"meeting the challenges of global economic
uncertainty with a plan that is real."
Jim Flaherty, Budget Speech 2008
On February 26, 2008, Minister of Finance, Jim Flaherty presented the third budget of the current Conservative government. The Minister's Budget Speech was titled "Responsible Leadership" and stressed a number of themes, including: maintaining strong fiscal management, strengthening Canada's tax advantage, investing in the future, supporting communities and providing leadership at home and abroad.
As with previous budgets, the 2008 Budget is clearly focused on the middle-class. There was no "poison pill" designed to trigger an election. The Liberals immediately announced that they will allow the 2008 Budget to pass and will not cause the government to fall.
The following summary features certain highlights of the 2008 Budget, with an emphasis on those areas that would be of greatest interest to clients of Borden Ladner Gervais LLP.
The government noted that growth in the Canadian economy has been strong. Through the first three quarters of 2007, the economy expanded at an average rate of 3.4%. The unemployment rate is at its lowest level in 33 years, with losses in the manufacturing sector offset by gains in other sectors. The higher Canadian dollar has resulted in increased investment by Canadian businesses in machinery and equipment, and a containment of inflation pressures. Higher prices for energy, grain and mineral products have resulted in record prices for Canadian-produced commodities. Profit strength in the financial, wholesale and retail trade and oil and gas sectors has offset weaknesses in the manufacturing and forestry sectors.
However, the 2008 Budget points out that Canada's immediate economic prospects are diminished and the country faces several important risks. Primary risks include a slowdown in U.S. demand resulting from a U.S. recession and turmoil in global financial markets. Furthermore, tighter global credit conditions are expected to reduce global economic growth. The higher Canadian dollar, rising energy prices and low-cost producers in developing countries threaten to decrease the competitiveness of Canadian exports. Accordingly, private sector forecasters have revised their outlook for the Canadian economy, and expect real GDP growth of 1.7% in 2008 and 2.4% in 2009, down from last fall's forecast of 2.4% in 2008 and 2.7% in 2009.
No new tax cuts were announced. However, the Minister reaffirmed the government's commitment contained in the October 30, 2007 Economic Statement to its long-term plan to reduce federal corporate tax to 15% by 2012 saying "this bold initiative will give Canada the lowest overall tax rate on new business investment in the G7 by 2010". The goal is to achieve a combined Canadian federal-provincial corporate tax rate of 25% by 2012.
The Minister reminded Canadians that the government had already cut the GST from 7% to 5%. Furthermore, it had lowered the personal income tax rate from 16% to 15%, as well as increased the basic personal exemption. The government reiterated its commitment to a competitive personal tax system, "Going forward, as resources permit, the government intends to implement further broad-based tax relief – with a particular emphasis on personal income tax."
1. Personal Tax Measures
Tax-Free Savings Account ("TFSA")
Beginning in 2009, any Canadian resident individual (other than a trust) who is 18 years of age or older may establish one or more Tax-Free Savings Accounts ("TFSA"). A TFSA is a registered account that complements existing registered savings plans such as Registered Retirement Savings Plans ("RRSPs") and Registered Education Savings Plans ("RESPs"). Any income, losses or gains in respect of investments held within a TFSA, as well as amounts withdrawn, will not be:
- included in computing income for tax purposes;
- taken into account in determining eligibility for income-tested benefits or credits delivered through the income tax system (i.e., the Canada Child Tax Benefit, the Goods and Services Tax Credit and the Age Credit); or
- taken into account in determining other benefits that are based on the individual's income level (i.e., Old Age Security benefits, the Guaranteed Income Supplement and Employment Insurance benefits).
Since both the investment income in, and withdrawals from, a TFSA will not be taxable, interest on money borrowed to invest in a TFSA will not be tax deductible.
An individual may make total TFSA contributions up to $5,000 starting in 2009. This $5,000 limit will be indexed to inflation and the annual addition to the contribution room will then be rounded to the nearest $500. Unused contribution room may be carried forward for an unlimited number of years. Any amounts withdrawn from a TFSA in a particular year will be added to the individual's contribution room for the following year. Excess contributions will be subject to a tax of 1% per month. While an individual who becomes a non-resident will be allowed to maintain his or her TFSA and continue to benefit from the exemption from tax on investment income and withdrawals, he or she will not be allowed to contribute while being a non-resident, and no contribution room will accrue for any year throughout which the individual is a non-resident.
