Finance Minister Jim Flaherty presented the "Economic Action Plan 2014" on February 11, 2014. In line with previous budgets and the Conservative government's objectives to promote jobs, economic stability and growth, this year's budget stressed fiscal management, prudent spending and "closing tax loopholes." No major tax measures emerged from the "lean" budget. Furthermore, there were no changes in personal or corporate income tax rates.
In their deficit-reduction plan, the government projects a deficit of $2.9 billion by the end of its fiscal 2015 year and a surplus of $6.4 billion the year after. To accomplish its surplus target, it will spread a number of spending projects over several years, including deferring defence expenditure. The government will raise more than $600 million per year by increasing the tax on tobacco products.
New business tax measures were few. Amongst the changes, the budget proposes to increase remittance thresholds for employer source deductions and expanded a tax incentive for clean energy generation. Additional funding ($1.5 billion over 10 years) for research and innovation will be made available through the newly created Canada First Research Excellence Fund for post-secondary institutions. The budget also proposes funding of approximately $229 million for apprenticeships and internships. Lastly, the automotive industry will see a cash injection of $500 million over two years via the Automotive Innovation Fund.
International measures included tightening Canada-U.S. price gaps on goods, increased tax transparency and consultation on treaty shopping. The personal tax measures included restricting graduated rate taxation of trusts and estates, expanding tax on split income and shutting down immigration trusts.
Details of the significant tax measures proposed in this year's budget (Budget 2014) are outlined below. Please contact us for additional information on any of these measures.
BUSINESS TAX MEASURES
Remittance Thresholds for Employer Source Deductions
- The frequency of the remittance of source deductions (income tax, Canada Pension Plan contributions, and Employment Insurance premiums) by an employer depends on the employer's total average monthly withholding amount in the two preceding calendar years.
- The budget proposes to increase employer remittance thresholds
as follows (for amounts to be withheld after 2014):
- For up to two required remittances per month, the threshold changes to $25,000 for average monthly withholdings (from $15,000), and;
- For up to four required remittances per month, the threshold changes to $100,000 for average monthly withholdings (from $50,000).
Tax Incentives for Clean Energy Generation
- The budget proposes to expand Class 43.2 of Schedule II to the Income Tax Regulations (which provides an accelerated capital cost allowance of 50 per cent per year on a declining-balance basis) for investments in specified clean energy generation and energy conservation equipment. These can include certain water-current energy equipment and equipment used to gasify eligible waste fuel for use in a broader range of applications.
Consultation on Eligible Capital Property
- The budget announces a public consultation on a proposal to repeal the eligible capital property (ECP) regime, replace it with a new capital cost allowance (CCA) class available to businesses, and transfer taxpayers' existing cumulative eligible capital (CEC) pools to the new CCA class. Special rules to simplify the transition for small businesses will be considered as part of the consultation.
- The proposed rules will include a new CCA class of depreciable property at a 100 per cent inclusion rate for eligible capital expenditures (versus the 75 per cent inclusion rate under the ECP regime) and a five per cent annual depreciation rate (versus the seven per cent under the ECP regime). The existing CCA rules (recapture, capital gains and depreciation) will generally apply.
CHARITIES AND NON-PROFIT ORGANIZATIONS
Donations of Ecologically Sensitive Land
- The budget proposes to extend the carry-forward period for claiming a donation credit (for individuals) or deducting a donation (for corporations) of ecologically sensitive land, or easements, covenants and servitudes on such land from five years to 10 years for donations made on or after February 11, 2014.
- Beginning in 2016, the budget proposes that donations made by will (and amounts designated to a qualified donee under a RRSP, RRIF, TFSA, or a life insurance policy upon the individual's death) will no longer be considered to have been made by the individual immediately before the individual's death. Instead, donations made by will and designated donations will be deemed to have been made by the estate at the time the property which is the subject of the donation is transferred to a qualified donee.
