February 12, 2014
Federal Budget 2014 – Summary
The 2014 Federal Budget tabled a number of proposals that will impact the financial, tax and estate plans of Canadians. Below is an Executive Summary of the most relevant budget proposals that may impact investors, followed by further important proposed items.
EXECUTIVE SUMMARY
Federal Tax Rates
There are no changes to personal federal income tax rates or income brackets.
Corporate Tax Rates
There are no changes to corporate tax rates.
Registered Disability Savings Plans (RDSPs) – Legal Representation
Last year, a temporary measure was introduced to allow “qualified family members” to establish an RDSP for an adult beneficiary who lacks the mental capacity to enter into a contract. While this allowed more adult persons with disabilities to access RDSPs, it failed to solve the problem for beneficiaries who do not have a parent or spouse. Some provinces streamlined processes to allow for the appointment of a trusted person to manage the resources of an adult who lacks contractual capacity, or have processes in place to address this concern. This includes British Columbia, Alberta, Saskatchewan, Manitoba, Newfoundland and Labrador, and Yukon. Ontario has recommended a streamlined procedure and Northwest Territories has indicated that it will address it on a case-by-case basis. The government is encouraging the remaining provinces/ territories (which include Quebec, Nova Scotia, New Brunswick, PEI and Nunavut) to take prompt action. These are positive developments that will allow a greater number of individuals with disabilities to take advantage of the many benefits that RDSPs offer.
Pension Transfer Limits
The Income Tax Act defines the limit as to how much an individual is able to transfer from a defined benefit pension plan (RPP) to an RRSP, RRIF, or other pension plan, on a tax-deferred basis. In 2011, the Government introduced a special rule that allows the maximum transferable amount for a plan member who is leaving an underfunded RPP to be the same as if the RPP were fully funded. This can reduce the taxable amount of the commuted value to the individual.
Budget 2014 proposes to allow this rule to apply in additional situations. In particular, the rule will be available in respect of a commutation payment to a plan member who is leaving an RPP if that payment has been reduced due to plan underfunding and either:
- where the plan is an RPP other than an individual pension plan (IPP), the reduction in the estimated pension benefit that results in the reduced commutation payment is approved pursuant to the applicable pension benefits standards legislation; or
- where the plan is an individual pension plan, the commutation payment to the plan member is the last payment made from the plan (i.e., the plan is being wound up).
This measure will apply in respect of commutation payments made after 2012.
FURTHER PROPOSALS
Adoption Expense Tax Credit
The Adoption Expense Tax Credit is a 15% non-refundable tax credit that allows adoptive parents to claim eligible adoption expenses related to the completed adoption of a child under the age of 18 (up to a maximum of $11,774 in expenses per child for 2014). Expenses which are eligible include fees such as those paid to a licensed adoption agency as well as mandatory immigration expenses in respect of the child. The Adoption Expense Tax Credit is claimed in the taxation year in which an adoption is completed.
Budget 2014 proposes to increase the maximum amount of eligible expenses to $15,000 per child for 2014. This maximum amount will be indexed to inflation for taxation years after 2014.
Medical Expense Tax Credit (METC)
The list of expenses eligible for the METC is regularly reviewed and updated in light of disability-specific or medically-related developments and new technologies. Currently, the METC provides tax relief for costs incurred for therapy provided to an individual who claims the Disability Tax Credit. However, effective therapy requires that a plan be designed to meet the specific needs of an individual (e.g., applied behaviour analysis therapy for children with autism). The design of a plan normally includes both its initial development and subsequent adjustment if necessary.
Budget 2014 proposes that amounts paid for the design of an individualized therapy plan be eligible for the METC as long as the cost of the therapy itself would be eligible for the METC as well as meeting some other conditions. In addition, Budget 2014 also proposes to add to the list of eligible medical expenses the costs for service animals specially trained to assist an individual in managing severe diabetes.
These expenses will be eligible for the METC if they were incurred after 2013.
