A PDF version of the highlights can be accessed here.
Jobs, Growth and Long-Term Prosperity
The government confirmed its commitment to cut spending and balance the budget. Taking into account a planning reserve of $3.0B, the budget anticipates deficits of $24.9B for fiscal 2011/12, $21.1B for fiscal 2012/13, $10.2B for fiscal 2013/14 and $1.3B for fiscal 2014/2015. A budget surplus of $3.4B is proposed to occur by fiscal year 2015/16.
Some non- tax measures proposed include:
- Changing the Old Age Security pension age eligibility from 65 to 67 (on a phased-in approach) starting on April 1, 2023 with full implementation by January 1, 2029.
- The Royal Canadian Mint will no longer distribute pennies as of Fall 2012 (however, pennies can still freely be used for transactions)
Various public service funding cuts
One of the more significant proposals in the budget this year relates to the Scientific Research and Experimental (SR&ED) tax incentive program. Acting upon the recommendations of the Jenkins panel, the government is looking to support innovation in Canada using a significantly different funding model and as a result proposes to scale back some of the benefits of the SR&ED tax incentives. Refer to our 2012 Federal Budget SR&ED Highlights for more information.
Highlights of the key tax measures announced in Budget 2012 are summarized below.
A. Corporate Income Tax Measures Corporate Income Tax Rates
No changes to the federal corporate income tax rates were announced.
Mineral Exploration and Development Tax Credit
Currently, a 10% corporate tax credit is available for pre-production mining expenditures related to certain mineral resources in Canada. Qualifying minerals for this credit include diamonds, base or precious metals and other industrial minerals that become base or precious metals through refining. The Budget proposes to phase out the tax credits applicable to pre-production mining expenditures and pre-production development expenses, albeit on different timelines. In the case of pre-production mining expenditures, a 10% credit will apply for exploration expenses incurred in 2012, a 5% credit will apply for exploration expenses incurred in 2013, and no credit will be available for exploration expenses incurred after 2013. For pre-production development expenditures, a 10% credit will apply for expenses incurred before 2014, a 7% credit will apply for expenses incurred in 2014, a 4% credit will apply for expenses incurred in 2015, and no credit will be available for pre-production development expenses incurred after 2015. Under certain circumstances, additional transitional support for pre-production development expenses incurred by a taxpayer before 2016 may also be available.
Atlantic Investment Tax Credit (AITC)
The A ITC is a 10% credit available for certain investments in new buildings, machinery and equipment used in the Atlantic region and the Gaspé Peninsula. It currently supports investments in farming, fishing, logging, manufacturing and processing, oil and gas, and mining. Recognizing that the oil & gas and mining sections are showing strong performance in the Atlantic region, the Budget proposes to phase out the Atlantic ITC for investments in the oil and gas, and mining sectors.
The Budget proposes to expand the eligibility of assets for Class 43.2 to include: waste-fuelled thermal energy equipment for space and water heating applications; equipment that is part of a district energy system that distributes thermal energy primarily generated by waste-fuelled thermal energy equipment; and equipment that uses plant residue to generate electricity and heat.
For dividends paid on or after March 29, 2012 (Budget Day), the Budget proposes to allow a corporation to pay a single dividend and designate a portion of it as an eligible dividend, rather than pay separate eligible and non-eligible dividends.
The Budget also proposes to allow the Canada Revenue Agency (CRA) to accept a corporation’s late designation of a taxable dividend to be an eligible dividend if the corporation makes the late designation within the three-year period following on the day on which the designation was first required to be made and the CRA is of the opinion that accepting the late eligible dividend designation would be just and equitable in the circumstances, including the affected shareholders.
The Budget proposes an amendment to the Income Tax Act (the “Act”) to provide authority for a single designated partner to sign a waiver on behalf of all partners where a partnership wants to file waivers to extend the period in which the CRA can make a determination of income, loss, deduction or other amount in respect of the partnership (to apply on Royal Assent to the enacting legislation).
Tax Avoidance Through The Use of Partnerships
The Budget introduces two new measures to ensure partnerships are not used to circumvent the intended application of certain relieving provisions in the Act.