Generally, a TFSA will be permitted to hold the same investments as RRSPs. As such, a TFSA may invest in mutual funds, publicly-traded securities, government and corporate bonds, guaranteed investment certificates and, in certain cases, shares of small business corporations. However, a TFSA may not hold investments in any entities with which the account holder does not deal at arm's length, including an entity of which the account holder is a "specified shareholder" as defined in the Income Tax Act or in which the account holder has an analogous interest (generally a 10% or greater interest, together with non-arm's length persons).
If an individual transfers property to the individual's spouse or common-law partner, the income tax rules generally treat any income earned on that property as income of the individual (and not of the individual's spouse or common-law partner). Such "attribution rules" will not apply to income earned in a TFSA.
Financial institutions that are currently allowed to issue RRSPs will also be allowed to issue TFSAs. Such financial institutions would include Canadian trust companies, life insurance companies, banks and credit unions. TFSA issuers will be required to file annual information returns that include the following information: the value of an account's assets at the beginning and end of the year and the amount of contributions, withdrawals and transfers made in the year.
TFSA contribution room will be determined by the Canada Revenue Agency (the "CRA") for each eligible individual who files an annual income tax return. If an individual has not filed returns for prior years, he or she will be allowed to establish his or her entitlement to contribution room by filing a return for those years or by other means acceptable to the CRA.
Registered Education Savings Plan
Under the current rules, contributions to a Registered Education Savings Plan ("RESP") can be made for 21 years following the year in which the plan is created. Further, an RESP must be terminated by the end of the year that includes the 25th anniversary of the opening of the plan. Where the beneficiary qualifies for the Disability Tax Credit, the time limits are 25 years and 30 years, respectively. In addition, no contributions may be made to a family plan for a beneficiary who is 21 years of age or older.
Beginning in 2008, each of the above limits will be extended by 10 years. That is, contributions to an RESP can be made for 31 years following the year in which the plan is entered into. Further, an RESP must be terminated by the end of the year that includes the 35th anniversary of the opening of the plan. Where the beneficiary qualifies for the Disability Tax Credit, the time limits are 35 years and 40 years, respectively. In addition, no contributions may be made to a family plan for a beneficiary who is 31 years of age or older.
Under the current rules, RESP beneficiaries are eligible to receive Educational Assistance Payments ("EAPs") from the plan if, at the time of the payment, they are enrolled as a student in a qualifying post-secondary program. For an RESP beneficiary who ceases to be enrolled in a qualifying program after 2007, he or she will be eligible to receive EAPs for up to six months after ceasing to be enrolled, provided that the payment would have qualified under the rules for EAPs if it had been made immediately before the student's enrolment ceased.
Capital Gains on Donations: Exchangeable Shares and Partnership Units
Capital gains realized from donations of publicly-traded securities to a registered charity are exempt from tax. The 2008 Budget proposes to extend this exemption to capital gains realized when unlisted securities that are shares or partnership interests (other than prescribed interests in a partnership) are exchanged for publicly-traded securities which are subsequently donated to a registered charity or other qualified donees. This exemption will only be available if:
- the unlisted securities were exchangeable for publicly-traded securities at the time they were issued;
- the publicly-traded securities are the only consideration received on the exchange; and
- the publicly-traded securities are donated within 30 days of the exchange.
In the case of partnership interests, special rules will apply. These rules will be adopted to ensure that only capital gains that reflect the economic appreciation of the partnership interests are exempt. Therefore, gains that arise because of various reductions to the adjusted cost base of partnership interests will not be exempt.
This measure will be available for donations made on or after February 26, 2008.
Dividend Tax Credit The 2008
Budget proposes to reduce the dividend gross-up factor and the dividend tax credit for eligible dividends to reflect reductions in the corporate income tax rates. The table illustrates the rates that will be applicable during the calendar years to 2012.
Dividend Tax Credits ("DTC") and Gross-Up
(in per cent)
2. Corporate Tax Measures
Enhanced Clean Energy Generation Regime
The 2008 Budget continues the trend of expanding the types of Clean Energy Generation that qualifies for the accelerated Capital Cost Allowance ("CCA") provided to property included in Class 43.1 or 43.2 of Schedule II. Generally the requirements to be met for both classes are the same, except that property included in Class 43.2 must be acquired after February 22, 2005 and before 2012 and cannot have been included in any other class by any taxpayer before it was acquired.
Classes 43.1 and 43.2 provide for a CCA rate of 30% and 50%, respectively, calculated on a declining balance basis. However, by virtue of the "available for use rules", the CCA for property included in these classes may be restricted until such time as the property is available for use.
