MNP Tax Alert 2011 Federal Budget Summary British Columbia FRASER VALLEY David Cesmystruk 604-870-7404 LOWER MAINLAND Ken Robinson 604-949-2103 Federal Minister of Finance James M. Flaherty delivered the Conservative government s Federal Budget on Tuesday, March 22, 2011. The Government reiterated its commitment to Canada s Economic Action Plan and introduced a new phase designed to secure its recovery and to improve the well-being of Canadians over the long term. To this end, the focus of this next phase will be supporting job creation, supporting families and communities, investing in innovation, education and training, and preserving Canada s fiscal advantage. Strong fiscal management continues to be the cornerstone of the Government s economic policy, with a plan to return to balanced budgets by 2015. No new personal or corporate income tax rate changes have been announced in this year s Budget; however, three new personal tax credits have been introduced, as well as proposals intended to close current loopholes. Highlights of the key tax measures announced in Budget 2011 are summarized below. I. Corporate Income Tax Measures PARTNERSHIPS - DEFERRAL OF CORPORATE TAX OKANAGAN Don Murdoch 250-979-1734 VANCOUVER Kevin Wong 604-637-1546 VANCOUVER ISLAND Alladin Versi 250-734-4305 Budget 2011 proposes to limit the deferral of tax by a corporation that has a significant interest in a partnership having a fiscal period different from the corporation s taxation year. In computing the corporation s income for a taxation year, in respect of a fiscal period of the partnership that begins in the taxation year and ends in a subsequent year, the corporation will be required to accrue income from the partnership for the portion of the partnership s fiscal period that falls within the corporation s taxation year. The proposed measures will apply to a corporate partner (other than a professional corporation) for a taxation year if the partner, together with affiliated and related parties, is entitled to more than 10% of the partnership s income (or assets in the case of wind-up) at the end of the last fiscal period of the partnership that ended in the taxation year. A one-time election will be provided that will enable a partnership to change its fiscal period, subject to specific conditions, to align with the taxation year of one or more corporate partners. Also, if a partnership has one or more partnerships as members, all of those partnerships will be required to adopt a common fiscal period. The proposed rules include several technical measures. For example, a corporate partner will be permitted to use either a formulaic approach or a designation approach in computing a Stub Period Accrual in respect of each
Alberta CALGARY Randy Bella 403-536-5536 partnership. A corporate partner may be entitled to reduce its Stub Period Accrual by the amount of its share of Designated Resource Expenses incurred by the partnership in the Stub Period. Also, special rules will apply to Multitier Alignment Income of a corporate partner that has an interest in a multitier partnership. Transitional relief will be available to recognize the incremental amount of income gradually over the five taxation years that follow the first taxation year in which the new rules apply. Income eligible for transitional relief will be subject to certain restrictions. STOP-LOSS RULES ON THE REDEMPTION OF A SHARE CENTRAL ALBERTA Brian Posthumus 403-356-1273 EDMONTON Les Creasy 780-453-5386 Currently, the stop-loss rules can apply to reduce the amount of a loss otherwise realized by a corporation on a disposition of shares by the amount of tax-free dividends received, or deemed to have been received, on those shares on or before the disposition. Budget 2011 proposes to extend the application of these stop-loss rules to any dividend deemed to be received on the redemption of shares held by a corporation, other than dividends deemed to be received on the redemption of shares of the capital stock of a private corporation that are held by a private corporation (other than a financial institution) whether directly or indirectly through a partnership or trust. ACCELERATED CAPITAL COST ALLOWANCE Manufacturing and Processing Machinery and Equipment PEACE Kim Drever 780-832-4287 CYPRESS Deidre Jensen 403-502-8467 LETHBRIDGE Michael Unick 403-536-5517 For Class 29 assets, the temporary accelerated CCA rate of 50% on a straight line basis has been extended for two years to eligible machinery and equipment acquired before 2014. Machinery and equipment acquired after 2013 will be included in Class 43 and subject to a 30% declining balance CCA rate. Clean Energy Generation Equipment Class 43.2 provides accelerated CCA for specified clean energy