There are no substantial changes to the tax measures previously announced in the March 22, 2011 budget. Here is a summary of the proposed tax additions and modifications as tabled June 6, 2011:
Personal Tax Measures
Guaranteed Income Supplement
The budget proposes that seniors with little or no income other than Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) will receive an annual top-up. Single seniors with $2000 or less of additional income will receive the maximum of $600 per year. Couples with $4000 or less of additional income will receive the maximum of $840.
The additional benefits will be reduced by 25% of the taxpayer's (or couples) income in excess of the base ($2,000 and $4,000)and eliminated at $4,400 for single seniors and $7,360 for senior couples.
These additional payments will be effective July1, 2011.
Children's Arts Tax Credit
The budget introduces a new non-refundable tax credit for up to $500 cost for enrolling children under age 16 in an eligible program of artistic, cultural, recreational or developmental activities. For disabled children (i.e. those eligible for the disability tax credit), an additional credit of 15% of $500 is available if more than $100 is paid for eligible expenses. This credit mirrors the Children's Fitness Tax Credit except that it applies to non-fitness programs. It is not clear what happens if an expense is eligible for both the Children's Fitness credit and the Children's Art Tax Credit however proposed legislation precludes the same expense from being claimed more than once.
An eligible program must include a significant amount of eligible activities and must be ongoing in nature. An eligible program will be either a weekly program lasting a minimum of eight consecutive weeks or, in the case of children's camps, a program lasting a minimum of five consecutive days.
If all other requirements are met, the full cost of a child's membership in an organization (including a club, association or similar organization) will be eligible for the credit if more than 50 per cent of the activities offered to children by the organization include a significant amount of eligible activities. Programs that are part of school curriculums will not be eligible.
An eligible activity is a supervised activity suitable for children that:
contributes to the development of creative skills or expertise in an artistic or cultural activity
provides a substantial focus on wilderness and the natural environment;
helps children develop and use particular intellectual skills;
includes structured interaction among children where supervisors teach or help children develop interpersonal skills; or
provides enrichment or tutoring in academic subjects.
An eligible activity will also include similar activities that have been adapted to accommodate the needs and abilities of a child who is eligible for the disability tax credit.
Like the Children's Fitness Tax Credit, this credit may be shared between eligible taxpayers (e.g. spouses) so long as the total claimed does not exceed the claim allowable for an individual. This credit will be available for expenses incurred in 2011 and subsequent years.
Volunteer Firefighters Tax Credit
The budget introduces a new non-refundable tax credit for eligible volunteer firefighters. The credit is (15% of) $3,000. To be eligible, a volunteer firefighter must perform at least 200 hours of volunteer firefighting in the tax year that consist primarily of:
responding to and being on call for firefighting and related emergency calls,
attending meetings held by the fire department and
participating in required training related to the prevention or suppression of fires.
If the firefighter provides services other than on a volunteer basis, he will not be eligible for this credit regardless of the number of volunteer hours performed. To claim this credit, certification confirming the number of volunteer hours will be required for the chief or delegated official of the fire department.
Volunteer firefighters who claim this credit will not be eligible to exclude honoraria from income (currently, volunteer firefighters can exempt up to $1,000 of honoraria received for volunteer work). This credit will be available for 2011 and subsequent years.
Family Caregiver Tax Credit
The budget increases, beginning in 2012, the claim for any of the following amounts by $2,000 where the dependant is infirm:
Spouse or Common-Law Partner Amount ($10,780 becomes $12,780)
Child Amount ($2,182 becomes $4,182)
Amount for Eligible Dependants ($10,780 becomes $12,780)
Caregiver Amount ($4,385 becomes $6,385, maximum income increases by $2,000 as well)
Infirm Dependant Amount ($4,385 becomes $6,385, maximum income increases by $2,000 as well)
Where the dependant is under age 18, they will be considered infirm only if they are likely to be, for a long and continuous period of indefinite duration, dependent on others for significantly more assistance in attending to the dependant's personal needs and care when compared generally to persons of the same age.
The $2000 Family Caregiver Tax Credit will be indexed to inflation beginning in 2013.
Infirm Dependant Amount
The budget proposes to increase the phase-out of the infirm dependant amount to match the spouse or common-law partner phase-out amount beginning in 2012.
Medical Expense Tax Credit for Other Dependants
The current limitation of $10,000 for the claim for medical expenses of other dependants will be eliminated for 2011 and subsequent years.
Child Tax Credit Eligibility
Because the Amount for Children under Age 18 is included in S. 118(1), the rule that no two persons may make a claim in respect of the same self-contained domestic establishment applies. The budget proposes to remove this rule beginning in taxation year 2011.
