2003 Federal Budget Commentary

Transcription

1 2003 Federal Budget Commentary Building the Canada We Want Introduction Deputy Prime Minister and Finance Minister John Manley tabled his first budget today in the House of Commons. This is the Liberal government s sixth consecutive balanced budget. The Federal government links social and economic policy primarily on three themes: Building the society Canadians value through investments in individual Canadians, their families and communities; Building the economy Canadians need by promoting productivity and innovation while staying fiscally prudent; and Building the accountability Canadians deserve by making government more transparent and accountable. The budget proposed large increases in spending including: $34.8 billion for Health care over the next five years; Additional spending to reduce child poverty including an increase to the Canadian Child Tax Benefit, assistance in providing quality child care to First Nations children, introduction of the Child Disability Benefit, funds to combat homelessness, additional funding to augment affordable housing and $3 billion in additional support infrastructure development over the next ten years; $2 billion to create a more innovative Canada including the creation of the new Canada Graduate Scholarships, additional funding for Canada s three research granting councils, funding for indirect costs of research at universities and $500 million to the Canada Foundation for Innovation to improve buildings and other infrastructure; $3 billion directed at key environmental initiatives; and Significant increases to military spending.

2 Personal Tax Measures Rate Relief Personal tax rate relief for 2003 is in the form of indexation only. (see Table of Tax Brackets pg. 7) Retirement Savings Measures The budget proposes increases in the Registered Pension Plan (RPP) and Registered Retirement Saving Plan (RRSP) limits over the next five years as follows: Existing and Proposed RPP / RRSP Limits Money Purchase RPP's $ $ $ $ $ Annual contribution limit Existing $ 14,500 $ 15,500 indexed Proposed $ 15,500 $ 16,500 $ 18,000 indexed Defined Benefit RPPs RRSPs Maximum Pension Benefit (per year of service) Existing $ 1,722 $ 1,722 indexed Proposed $ 1,722 $ 1,833 $ 2,000 indexed Annual contribution limit Existing $ 13,500 $ 14,500 $ 15,500 indexed Proposed $ 14,500 $ 15,500 $ 16,500 $ 18,000 indexed Registered Retirement Income Fund (RRIF) Type Payouts from Money Purchase RPPs Previously, individuals who had RPPs on retirement could either purchase a lifetime annuity or roll the value of their RPP into an RRSP. The budget proposes that RPPs be permitted to pay benefits to the plan holder on the same basis as a RRIF. A member will be required to make withdrawals from their money purchase account no later than the year they attain the age of 70 and the minimum amount will be determined in accordance with the rules governing RRIFs. The measure will also allow an individual to transfer funds back to their RPP after they have previously rolled the amounts to an RRSP. The changes will apply after Automobile Benefit and Expense Provisions The budget proposes to ease the charges and restrictions with respect to automobiles. Standby Charge Currently, there is a reduction of the standby charge if an individual drove the automobile for personal purposes less than 12,000 km and the automobile was used over 90% for business purposes. These measurements will be eased in two ways: the first is an increase in the annual kilometre limit from 12,000 km to 20,000 km; and The second is to replace the all or substantially all (90%) business use test with primarily used (50%) test to determine whether the reduction will be applied. For example, if an individual drove the automobile for 15,000 km and the automobile was used over 50% for business use, the standby charge would be reduced by 25%. For additional information about Collins Barrow, visit us online at 2