A property that becomes available for use in the year is subject to the application of the "half-year rule" which restricts the CCA rate to 50% of the normal rate, in the first year of use. Previous budgets have included the government's promise to review the Clean Energy Generation class on an ongoing basis, and respond to developments in new electricity generation technologies that demonstrate the ability to contribute to energy efficiency and/or renewable energy. The 2008 Budget expands the eligible systems to include "ground source heat pump systems" and "biogas production equipment".
Clean Energy Generation includes certain systems described in paragraph (d) of Class 43.1 which make use of "waste fuels". To qualify for inclusion in Class 43.1 or 43.2, such systems often include a requirement that the taxpayer itself make specific use of the of the heat output or fuel produced from the waste product, in connection with an industrial process or for the purpose of generating electricity, or both electricity and heat. The 2008 Budget proposes to relax this operational requirement and allow the taxpayer to sell the bio oil or heat produced from waste fuels to third parties, provided that this "designated use is consistent with the intent of Class 43.2 [43.1]".
The 2008 Budget also proposes changes, effective for supplies made on or after February 26, 2008 in respect of a right of entry or use to generate, or evaluate the feasibility of generating electricity from the sun or wind. Such supplies will be deemed not to be a supply for GST/HST purposes and payments made for that right will be deemed not to be consideration.
Income Trust Tax Rates and Conversions
Originally announced on October 31, 2006 and passed into law June 22, 2007 was the highly unpopular tax on certain distributions from income trusts. To be more precise the tax applies to distributions and allocations of "non-portfolio earnings" from Specified Investment Flow-Through ("SIFT") trusts and SIFT partnerships. The tax applies beginning in 2011, subject to an earlier application where the Growth Guidelines announced by the Department of Finance in December 2006 are exceeded, or for SIFT trusts or partnerships that were not publicly traded on October 31, 2006. Currently, the tax rate is made up of two components: the first is equal to the federal general corporate tax rate, which will be reduced in step with the actual corporate tax rate to 15% beginning in 2012 and the second is 13% in lieu of provincial tax.
The 2008 Budget proposes that beginning in 2009 the second component be based on the general provincial corporate income tax rate in each province in which the SIFT has a permanent establishment. Where a SIFT has more than one permanent establishment, the taxable distributions of the SIFT will be notionally allocated to provinces according to the general corporate taxable income allocation formula. Generally, this formula is based on the proportion of wages and salaries and of gross revenues in the particular province.
The second component for taxable distributions not allocated to a province will be 10% and for taxable distributions allocated to Quebec will be nil, to take into account the SIFT tax imposed by that province. Based on statements made by government officials contemporaneous with the 2008 Budget, it is understood that draft legislation providing for the conversion of income trusts to corporations is in process and will be released along with the draft legislation implementing the Proposed Technical Amendments to the SIFT Income Tax Rules announced in the Department of Finance Backgrounder released on December 20, 2007.
Accelerated CCA Claims for Manufacturing and Processing Equipment
The 2007 Budget provided that expenditures on manufacturing or processing machinery and equipment that were made before January 1, 2009 would be eligible for an accelerated, 50% straight-line CCA rate. The 2008 Budget extends this accelerated CCA rate to expenditures made by December 31, 2009, and also offers an enhanced CCA rate for purchases of such equipment made during the years 2010 and 2011.
In particular, the following CCA rates will be applied:
- the current, 50% straight-line CCA rate will continue to apply to investments in manufacturing and processing machinery and equipment acquired up to December 31, 2009;
- eligible assets acquired during 2010 will qualify for a 50% declining-balance CCA rate in the first taxation year ending after the assets are acquired, a 40% declining-balance CCA rate in the following taxation year and the regular 30% declining balance CCA rate thereafter;
- eligible assets acquired in 2011 will generally be eligible for a 40% declining-balance rate in the first taxation year ending after the assets are acquired and the regular 30% declining-balance treatment thereafter; and
- the 30% declining-balance rate will apply to all Class 43 assets acquired after 2011.
In all cases, the "half-year rule", which allows half the CCA write-off otherwise available in the year the asset is first available for use by the taxpayer, will apply to the assets that are subject to this measure.
Increasing the CCA Rate for Railway Locomotives
The 2008 Budget proposes to increase the CCA rate for railway locomotives to 30% from 15%. This change is effective for new locomotives acquired on or after February 26, 2008, as well as for related reconditioning and refurbishing costs incurred on or after February 26, 2008.
Mineral Exploration Tax Credit
The 2008 Budget proposes to extend the eligibility for the mineral exploration tax credit to flow-through share agreements entered into on or before March 31, 2009. This investment tax credit is equal to 15% of certain specified mineral exploration expenses incurred in Canada and renounced to individuals who invest in flowthrough shares. Using the "look-back" provision in the Income Tax Act ("the Act"), funds raised with the benefit of the credit can be spent on eligible exploration expenses up to the end of 2010.
