On February 26, 2008, the Conservative Government tabled its third budget. Budget 2008 contains targeted corporate and personal income tax measures, as well as measures to improve the efficiency of the tax system.
BUSINESS INCOME TAX MEASURES
Budget 2008 does not introduce new tax rate cuts. However, there are a number of provisions that provide targeted assistance or simplify tax compliance.
CAPITAL COST ALLOWANCE (CCA) MEASURES
Tax Assistance to the Manufacturing Sector: Accelerated CCA
The 2007 budget introduced a 50% straight-line accelerated CCA rate for eligible manufacturing and processing machinery and equipment acquired before 2009. Budget 2008 extends this measure for an additional year, with a reduced accelerated CCA rate for an additional two years.
- Manufacturing and processing machinery and equipment acquired in 2009 will be eligible for the accelerated 50% straight-line CCA rate;
- Manufacturing and processing machinery and equipment acquired in 2010 will be eligible for a 50% declining-balance rate in the first taxation year ending after the machinery and equipment is acquired, a 40% declining-balance rate in the following taxation year and the regular 30% declining-balance rate thereafter; and
- Manufacturing and processing machinery and equipment acquired in 2011 will be eligible for a 40% declining-balance rate in the first taxation year ending after the machinery and equipment is acquired and the regular 30% declining-balance rate thereafter.
The “half-year rule” will apply in all cases.
Clean Energy Generation
Budget 2008 proposes to broaden the specified clean energy generation equipment that is eligible for the accelerated CCA (50% per year on a declining basis) under Class 43.2 of the Income Tax Regulations.
CCA Rates: Alignment with Useful Life
As part of the ongoing effort to align CCA rates with the useful life of the property being amortized, Budget 2008 proposes to increase the CCA rate for railway locomotives, capital expenses for the refurbishing or reconditioning of a railway locomotive, as well as for carbon dioxide pipelines and related equipment.
CROSS-BORDER BUSINESS AND INVESTMENTS: COMPLIANCE RELIEF
Budget 2008 proposes certain amendments to facilitate compliance with the rules applicable to the disposition of taxable Canadian property (“TCP”) by a non-resident of Canada. TCP includes private company shares, significant holdings in publicly-listed shares, interests in Canadian real property and other defined properties. Currently, a purchaser of TCP (other than excluded property such as listed shares, mutual fund trust units and inventory of a business) is liable to remit a portion of the purchase price to the tax authorities unless the vendor obtains a clearance certificate from the Canada Revenue Agency under section 116 of the Income Tax Act. The liability to remit applies even if the gain from the disposition of the TCP is otherwise exempt from tax in Canada by reason of the application of a bilateral tax treaty. Moreover, the non-resident must file a Canadian tax return even if no tax is payable in respect of the disposition.
Budget 2008 proposes to eliminate the obligation to apply for a clearance certificate if the property disposed of is a “treaty-protected property” (generally, property the gain from the disposition of which would be exempt from tax in Canada by reason of the application of a tax treaty).
Budget 2008 also proposes to relieve a purchaser from its liability to remit an amount if the purchaser concludes after reasonable inquiry that the vendor is resident in a country that has a tax treaty with Canada, the property acquired would be treaty-protected property if the vendor was resident in the particular treaty country, and the purchaser sends an information notice to the Minister within 30 days after the date of the acquisition.
Consequential to these proposed changes, a non-resident will no longer be required to file an income tax return in respect of the disposition of TCP if (i) no tax is payable for the year by the non-resident under the Income Tax Act, (ii) the non-resident is not liable to pay an amount under the Income Tax Act in respect of a prior taxation year, and (iii) the property disposed of is excluded property (which will now include treaty-protected property) or a property in respect of which a section 116 clearance certificate has been issued by the CRA.
These changes will be applicable to dispositions occurring after 2008.
SCIENTIFIC RESEARCH AND EXPERIMENTAL DEVELOPMENT PROGRAM
The current federal scientific research and experimental development (“SR&ED”) program provides for an enhanced 35% investment tax credit for Canadian-controlled private corporations (“CCPCs”) in respect of their qualified SR&ED expenditures. The dollar amount of qualified expenditures upon which the 35% investment tax credit may be claimed by a CCPC is currently limited to $2 million and is phased out if the taxable income of the CCPC for the previous taxation year is between $400,000 and $600,000 or if its taxable capital employed in Canada for the previous taxation year is between $10 million and $15 million.
Budget 2008 proposes to increase the expenditure limit to $3 million thereby increasing the maximum refundable SR&ED investment tax credit available to a qualifying CCPC from $700,000 to $1.05 million. Budget 2008 also proposes to increase the upper limit of taxable income and taxable capital for the prior year used to calculate the phase-out to $700,000 and $50 million, respectively.
Changes are also proposed to allow salary and wages paid to employees working on SR&ED outside Canada to be eligible for the SR&ED investment tax credit if certain conditions are met.
Finally a number of measures are proposed to improve the administration of the SR&ED program, including the adoption of a new claim form and guide, an eligibility self-assessment tool and the injection of additional resources for the administration of the program.
These changes are generally to apply to taxation years that end on or after February 26, 2008.
