Posted January 28, 2009
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2009 Budget Comment

Highlights of the 2009 Federal Budget

Toronto - Finance Minister Jim Flaherty’s federal budget, tabled yesterday, features a widely expected package to stimulate economic growth and to help Canada weather the global recession. Among other things, the budget’s measures are designed to strengthen our financial system, support Canadian workers, stimulate spending, promote housing construction, and build infrastructure. The budget projects deficits of $1.1 billion for the current fiscal year, $33.7 billion for 2009-10, and $29.8 billion for 2010-11.

In terms of tax changes, today’s budget features personal tax cuts and enhanced tax credits for homeowners. For businesses, the budget increases the threshold for the small business tax rate and enhances CCA rates for manufacturing and processing equipment and computers. The budget also repeals section 18.2 of the Income Tax Act, a controversial provision which would deny tax deductions on interest related to investments in foreign affiliates.

These and other tax highlights of the 2009 federal budget are discussed below.

Business Tax Changes

International tax changes

Interest deductibility

The federal budget repeals section 18.2 of the Income Tax Act in response to criticism by the Advisory Panel on Canada’s System of International Taxation and others, including KPMG. It was widely believed that the rule would disadvantage Canadian businesses investing abroad. Scheduled to take effect in 2012, the rule would have constrained the deductibility of interest in certain situations where a Canadian corporation uses borrowed funds to finance a foreign affiliate and a second deduction for that interest is available in a foreign jurisdiction.

Other Advisory Panel recommendations

The government also says it will take the Panel’s advice to reconsider and consult on two packages of outstanding tax proposals before proceeding, namely, the rules for foreign investment entities and non-resident trusts introduced in 1999 and the remaining foreign affiliate amendments announced in 2004.

The government says it is studying the Advisory Panel’s other recommendations and will provide a response in due course, to be followed by consultations. For a detailed analysis of the Panel’s recommendations, see TaxNewsFlash-Canada 2008-33 dated December 18, 2008.

Small business limit

The budget increases the amount of active business income earned by a small business that is taxed at the low federal corporate tax rate of 11% (instead of the general federal corporate rate of 19%) to $500,000 (up from $400,000), as of January 1, 2009.

Consistent with this proposal, the $3-million expenditure limit for claiming investment tax credits for scientific research and experimental development (SR&ED) at the enhanced rate of 35 percent will begin to be reduced at $500,000 and will be fully eliminated where taxable income in the previous year is $800,000 or more. This change applies where the previous tax year ends after 2008.

Canadian controlled private corporations (CCPC) with taxable income above $400,000 but below $500,000 will have an additional month in which to pay any balance of tax owing. CCPCs with taxable income below $500,000 for 2009 and later tax years may be eligible for quarterly (rather than monthly) tax instalments.

Accelerated Capital Cost Allowance measures

Manufacturing and processing machinery and equipment

The budget proposes a two-year extension to the temporary 50% straight-line capital cost allowance (CCA) rate for manufacturing and processing (M&P) machinery and equipment that currently applies to eligible assets acquired on or after March 19, 2007 and before 2010 (instead of before 2009). Under this proposal, the 50-percent straight-line CCA treatment will apply to M&P equipment acquired in 2010 and in 2011 in lieu of the accelerated CCA treatment on a declining basis announced in the 2008 federal budget. The half-year rule will apply to M&P assets subject to this measure.

Computers

The budget proposes a temporary 100-percent CCA rate for eligible computers and software (described in CCA Class 50) acquired after January 27, 2009 and before February 2011. As this enhanced rate will not be subject to the rule that generally only allows half the CCA write-off otherwise available in the year the asset is first available for use, businesses can fully deduct the cost of eligible computers and the system’s software in the first year that CCA deductions are available.

The computer tax shelter property rules, which prevent investors from using CCA deductions to shelter other income, will also apply to computer equipment eligible for the 100-percent CCA rate.

Acquisition of control rules

The Federal Court of Appeal’s 2006 decision in La Survivance has caused problems with the interpretation of the rule which deems control of a corporation to be acquired at the beginning of the day of acquisition, rather than at a particular time during that day when ownership is legally transferred. The rule is designed to facilitate certain computations, such as valuation of inventory and other tax pools, that are required as a result of an acquisition of control.

According to the budget, the interpretation in La Survivance could produce anomalies affecting the vendor’s entitlement to claim certain tax benefits, such as those available to CCPCs, which depend on who has control of the corporation at the time of the transfer (e.g., where the purchaser is a non-resident). The deeming rule will be amended to ensure it does not affect a corporation’s CCPC status at the time of the transaction that caused the change of control.

The change will apply in respect of acquisitions of control that occur after 2005, except that it will not apply to such an acquisition that occurs before January 28, 2009 if the taxpayer elects within certain deadlines.

