of a decline in the value of the optioned securities to the point that the value of the securities is less than the deferred tax liability on the underlying stock option benefit. The budget proposes to provide relief to ensure that the tax liability on a deferred stock option benefit does not exceed the proceeds of disposition of the optioned securities, taking into account tax relief resulting from the use of capital losses on the optioned securities against capital gains from other sources. Only stock option benefits for which an election to defer taxation has been made will qualify for this special tax treatment. Taxpayers must dispose of their optioned securities before 2015 in order to be eligible for the special tax treatment. The budget is also proposing to allow taxpayers to apply this provision retroactively for stock option benefits realized prior to the budget date.
Child Benefits in Shared Custody Situations
The Canada Child Tax Benefit (CCTB), Universal Child Care Benefit (UCCB) and child component of the Goods and Service Tax (GST) credit are currently only available to one parent (the parent who primarily fulfills the responsibility for care and upbringing of the child). Commencing July 2011, parents who share custody of a child will both be able to receive these benefits. This measure will apply when a child lives more or less equally with their parents who live separately. Each parent will receive one-half of the annual entitlement that they would have received if they were the sole person receiving benefits, paid monthly for the CCTB and UCCB and paid quarterly for the GST credit.
Universal Child Care Benefit for Single Parents
The Universal Child Care Benefit (UCCB) provides families with $100 per month for each child under the age of six years. The benefit is included in the income of the lower income spouse or common law partner, or in the case of a single parent, in the single parent's income and taxed at his or her marginal tax rate. For 2010 and subsequent years, single parents will have the option of including the total UCCB amount received for all their children in their income or in the income of the dependant that they claim the eligible dependant credit for (generally a dependant under 18 who resides with the single parent and is wholly dependent on the single parent for support). Where a single parent is not eligible for the eligible dependant credit, they will have the option of including the total UCCB in the income of the child for who the UCCB is paid.
Medical Expenses for Purely Cosmetic Procedures
After March 4, 2010, expenses incurred for purely cosmetic procedures will be ineligible for the medical expense tax credit. This will generally include surgical and non-surgical procedures purely aimed at enhancing one's appearance. Cosmetic procedures will continue to qualify if they are required for medical or reconstructive purposes.
RRSP Proceeds Rollover to RDSP
Special rules exist in the Income Tax Act that allow certain Registered Retirement Savings Plans (RRSP) proceeds, Registered Retirement Income Fund (RRIF) proceeds, and Registered Pension Plan (RPP) proceeds that occur on death to be excluded from the deceased's income when the distributions are made to the deceased's surviving spouse or common-law partner, or to a financially dependent child or grandchild. When these rules apply, the distributions are instead included in the income of the recipient and an offsetting deduction allows the recipient to transfer these amounts on a tax deferred basis to the RRSP of the recipient. These special rules will be extended to allow rollovers of a deceased's RRSP proceeds to the Registered Disability Savings Plan (RDSP) of a financially dependent infirm child or grandchild who meets the age and residency requirements for RDSP contributions. RDSPs are tax assisted savings vehicles where investment income accumulates tax-free. These measures will be effective for deaths occurring on or after March 4, 2010, but transitional rules will be in place to effectively allow this measure to apply as of January 1, 2008.
RDSP Grant and Bond Carry Forward
The Government of Canada supports RDSPs by providing Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs). Entitlement to these grants and bonds is based on annual RDSP contribution amounts, depend on the beneficiary's family income, and is subject to lifetime limits. Beneficiaries are currently unable to carry forward unused CDSG and CDSB entitlements to future years. To recognize the fact that families of children with disabilities may not be able to contribute annually to RDSPs, a 10 year carry forward of the CDSG and CDSB entitlements will be introduced and will be available starting in 2011.