- The budget proposes that when a qualified donation is made in
the first 36 months following the individual's death, the
estate trustee will have the flexibility to claim the donation
among any of:
- the tax year of the estate in which the donation is made,
- an earlier tax year of the estate, or,
- the last two tax years of the individual.
- The budget notes that an estate will continue to be able to claim a charitable donation tax credit for other donations in the tax year that the donation is made, or in any of the five following taxation years.
State Supporters of Terrorism
- The budget proposes that the Minister of National Revenue may refuse to register a charity, or may revoke a charity's registration, if that charity accepts a donation (on or after February 11, 2014) from a foreign state (or an agent thereof) listed as a supporter of terrorism for purposes of the State Immunity Act.
Consultation on Non-Profit Organizations (NPOs)
- The budget announces the government's intention to review the income tax exemption for NPOs for sufficient transparency and accountability of NPO reporting. The government will continue to consult with stakeholders as well as publicly release a consultation paper for comment on the matter.
INTERNATIONAL TAX MEASURES
CRA – IRS Automatic Exchange of Information for Tax Purposes
- Under the Canada-U.S. agreement (signed on February 5, 2014), Canadian financial institutions will report to the CRA information in respect of U.S. persons. This information will be transmitted by the CRA to the IRS under the mechanism provided in the Canada-U.S. tax treaty and, consequently, will be subject to its confidentiality safeguards. Many registered accounts (RRSP's, RRIF's, TFSA's, RESP's, etc.) will be exempt from this reporting.
- Meanwhile, the CRA will receive information from the U.S. in respect of Canadian resident taxpayers that hold accounts in U.S. financial institutions. This will assist Canadian tax authorities in enforcing compliance with Canadian tax laws.
- The CRA will not collect the U.S. tax liability of a Canadian citizen if the individual was a Canadian citizen at the time the liability arose (whether or not the individual was also a U.S. citizen at that time).
- This 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.
Thin Capitalization — Back-to-Back Loans
- Thin capitalization rules limit interest deductibility where the debt owing to certain non-residents exceeds a 1.5:1 debt-equity-ratio.
- Part XIII applies a 25 per cent withholding tax (subject to reduction under a tax treaty) on interest paid or credited by a Canadian resident person to a non-arm's length non-resident person.
- Certain back-to-back loan arrangements have been undertaken by taxpayers with an unrelated third party to avoid the application of these two sets of rules.
- The budget proposes new anti-avoidance measures in respect of withholding tax on interest payments, and amends an existing avoidance measure to address these back-to-back loan arrangements.
- These budget proposals apply to the thin capitalization rules for years beginning after 2014, and to Part XIII withholding tax on amounts paid or credited after 2014.
- A specific anti-avoidance rule in the foreign accrual property income (FAPI) rules is intended to prevent Canadian taxpayers (e.g. financial institutions) from shifting income from the insurance of Canadian risks (i.e. risks in respect of persons resident in Canada, property situated in Canada or businesses carried on in Canada) offshore.
- This rule applies where 10 per cent or more of the gross premium income of a foreign affiliate of the taxpayer is from the insurance of Canadian risks.
- Some taxpayers have created sophisticated tax-planning arrangements ("insurance swaps") designed to circumvent this rule.
- The budget proposes to amend the existing provision (for tax
years beginning on or after February 11, 2014) to apply
- the foreign affiliate, or a person or partnership that does not deal at arm's length with the affiliate, has entered into one or more arrangements and the affiliate's risk of loss or opportunity for gain or profit in respect of one or more foreign risks can – or could if the affiliate had entered into the agreements or arrangements directly – reasonably be considered to be determined by reference to the returns from one or more other risks (the tracked risks) that are insured by other parties, and
- at least 10 per cent of the tracked risks are Canadian risks.
Offshore Regulated Banks
- The budget proposes to limit the availability of the exception from the FAPI regime for regulated foreign financial institutions based on the status of the Canadian taxpayer and related companies.