Section 88 of the Act contains rules allowing a taxable Canadian corporation that has acquired control of another taxable Canadian corporation to increase the cost of certain non-depreciable assets acquired by the acquiring corporation in certain reorganization transactions. This is commonly referred to as the section 88 bump. Assets that, if sold, produce income rather than capital gains (“income assets”) are not eligible for the section 88 bump. In recent years, corporate partnership structures have been used to attempt to circumvent the denial of the section 88 bump, where income assets are held indirectly through a partnership. Upon an acquisition of control, the acquiring company amalgamates with, or winds up the acquired entity and claims a section 88 bump to the cost of the partnership interest.
Accelerated Capital Cost Allowance (CCA) for Clean Energy Generation
An accelerated CCA rate is available as an incentive for businesses to invest in clean energy generation and energy efficiency equipment. Class 43.2 includes a variety of equipment that generates or conserves energy by using renewable sources or fuels from waste, or by using fuel more efficiently. The cost of Class 43.2 assets are depreciated for tax purposes at 50% per year on a declining balance basis.
Budget 2012 proposes to deny a section 88 bump on a partnership interest to the extent that the accrued gain in respect of the partnership interest is reasonably attributable to the amount by which the fair market value of income assets exceed their cost amount. This measure will apply where the income assets are held directly by the partnership or indirectly through a second partnership.
This measure will apply to amalgamations that occur and wind-ups that begin on or after March 29, 2012. An exception is available where an amalgamation or wind-up takes place before 2013 if the acquiring corporation had acquired control, or was obligated in writing to acquire control, of the subsidiary prior to March 29, 2012 and the acquiring corporation had written intent to amalgamate with or wind up the subsidiary.
Section 100 of the Act ensures that income assets held by a partnership are fully taxable when the partnership is sold to a tax-exempt person. This rule currently does not apply to a sale of a partnership to a non-resident. In addition, taxpayers have taken advantage of the fact that section 100 does not expressly refer to indirect sales of partnership interests to a tax-exempt person.
The Budget proposes to extend the application of section 100 of the Act to the sale of a partnership interest to a non-resident person, unless the partnership carries on business in Canada through a permanent establishment in which all of the assets of the partnership are used. In addition, Section 100 will be clarified to apply to direct or indirect (as part of a series of transactions) dispositions to a tax-exempt or non-resident person.
CRA Administrative Improvements
The Budget announces a number of administrative improvements by the CRA to facilitate tax compliance for small businesses:
- As of April 16, 2012, businesses will be able to submit questions and receive answers to specific business enquiries electronically using the CRA’s secure My Business Account portal.
- Expansion of CRA’s Web Forms application to allow for the creation and filing of 11 additional types of information returns as well as the inclusion of up to 50 slips (up from 6 slips)
- Effective April 16, 2012, business owners will have the option make additional changes to their online business accounts and view account balances through the My Business Account portal
- Improved navigation on CRA website for businesses
- The introduction of a new administrative policy to level graduated late filing penalties. For certain information returns, reduced penalties will apply when the number of late-filed returns is small
- Improved access to information on complaints and disputes on the CRA website.
Tax Fairness and Equity
The Budget is aiming to improve the fairness of the Canadian tax system through the following measures:
- Prevent avoidance of corporate income tax through the use of partnerships to convert income gains to capital gains.
- Modify penalties for making unreported tax shelter sales to match the penalties to the tax savings of the unreported tax shelter.
- Restrict rules applicable to Retirement Compensation Arrangements to prevent schemes to inappropriately reduce tax liabilities.
- Restrict rules applicable to Employees Profit Sharing Plans to discourage excessive contributions for employees with close ties to their employer.
Curtailing Foreign Affiliate Dumping
Foreign affiliate dumping transactions essentially refer to a whole host of transactions that involve the investment in a foreign affiliate by a foreign parent corporation through a Canadian subsidiary. The budget proposals seek to curtail those transactions that do not meet a "business purpose" test and that involve the transfer of property by the Canadian subsidiary corporation in relation to the investment (other than shares of the corporation) by deeming a dividend for the value of such property transfers to be paid to the foreign parent by the Canadian subsidiary. In addition, there will be no increment to paid up capital of the shares of the Canadian corporation arising from the investment. This would also include for purposes of the thin capitalization rules.