Provincial Payments to RESPs and RDSPs
The Government of Canada provides financial assistance to Canadian families saving for their children's education through Registered Education Savings Plans (RESPs) and the associated Canada Education Savings Grants and Canada Learning Bond. As discussed above, the government also helps families with severely disabled children save for their children's long-term financial security through RDSPs and the associated CDSGs and CDSBs. Provincial and territorial governments may also support the efforts of parents to save by making payments into RESPs and RDSPs. These provincial initiatives must currently be prescribed in order to ensure they do not attract or reduce federal grants and bonds. As a result of Budget 2010, these programs will no longer need to be prescribed. Payments made to a RESP or a RDSP through a program funded, directly or indirectly, by a province or administered by a province will not attract or reduce federal grants and bonds. In the case of programs that are administered by a province, this measure will apply to payments made after 2006. In the case of programs that are not administered by a province, this measure will apply to payments made after 2008.
Scholarship Exemption and Education Tax Credit
Effective for the 2010 and subsequent taxation years, the scholarship exemption for post-secondary scholarships, fellowships, and bursaries will be narrowed for post secondary programs that consist primarily of research. For these programs, the Education Tax Credit and the scholarship exemption will be available only if it leads to a college diploma, bachelor, masters, doctoral, or equivalent degree. Post-doctoral fellowships will therefore be taxable.
In addition, amounts will be eligible for the scholarship exemption only to the extent that they can reasonably be considered to be received in connection with enrolment in eligible education programs for the duration of the period of study related to the scholarship. If amounts are provided in connection with part-time programs, the scholarship exemption will generally be limited to the amount of tuition paid for the program plus the costs of program related materials.
U.S. Social Security Benefits
Currently, Canadian residents receiving benefits under the social security legislation in the United States are required to include 85% of those benefits in computing their Canadian income (prior to 1996 they were required to include only 50%). Effective for benefits received on or after
January 1, 2010, the 50% inclusion rate will be reinstated for Canadian residents (and their spouses or common-law partners eligible to receive survivor benefits) who have been in receipt of U.S. Social Security benefits since before January 1, 1996.
Mineral Exploration Tax Credit
Flow-through shares allow companies to renounce or "flow-through" tax expenses associated with their Canadian exploration activities to investors, who can deduct the expenses in calculating their own taxable income. The mineral exploration tax credit is an additional benefit, available to individuals who invest in flow-through shares, equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. The eligibility for the mineral exploration tax credit will be extended for one year, specifically to flow-through share agreements entered into on or before March 31, 2011.
BUSINESS TAX MEASURES
SIFT Conversions and Loss Trading
Aggressive schemes have been designed recently to use the tax rules for specified investment flow-through (SIFT) trusts and partnerships to achieve, in the government's view, inappropriate tax loss trading. In response, the budget proposes to extend the acquisition of control of rules to ensure that they also apply to impose restrictions on the use of losses in situations where units of a SIFT trust or SIFT partnership are exchanged for shares of a corporation. The budget also proposes to amend the acquisition of control rules to ensure that they do not inappropriately restrict the use of losses where a SIFT trust is wound up and distributes the shares of a corporation it holds. It is proposed that these amendments apply to transactions undertaken after 4 pm EST on
March 4, 2010, other than transactions that the parties are obligated to complete pursuant to the terms of an agreement in writing between the parties entered into before that time.
Television Set-top Boxes: Accelerated CCA
Satellite set-top boxes used to decode digital television signals are currently eligible for a declining-balance capital cost allowance (CCA) rate of 20% and cable set-top boxes are eligible for a declining-balance CCA rate of 30%. The budget proposes to increase the CCA rates for both types of set-top boxes to 40%. The change will be effective for set-top boxes acquired after
March 4, 2010 and that have not been used or acquired for use before March 5, 2010.
Clean Energy Generation: Accelerated CCA
Accelerated CCA is provided in Classes 43.1 and 43.2 for specified clean energy generation and conservation equipment. The budget proposes to expand Class 43.2 to include a broader range of heat recovery equipment by removing the restrictions that require the recovered heat to be reused in a process of the same type that generated it. The budget also proposes to broaden Classes 43.1 and 43.2 to include specified distribution equipment used in district energy systems that rely primarily on ground source heat pumps, active solar systems or heat recovery equipment, or a combination of these energy sources, provided the generation equipment is included in Class 43.1 or 43.2. These measures are effective for eligible assets acquired on or after March 4, 2010 and that have not be used or acquired for use before that date.
