Canada: The Upcoming 2013 Federal Budget

Last Updated: March 5 2013
Article by Kim G C Moody

Last year, before the 2012 Federal Budget, I mused in a blog as to what it may contain. Accordingly, in the same vein and perhaps starting a little tradition for our firm, I'll continue what I called "sport fishing for tax practitioners." There is no shortage of speculation what the content for Budget 2013 may contain. As I said last year, the views / guesses below are purely mine.....I have no inside knowledge and readers are cautioned to not rely on this speculation. The contents of the Federal Budget are a closely guarded secret until its release. As of today, the date for Budget 2013 has not been announced although most people believe it will be in the next three weeks or so.

1. Tax Rates

Will the federal government increase personal or corporate tax rates? My guess is an emphatic "no." It has been trendy and popular around the world to increase taxes on "the rich" (see, for example, France which increased its tax rate to 75 percent last year for certain high income earners but a French court struck it down as being unconstitutional). The 2012 Ontario Provincial Budget also increased the tax rate for certain individuals who are high income earners and British Columbia recently did something similar in its 2013 Provincial Budget. Ontario also delayed scheduled corporate tax rate decreases and British Columbia increased its corporate tax rate. Will Canada's federal government follow the trend? I can't see it. The Conservative Government is on record saying that it wants to keep taxes low. Accordingly, I predict no increases in personal or corporate tax rates notwithstanding that other governments feel the need to do so.

2. Charitable Tax Credit Changes

Last year, I commented that many of the recent Federal Budgets have contained targeted changes to the tax system for charities and donors. Most changes have been significant improvements. I mused that the Federal Budget might introduce a "stretch credit" for charitable donations much like what Alberta has done. A stretch credit is where the underlying tax credit granted for making the charitable donation is greater than the top rate of income tax for donors. For example, in Alberta, donors to charities of amounts greater than $200 per year will receive a combined Federal – Alberta tax credit of 50 percent notwithstanding that the highest personal tax rate on salary type income is 39 percent. Will the federal government follow suit? I am guessing a hedged maybe. Like 2012, there have been calls for the federal government to introduce such a credit. For years, there has also been speculation that the government might introduce proposals to exempt realized capital gains on private company shares or certain real property from taxation when donated directly to charity (similar to that for listed securities). While nice in theory, I am once again guessing that this will not happen in Budget 2013. Having said that, I think it is a safe bet that Budget 2013 will have some charitable tax proposals.

3. Trust Changes

An important decision, Sommerer, involving fair market value ("FMV") transfers of properties to a trust (and whether the nasty trust attribution provision of subsection 75(2) was applicable to such a transfer) was released by the Federal Court of Appeal in 2012. We wrote about this decision in our July 20, 2012 blog. This decision was very taxpayer friendly and has certainly caused a lot of discussion amongst Canadian tax practitioners. For example, I was part of a panel that discussed this case at the 2012 National Conference of the Canadian Tax Foundation in Calgary, Alberta at the end of November, 2012. While I certainly like the decision of the Federal Court of Appeal, I don't think I'm going out on a limb to suggest that the Department of Finance likely thinks otherwise. Will we see a technical amendment to prevent FMV transfers of properties to a trust? I'm guessing yes.

4. Farm Losses

The Supreme Court of Canada released a very important decision, Craig, on farm losses in 2012. We wrote about this case in two blogs on August 2, 2012 and on November 5, 2012. Like Sommerer, I'm sure it is not much of a stretch to suggest that the Department of Finance might "fix" the result of the decision to make it more difficult to claim farm losses. I hope I'm wrong.

5. Stock Options

In Canada, stock option benefits are taxed preferentially. Overly simplified, if an arm's length employee exercises stock options and realizes a taxable benefit, then such a benefit will normally only be half taxable (as a result of a full income inclusion and the deduction of half of the income inclusion if certain conditions are met). Accordingly, benefits realized by the exercise of stock options are certainly tax preferred. There appears to have been very good policy reasons, historically, for the tax preferred nature of stock options. However, some commentators have openly questioned whether such policy reasons still exist. In addition, other countries, such as the US, generally treat stock option benefits as ordinary income that is fully taxed. Is this the year that Canada eliminates the tax preference on stock option benefits? I'm guessing no.

6. Tax Depreciation Rates

In my 2012 musing, I stated that the government will usually use the Federal Budget to make certain adjustments to the capital cost allowance rates for depreciable property used by businesses. Such tinkering is almost a given.

7. Registered Tax Preparers?

In last year's predictions, and as I've written about before, there seems to be some momentum with Canada trying to regulate paid tax preparers. The Canada Revenue Agency ("CRA") openly mused with the audience at the National Conference of the Canadian Tax Foundation in November 2012 that it was thinking about the pros and cons of such a system. Will this be the year that Canada follows the example of the US (and other countries) and requires paid tax preparers to register with the CRA? I'm guessing a "soft yes." Such a proposal would be very controversial. And, of course, the "devil would be in the details." In theory, however, I would support this.

8. Relief for US Citizens Resident in Canada?

Every year, US citizens who are resident in Canada face a complex, time consuming and costly tax season. We recently published a tax calendar for Canada and the US and, as should be evident from that, the reporting obligations for US citizens who are resident in Canada are tremendous. In addition, such persons may now face double tax exposure in 2013 as we recently wrote about. Given their complexity, it is usual that their tax compliance costs are higher than a non-US citizen who is resident in some cases significantly higher if the US citizen is "catching up" on their overdue US tax filings. In the fall of 2012, our firm made a submission to the Department of Finance seeking relief for US citizens who are resident in Canada. Will we see relief in Budget 2013 for such people? I'm crossing my fingers!

Well.....that's it for now. I'm obviously missing a lot but the above is top of mind. Let's once again see how close my predictions are. Fun times!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Kim G C Moody
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