Tuition Tax Credit ñ Examination Fees
The budget proposes to change the Tuition Tax Credit to include fees paid to an educational institution, professional association, provincial ministry or other similar institution to take an examination that is required to obtain a professional status recognized by federal or provincial statute, or to be licensed or certified in order to practice a profession or trade in Canada as well as ancillary fees and charges.
Ancillary fees include the cost of examination materials used during the examination and certain pre-requisite study materials. Entrance examinations to begin study in a field will not be eligible.
These changes apply to fees paid for examinations taken in 2011 and subsequent years.
Education Tax Measures ñ Study Abroad
The required study period to claim the Tuition and Education amount as well as to qualify for Education Assistance Payments for students studying abroad will be reduced from 13 consecutive weeks to 3 consecutive weeks for students enrolled at a university in a full-time course.
This change will be effective for courses taken in 2011 and subsequent years and EAPs made after 2010.
RESPs ñ Asset Sharing Among Siblings
The budget proposes to allow tax-free transfers between individual RESPs for siblings without triggering the repayment of CESGs so long as the beneficiary of the recipient plan is less than 21 years old at the time of the transfer.
This change applies to asset transfers after 2010.
RDSPs - Shortened Life Expectancy
The budget proposes to remove the 10-year repayment rule for CDSGs and CDSBs for RDSP beneficiaries with shortened life expectancies (i.e. a doctor has certified that the individual's life expectancy is five years or less).
In order to qualify, the beneficiary will be required to file an election in prescribed form and submit the election with the medical certification to the RDSP issuer. If the election is made, withdrawals where the taxable portion is $10,000 or less in any taxation year will not trigger the 10-year repayment rule. However, once the election is made, no further contributions (other than rollovers from a deceased annuitant's RRSP or RRIF) will be allowed and no further CDSGs or CDSBs will be paid into the plan. In addition, beginning the year following the election, the minimum withdrawal requirements that normally apply once the beneficiary reaches age 60 will apply regardless of the age of the beneficiary.
These changes will apply to withdrawals made after the legislation has received Royal Assent. As a transitional rule, beneficiaries will be able to use their 2011 withdrawal limit in 2012, provided that the medical certificate was received before 2012.
RRSPS - Anti-Avoidance Rules
1. Advantage Rules
The budget proposes to expand the existing RRSP advantage rules to parallel the recent advantage rules implemented for Tax Free Savings Accounts. As with the TFSA, the tax payable on such advantage will be the fair market value of any benefit received by the taxpayer. If the benefit is extended by the RRSP issuer, the tax will be payable by the issuer, otherwise the tax will be payable by the taxpayer.
The following are added to the "advantage concept" for RRSPs:
Benefits derived from transactions that would not have occurred in a regular, open market between arm's length parties, if it is reasonable to conclude that the transactions were undertaken to benefit from the tax attributes of RRSPs
Payments to an RRSP made on account or in lieu of payments for services
Payments of investment income, where the income is tied to the existence of another investment
Benefits derived from asset purchase and sale transactions ("swap transactions") between RRSPs and other accounts controlled by the RRSP annuitant.
Non-qualified investment income where the income is not removed from the taxpayer's RRSP within 90 days of receipt of notice from Minister of National Revenue to remove such amounts from the RRSP
Income derived from a "prohibited investment"
Benefits from any transaction or event (other than participation in the Home Buyer's Plan or Lifelong Learning Plan) where one of the main purposes is to enable an RRSP annuitant, or a non-arm's length person, to use or obtain property held in connection with the RRSP without including the value of the property in the RRSP annuitant's income
2. RRSP Prohibited Investments
The budget proposes to extend the concept of "prohibited investments" currently in place for TFSAs to RRSPs. Prohibited investments will include debt of the RRSP holder and investments in entities in which the RRSP holder or a non-arm's length person has a "significant interest" (generally 10 per cent or more) or with which the RRSP holder does not deal at arm's length. This is adapted from the TFSA definition of "prohibited investmentî.
Upon the acquisition of a prohibited investment by the RRSP, a tax of 50% of the fair market value of the prohibited investment will be payable but that tax will generally be refunded if the prohibited investment is removed from the RRSP by the end of the year following the year in which the tax was applied, unless the annuitant knew that the investment was a prohibited investment. In addition any income earned on a prohibited investment will be considered to be an advantage and a tax of 100% of the income will be payable.
3. RRSP Non-qualifying Investments
Under current rules, there is a 1% per month tax on the value of non-qualifying investment in an RRSP. The budget proposes to replace that tax as well as the other current rules in respect of non-qualifying investments in RRSPs with a special tax of 50% of the value of non-qualifying investments. This tax would generally be refunded if the non-qualifying investment is removed from the RRSP by the end of the year following the year in which the tax was applied, unless the annuitant knew that the investment was a non-qualifying investment. Income earned on a non-qualifying investment will continue to be taxable to the RRSP.
Non-qualifying investments include shares in private investment holding companies, shares in foreign private companies, and real estate.