Principal-Business Corporations Clarified
A principal-business corporation can transfer or "renounce" Canadian Renewable and Conservation Expenses to an investor using flow-through shares. A principal-business corporation includes a corporation the principal business of which is the generation of energy using Class 43.2 property or the development of Class 43.2 projects. The definition of a principal-business corporation will be amended to clarify that it includes corporations the principal business of which is one, or any combination of: producing fuel, generating energy, or distributing energy, using Class 43.1 or 43.2 property. This measure is effective for taxation years ending after 2004.
Specified Leasing Property Rules
The specified leasing property rules effectively re-characterize a lease from a lessor's perspective to be a loan, with the lease payments received being treated as blended payments of principal and interest. The effect of these rules is that the lessor is essentially in the same position as lenders who receive blended payments of principal and interest. The budget proposes to extend the application of the specified leasing property rules to otherwise exempt property that is the subject of a lease to a government or other tax-exempt entity, or to a non-resident, but only to the extent that the total value of the property leased is more than $1 million. This measure will apply to leases entered into after 4 pm EST March 4, 2010.
Taxation of Corporate Groups
The government will explore whether new rules for the taxation of corporate groups such as the introduction of a formal system of loss transfers or consolidated reporting could improve the functioning of the tax system.
INTERNATIONAL TAX MEASURES
Regulation 105 and Section 116 Refunds
Regulation 105 and Section 116 require payors of funds to non-resident service providers and purchasers of taxable Canadian property from non-residents, respectively, to withhold and remit a portion of the funds on account of the non-resident's potential Canadian tax liability, in certain circumstances. This obligation can arise when the non-resident is not liable for Canadian tax. To ensure a refund of any overpayment of tax can be obtained, the budget proposes to allow a refund if the overpayment is related to an assessment of the payor or purchaser in respect of a required withholding under regulation 105 or section 116 and the taxpayer files a return no more than two years after the date of the assessment. This measure fixes a problem where the CRA assessed a taxpayer for failure to withhold these amounts and the non-resident was no longer able to file a tax return to recover the amounts assessed. This measure is effective for refund applications claimed in returns filed after March 4, 2010.
Foreign Investment Entities
Following a review by the government, the outstanding proposals to amend the Foreign Investment Entity Rules have been scrapped. The existing rules in the Income Tax Act will apply with the following limited enhancements effective for taxation years that end after March 4, 2010:
- The prescribed rate applicable in computing the income inclusion for an interest in an offshore investment fund property will be increased to the three month average Treasury Bill rate plus two percentage points.
- The rules requiring beneficiaries of certain non-resident trusts to report income on a modified foreign accrual property income basis will be broadened to apply to any resident beneficiary who, together with any person not dealing at arm's length with the beneficiary, holds 10% or more of any class of interests in a non-resident trust determined by fair market value.
- The relevant reassessment period will be extended by three years for interests in offshore investment fund properties and interests in the non-resident trusts described above. Also the reporting requirements with respect to "specified foreign property" will be expanded so that more detailed information is available for audit use.
A taxpayer who voluntarily complied with the outstanding proposals in previous years will have the option of having those years reassessed. If the taxpayer does not wish to be reassessed for those years, and had more income than would have been the case under the modified rules, the taxpayer will be entitled to a deduction in the current year for the excess income.
Non-Resident Trusts
The existing rules deem a non-resident discretionary trust to be resident in Canada if it has a Canadian contributor and a related Canadian beneficiary. Such a trust is required to pay tax on its income in the same manner as other Canadian residents. The outstanding proposals to amend these rules broaden their scope and they generally make both resident contributors and resident beneficiaries jointly and severally, or solidarily, liable for tax payable by a trust deemed resident.
The budget proposes the following amendments to simplify and provide relief from the scope of the outstanding proposals:
- Entities exempt from tax under section 149 of the Income Tax Act (e.g. pension funds and registered charities) will not be jointly and severally, or solidarily, liable for the trust's tax liabilities.
- Investments in bona fide commercial trusts will not be caught by the new rules and the provision in the outstanding proposals that would have imposed deemed Canadian residence on a trust by reason only of the trust acquiring or holding restricted property will be eliminated.