Consultation on Tax Planning by Multinational Enterprises
- In response to direction from many western countries, the OECD
released an "Action Plan" in July 2013 aimed at
addressing "abusive" international tax planning carried
on by global corporate groups. To assist in determining how the
government will adopt the OECD Action Plan, the government is
inviting input, by early June 2014, on the following
- What are the impacts of international tax planning by multinational enterprises on other participants in the Canadian economy?
- Which of the international corporate income tax and sales tax issues identified in the Action Plan should be considered the highest priorities for examination and potential action by the government?
- Are there corporate income tax or sales tax issues (other than those set out in the Action Plan) related to improving international tax integrity that should be of concern to the government?
- What considerations should guide the government in determining the appropriate approach to take in responding to the issues identified – either in general or with respect to particular issues?
- Would concerns about maintaining Canada's competitive tax system be alleviated by coordinated multilateral implementation of protection measures?
- In addition, the government is inviting input from stakeholders on what actions the government should take to ensure the effective collection of sales tax on e-commerce sales to residents of Canada by foreign-based vendors.
Consultations on Treaty Shopping Avoidance Measures
- In August 2013, the Department of Finance released a consultation paper to help examine the range of possible approaches to address the practice of treaty shopping in Canada. The consultation period ended in December 2013
- One of the most important questions in the paper was whether changes in this area should be instituted through domestic law amendments, through renegotiation of treaties, or a combination of the two.
- The government favors domestic law amendments. The budget outlines the main elements that would be encompassed in these new rules and invites comments on them in the next 60 days.
PERSONAL TAX MEASURES
Adoption Expense Tax Credit
- The Adoption Expense Tax Credit (AETC) may be claimed for eligible adoption expenses in the taxation year in which an adoption is completed. The budget proposes to increase the maximum amount of eligible expenses for the AETC to $15,000 per child for 2014. The maximum amount will be indexed to inflation for taxation years after 2014.
Medical Expense Tax Credit
- Amounts paid for the design of certain individualized therapy plans may be eligible for the Medical Expense Tax Credit (METC) if the cost of the therapy itself would be eligible for the METC provided certain conditions are met. As well, the budget proposes to add to the list of expenditures eligible for the METC, expenses for service animals specially trained to assist an individual in managing their severe diabetes. These measures will apply to expenses incurred after 2013.
Search and Rescue Volunteers Tax Credit
- A Search and Rescue Volunteers Tax Credit (SRVTC) is now available to eligible ground, air and marine search and rescue volunteers. Eligible individuals for the SRVTC would be able to claim a 15 per cent non-refundable tax credit based on an amount of $3,000. The SRVTC will apply to the 2014 and subsequent taxation years.
Mineral Exploration Tax Credit
- Eligibility for the Mineral Exploration Tax Credit will be extended for one year, to flow-through share agreements entered into on or before March 31, 2015.
Amateur Athlete Trusts
- Income that is contributed to an amateur athlete trust qualifies as earned income for the purposes of determining the RRSP contribution limit of the contributing individual. This measure will apply in respect of contributions made to amateur athlete trusts after 2013. Further, individuals who contributed to an amateur athlete trust before 2014 will be permitted to make an election to have income that was previously contributed to trust in 2011, 2012, and 2013 also qualify as earned income.
Pension Transfer Limits
- The budget proposes to extend a rule that allows a member leaving a Registered Pension Plan, whose estimated pension benefit has been reduced due to plan underfunding, to disregard that benefit reduction in calculating the amount that may be transferred to a Registered Retirement Savings Plan on a tax-free basis. The rule will apply for payments after 2012.
GST/HST Credit Administration
- The Canada Revenue Agency will automatically determine if an individual is eligible to receive the GST/HST Credit (and will eliminate the need for an individual to apply for the credit).
Tax on Split Income
- The budget proposes modifications to the definition of
"split income." This modification will increase tax in
certain situations where a minor is allocated income from a
partnership or trust. The definition will be changed (for 2014 and
subsequent taxation years) to include income that is, directly or
indirectly, paid or allocated to a minor from a trust or
- the income is 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).