Most of these rules will apply to transactions after March 22, 2011 with the following exceptions:
The RRSP advantage rules will not apply to swap transactions undertaken before July 2011.
RRSP swap transaction will be allowed until the end of 2012 if they are undertaken in order to remove prohibited investments or investments that give rise to an advantage.
Investments which become prohibited investments as a result of the new definition (above) which were already in the RRSP will not be subject to the 50% tax unless they remain in the RRSP after 2012.
Past-Service IPP Contributions
Individual Pension Plans are established for the employee of a corporation that he or she controls. By transferring the commuted value of a Registered Pension plan to the IPP, a great deal of the value in the plan becomes pension surplus that does not have withdrawal requirements. Therefore, the taxpayer can wait before having to take this money into income.
In order to level the playing field with owners of RPPs and RRSP and RRIF plans, the budget proposes several changes:
Annual minimum amounts will be required from IPPs once a plan member is 72. These amounts will be based on current RRIF rules unless the regular pension amount is more.
Contributions to an IPP related to past years of employment will have to come from RRSP or RPP assets or by reducing RRSP contribution room, before deductible contributions can be made.
These provisions will apply to IPP past service contributions made after March 22, 2011, except in the case of past service that was credited to an IPP member before March 22, 2011 under terms of the IPP submitted for registration on or before March 22, 2011.
Tax on Split Income
Taxable dividends from private corporations that are received by minors are subject to a special tax on split income, or "kiddie tax". These dividends have been received from a business carried on by a person related to the child or in which the related person participates. This tax is calculated on Form T1206.
The budget proposes to treat capital gains realized by or included in the income of a minor as a result of the disposition of such shares as dividends. This makes the gains subject to the tax on split income and will disqualify the income from capital gains inclusion rates and the lifetime capital gains exemption. This measure will apply to capital gains realized on or after March 22, 2011.
Agri-Quebec
Agriculture Canada offers AgriInvest, an inventive that encourages farmers to contribute to savings accounts that can be used in years of income decline. The government provides matching contributions. Government contributions and interest earned are not taxed until withdrawn.
The province of Quebec has established a similar program, Agri-Quebec. The budget proposes to allow the same tax treatment to Agri-Quebec as currently applies to AgriInvest, beginning in 2011.
Mineral Exploration Tax Credit
Investors in flow-through shares are allowed to deduct expenses related to Canadian exploration activity that are downloaded to them by the exploration companies, who renounce these expenses. The mineral exploration tax benefit (15% of expenses incurred in Canada) is an added incentive to purchase these shares.
The budget proposes to extend the mineral exploration tax credit to the end of 2013 for agreements before March 31, 2012.
Administrative Changes
Beginning after June 30, 2011, CRA will require notification from recipients of the Canada Child Tax Benefit (CCTB) at the end of the month following the month in which a marital status change occurs. This is already the rule for recipients of the GST/HST credit and notification has to be made only once.
Advance payments for the CCTB and GST/HST are made when expected monthly amounts are less than $10 for the CCTB and expected quarterly payments are less than $25 for the GST/HST credit. These occur once annually. The budget proposes to increase these thresholdsto $20 and $50 respectively for benefits paid after June 30, 2011.
Lump sum amounts receivedby former employees in lieu of dental and health benefits from insolvent employers will not be included in taxable income. This will apply to insolvencies occurring before 2012.
Employee Profit Sharing Plans
The budget proposes to examine the appropriate use of employee profit sharing plans. The goal of these plans is to allow the employee to buy into the business, encouraging increased effort that will lead to greater profitability. It is felt that some business owners use EPSPs to transfer profits to family members and avoid taxation.
Children's Special Allowances Act
The budget proposes to amend this act to allow payment of a special allowance to a child protection agency in respect of a former crown ward when the child is placed in the custody of a legal guardian, tutor or other individual and the agency provides financial assistance in the maintenance of the child.
Changes to the Charitable Sector
Any organization that can issue a tax receipt for a donation (known as a qualified donee) will have to be on a list that is available to the public. The Income Tax Act spells out the rules for donation receipts. If these rules are broken registered charities will have receipting privileges revoked or charitable status rescinded. Penalties that currently apply to registered charities will now apply to Registered Canadian Amateur Athletic Associations (RCAAAs).
All qualified donees must maintain books and records that are accessible to CRA. Failure to do so or will result in sanctions. Penalties that now apply to registered charities for failing to file information returns will be extended to RCAAAs.
RCAAAs must now operate exclusively for promotion of amateur athletics rather than primarily. Feedback will be solicited to define allowed activities.
A registered charity will be sanctioned if it provides an "undue benefitî to any person. Proposed measures will apply this rule to RCAAAs.
Public availability of certain information pertaining to RCAAAs is proposed.
