Special Edition
The Federal Budget of yesterday was, for the most part, a non-event from a tax policy perspective. There were a few changes of some note, described below, some minor "tinkering", and the announcement of some administrative changes intended to make tax compliance easier (which is always welcome). Following are the most significant announcements from yesterday.
- New Registered Tax Free Savings Accounts
- Increased Tax Credits For Research
- Section 116 Regime - Some Long-Awaited Changes (that we will have to wait a little longer for)
- Extension of Accelerated CCA for M&P Property
New Registered Tax Free Savings Accounts
As part of the Government's attempt to fulfill its election promise to provide tax relief in respect of capital gains that are reinvested, the budget included a new proposed Tax-Free Savings Account ("TFSA").
Starting in 2009, individuals (other than trusts) resident in Canada who are 18 and older will be permitted to contribute up to $5,000 per year (indexed annually) to a TFSA. Contributions will not be deductible in computing taxable income. Nevertheless, income earned in a TFSA will not be taxable and can be withdrawn free of tax. Eligible investments will, in general terms, include investments that are qualified for a registered retirement savings plan ("RRSP"), but investments in any entity not dealing at arm's length with the account holder will not be permitted.
Other aspects of the proposed TFSA are as follows:
- Unused contribution room can be carried forward indefinitely.
- Any amounts withdrawn from a TFSA in year will be added to the individual's contribution room.
- Excess contributions will be subject to a penalty tax.
- Interest on funds borrowed to contribute to a TFSA will not be tax deductible.
- Assets within a TFSA will be able to be used as security.
- Assets within a TFSA may be transferred on a tax-free basis to a spouse or common law partner upon death or breakdown of marriage.
Initial reactions are that the TFSA proposal will benefit a number of financial institutions permitted to establish RRSP accounts as well as individuals who will have an ability to select assets that will generate significant returns. Time will only tell how the TFSA will form part of the investment strategies of Canadians that will now be able to include the TFSA, RRSPs and registered education savings plans as part of their tax free savings tools.
Increased Tax Credits For Research
Canadian-controlled private corporations ("CCPCs") which carry on research activities will be pleased with the proposed increase in refundable tax credits contained in the Budget. Presently, up to $2 million a year of qualified expenditures on scientific research and experimental development ("SR&ED") are eligible for a 35% tax credit that is fully refundable to a CCPC. This credit can generate up to $700,000 a year in cash refunds. Under the Budget proposals, the limit for fully refundable tax credits will increase to $3 million, thereby allowing a CCPC to generate up to $1,050,000 a year in cash refunds. As a result of this change, Federal tax assistance for research activities should increase significantly above the $4 billion that was provided in 2007. This is the first such increase since the SR&ED program was introduced in 1985. Given the rising costs of research, no doubt some organizations will argue that the proposed increase is long overdue.
Canada's SR&ED program is designed to prevent larger CCPCs from claiming the full tax credit. It does this by steadily reducing the fully refundable tax credit for corporations which exceed certain thresholds of taxable income or taxable capital. Presently, a corporation which has $600,000 of taxable income or $15 million of taxable capital loses the entire benefit of the 35% fully refundable tax credit. Under the Budget, a CCPC may have up to $700,000 of taxable income or $50 million of taxable capital before this tax credit is fully eroded. The increased limits will allow somewhat larger corporations to benefit from the fully refundable tax credit.
The Budget also offers a slight accommodation for research carried on outside Canada. Normally, expenditures only qualify for an investment tax credit if the related SR&ED is carried on inside Canada. Under the new rules, where Canadian resident employees carry on SR&ED activities outside Canada, and where their work is solely in support of SR&ED carried on by the taxpayer in Canada, the salary and wages of those employees may qualify for the SR&ED investment tax credit. However, a number of restrictions will apply. For example, under the Budget, qualifying salary or wages for work outside Canada will be limited to 10% of the total salary and wages directly attributable to SR&ED carried on in Canada during the year. In a number of ways the Budget effectively limits the tax credits which will be available in Canada for research activities conducted outside Canada.
Section 116 Regime - Some Long-Awaited Changes (that we will have to wait a little longer for)
One of the greatest complaints of non-resident investors into Canada is in respect of the requirement to obtain advance clearance certificates under section 116 of the Income Tax Act (Canada) each time a non-resident disposes of "taxable Canadian property" ("TCP"). The definition of TCP is quite broad and includes numerous types of property interests. The section 116 requirements exist even where Canada had ceded the right to tax certain types of property interests under the terms of a tax treaty.
The Budget provides a measure of relief. For no discernible reason, however, this relief will only be effective for dispositions of property commencing on January 1, 2009. From that date forward, where a person purchases property from a non-resident vendor and: (i) the purchaser is satisfied, after reasonable inquiry, that the vendor is resident in a jurisdiction that Canada has a tax treaty with; (ii) the disposition of the property by the vendor would not be subject to Canadian tax by reason of that treaty; and (iii) in the case of a vendor that is related to the purchaser, the purchaser provides notice to the CRA, containing certain prescribed information, within 30 days after the acquisition of the property, no section 116 certificate will be required of the vendor.
As an added bonus, the non-resident vendor will not be required to file a Canadian income tax return in respect of dispositions of TCP which satisfy the conditions described above. Currently a non-resident is required to file a Canadian income tax return if it has disposed of TCP even where there was no Canadian tax payable by reason of a particular treaty (an obligation likely more honoured in the breach than in the observance). In this regard, these changes should be viewed as some long-awaited "common-sense" relief.
Extension of Accelerated CCA for M&P Property
In its Budget for 2007 the Government announced a temporary two-year 50-per-cent straight-line accelerated capital cost allowance ("CCA") rate for investment in manufacturing or processing machinery and equipment undertaken before 2009. The 2008 Budget proposes to extend the accelerated CCA treatment for investments in machinery and equipment in the manufacturing and processing sector for three additional years until the end of 2011. There will be a one-year extension of the 50-per-cent straight-line accelerated CCA treatment, followed by a two-year period during which the accelerated treatment will be provided on a declining balance basis. For eligible assets acquired in 2009, a 50-per-cent straight-line rate will be provided. For assets acquired in 2010, a 50-per-cent declining balance rate will apply in the first taxation year, a 40-per-cent declining balance rate will apply in the second year, and a 30-per-cent declining balance rate will apply in subsequent years. For assets acquired in 2011, a 40-per-cent declining balance rate will apply in the first year and a 30-per-cent declining balance rate will apply in subsequent years.
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