3 Extended Cab Pick-Up Trucks Extended cab pick-up trucks, with the ability to seat a driver and more than 2 passengers, are excluded from the definition of automobile provided they are used over 90% for business purposes. The budget proposes easing this restriction to require the vehicle be used over 50% for business purposes providing they are producing income at a work site over 30 km from any community having a population exceeding 40,000. This amendment is for taxation years after Emergency Police and Fire Vehicles The budget proposes to remove clearly marked police and fire vehicles from the definition of automobiles. Therefore, these vehicles will not be subject to a standby charge where the individual is required to take the vehicle home. National Child Tax Benefit Supplement The budget proposes changes in the Canada Child Tax Benefit (CCTB). Currently the CCTB has two components, the CCTB Base benefit and the National Child Benefit (NCB). The budget proposes to increase the NCB supplement as follows: $150 per child in July 2003; $185 in July 2005; and $185 in July Therefore, the maximum CCTB for first child will increase to: $2,632 in July 2003; and $3,243 by July 2007 with marginally lower limits for subsequent children. Child Disability Benefit The budget introduces a $1,600 Child Disability Benefit (CDB). The CDB will be available to families with incomes below the amount at which the NCB is phased out ($33,487 in July 2003). The benefits beyond this threshold will be reduced by 12.2% for one disabled child, 22.7% for two disabled children and 32.6% for three or more disabled children. The CDB will be reduced to zero as net family income reaches $46,602 for a family caring for one disabled child, $47,584 for two disabled children and $48,211 for three or more disabled children. The CDB will be effective in July 2003 but will become payable and included in the CCTB in March 2004 with retroactive payment for the July 2003 and March 2004 periods. RRSP/RRIF Rollovers for an Infirm Child The budget proposes to increase the level of income used to determine the financial dependence of an infirm child or grandchild from $7,634 to $13,814 (indexed after 2003) for purposes of tax-free transfer of RRSP/RRIF from a deceased parent. The increase will apply for the 2003 and subsequent tax years. Eligibility Criteria for The Disability Tax Credit Due to a March 2002 federal court of appeal decision that potentially expanded the eligibility criteria for the Disability Tax Credit (DTC) to persons with food allergies who must spend an inordinate amount of time preparing their food, legislation will be changed to clarify the eligibility requirements for the DTC. Specific tests will need to be met to qualify for the credit. For additional information about Collins Barrow, visit us online at 3

4 Eligible Expenses for the Medical Expense Tax Credit The budget proposes to expand the list of eligible medical expenses to include: The cost of real-time captioning on behalf of individuals with a speech or hearing impairment; The cost of note-taking services used by persons with mental or physical impairments and the cost of voice recognition software for persons with a physical impairment. A medical practitioner must certify the requirement for these services; and The incremental cost associated with the purchase of gluten free food products for individuals with Celiac disease who require a gluten-free diet. Maximum Pension Accrual for Firefighters The maximum pension accrual will be increased from 2 per cent to 2.33 per cent for fire fighters who are members of defined benefit RPPs that are integrated with the Canada Pension Plan or the Quebec Pension Plan. Capital Gains Rollover for Small Business Investors Currently, investors holding eligible small business corporation shares may defer the gain on the sale of those shares provided they reinvest in an eligible small business corporation share within the earliest of 120 days after the disposition or 60 days after the end of that calendar year. The rollover provides a reduction of the deferral for shares with a cost base in excess of $2,000,000. The budget proposes to remove the $2,000,000 restriction and to allow a reinvestment to be made at any time during the year of disposition or within 120 days after the end of that calendar year. The changes apply to dispositions after February 18, Qualified Limited Partnerships There are several changes to the qualified limited partnership rules to ease the restrictions of a Canadian venture capital fund to structure itself as a QLP. For additional information about Collins Barrow, visit us online at 4