The criminal history or past misconduct of individuals involved in charities will be grounds to refuse or revoke registration. Public consultation is planned to flesh out this policy.
Returned Gifts
When donations received are subsequently returned to the taxpayer, the qualified donee must have a revised receipt issued to the donor and a copy sent to CRA. This will allow reassessment of previously claimed donations that have been cancelled or reduced. This will apply to gifts or property returned after March 22, 2011.
Gift of Non-Qualifying Securities
A donor will not receive a donation receipt for a donation of a NQS (non-qualifying security i.e. share in a private corporation) until, within five years of the donation, the shares have been sold for consideration that is not another NQS. In other words, there will be no receipt until the real value of the donation has been realized. This rule will apply to securities disposed of by donees on or after March 22, 2011.
Granting of Options to Qualified Donees
The donation of an option to acquire a property is allowed and, in the past, a receipt has been issued immediately. New rules will delay the receipt until the option has been exercised. As well, the donation receipt will be issued for the difference between any amount paid for the property and/or option by the donee (the advantage) and the Fair Market Value of the property at the time the option is granted. If the advantage exceeds 80% of the FMV then it is not considered a gift and there will be no receipt. This measure will apply in respect of options granted on or after March 22, 2011.
Donations of Flow-Through Shares
Donation of flow-through shares will still be allowed. However, unlike other publically-traded securities that are donated, the elimination of tax on the capital gain will apply only to the amount that exceeds the original cost of the flow-through share, rather than the entire amount. This will greatly reduce the tax advantage of donating flow-through shares in the future. This change would be in effect for flow-through shares acquired through an agreement entered into on or after March 22, 2011.
The government supports a motion that calls for the House Standing Committee on Finance to study charitable donation incentives. The committee will be asked to undertake this study in the first session of this parliament.
Business Tax Changes
Employment Insurance
The one new initiative announced in the Budget that will have a positive effect for small business is the announcement of a "Hiring Credit for Small Business." The Budget proposes a temporary Hiring Credit of up to $1,000 against a small employer's increase in its 2011 EI premiums in excess of the 2010 calendar year. For the purposes of the credit, a small business is an employer whose total EI premiums were at or below $10,000 in 2010.
Employers currently pay 1.4 times the amount of EI premiums withheld from employees pay cheques. For 2010 the maximum EI per employee paid by the employer was $1,046.30 per employee.
The Government also announced that it would take further action to limit the potential increase in EI premiums. Currently EI premiums are scheduled to rise by 10% as of January 1, 2012.
The government pledges to renew the "Best 14 Weeksî and "Working While on Claimî EI pilot projects for one year.
Other Small Business Measures
The government will provide $20 million over two years to help the Canadian Youth Business Foundation support young entrepreneurs.
The government will continue to lighten the load for small businesses through the Red Tape Reduction Commission and upgrading the BizPal service.
Capital Cost Allowance
The budget announced the extension of the temporary accelerated capital cost allowance treatment for investment in machinery and equipment in the manufacturing and processing sector until 2014. This allows qualifying expenditures acquired before 2014 to claim an accelerated 50% straight-line method of depreciation.
Accelerated CCA on Clean Energy Generation Equipment - Also announced was the inclusion in class 43.2 (50% declining balance) of equipment designed to generate electricity in a process in which all or substantially all or the energy input is from waste heat. This applies to equipment acquired after March 22, 2011.
Limit of Deferral of Corporate Income Earned Through a Partnership
The budget introduces a Stub Period, for corporations that are members of partnerships where the fiscal year-end of the corporation differs from the year-end of the partnership. This will eliminate the ability of corporations to structure year-ends creating a tax deferral.
Previously Introduced Measures
It should be noted that Budget 2011 confirms the government's intention to proceed with these previously announced measures now that consultation has taken place:
Legislation relating to measures announced in the March 2010 Budget(including related legislative proposals that were released on August27,2010);
Legislative proposals released on July 16, 2010 relating to income tax technical and bijuralism amendments;
GST/HST relief for Royal Canadian Legion purchases of Remembrance Day poppies and wreaths announced on October28,2010;
Legislative proposals released on November5,2010 relating to income tax technical amendments;
Measures announced on November25,2010 to ensure that individuals can appeal, in every case, a determination concerning their eligibility for the Disability Tax Credit;
Legislative proposals released on December7,2010 to accommodate changes to the Saskatchewan Pension Plan;
Legislative proposals released on December16,2010 relating to the RealEstate Investment Trust rules;
Proposed changes to certain GST/HST rules relating to financial institutions released on January28,2011;
Legislative proposals released in draft form on March 16, 2011 relating tothe deductibility of contingent amounts, withholding tax on interest paid to certain non-residents, and the tax treatment of certain life insurance corporation reserves
Outstanding draft legislative proposals relating to foreign affiliates