The budget proposals set out a series of factors to be considered in meeting this test. Commentary is invited on the "business purposes" test factors until May 31, 2012.
These changes will apply to transactions which occur after March 28, 2012 except for certain transactions between arm's length parties which occur before 2013.
Stricter Thin Capitalization Restrictions
Thin capitalization rules limit the deductibility of interest expense to Canadian-resident corporations that are highly leveraged by their foreign parent (2:1 debt-to-equity ratio).
This limitation is being changed to a 1.5:1 debt-to-equity ratio for years beginning after 2012. For years that begin after March 28, 2012, the thin capitalization rules will be extended to include debts of a partnership in which a Canadian-resident corporation is a member.
Application of Thin Capitalization Rules to Partnerships
Debts of the partnership are to be allocated to partners based upon their proportionate interest in the partnership. However, where a corporate partner exceeds the debt-to-equity ratio, there will not be a disallowed interest deduction, but rather the corporation will have an income inclusion equal to a portion of the interest of the partnership that was deductible.
Treatment of Disallowed Interest
For years that end after March 28, 2012, disallowed interest arising from the application of the thin capitalization rules will be treated as dividends for Part XIII withholding tax purposes. The interest that is disallowed will be treated as dividends paid (and thereby subject to Part XIII withholding tax) when the actual interest is paid or, if not paid by year end, at the corporation's year end. A taxpayer will be allowed to elect to allocate disallowed interest to the latest interest payments made in the year so as to defer the withholding tax obligation.
Lending by Controlled Foreign Affiliates
The thin capitalization rules are also being amended so that there is no double taxation where a controlled foreign affiliate of a Canadian resident taxpayer lends funds to it and the interest in included as FAPI (foreign accrual property income) to the foreign affiliate.
Deemed Dividend on Transfer Pricing Secondary Adjustments
Primary adjustments occur for tax purposes where the Canadian rules for transfer pricing apply to adjust amounts related to transactions between a Canadian corporation and arm's length non-residents. Generally, these adjustments have been effected by way of a deemed dividend or other notional transaction adjustment to the affected non-resident. known as a "secondary adjustment". The budget proposals essentially confirm that these secondary adjustments will be affected by means of a deemed dividend. The proposals also confirm a CRA administrative practice that essentially eliminates the any deemed dividend where the amount of the primary adjustment is in fact repatriated to the Canadian corporation. The deemed dividend will also not apply to certain primary adjustments impacting certain controlled foreign affiliates.
Return to top >>
B. Personal Income Tax Measures
Employee Profit Sharing Plans (EPSPs)
Budget 2012 proposes a targeted measure to impose a special tax payable on excess EPSP amounts by an employee who has a significant equity interest in their employer (or who does not deal at arm’s length with their employer). An excess EPSP amount is defined as a portion of an employer’s EPSP contribution allocated by a trustee to a specified employee that exceeds 20% of the specified employee’s salary received in the year by the specified employee from the employer. This measure generally applies in respect of EPSP contributions made by an employer on or after March 29, 2012.
Group Sickness or Accident Insurance Plans
The Budget proposes to treat contributions to a group sickness or accident insurance plan as a taxable benefit to the extent that the contributions are not in respect of a wage-loss replacement benefit payable on a periodic basis. This measure generally does not affect the tax treatment of private health services plans. This measure applies to employer contributions made on or after March 29, 2012.
Retirement Compensation Arrangements (RCAs)
The CRA has identified a number of arrangements that seek to take advantage of the RCA rules in order to obtain unintended tax benefits. Budget 2012 proposes to apply new prohibited investment and advantage rules for RCAs similar to those that currently apply to Tax Free Savings Accounts (TFSAs), RRSPs and RRIFs. These rules apply to directly prevent RCAs from engaging in non-arm’s length transactions. The proposed prohibited investment rules apply to investments acquired, or that become prohibited investments on or after Budget Day. The advantage rules will also apply on or after Budget Day, subject to special transitional rules.
Registered Disability Savings Plans (RDSPs)
Budget 2012 proposes several amendments to the RDSP rules.