generation and conservation equipment. In Budget 2010, the Government expanded Class 43.2 to include equipment that recovers waste heat in a broader range of applications than was previously eligible. Budget 2011 proposes to further amend Class 43.2 to include equipment that is used by the taxpayer, or by a lessee of the taxpayer, to generate electrical energy in a process in which all or substantially all of the energy input is from waste heat. This measure will apply to eligible assets acquired on or after Budget Day that have not been used, or acquired for use, before that date. QUALIFYING ENVIRONMENTAL TRUSTS (QET) Budget 2011 proposes to expand the range of trusts eligible for QET treatment to include trusts that are required to be established in the context of pipeline abandonment. One of the conditions for a trust to qualify for QET treatment is that the trust must be mandated under the terms of a contract entered into with the Crown in right of Canada or a province or under a law of Canada or a province. Budget 2011 proposes to now include trusts that are created after
Saskatchewan NORTH SASK Dave Boyko 306-664-8301 SOUTH SASK Carol Hanney 306-790-7930 Manitoba WINNIPEG Terry Speiss 204-788-6059 SOUTHERN MANITOBA Shawn de Delley 204-571-7672 2011 and mandated by order of a tribunal, such as the National Energy Board, constituted by a law of Canada or a province. To qualify for tax treatment as a QET, a trust s holdings must be limited to certain eligible investments. Budget 2011 proposes to expand the range of eligible investments to include debt obligations described in paragraphs (c) and (c.1), and securities described in paragraph (d), of the definition qualified investment in section 204 of the Income Tax Act. This will generally include debt of public corporations, investment-grade debt and securities listed on a designated stock exchange. Budget 2011 proposes to set the rate of tax payable by a QET to the corporate income tax rate generally applicable for the 2012 and later taxation years. All changes regarding qualifying environmental trusts will apply to the 2012 and subsequent taxation years. INTANGIBLE CAPITAL EXPENSES IN OIL SANDS PROJECTS Budget 2011 proposes that the cost of oil sands leases and other oil sands resource property be treated as Canadian oil and gas property expense and thus be eligible for deduction at 10% per year. Currently, the cost of acquiring oil sands leases and other oil sands resource property generally can be treated as Canadian development expense (CDE) which is deductible at the current rate of 30% declining balance. Budget 2011 also proposes that development expenses incurred for the purpose of bringing a new oil sands mine into production be treated as CDE, rather than the current treatment as Canadian exploration expense (CEE) and deductible in full in the year incurred. II. Personal Income Tax Measures CHILDREN'S ARTS TAX CREDIT Budget 2011 proposes a new Children s Arts Tax Credit for a child, under the age of 16, who is enrolled in an eligible program of artistic, cultural, recreational or developmental activities. The credit is available for eligible expenses paid in the 2011 and subsequent taxation year. A related, additional disability supplement amount may be claimed for children under the age of 18 who are eligible for the Disability Tax Credit where a minimum of $100 is paid in eligible expenses. VOLUNTEER FIREFIGHTERS TAX CREDIT Under Budget 2011, volunteer firefighters who perform at least 200 hours of volunteer firefighting services in a taxation year will be eligible for a 15% nonrefundable tax credit based on an amount of $3,000. This credit is available for the 2011 and subsequent tax years. FAMILY CAREGIVER TAX CREDIT Beginning in 2012, caregivers of dependants with mental or physical infirmity may claim an enhanced non-refundable tax credit amount for an infirm dependant. The 2011 Budget proposes to add a $2,000 Family Caregiver Tax Credit to the existing dependency related credits such as the Child Tax
Ontario NW ONTARIO Steve Blazino 807-625-4845 SW ONTARIO Bill Mitchell 519-621-8701 TORONTO Bryan Allendorf 416-515-3855 Quebec MONTREAL Charles Leibovich 514-906-4640 Credit, Spousal/Common-law Partner Credit or Eligible Dependant Credit. The $2,000 Family Caregiver Tax Credit will be indexed for inflation in 2013 and later years. MEDICAL EXPENSE TAX CREDIT FOR OTHER DEPENDANTS Effective for 2011 and subsequent taxation years, Budget 2011 proposes to remove the $10,000 limit on eligible expenses that can be claimed under the Medical Expense Tax Credit in respect of a dependent relative. A dependent relative includes a child who is 18 years of age or older, a grandchild, parent, grandparent, brother, sister, uncle, aunt, niece