Tax Changes for Individuals and Families

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), and 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.

Eligible Programs

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 childrenís camps, a program lasting a minimum of five consecutive days.

If all other requirements are met, the full cost of a childís 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

Eligible Activities

An eligible activity is a supervised activity suitable for children that:

• contributes to the development of creative skills (a child's ability to improve dexterity or co-ordination, or acquire and apply knowledge in the pursuit of artistic or cultural activities) or expertise in an artistic or cultural activity(the literary arts, visual arts, performing arts, music, media, languages, customs and heritage)

• 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.

Eligible Firefighters

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, they will not be eligible for this credit regardless of the number of volunteer hours performed.

Certification

To claim this credit, certification confirming the number of volunteer hours will be required for the chief or delegated official of the fire department.

Income Exemption

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 ($2,128 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 dependantís personal needs and care when compared generally to persons of the same age.

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 ñ 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.

RRSPs ñ Anti-Avoidance Rules

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 armís 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-armís length person, to use or obtain property held in connection with the RRSP without including the value of the property in the RRSP annuitantís income.

Prohibited Investments

The budget proposes to extend the concept of "prohibited investments" currently in place for TFSAs to RRSPs. Prohibited investments will include:

• investments in entities in which the RRSP holder or a non-armís length person has a "significant interest" (generally 10 per cent or more) or with which the RRSP holder does not deal at armís length, and

• a debt of the RRSP holder

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.

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.

Timing

Most of these rules will apply to transactions after budget day 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.

Individual Pension Plans

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 come into effect in 2012.

Tax on Split Income ñ Capital Gains

Taxable dividends from private corporations received by minors is subject to a special tax on split income or "kiddie tax" if 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 make 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.

Agri-Québec

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 thresholds to $20 and $50 respectively for benefits paid after June 30, 2011.

Pension Plan Wind-Ups

Lump sum amounts received by 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.

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 taxpayerís (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 July 2011.