- Permitted Plan Holders: Proposal to temporarily allow certain family members to become the plan holder of an RDSP for an adult individual who might not be able to enter into contracts. This measure will apply from the date of Royal Assent until the end of 2016.
- Rollover of RESP Investment Income: To provide greater flexibility for parents who save in a RESP for a child with a severe disability, Budget 2012 proposes to allow investment income earned in an RESP to be transferred on a tax-free basis to an RDSP if the plans share a common beneficiary.
- Introduction of a proportional repayment rule that will apply when a withdrawal is made from an RDSP. This will replace the current 10-year repayment rule only in respect to RDSP withdrawals. The existing 10-year repayment rule continues to apply where the RDSP is terminated or deregistered, or the RDSP beneficiary ceases to be eligible for the disability credit or dies. The proportional repayment rule will require that, for each $1 withdrawn from an RDSP, $3 of any government grants and bonds paid into the plan (i.e. CDSG’s or CDSB’s) in the 10 years preceding the withdrawal be repaid, up to a maximum of the assistance holdback amount.
- Maximum and Minimum Withdrawals: Proposal to increase the maximum annual limit for withdrawals from an RDSP that is a primarily government-assisted plan (PGAP). This will allow for greater flexibility in making withdrawals and ensuring that RDSP assets are used to support the RDSP beneficiary during their lifetime. Budget 2012 also proposes to extend the minimum annual withdrawal requirement that currently only applies to PGAPs to all RDSPs. These measures will apply after 2013.
- Extension of period for which an RDSP may remain open when a beneficiary becomes ineligible for the disability tax credit
Mineral Exploration Tax Credit for Flow-Through Share Investors
Budget 2012 proposes to extend the mineral exploration tax credit (equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors) for one year to flow-through share agreements entered into on or before March 31, 2013.
Medical Expense Tax Credit
Budget 2012 expands the list of expenses eligible for this credit to include blood coagulation monitors and related supplies for use by individuals who require anti-coagulation therapy (2012 and later years).
Overseas Employment Tax Credit (OETC)
Subject to certain transitional rules, Budget 2012 proposes to phase out the OETC over four years, beginning with 2013. The OETC will consequently be eliminated for the 2016 and subsequent taxation years.
Return to top >>
C. Other Tax Measures
As the average life expectancy of Canadians continues to rise, so does the cost of administering the OAS program. The age of eligibility for OAS and the Guaranteed Income Supplement (GIS) will be gradually increased from 65 to 67 years of age (see table below), starting in April 2023, with full implementation by January 2029. The proposed legislative change to the age of OAS/GIS eligibility will not affect those who are 54 years of age or older as of March 31, 2012.
Ages at which the Allowance and the Allowance for the Survivor are provided will also increase over time from 60-64 today to 62-66 starting in April 2023. Individuals who are 49 years of age or older as of March 31, 2012 are not affected.
Other federal programs, including those provided by Veterans Affairs Canada and Aboriginal Affairs and Northern Development Canada will also be aligned to changes to the OAS program.
To improve flexibility in the OAS program, starting on July 1, 2013, taxpayers are allowed to voluntarily defer receipt of OAS pension for up to five years, receiving a higher, actuarially adjusted, annual pension after the deferral period. GIS benefits will not be eligible for the actuarial adjustment.
The Government is looking into additional standardization and consolidation opportunities to improve service delivery to Canadians. In particular, services for seniors will be improved by putting in place a protective enrollment process that will eliminate the need for seniors to apply for OAS and GIS. Protective enrollment will be implemented in phases from 2013 to 2015.
Canada Pension Plan (CPP)
As a result of the 2010-2012 triennial review of the CPP, the Budget confirms that the CPP is financially sustainable for at least the next 75 years at the current contribution rate of 9.9% of pensionable earnings. As such, there will be no change to the contribution rate.
The Finance Ministers also agreed to a number of technical amendments to the CPP legislation and the CPP Investment Board regulations. These amendments will not change the level of CPP benefits or have an impact on the contribution rate.
The Budget proposes a number of measures to make the EI program more efficient and to focus the program on job creation and other employment opportunities:
- Limit EI premium rate increases to 5 cents each year until the EI Operating Account is balanced.