SIFT TAX: ADJUSTMENT OF PROVINCIAL COMPONENT
“Specified Investment Flow Through” entities, such as publicly-traded income trusts and partnerships, are subject to a tax on their distributions of non-portfolio earnings (subject to grandfathering until 2011 for SIFTs in existence on October 31, 2006). The SIFT tax has a federal component, equal to the general corporate rate, and a notional provincial component, presently set at 13%, approximating the average provincial corporate tax rate. A SIFT is subject to the 13% provincial component even if the SIFT earns its income in a province with a lower corporate tax rate. Budget 2008 proposes that, as of 2009, the provincial component of the SIFT tax will be based on the tax rate in each province in which the SIFT has a permanent establishment.
SOURCE DEDUCTIONS: COMPLIANCE MEASURES
Budget 2008 proposes two measures to assist taxpayers in remitting source deductions. First, the current 10% penalty for all late remittances is to be replaced with a graduated penalty ranging from 3% if the remittance is less than 4 days late to 10% if the remittance is more than 7 days late. In addition, large remitters, who are required to make remittances directly to a financial institution, will no longer be penalized for making remittances directly to the government, provided the remittance is received one full day before it is due. These measures are to apply to remittances due on or after February 26, 2008.
PERSONAL INCOME TAX MEASURES
Budget 2008 does not propose any change to tax rates.
Tax Free Savings Account
The highlight of Budget 2008 for individuals is the proposed creation of the Tax-Free Savings Account (TFSA) for 2009 and subsequent years. A TFSA is a registered account to which a Canadian-resident individual (other than a trust) will be permitted to contribute $5,000 per year. The key features of a TFSA are as follows:
- contributions will not be tax-deductible;
- neither income nor capital gains earned in the TFSA will be taxable;
- withdrawals from the TFSA will not be taxable and amounts withdrawn will not be included in determining eligibility for income-tested benefits or credits;
- unused contribution room will be carried forward, withdrawals will reinstate previously used contribution room and spousal contributions will be permitted (with no spousal attribution);
- excess contributions will be subject to a penalty tax of 1% per month;
- permitted investments will include most “qualified investments” for RRSP purposes; however, a TFSA will not be permitted to invest in an entity with which the account holder does not deal at arm’s length;
- tax-free status of the account will be lost on death of account holder unless the account is transferred to spouse;
- interest on money borrowed to make a TFSA contribution will not be deductible; and
- financial institutions eligible to issue RRSPs will be permitted to issue TFSAs and will file an annual information return.
Changes to Registered Education Savings Plan Regime
Currently, contributions may be made to an RESP for 21 years and the plan must be terminated on the 25th anniversary of the plan. Budget 2008 proposes to extend these time limits by ten years. Further extension of the time limits is proposed for plans established for persons with disabilities.
Mineral Exploration Tax Credit
The 15% investment tax credit for flow-through mining expenses is extended for another year. The tax credit will be available for flow-through share agreements entered into on or before March 31, 2009. Under the “look-back rule”, funds raised with the benefit of the credit before April 2009 can be spent on mineral exploration up to the end of 2010.
Capital Gains and Donations: Gains Arising on Exchange of Securities
Previous budgets eliminated the tax on capital gains arising on the donation of publicly-traded securities to charities. Budget 2008 proposes to extend the exemption to gains realized on the exchange of unlisted securities (shares or partnership interests) for publicly-traded securities, where (i) the unlisted security included the exchange feature at the time of its issue, (ii) the taxpayer receives no consideration on the exchange other than the publicly-traded security, and (iii) the publicly-traded security is donated to the charity within 30 days of the exchange. This measure will apply for donations made on or after February 26, 2008.
Private Foundations: Relief from Excess Corporate Holdings Rules
The 2007 budget proposed an “excess business holdings” regime that placed limits on a private foundation’s shareholdings in both publicly-listed and non-listed shares. Under those rules, a foundation is in a “safe harbour” if it holds 2% or less of any class of a corporation’s shares but is required to divest itself of certain shareholdings where those holdings, together with those of non-arm’s length persons, exceed 20% of the shares of any class of a corporation. In recognition of the difficulty of divesting unlisted shares, Budget 2008 proposes to exempt from these divestiture rules shares that are not listed on a designated stock exchange and that were held by the foundation on March 18, 2007. New rules are also proposed (i) for “substituted shares” (to permit the divestiture exemption to continue after a corporate reorganization), (ii) to clarify the absence of a divestiture requirement in respect of “entrusted shares” and (iii) to introduce an anti-avoidance rule for shares held through a trust.
Dividend Tax Credit
Budget 2008 proposes changes to the dividend gross-up and tax credit rates for eligible dividends to account for previously announced reductions in the general corporate tax rates for 2010 to 2012.
Medical Expense Tax Credit
Budget 2008 proposes certain additions to the list of permitted expenses, and clarifies that drugs and medications that may be purchased without a prescription are not eligible.
PREVIOUSLY ANNOUNCED MEASURES AND TECHNICAL CHANGES
Budget 2008 confirmed the government is committed to implementing previously-announced measures, as well as rules to implement the conversion of income trusts. Budget 2008 also proposes technical changes to the GST.