Farming and Fishing Businesses
- The income tax rules allow for a beneficial tax deferral ("rollover") of capital gains, and of the recapture of depreciation, on intergenerational transfers of farming property and fishing property from an individual to the individual's child. As well, the income tax rules provide an $800,000 Lifetime Capital Gains Exemption (LCGE) on certain farming or fishing property, shares or interests. The budget proposes to amend these rules to provide these benefits to taxpayers that are involved in a combination of farming and fishing.
- The budget will extend the eligibility for the intergenerational rollover and the LCGE to property of an individual used principally (more than 50 per cent) in a combination of farming and fishing.
- The budget will also extend the 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.
TAXATION OF TRUSTS AND ESTATES
- The budget will generally proceed with the measures that were previously described in a 2013 consultation paper regarding the elimination of special tax benefits granted to testamentary trusts and grandfathered inter vivos trusts (i.e., certain inter vivos trusts created before June 18, 1971).
- The budget proposes to apply flat top-rate taxation to grandfathered inter vivos trusts, trusts created by will, and certain estates. However, graduated tax rates will 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. Further, graduated tax rates will continue to be provided in respect of testamentary trusts that have individual beneficiaries who are eligible for the federal Disability Tax Credit.
- As well, the budget proposes that testamentary trusts and grandfathered inter vivos trusts will no longer benefit from special treatment under a number of related tax rules including an exemption from the income tax instalment rules and an exemption from the requirement that trusts have a calendar year-end.
- Testamentary trusts that do not already have a calendar taxation year will have a deemed taxation year-end on December 31, 2015 (or in the case of an estate for which that 36-month period ends after 2015, the day on which that period ends).
- The budget proposes to eliminate the 60-month exemption from the deemed residence rules for trusts and non-resident trusts.
GOODS AND SERVICES TAX / HARMONIZED SALES TAX (GST/HST)
Health Care Sector
- The budget expands the list of GST/HST exempt health-related
services by adding the following goods and services effective after
February 11, 2014:
- the service of designing training for individuals with a disorder or disability when provided under certain conditions,
- acupuncturists' services, and
- naturopathic doctors' services.
- The budget also adds eyewear specially designed to electronically enhance the vision of individuals with vision impairment to the list of existing zero-rated supplies that can be provided on the written order of a physician or optometrist.
Group Relief Election
- The budget expands the availability of the election to include a new member of a closely related group that would not, under current rules, qualify for the election only because the new member had not yet acquired any property at the time the election was executed. This measure will become effective January 1, 2015.
- The budget also proposes that the election be filed with the CRA. This requirement will apply to any new election that takes effect on or after January 1, 2015. Parties to an election made before January 1, 2015 that is in effect on January 1, 2015 will have until January 1, 2016 to file the election with the CRA.
- In addition, the budget proposes that parties to an existing or new group relief election will be subject to a joint and several liability provisions for the GST/HST liability that may arise for supplies made between them on or after January 1, 2015.
Joint Venture Election
- The government intends to expand the joint venture election measures, which simplify the GST/HST obligations for joint venture activities. The election will be available as long as the joint venture activities are exclusively commercial and the participants to joint ventures are engaged exclusively in commercial activities. The government also intends to implement some related anti-avoidance measures. The budget states that draft legislative proposals will be released later in the year for stakeholder comments.
GST/HST Registration Enforcement
- The CRA will be given the discretionary authority to register and assign a GST/HST registration number to a person who fails to comply with the requirement to register. Under the current rules, a business that fails to register as required cannot be compelled to do so. This measure will apply on Royal Assent to the enacting legislation.
Excise Tax Measures
- The budget proposes a number of changes to tobacco taxation, including an increase in the rate of excise duty on cigarettes and other tobacco products effective after February 11, 2014.
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