or nephew who is dependent on the taxpayer for support. CHILD TAX CREDIT (CTC) ELIGIBILITY Budget 2011 proposes to repeal the rule that limits the number of CTC claimants to one per domestic establishment. This will allow two or more families that share a home to each claim the CTC in respect of their children. This measure will be effective for 2011 and subsequent years. TUITION TAX CREDIT - EXAMINATION FEES Under Budget 2011, examinations fees paid to an educational institution, professional association or provincial ministry in order to be licensed or certified to practice a profession or trade in Canada will be eligible for the Tuition Tax Credit. This will help apprentices in the skilled trades and workers in regulated professions. This measure is effective for eligible amounts paid for examinations taken in 2011 and later years. EDUCATION TAX MEASURES - STUDY ABROAD Budget 2011 proposes to reduce the minimum course-duration requirement for the Tuition, Education and Textbook Tax Credit for Canadians studying at foreign universities from 13 consecutive weeks to 3 weeks. The course duration requirement for Educational Assistance Payments (EAP s) from a Registered Education Savings Plan for Canadian students studying abroad is also reduced to 3 consecutive weeks. These measures apply to tuition fees paid for courses taken in 2011 and EAP s made after 2010. REGISTERED EDUCATION SAVINGS PLANS (RESP'S) - ASSET SHARING AMONG SIBLINGS Effective 2011, Budget 2011 will allow transfers between individual Registered Education Savings Plans (RESP) for siblings without tax penalties and without triggering the repayment of the Canada Education Savings Grants. This transfer between siblings is available as long as the individual receiving the transferred asset had not attained the age of 21 when the RESP was opened. REGISTERED DISABILITY SAVINGS PLANS (RDSP'S) - SHORTENED LIFE EXPECTANCY Budget 2011 proposes to allow RDSP beneficiaries with shortened life expectancies to withdraw more of their RDSP savings by permitting annual withdrawals without triggering the ten year repayment rule, subject to specified limits and certain conditions. The holder of the RDSP must make an
election and submit it with a medical certification in order to take advantage of this measure. This measure applies to withdrawals made after the enacting legislation receives Royal Assent. REGISTERED RETIREMENT SAVINGS PLANS (RRSP'S) - ANTI-AVOIDANCE RULES Budget 2011 proposes to address the use of RRSPs in tax planning schemes such as RRSP strips (schemes which purport to enable RRSP annuitants to access their RRSP funds without including the appropriate amount in income). Changes have also been proposed to expand the RRSP anti-avoidance rules by introducing rules similar to the advantage, the prohibited investment, and the non-qualified investment rules that currently apply to Tax-Free Savings Accounts (TFSAs). These new rules will generally apply to transactions occurring and investments acquired after March 22, 2011. INDIVIDUAL PENSION PLANS (IPP'S) - TWO NEW MEASURES Budget 2011 proposes that annual minimum amounts be withdrawn from IPPs (similar to RRIF s) once a plan member attains the age of 72. Further, contributions made to an IPP that relate to past years of employment will be required to be funded first by transfers from the RRSP assets of the plan member or by reducing the IPP member s accumulated RRSP contribution room before any new past service contributions can be made. TAX ON SPLIT INCOME - CAPITAL GAINS The Government proposes a measure to extend the tax on split income to capital gains realized by, or included in the income of, a minor from a disposition of shares of a corporation to a person who does not deal at arm s length with the minor, if taxable dividends on the shares would have been subject to the tax on split income (ie. kiddie tax). Capital gains subject to this new measure will be treated as dividends and will not benefit from capital gains inclusion rates or qualify for the lifetime capital gains exemption. MISCELLANEOUS PERSONAL TAX MEASURES The Government plans to review the existing rules applying to Employee Profit Sharing Plans in order to determine whether technical improvements are required in this area. Consultations will be undertaken to seek the views of stakeholders prior to introducing any amendments to the tax rules. Budget 2011 proposes to require an individual who receives the Canada Child Tax Benefit (CCTB) to notify the CRA of a marital status change before the end of the month following the month in which the change in status occurs. The Budget proposes to increase the advance payment threshold for the CCTB to $20 per month and for the GST/HST Credit to $50 per quarter.