- Provide $21 million over two years to improve the content and timeliness of the job and labour market information available to Canadians seeking employment.
- Invest $74 million over two years to ensure EI claimants benefit from accepting work.
- Invest $387 million over two years to align EI benefit calculations to local labour market conditions.
Enhancing Transparency and Accountability
Charities are required by law to operate exclusively for charitable purposes and to devote their resources exclusively to charitable activities. Under the Act, charities are permitted to use a limited amount of their resources for non-partisan political activities that are related to their charitable purposes. Recent concerns have been raised that certain charitable organizations may not be respecting the rules regarding political activities. In addition, there have been requests for greater public transparency relating to political activities of charities, including the extent to which they are funded by foreign sources.
The Budget proposes the following for the CRA in order to monitor the activities and spending of charities:
- Enhance education and compliance activities with respect to political activities by charities
- Improve transparency of political activities by requiring charities to disclose additional information, including any funding from foreign sources
The Budget also proposes that the Act be amended to restrict the extent to which charities can fund political activities of other qualified donees, as well as to introduce sanctions for charities that exceed spending limits on political activities or fail to disclose complete and accurate information on their annual returns.
Gifts to Foreign Charities
Generally, donations made by Canadians to foreign charities are not eligible for the Charitable Donations Tax Credit or Deduction. However, where a foreign charity receives a gift from the Government of Canada, the foreign charity may register as a qualified done, and can issue an official donation receipt for gifts received.
The Budget proposes to modify existing rules to register certain foreign charitable organizations that receive gifts from the Government as qualified donees where the foreign charity’s activities are related to disaster relief or urgent humanitarian aid, or are in the national interest of Canada. Qualified donee status for foreign charities meeting these criteria can be granted for a 24-month period and the qualified done status will be available to the public.
This measure will apply to applications made by foreign charitable organizations on or after the later of January 1, 2013 and Royal Assent to the enacting legislation.
Trade & Customs – Travelers’ Exemptions
Starting June 1, 2012, Budget 2012 proposes to increase the dollar limits of the exemption that allows Canadian residents to bring back goods without having to pay duties or taxes. The dollar limit for returning Canadian residents is proposed as follows:
- Less than 24 hours – no duty or tax exemptions; volume and quantity limits on alcohol and tobacco products remain unchanged
- 24 hours or more – travellers’ exemption increases from $50 to $200
- 48 hours or more – travellers’ exemption increases to $800 (replacing the current exemptions of $400 and $750 which previously applied in respect of 48 hours and 7 days, respectively).
Return to top >>
D. Indirect Taxes
A new provision is to be added to the listing of exempt services to allow services of a pharmacist in a pharmacist / patient relationship to be exempt where the service is provided for the promotion of health and the prevention and treatment of disease.
Medical and Assistive Devices
Several new devices have been added to the listing of zero rated medical supplies
- Heart monitoring device
- Hospital Bed - clarification as to who can provide
- Aerosol chamber inhalers for asthma
Each of these has specific criteria as to who they are provided to and where they are obtained from in order to qualify for the zero rating tax treatment.
Opticians are now entitled under the laws of many provinces to dispense eyewear and conduct vision assessments. The Budget proposes to zero rate corrective eyewear dispensed by these persons, provided they are authorized by the laws of their province to carry out these activities.
GST Rebate for Books Given Away
The Budget proposes to put in place a rebate for charities and prescribed qualifying non-profit literacy organizations to be eligible for a rebate for the GST and the federal part of the HST on books acquired to be given away.
GST/HST Quick Method and Special Quick Method Threshold Doubling
Businesses eligible to use these special methods will be able to continue to use them as their business grows. The threshold of revenue a business can have will be doubling from $200,000 to $400,000.
The rate of sales for the Special Quick Method used by Public Service Bodies will go from $500,000 to $1,000,000 and the threshold for expenses will also double from $2,000,000 to $4,000,000.
This communication contains a general overview of the subject matter and is current as of the date of publication. The information should not be regarded as a substitute for professional advice. MNP LLP accepts no responsibility for any loss or damage caused by your reliance on information contained in this publication.