Search and Rescue Volunteer Tax Credit
A couple of years ago, the Federal Government introduced the Volunteer Firefighters Tax Credit which applied to Canadians who volunteered their time to contribute to the safety and security of Canadians. This year, Budget 2014 proposes a Search and Rescue Volunteers Tax Credit (SRVTC) to allow eligible ground, air and marine search and rescue volunteers to claim a similar 15% non-refundable tax credit based on an amount of $3,000. The individual must perform a minimum of 200 hours of volunteer search and rescue services in a taxation year, for one or more ground, air or marine search and rescue organizations, that consist primarily of responding to and being on call for search and rescue and related emergencies, attending meetings held by the search and rescue organization and participating in required training related to search and rescue. An individual who performs both eligible volunteer firefighting services and eligible volunteer search and rescue services for a total of at least 200 hours in the year will be able to claim either the Volunteer Firefighters Tax Credit (VFTC) or the SRVTC, but not both.
This measure will apply to the 2014 and subsequent taxation years.
Extended Eligibility for Mineral Exploration Tax Credit
Flow-through shares allow companies to renounce or “flow through” Canadian exploration expenses to investors who can deduct the expenses in calculating their own taxable incomes. This facilitates the raising of equity to fund exploration. The mineral exploration tax credit is an additional benefit, equal to 15% of specified mineral exploration expenses incurred in Canada and renounced to flow through share investors. Budget 2014 proposes to extend eligibility of this credit for one year, to flow-through agreements entered into on or before March 31, 2015.
Amateur Athletic Trusts
Amateur athletes are permitted to place certain income that they earn (such as endorsements, prize money, income from public appearances) into an Amateur Athletic Trust, of which they are the beneficiary. Amounts contributed to an Amateur Athletic Trust are excluded from the athlete beneficiary’s income in the year in which contributions are made. In addition, no taxes are payable on investment income earned by the trust. Since income contributed to the trust is exempt from income tax, it is not treated as “earned income” for purposes of determining an athlete’s annual RRSP contribution limit.
Budget 2014 proposes to allow income that is contributed to an Amateur Athletic Trust to qualify as “earned income” and thus create additional RRSP contribution room for the trust beneficiary. This proposal will apply to contributions made after 2013. In addition, athletes who contributed to an Amateur Athletic Trust in 2011, 2012, and 2013 will be permitted to file an election (due by March 2, 2015) to have that income also qualify as earned income to create additional RRSP contribution room. RRSP contribution room will be adjusted each year based on the election filed.
GST / HST Credit Administration
The Goods and Services Tax/Harmonized Sales Tax (GST/HST) Credit is a non-taxable benefit that is paid to individuals based on their adjusted family net income. Currently, individuals apply for the Credit by clicking a box on their personal income tax returns and eligibility is subsequently confirmed by the Minister of National Revenue.
Budget 2014 proposes to eliminate the need for an individual to apply for the GST/HST Credit and to allow the Canada Revenue Agency to automatically determine if an individual is eligible to receive the GST/HST Credit. For couples, the GST/HST Credit will be paid to the spouse or common-law partner whose tax return is assessed first and will apply for 2014 and subsequent income tax returns.
Tax on Split Income (Extension of the “Kiddie Tax”)
Tax on Split Income (also known as the “kiddie tax”) limits income splitting techniques that attempt to shift certain types of income from a higher income individual to a lower income minor. The highest marginal tax rate, currently 29% (Federal) applies to ‘split income’ paid or payable to a minor. Traditionally, this has applied to taxable dividends (and shareholder benefits) received directly or indirectly through a partnership or trust, in respect of unlisted shares of Canadian and foreign corporations by a minor. Recent rules have also included capital gains from dispositions of these same types of shares to persons who do not deal at arm’s length with the minor, as well as other types of income.
Budget 2014 proposes to extend the definition “split income” to also include income that is, directly or indirectly, paid or allocated to a minor from a trust or partnership, if:
- the income is derived from a source that is a business or a rental property; and
- a person related to the minor
- is actively engaged on a regular basis in the activities of the trust or partnership to earn income from any business or rental property, or
- has, in the case of a partnership, an interest in the partnership (whether held directly or through another partnership).
This measure will apply to the 2014 and subsequent taxation years.