5 Business Tax Issues Small Business Deduction The budget will finally raise the small business deduction limit from $200,000 to $300,000 over the next four years as follows: after 2005 $225,000 $250,000 $275,000 $300,000 Once fully implemented, the increased small business deduction will reduce taxes payable earned by a Canadian Controlled Private Corporation (CCPC) on its active business income by $9,000. These limits will continue to be reduced for CCPCs with taxable capital between $10 million and $15 million. To coincide with the increase in the small business deduction, the income used to reduce the annual expenditure limit, for CCPCs engaged in research and development, will be raised by $100,000. Therefore, the expenditure limit for a corporation to earn refundable R&D tax credits at the 35% rate will be reduced between $300,000 and $500,000. Federal Capital Tax The budget proposes to eliminate the Federal Large Corporations Tax over the next 5 years, with full elimination by 2008 as follows: Rate 0.225% 0.200% 0.175% 0.125% % Threshold $10,000,000 $50,000,000 $50,000,000 $50,000,000 $50,000,000 Note the large increase in the threshold to $50M in Rates will be prorated for fiscal years not ending on a calendar year end, however, the threshold will be available to corporations ending in the calendar year and will not be prorated. The federal corporate surtax in excess of a corporations federal capital tax liability will continue to be calculated as if the federal corporate capital tax was being calculated at 0.225% and the capital deduction remained at $10 million. The federal capital tax levied on large financial institutions will continue to apply with no change. Changes to Resource Taxation The Budget proposes to reduce the rate of taxation on income from resource activities from 28% to 21% over a period of five years; permit a deduction for actual provincial and other Crown royalties and mining taxes paid and the elimination of the existing 25% resource allowance; and create a new 15% tax credit for qualifying mineral exploration. Capital Cost Allowance Class 43.1 (renewable and alternate energy) The budget proposes that certain fixed-location fuel cells and ancillary fuel reformation and electrolysis equipment will now be eligible for class 43.1 (30% rate). Film or Video Production Services Tax Credit The budget proposes to increase the refundable tax credit from 11% to 16% of qualified Canadian Labour expenditures. The increase is applicable to expenditures incurred after February 18, For additional information about Collins Barrow, visit us online at 5

6 Other Measures FEDERAL BUDGET COMMENTARY 2003 Tax Shelter Definition The definition is being expanded and modified to add clarification. Excise Matters The federal government will remove the 4-cent per litre excise tax on diesel fuel from Bio-Diesel and E- Diesel fuel, biomass-produced ethanol or methanol portion of blended diesel fuel. The federal budget proposes increases in tobacco tax of $3.50 per carton of cigarettes, $2.50 per 200 tobacco sticks and $2.50 per 200 grams of other manufactured tobacco. GST Matters School Transportation Services The government proposed changes to ensure that school transportation services transporting elementary or secondary school students continues to be treated as an exempt service. The amendment will be effective retroactive to the date of introduction of the GST with the exception of specific cases decided on by the Federal court at the time of the announcement. Contracted Municipal Services The budget proposes to amend the GST/HST legislation to clarify that purchases by municipalities of contracted services continue to be taxable. This amendment will be retroactive to the date of introduction of the GST. Employment Insurance Premium Rates (EI) EI rates will continue to decline from $2.10 per $100 of insurable earnings in 2003 to $1.98 in Interest Deductibility In light of recent court decisions, legislative amendments will be considered by the Department of Finance with respect to the deductibility of interest and certain other expenses. For additional information about Collins Barrow, visit us online at 6

7 Table of Tax Brackets Detailed Listing of Indexed Personal Income Tax Parameters Including Budget 2003 Measures Personal amounts and bracket thresholds Pre-2000 Budget $ $ $ Basic personal amount 7,131 7,634 7,756 Spousal/equivalent-to-spouse amount 6,055 6,482 6,586 Net income threshold Taxable income at which 22-per-cent bracket begins 29,590 31,677 32,183 Taxable income at which 26-per-cent bracket begins 59,180 63,354 64,368 Taxable income at which 29-per-cent bracket begins n/a 103, ,648 Credit amounts to reflect needs Infirm dependant amount 2,353 3,605 3,663 Net income threshold 4,778 5,115 5,197 Caregiver amount 2,353 3,605 3,663 Net income threshold 11,500 12,312 12,509 Disability amount 4,233 6,180 6,279 Disabled child amount n/a 3,605 3,663 Allowable child care and care expenses n/a 2,112 2,145 Medical expense tax credit 3 per cent of net income ceiling 1,614 1,728 1,755 Refundable medical expense tax credit supplement Minimum earnings threshold 2,500 2,676 2,719 Family net income threshold 17,419 20,296 20,621 Age amount 3,482 3,728 3,787 Net income threshold 25,921 27,749 28,193 Old Age Security repayment threshold 53,215 56,968 57,879 Disclaimer The information contained herein is for information purposes only and is not intended to be complete in all respects. It is merely a summary of budget materials released by the Department of Finance Canada. We recommend that you consult with a tax professional before acting on the basis of material contained herein. For additional information about Collins Barrow, visit us online at 7