Personal Tax Changes

Personal tax cuts

The 2009 federal budget proposes to increase the thresholds for the two lowest personal income tax brackets for 2009 and increase the basic personal amount, the spousal and common-law partner amount and the eligible dependant amount to $10,320 for 2009 (up from $9,600 in 2008). The changes will combine to provide single tax filers with income over $81,500 with tax savings of up to about $317 in 2009. The current and proposed tax brackets for 2009 are as follows:

Tax Rate

2009 Tax Brackets

 

Pre-budget

Post-budget

15%

Up to $38,832

Up to $40,726

22%

38,833  77,664

40,727  81,452

26%

77,665  126,264

81,453  126,264

29%

126,265 and over

126,265 and over

The increased amounts and bracket thresholds will be indexed for inflation for 2010 and later years.

Tax credits for home buyers and home owners

Home renovation tax credit

Under a new temporary renovation tax credit, home owners can claim a 15 percent non-refundable tax credit for eligible expenditures over $1,000 but not more than $10,000, for a maximum credit of $1,350 ($9,000 × 15%). The credit is available for eligible costs of work performed or goods acquired after January 27, 2009 and before February 1, 2010 (unless the expenditure is made under an agreement in place on or before January 27, 2009).

Family members (spouses or common-law partners and their children under 18) are subject to a single limit based on their pooled expenditures. The credit is only available for a dwelling that is eligible to be the family’s principal residence or that of one or more of their other family members.

Expenditures will qualify for the credit if they are incurred in relation to a renovation or alteration of an eligible dwelling, provided the renovation is of an enduring nature and is integral to the dwelling. Examples include new furnaces, windows and decks. Eligible expenditures include labour costs, professional fees, building materials, fixtures, equipment rentals and permits.

First-time home buyers’ credit

First-time home buyers who acquire a qualifying home after January 27, 2009 may be entitled to claim a new non-refundable tax credit up to $5,000 and worth up to $750 ($5,000 × 15%).

To qualify, neither the individual nor his or her spouse or common-law partner can have owned and lived in another home in the calendar year of the new home purchase or in any of the four preceding calendar years. The credit can be claimed by either the purchaser or by his or her spouse or common-law partner.

The credit will also be available for certain home purchases by or for the benefit of an individual eligible for the disability tax credit.

Home Buyers’ Plan threshold increased

The budget increases the amount that first-time home buyers can withdraw tax-free from a Registered Retirement Savings Plan (RRSP) to purchase or build a new home to $25,000 (up from $20,000). The new limit applies to withdrawals made after January 27, 2009.


Mineral exploration credit

The budget extends the mineral exploration tax credit for flow-through share investors, which was set to expire at the end of March 31, 2009. The credit will continue to be available for flow-through share agreements entered into on or before March 31, 2010.

Tax measures for seniors

Age credit

The budget increases the amount for the tax credit for Canadians aged 65 years or older to $6,408 for 2009 (from $5,408). The net income level at which the age credit begins to be phased out remains unchanged at $32,312, and so the income level at which the age credit is fully phased out will rise to $75,032 (from $68,365).

RRSP and RRIF losses after death

Currently, the fair market value of investments in RRSPs at the time of an annuitant’s death is generally included in the deceased’s income in the year of death. On distribution to beneficiaries, any increase in the value of RRSP investments after the annuitant’s death is included in the income of the RRSP’s beneficiaries on distribution, but losses cannot be deducted. Similar rues apply in the case of Registered Retirement Income Funds (RRIF).

The budget proposes to allow the amount of post-death decreases in the value of the RRSP or RRIF to be carried back and deducted against the year-of-death income inclusion of the deceased.

Indirect Tax Changes

Simplified GST/HST accounting method for certain direct sellers

The budget proposes to allow “network sellers” that meet certain conditions to use a special, simplified GST/HST accounting method. “Network sellers” are direct-selling organizations that use networks of commissioned sales representatives to sell goods to customers. The special method will be available for fiscal years of a network seller that begin after 2009.

Tariff reductions for machinery and equipment

The budget proposes to permanently eliminate tariffs on a range of machinery and equipment. The reductions are effective for goods imported into Canada on or after January 28, 2009, and apply to 214 tariff items currently listed in the Schedule to the Customs Tariff.

Administrative Measures

Mandatory e-filing

The government is extending requirements to electronically file (e-file) income tax information as follows:

· Corporations with annual gross revenues over $1 million for a taxation year that ends after 2009 will be required to e-file their income tax returns. (The CRA may grant exceptions for certain companies such as non-resident corporations and insurance corporations and functional currency filers).

· The number of any type of a tax information return that must be e-filed is reduced to 50 (from 500) for returns required to be filed after 2009. Affected returns include T4 information returns and slips for employment income.

To encourage compliance with these e-file requirements, the budget also introduces a penalty for filing a corporate income tax return in an incorrect format and reduces penalties for late-filed or incorrectly filed information returns as follows:

· For corporate income tax returns filed in an incorrect format, the penalty will not apply for returns required to be filed before 2011. The penalty will be phased in for returns required to be filed for taxation years ending in 2011 and later years.

· Recognizing that current penalties can be excessive where a high number of similar returns are late-filed (e.g., T4 slips), penalties will be reduced for information returns filed in an incorrect format and for late-filed information returns, for returns required to be filed after 2009.

© Copyright 2009/Exchange Morning Post/Exchange Business Communications Inc.
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