Change in Tax Exemption of Immigration Trusts
Generally speaking, the Income Tax Act contains rules that will treat a non-resident trust as resident in Canada and thus taxable in Canada, if a Canadian resident contributes property to that trust. An exemption applies if the contributors to the trust are individuals who have been resident in Canada for a total period of not more than 60 months. These are commonly referred to as ‘immigration trusts’ and have been used by recent immigrants coming into Canada with investment assets and other property. Immigration trusts have been effective in avoiding Canadian income tax on foreign source income for up to a period of 5 years from the time an immigrant becomes a Canadian resident.
Budget 2014 proposes to eliminate the 60-month exemption from the deemed residency rules, including related rules that apply to non-resident trusts. This measure will apply in respect of trusts for taxation years:
- that end after 2014 if (i) at any time that is after 2013 and before Budget Day the 60-month exemption applies in respect of the trust, and (ii) no contributions are made to the trust on or after Budget Day and before 2015; or
- that end on or after Budget Day in any other case.
This proposal effectively eliminates the opportunity to use an immigration trust to shelter income from Canadian taxation for new immigrants to Canada.
Elimination of the Graduated Rate Taxation of Trusts and Estates
Budget 2014 proposes to generally proceed with the measures the Federal Government introduced in a consultation paper released on June 3rd, 2013 relating to taxation of testamentary trusts and grandfathered inter vivos trusts. Specifically, Budget 2014 proposes to apply flat top-rate taxation to grandfathered inter vivos trusts, trusts created by will and certain estates. Two exceptions to this treatment are proposed.
First, graduated rates will continue to apply for the first 36 months of an estate that arises on and as a consequence of an individual’s death and that is a testamentary trust. For estates which remain in existence beyond 36 months after death, flat top-rate taxation will apply at the end of that 36-month period. Second, graduated rates will continue to be made available with respect of such trusts having as their beneficiaries individuals who are eligible for the Federal Disability Tax Credit. More detail regarding the parameters of this exception will be released in the coming months.
In addition, testamentary trusts (other than estates for their first 36 months) and grandfathered inter vivos trusts will not benefit from special treatment under a number of related tax rules such as an exemption from income tax installments, or exemption from having a calendar year end, to name a couple.
The measure will apply to the 2016 and subsequent tax years.
Change to Tax Treatment of Estate Donations
Where an individual makes a charitable donation that is specified under the terms of a will (by way of a formula or dollar amount), the donation is treated for income tax purposes as having been made by the individual immediately before the individual’s death. Similar rules apply where an individual designates a registered charity as a beneficiary under an RRSP, RRIF, TFSA or life insurance policy. In these cases, a charitable donation tax credit is available on the deceased’s final tax return. Alternatively, donations considered to be made by the estate may only be applied against the estate’s income tax payable.
Budget 2014 proposes to provide more flexibility in the tax treatment of charitable donations made in the context of a death that occurs after 2015. Donations made by will and designation donations will no longer be deemed to be made by an individual immediately before death. Instead, these donations will be deemed to have been made by the estate. In addition, the trustee of the individual’s estate will have the flexibility to allocate the available donation (and thus the charitable donation tax credit) among any of:
i) the taxation year of the estate in which the donation is made
ii) an earlier taxation year of the estate or;
iii) the last two taxation years of the deceased individual.
This measure will apply to the 2016 and subsequent taxation years. In light of the changes to the taxation of testamentary trusts, this proposal is good news for estate trustees, as this will allow some flexibility to apply the charitable donation tax credits to where they may be most needed, either on the deceased’s personal returns, or on the estate tax return.
Change to Taxation Credit for Donations of Ecologically Sensitive Land
The Ecological Gifts Program provides a way for Canadians with ecologically sensitive land to contribute to the protection of Canada’s environmental heritage. Under this program, certain donations of ecologically sensitive land, or easements, covenants and servitudes on land are eligible for a Charitable Donations Tax Credit in the case of individuals, or a Charitable Donations Tax Deduction in the case of corporations. As with other charitable donations, amounts not claimed for a year may be carried forward for up to five years. In addition, capital gains associated with the donation are exempt from tax.
Budget 2014 proposes to extend to ten years the carry-forward period for these donations. This measure will apply to donations of ecologically sensitive land made on or after Budget Day.