Administrative Relief for Non-Resident Tax-Filers
The 2008 Budget proposes three changes to streamline and simplify the rules that apply to a non-resident's disposition of Taxable Canadian property ("TCP"). The goal is to make the process more efficient. These changes will only apply to dispositions of property that take place after 2008.
The first change will provide to a non-resident vendor an exemption from the Canadian withholding tax requirements on a disposition of TCP if the property is not otherwise subject to Canadian tax as a result of a tax convention entered into between Canada and the non-resident's jurisdiction of residence. If the particular property is being disposed to a person who is related to the non-resident, then a notice containing information on the transaction and the vendor must be presented to the Minister of National Revenue within 30 days of the disposition. If the conditions are met, the non-resident can avoid the section 116 withholding tax filing requirements.
The second change will expand the existing "reasonable inquiry" protection for purchasers of TCP from nonresident vendors. Under the current reasonable inquiry provisions, the purchaser is not liable for failing to withhold taxes if, after a reasonable inquiry, there are no indications to believe that the vendor is a non-resident. The 2008 Budget proposes to expand the reasonable inquiry provisions if all of the following conditions are met:
- after a reasonable inquiry, it becomes clear that the vendor is resident in a treaty country;
- the property would be treaty-protected property of the vendor if the vendor were resident in the particular treaty country; and
- the purchaser sends to the Minister of National Revenue a notice setting out basic information about the transaction and the vendor within 30 days of the date of the acquisition.
The third change will exempt non-residents from filing Canadian income tax returns for any taxation year if the following criteria were satisfied:
- the non-resident has no tax payable under Part I of the Act for the taxation year;
- the non-resident is not currently liable to pay any amount under the Act in respect of any previous taxation year (other than an amount for which the Minister of National Revenue has accepted, and holds, adequate security under section 116 or 220 of the Act); and
- each TCP disposed of by the non-resident in the year is either "excluded property" under section 116 of the Act which now includes the treaty-protected property as described in the prior paragraph, or a property for which a certificate under section 116 of the Act has been issued to the non-resident as a result of its disposition.
3. Commodity Tax Measures
GST/HST Health Measures
The 2008 Budget proposes to make a number of changes with respect to the application of goods and services tax/harmonized sales tax ("GST/HST") in the health care context. These proposals are summarized briefly below:
Training for Individuals with Autism or Other Disabilities
The GST/HST exemptions for basic health and education services are expanded to include training that is specially designed to assist individuals to cope with the effects of a disorder or disability if the training is supplied by the government, fully or partially reimbursed under a government program, or if a health care professional identifies the training as an appropriate means of coping with the disability or disorder.
Currently, nursing services provided in institutional and residential settings by registered or licensed nurses are exempt from GST/HST. The 2008 Budget proposes to expand the exemption to include nursing services that are provided within the nurse-patient relationship, regardless of where the service is performed.
Currently, drugs (other than drugs that must under federal legislation be sold under prescription, which are unconditionally zero-rated) are zero-rated only when the drugs are dispensed by a medical practitioner or a by a pharmacist on the prescription of a medical practitioner. The 2008 Budget expands the tax-free status of such drugs to include situations where the drugs are supplied to final consumers by health professionals who are authorized to prescribe them under provincial or territorial legislation. In other words, zero-rating is no longer restricted to situations where the drugs are ordered by a medical practitioner.
Medical and Assistive Devices
The 2008 Budget clarifies that only medical and assistive devices that are intended for human use are zero-rated. Also, the 2008 Budget expands the list of zero-rated medical and assistive devices to include:
- devices, for use by an individual with a severe mobility impairment or paralysis, that are specially designed for neuromuscular stimulation or standing therapy when supplied on the written order of a medical practitioner;
- chairs that are specially designed for use by an individual with a disability, when supplied on the written order of a medical practitioner;
- chest wall oscillation systems for use in airway clearance therapy; and
- service animals specially trained to assist an individual with a disability or impairment, if they are supplied to or by an organization that is operated for the purpose of supplying such specially-trained animals.
Exempt Health Services Supplied Through a Corporation
Most professional services rendered by doctors, dentists and certain other health professionals are exempt from GST/HST when rendered directly by the professional. The 2008 Budget proposes to treat the services of these health professionals as exempt even if the services are supplied through a corporation.