- A commercial trust will not be deemed resident in Canada if the trust satisfies certain criteria, including that the trust not be a discretionary or personal trust and that each beneficiary be entitled to both the income and capital of the trust. A commercial trust cannot be varied in any way without losing its exempt trust status.
- The definition "restricted property" will be limited to shares or rights (or property that derives its value from such shares or rights) acquired, held, loaned or transferred by a taxpayer as part of a series of transactions or events in which "specified shares" (generally, shares with fixed entitlement rights) of a closely-held corporation were issued at a tax cost less than their fair market value.
- Loans made by a Canadian financial institution to a non-resident trust will not result in the financial institution being a resident contributor to the trust as long as the loan is made in the ordinary course of the financial institution's business.
The budget also proposes a number of refinements to the taxation of a trust deemed resident in Canada. For this purpose, the trust's property will be divided into a resident portion and a non-resident portion. The resident portion will consist of property acquired by the trust by way of contributions from residents and certain former residents, and any property substituted for such property. The non-resident portion will consist of all other property. Any income arising from property that is part of the non-resident portion, other than income from sources in Canada upon which non-residents are normally required to pay tax, will be excluded from Canadian taxation.
Ordering rules will be introduced with respect to distributions to beneficiaries of the trust. Distributions to resident beneficiaries will be deemed to be made first out of the resident portion of the trust's income while distributions to non-resident beneficiaries will be deemed to be made first out of the non-resident portion. Distributions to non-resident beneficiaries out of the non-resident portion of the trust will not be subject to non-resident withholding tax, but distributions to non-resident beneficiaries out of the resident portion of the trust will be subject to non-resident withholding tax.
When income of the trust is not distributed to beneficiaries, the amount of accumulated income will be deemed to be a contribution by the trust's connected contributors and will form part of the resident portion for the next taxation year. Furthermore, resident contributors will be attributed, and taxed on, their proportionate share of the trust's income for Canadian tax purposes. They will not be jointly and severally, or solidarily, liable for the trust's own income tax obligations.
In addition, a trust that is deemed to be resident in Canada under these rules will be permitted to claim a foreign tax credit for income taxes paid to another country that treats the trust as a resident of that country for income tax purposes. This is irrespective of the foreign tax credit limit (which generally limits the foreign tax credit in respect of property income to 15% of the foreign income).
The reassessment period for income in respect of trusts subject to these rules will be extended by three years and the Income Tax Conventions Interpretation Act will be amended to clarify that a trust that is deemed to be resident in Canada under these rules is a resident of Canada and subject to tax under the Income Tax Act for tax treaty purposes.
It is proposed that the measures regarding non-resident trusts apply retroactively to the 2007 and subsequent taxation years. An election allowing a trust to be deemed resident for the 2001 and subsequent taxation years will be available. The attribution of trust income to resident contributors will apply only to taxation years that end after March 4, 2010.
Foreign Tax Credit Generators
Some Canadian corporations have been engaging in transactions, often referred to as "foreign tax credit generators", that are designed to shelter tax otherwise payable in Canada in respect of interest income on loans made, indirectly, to foreign corporations. These transactions artificially create foreign taxes that are claimed by the Canadian corporation as a foreign tax credit, a foreign accrual tax or an underlying foreign tax deduction, in order to offset Canadian tax otherwise payable.
The budget proposes measures that would put the Canadian corporation in the same tax position as if it had made a simple loan to the foreign corporation. The measures will deny claims for foreign tax credits, foreign accrual tax and underlying foreign tax deductions, in circumstances in which the income tax law of the jurisdiction levying the foreign income tax, or another relevant jurisdiction, considers the Canadian corporation to have a lesser direct or indirect interest in the foreign special purpose entity than the Canadian corporation is considered to have for the purposes of the Income Tax Act. This measure will apply in determining after March 4, 2010 whether a property is taxable Canadian property of a taxpayer. This measure is proposed to be effective for foreign taxes incurred in respect of taxation years that end after March 4, 2010
Taxable Canadian Property
In a move that will simplify the compliance burden for dispositions of shares of Canadian companies by non-residents of Canada, the budget proposes that the definition of taxable Canadian property in the Income Tax Act be amended to exclude shares of corporations, and certain other interests, that do not derive their value principally from real or immovable property situated in Canada, Canadian resource property, or timber resource property (subject to the 60 month look back rule). This measure will eliminate section 116 compliance obligations for these types of properties and will bring Canada's domestic tax rules more in line with our tax treaties and the tax laws of our major trading partners.