Farming and Fishing Businesses
Currently, a tax-deferred rollover of capital gains (and of the recapture of depreciation) is available on intergenerational transfers of farming and fishing property from an individual to his or her child. In addition, the $800,000 Lifetime Capital Gains Exemption (LCGE) may also be available on certain farming or fishing property. To simplify the tax rules relating to the intergenerational rollover and the LCGE, Budget 2014 proposes a few adjustments that cater to taxpayers involved in both farming and fishing activities.
Property Held Directly or Through a Partnership
Where an individual carries on a farming or fishing business as a sole proprietor, or through a partnership, in order to be eligible for the intergenerational rollover and LCGE, the qualifying property is required to be used principally (50% or more) in a farming business or a fishing business. Property used in a combination of farming and fishing can currently qualify for the LCGE only if it is used principally in one of those activities. For example, a property that is used 40% of the time for farming, 35% of the time for fishing, and 25% of the time in a third business will not qualify for the exemption. Budget 2014 proposes to extend eligibility for the intergenerational rollover and the LCGE to property of an individual used principally in a combination of farming and fishing, so that an individual, as illustrated in the example above, would qualify for the inter-generational rollover as well as the LCGE.
Shares or Partnership Interests
Likewise, in the case where an individual hold shares in a family corporation or in a family partnership, all or substantially all (which means that 90% or more) of the fair market value of the property must be used in the farming or fishing business. Currently, these businesses are treated independently for purposes of claiming the intergenerational rollover or the LCGE. Therefore, Budget 2014 proposes to extend eligibility for the intergenerational rollover and the LCGE to an individual’s shares in a corporation, or interest in a partnership, where the corporation or partnership carries on both a farming business and a fishing business. In particular, if a property of the corporation or partnership is used principally in either business, or is used principally in a combination of farming and fishing, the property will count towards the all or substantially all test.
This measure will apply to dispositions and transfers that occur in the 2014 and subsequent taxation years.
Employment Insurance Premium Freeze
Employment Insurance (EI) premiums and Canada Pension Plan (CPP) contributions represent a significant expense for business owners. The Government froze EI premium rates for employees in 2014 at the 2013 level of $1.88 per $100 of insurable earnings, and is committing to set the rate no higher than $1.88 for 2015 as well as 2016.
Reduced Payroll Remittance Requirements for Certain Employers
Employers are required to remit income tax, Canada Pension Plan contributions and Employment Insurance premiums to the CRA on behalf of employees. The frequency with which these amounts are remitted is based on the employer’s average monthly withholding amount in previous years. Generally, where employers had a total average monthly withholding amount of at least $15,000 but less than $50,000, the employer is required to remit contributions up to twice per month, depending on payroll frequency. Employers who had a total average monthly withholding amount of at least $50,000 are required to remit contributions up to four times per month, depending on payroll frequency.
To reduce the tax compliance burden for employers, Budget 2014 proposes to reduce the frequency of source deduction remittances by increasing the threshold level of average monthly withholdings to $25,000 (from $15,000) and $100,000 (from $50,000) respectively. This measure will apply in respect of amounts to be withheld after 2014.
Consultation on Eligible Capital Property (ECP) Rules
Eligible capital property (ECP) represents rights or benefits of an intangible nature. This typically includes goodwill when a business is purchased or sold, customer lists, licenses, franchise rights and farm quotas. Under the ECP regime, 75 per cent of an eligible capital expense is added to the taxpayer’s cumulative eligible capital (CEC) pool, where, instead of being fully deductible in one year, the expense is amortized at 7% per year. The seller of ECP normally includes 50% of his/her gain in income, resulting in capital gains-type tax treatment. In the financial services arena, we often see this type of transaction in the purchase and sale of a book of business.
Over the years, the ECP regime has become increasingly complicated and many stakeholders have suggested that this complexity be reduced by changing the way these transactions are reported. Budget 2014 indicates that a public consultation will take place with a view to replacing the current ECP regime with a new, simpler tax reporting structure. Detailed draft proposals will be released for comment soon.