GST/HST Treatment of Long-Term Residential Care Facilities
The 2008 Budget proposes to "clarify" that the GST New Residential Rental Property Rebate (the "Rebate") and that GST/HST exempt treatment will apply to long-term residential care facilities. Currently, these relieving rules may not apply where the facility is viewed as not supplying residential units, but rather a mix of health, personal care and accommodation services that include long-term occupancy of those units as a place of residence.
In particular, the conditions for eligibility for the Rebate are modified by replacing the current condition that residential units in the facility be "supplied" to individuals under a lease, licence or similar arrangement with a requirement that the "possession" or "use" of the residential units in the facility be given to individuals for purposes of their "occupancy" as a place of residence under a lease, licence or similar arrangement.
The 2008 Budget clarifies that head lease payments by an operator to an owner of a long-term residential care facility are exempt if "possession" or "use" of all or substantially all of the residential units of the facility has been given by the operator to individuals under a lease, licence or similar arrangement entered into for the purpose of their "occupancy" as a place of residence.
The GST/HST self-assessment rules are amended to clarify that they apply where either "possession" or "use" of a residential unit in a residential facility is given to an individual under a lease, licence or similar arrangement for the purpose of occupying the unit as a place of residence. This allows owners that construct or substantially renovate long-term residential care facilities to benefit from the Rebate and to ensure that subsequent sales of the facility are exempt from GST/HST. This proposal is in response to a recent decision of the Federal Court of Appeal that held that an owner of a facility was not able to self-assess GST on a facility which it constructed.
In recent weeks, economic forecasters had predicted that the Canadian government had little money to spend in the 2008 Budget. The 2008 Budget will be remembered as a "small" budget which allocated government resources cautiously to strategic expenditures and insured, through provision for relatively substantial debt repayment ($10.2 billion), the government's continued attention to "economic fundamentals." In particular the government is committing resources to:
- Providing $250 million dollars over five years to support strategic, large-scale research and development projects in the automotive sector to develop greener and more fuel-efficient vehicles.
- $250 million for research and demonstration of carbon capture and storage;
- An increased CCA rate for carbon dioxide pipeline;
- $200 million to support nuclear energy and maintain nuclear safety; and
- Expanded tax incentives for clean energy generation.
- Providing $10 million over two years to Natural Resources Canada to promote Canada's forestry sector in international markets.
Employment Insurance Changes
The creation of an independent Crown corporation, the Canada Employment Insurance Financing Board, to:
- Maintain a separate bank account for annual Employment Insurance ("EI") surpluses;
- Implement a new EI premium rate-setting mechanism; and
- Maintain a $2 billion dollar cash reserve.
Investment in Infrastructure
- The creation of a Crown corporation, PPP Canada Inc., to support Public-Private Partnership;
- Allocation of $500 million to support capital investment for public transit; and
- Making permanent the Gas Tax Fund, which will grow to $2 billion, to help finance municipal infrastructure.
- Allocation of up to $400 million for a Police Officers Recruitment Fund to encourage the recruitment of 2,500 new front-line police officers.
- New electronic passports to be introduced in 2011, which will be valid for 10 years;
- $14 million over two years to expand the joint Canada-U.S. NEXUS program for low-risk and frequent travelers;
- $26 million over two years to facilitate the processing of visas and enhance border security through the use of biometric data.
Investing in Knowledge
- $350 million for a new Canada Student Grant Program, beginning in 2009, and rising to $430 million by 2012-2013;
- $123 million over four years to streamline and modernize the Canada Student Loans Program;
- $80 million per year to Canada's three university granting councils for research;
- $15 million per year for the Indirect Costs of Research program; and
- $140 million for Genome Canada.
- The 2008 Budget reaffirmed the commitment to double international assistance to $5 billion by 2010- 2011. Furthermore, the government said it would make Canada the first G8 country to meet its commitment to double aid to Africa.
Unlike last year, there was no increase in transfers to provinces. Furthermore, unlike previous years, health care was not a major issue in the 2008 Budget. This is consistent with the Conservative's intent to stay out of areas of provincial jurisdiction. In regards to military spending, there were no major announcements. There was little mention of the war in Afghanistan. The government did, however, pledge to increase funding for the military by 2% per year, starting in 2011 – 2012.
The days of billion-dollar tax cuts will not be seen again at least for a few years. The Bloc Québécois and the NDP will say the 2008 Budget did not go "far enough" to address a variety of pressing issues and, consequently, will likely vote against the 2008 Budget. The Liberals will allow the 2008 Budget to pass to avoid an election. The Conservatives have delivered a well-crafted "political" budget that should receive broad-based support.About BLG
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.