OTHER TAX MEASURERS
GST/HST and Purely Cosmetic Procedures
The budget proposes to clarify that GST/HST applies to all purely cosmetic (as opposed to medical) procedures, to devices or other goods used or provided with cosmetic procedures and to services related to cosmetic procedures.
GST/HST Tax Changes for Direct Sellers
The 2009 budget proposed to allow network sellers that meet certain qualification criteria to be able to elect jointly with their sales representatives for a new set of simplified rules to apply. The 2010 budget proposes enhancements to the previously announced measures to make the administration of these rules easier for new entrants. As well, the budget clarified that the supply of host gifts by a network seller to hosts would not be subject to GST/HST. The budget also introduced a "safety mechanism" for network sellers that no longer meet the qualification criteria, to facilitate a smooth transition back to the standard reporting rules.
Information Reporting of Tax Avoidance Transactions
The budget proposes to implement requirements to report certain tax avoidance transactions to assist the CRA in identifying aggressive tax planning in a timely manner. Under this new reporting regime, "reportable transactions" must be reported to the CRA. A reportable transaction would be
an avoidance transaction, as defined in the Income Tax Act, which is entered into by or for the benefit of a taxpayer and bears at least two of the following three "hallmarks":
- A promoter/tax advisor in respect of the transaction is entitled to fees that are to any extent attributable to the amount of the tax benefit from the transaction; contingent upon the obtaining of a tax benefit from the transaction; or attributable to the number of taxpayers who participate in the transaction or who have been provided access to advice given by the promoter or advisor regarding the tax consequences from the transaction.
- A promoter/tax advisor in respect of the transaction requires "confidential protection" about the transaction.
- The taxpayer or the person who entered into the transaction for the benefit of the taxpayer obtains "contractual protection" in respect of the transaction (otherwise than as a result of a fee described in the first hallmark).
If the CRA discovers a reportable transaction that has not been reported, the benefit resulting from the transaction could be denied. In order to then claim that benefit, the taxpayer would be required to file any required information with the CRA and pay a penalty. Note that tax shelter or a flow-through share arrangement related transactions will continue to be subject to current reporting requirements and will not be impacted by these proposals.
In 2009, the province of Québec took steps to add a stronger deterrent to combat aggressive tax planning. The proposals today are not as strict as the rules implemented in Québec. The federal reporting measure is meant to assist the CRA in identifying transactions where the presence of the above hallmarks indicates a higher risk of abuse of the income tax system, but it is not considered an admission that the General Anti-Avoidance Rule applies to the transaction.
The government will undertake consultations with stakeholders on these proposals. Further details of these proposals will be released at the earliest opportunity and the consultation process will be announced at that time. The proposals, with modifications made during the consultation process, would apply to avoidance transactions entered into after 2010, as well as those that are part of a series of transactions completed after 2010.
Online Notices
Currently, in accordance with the Personal Information Protection and Electronic Documents Act, taxpayers can receive notices, such as notices of assessment under the Income Tax Act, from the CRA only though the mail system or personally. The budget proposes that the Income Tax Act, Excise Tax Act, Excise Act, 2001, Air Travellers Security Charge Act, Canada Pension Plan and Employment Insurance Act be amended to allow for the electronic issuance of those notices. Notices that are specifically required to be served personally or by registered or certified mail will not be eligible to be transmitted electronically.
Tax Evasion and Proceeds of Crime and Money Laundering Regime
The proceeds of crime and money laundering regime in the Criminal Code, provides the Crown, in respect of certain criminal and terrorist activities, the enhanced power to search, seize and to retain proceeds of crime and to apply minimum terms of imprisonment to convicted criminals and terrorists who do not forfeit their proceeds of crime. Currently, indictable tax offences are excluded from falling within the ambit of this regime. The budget proposes to rationalize the rules concerning the application of the regime, and provide further support to allow the Crown to prosecute these tax offences using the regime.