Strengthening GST/HST Compliance
Generally, businesses that provide $30,000 or more in taxable supplies each year are required to register for Goods and Services Tax/Harmonized Sales Tax (GST/HST) purposes and collect and remit GST/HST on behalf of the CRA. There are, however, businesses that should be registered that are not. While efforts are made to ensure that businesses meet their tax obligations, businesses that fail to register as required cannot currently be compelled to do so.
In an effort to strengthen GST/HST compliance and combat the underground economy, Budget 2014 proposes that the Minister of National Revenue be given authority to register and assign a GST/HST registration number where a person or business fails to comply with registration requirements. This measure will improve the effectiveness of CRA’s GST/HST compliance efforts and level the playing field for businesses that comply with the GST/HST requirements.
This measure will apply once legislative proposals receive Royal Assent.
The Automatic Exchange of Information for Tax Purposes (and FATCA)
The exchange of tax information between countries is a tool to combat tax evasion. Canada’s exchange of information relationships with other countries were made more effective in 2007 when the Canadian Government announced that all future tax treaties (and updates to existing treaties) would include a new standard for information exchange. This was an important step towards a new global standard that would allow for an automatic exchange of tax information across countries. A current example of this information exchange is FATCA.
In 2010, the U.S. enacted provisions known as the Foreign Account Tax Compliance Act (FATCA). FATCA would require non-U.S. financial institutions to identify accounts held by U.S. persons (including U.S. citizens living abroad), and report to the U.S. Internal Revenue Service (IRS) information in respect of these accounts. FATCA has raised a number of concerns in Canada among both U.S. citizens living in Canada and Canadian financial institutions. Without an intergovernmental agreement between Canada and the U.S., under FATCA legislation, Canadian financial institutions and U.S. persons holding financial accounts in Canada would be required to report the existence of accounts directly to the IRS starting July 1, 2014.
In response to concerns, the Government of Canada successfully negotiated an intergovernmental agreement with the U.S. which contains significant exemptions and other relief. Under the agreement, Canadian financial institutions will report to the Canada Revenue Agency (CRA) information in respect of U.S. persons that will be transmitted by the CRA to the IRS (this relieves Canadian financial institutions from having to report directly to the IRS). The agreement also clarified that a variety of registered accounts (including Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Education Savings Plans, Registered Disability Savings Plans, and Tax-Free Savings Accounts will be exempt from the reporting. Note though, Canada will not be collecting and remitting U.S. tax liabilities of Canadian citizens on behalf of the United States (whether or not the individual is also a U.S. citizen).
Meanwhile, the CRA will receive information from the U.S. in respect of Canadian resident taxpayers that hold accounts at U.S. financial institutions, which will assist with the enforcement of Canadian taxation.
The new reporting regime will come into effect starting in July 2014, with Canada and the U.S. beginning to receive enhanced tax information from each other in 2015.
Consultation on Non-Profit Organizations
A non-profit organization (NPO) is an entity that qualifies for an income tax exemption if it meets certain conditions and typically includes clubs, societies or associations organized and operated exclusively for social welfare, civic improvement, pleasure or any purpose other than profit. While NPO rules have changed little since 1917, today’s NPOs include varied groups such as professional associations, recreational clubs, cultural groups, advocacy groups and trade associations.
Concerns have been raised that some organizations claiming the NPO tax exemption may be earning profits that are not incidental to carrying out the organization’s non-profit purposes, resulting in income being available for the personal benefit of members. In addition, because of limited reporting requirements, members of the public may not be adequately able to monitor the activities of these organizations.
Budget 2014 announces the Government’s intention to review whether the income tax exemption for NPOs remains properly targeted and whether sufficient transparency and accountability provisions are in place. As part of the review, the Government will release a consultation paper for comment and will consult with stakeholders as appropriate.
Ongoing Discussion – Treaty Shopping
Last year’s Budget set out concerns with the abuse of Canada’s tax treaties through “treaty shopping”. This term refers to arrangements under which a person not entitled to treaty benefits establishes an entity in another country (e.g., a country with which treaty benefits are available) to obtain Canadian tax benefits. Last year’s budget stressed the importance of developing safeguards to ensure that taxpayers cannot make improper use of Canada’s tax treaties. Consultations in this regard have begun and will continue.