ABOUT MNP Founded in 1945, Meyers Norris Penny has grown from a single office in Manitoba to over 75 full and part-time locations across Canada. MNP is now the seventh largest chartered accountancy and advisory firm in Canada. Our roots in our communities are a big part of how we do business. Because we live and work in the same communities as our clients, we understand the markets they deal with. When they talk, we listen. And we provide clear, straightforward business advice to help get you where you want to go. MNP has a proven track record providing traditional accounting and assurance services to our public sector clients. With our experiences, we have gained valuable insight into the Canadian public sector, and the specific requirements of our clients. A key strength of MNP is our approach to addressing your needs. We believe in teamwork and applying the appropriate resources to each engagement. This means when you have a need for a service, we will meet with you to understand your specific requirements and assemble the best team for the situation. III. Charitable Sector Tax Measures Budget 2011 contains a number of measures relating to charitable organizations that help clarify existing legislation, ensure compliance with the law and provide greater certainty to donors. Qualified Donees: The proposal extends certain regulatory requirements that currently apply to registered charities to the following list of qualified donees: registered Canadian amateur athletic associations (RCAAA s); municipalities in Canada; municipal and public bodies performing a function of government in Canada; housing corporations in Canada which provide low-cost housing for the aged; universities outside of Canada, the student body of which ordinarily includes students from Canada; and certain other charitable organizations outside of Canada that have received a gift from Her Majesty in right of Canada. Qualified donees will be required to be on a publicly available list maintained by the Canada Revenue Agency in order to be eligible to issue official donation receipts. CRA will be authorized to suspend donation receipting privileges / revoke qualified donee status where donation receipts are not issued in accordance with the provisions of the Income Tax Act. Qualified donees will be required to maintain proper books and records and make them accessible to CRA when requested. There is a proposal for the Minister of National Revenue to have the discretion to refuse or to revoke the registration of an organization if a member of the board of directors, or certain other individuals who influence the organization, have been found guilty of a criminal offence involving financial dishonesty or have been involved with another charity who had its registration revoked. These measures will apply on or after the later of January 1, 2012 and Royal Assent to the enacting legislation. Charitable donation tax credit for gifts of non-qualifying securities (NQS) will be deferred until such time, within five years of the donation, as the qualified donee has disposed of the NQS for consideration that is not, to any person, another NQS. Donors: There is a proposal to issue reassessments to disallow a taxpayer s claim for a credit in instances where property donated is returned to a donor. Revised receipts will be required to be issued by the qualified donee. Budget 2011 clarifies that the charitable donation tax credit is not available to a taxpayer in respect of the granting of an option to a qualified donee to acquire a property of the taxpayer until the time the donee acquires property of the taxpayer that is the subject of the option. Donations of publicly listed flow-through shares would be exempt from capital gains tax for agreements entered into on or after March 22, 2011
only to the extent that cumulative capital gains in respect of disposition s of shares of that class exceed the original cost of the flow-through shares. IV. Previously Announced Measures Budget 2011 confirms the government s intention to proceed with the following previously announced tax measures (as modified to take into account consultations and deliberations since their release): Legislative proposals released on March 16, 2011 by the Department of Finance relating to the deductibility of contingent amounts, withholding tax on interest paid to certain non-residents, and the tax treatment of certain life insurance corporation reserves. Proposed changes to certain GST / HST rules relating to financial institutions released January 28, 2011. Legislative proposals released on December 16, 2010 relating to Real Estate Investment Trust rules. Legislative proposals released on December 7, 2010 to accommodate changes to the Saskatchewan Pension Plan. Outstanding measures announced in the March 2010 Budget (including related legislative proposals that were released on August 27, 2010) including the taxation of foreign affiliates, revised proposals on foreign tax credit generators, revised foreign investment entity and nonresident trust rules and measures to implement a new reporting regime for aggressive tax planning. Legislative proposals released on November 5, 2010 relating to income tax technical amendments. DISCLAIMER 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.