Charities: Disbursement Quota Reform
In an effort to simplify the disbursement quota rules, particularly for smaller registered charities, the budget proposes to repeal the charitable expenditure rule. The concepts of enduring property, the capital gains reduction and capital gains pool, specified gifts and various exclusions from the calculation of the base to which the 3.5% disbursement rate is applied will no longer be required to calculate the disbursement quota.
The budget also proposes to amend the existing rule that provides the CRA with the discretion to allow charities to accumulate property for a particular purpose, such as a building project. The CRA will be given the discretion to exclude the accumulated property for certain purposes from the capital accumulation rule calculation. In addition, the budget proposes to increase the current exemption from the capital accumulation rule for charities having $25,000 or less in assets not used in charitable programs or administration to $100,000. This changes does not apply to charitable foundations.
Finally, the budget proposes extending anti-avoidance rules to ensure that the current changes are not circumvented. The budget proposals are effective for fiscal years that end on or after
March 4, 2010.
New Legislation for Health and Welfare Trusts
For a number of years, the CRA has allowed employers to operate their health and welfare programs through a trust arrangement called a health and welfare trust. These trusts are subject to administrative rules set by the CRA that are generally beneficial. To qualify for these rules, the benefits administered by these trust arrangements must be restricted to group sickness or accident insurance plans, private health services plans and group term life insurance policies (or any combination thereof).
The CRA allows these trusts to be effectively treated as conduits. Employers can deduct contributions to health and welfare trusts in the year the legal obligation to make the payment to the trust arises, to the extent they are reasonable and laid out to earn business or property income. In addition, any income tax advantage that an employee would otherwise benefit from is not affected by the use of a health and welfare trust as an intermediary. Any income earned inside the trust on excess funds is generally non-taxable.
Over the years, two key issues have caught the attention of the CRA: the use of non-resident trusts, and disagreements on whether current contributions relate to current or future obligations. On February 26, 2010, the Department of Finance issued new draft legislation which will codify these administrative positions, and also deal with the longstanding issues just described.
The draft rules will apply to trusts formed after 2009, referred to as "employee life and health trusts". Most of the CRA's administrative rules will continue to apply, but there are some new specific rules that didn't apply before:
- The trust must be resident in Canada.
- The trust must be maintained primarily for the benefit of employees who are not key employees. A key employee is a specified employee (basically an employee who owns 10% or more or who is non-arm's length) or a high-income employee.
- The amount contributed will have to be compared with the cost of providing benefits in that year and any assets in the plan. To the extent that the contribution is not required to fund current benefits, the contribution will not be deductible in that year.
- If there is a loss (the cost of benefits provided by the trust are deductible to the trust), that loss can be carried back to any of the three preceding years or carried forward to the three following taxation years.
For trusts formed before 2010, we assume that the CRA will continue to apply their administrative rules.
Interest on Overpaid Taxes Reduced
Currently, the interest rate used by the government to calculate interest paid on overpaid taxes is based on Treasury bill rates, plus 2%. Effective July 1, 2010, the rate will be equal to the average yield of three-month Government of Canada Treasury Bills sold in the first month of the preceding quarter, rounded up to the nearest percentage point. The rate will no longer be increased by 2%. The new rate will apply in respect of income tax, GST/HST, employment insurance premiums, CPP contributions, excise tax and duty (with an exception for excise duty on beer), the Air Travellers Security Charge and the softwood lumber products export charge. This change will not apply to interest rate calculations for non-corporate taxpayers.
Federal Credit Unions
The budget proposes to allow for the establishment of federal credit unions. With this change, amendments will be made to the Income Tax Act as required to provide that federal credit unions will be subject to the same income tax rules as other credit unions, provided the existing definition of "credit union" in the Income Tax Act is satisfied.
Customs Tariff Measure
The budget proposes to eliminate the remaining tariffs on manufacturing inputs and machinery and equipment.
The information in this publication is current as of March 4, 2010.
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