FBC – Canada's Small Business Tax Specialist

Today, federal Finance Minister Jim Flaherty tabled the federal government’s ‘stay the course’ budget by confirming $19 billion in new federal stimulus under Year 2 of Canada’s Economic Action Plan that focuses on jobs and growth. Budget 2010 forecasts declining deficits over the next five years of $49.2 billion in 2010-2011, $27.6 billion in 2011-2012, $17.8 billion in 2012-2013, $8.5 billion in 2013-2014 and $1.8 billion in 2014-2015. Through targeted spending restraint measures, the government also plans to achieve $17.6 billion in savings over the next five years to return to a budgetary balance.

No major new spending or tax measures were included in this budget beyond what the government had announced already in its economic stimulus plan. Highlights of the budget’s tax and other measures of particular interest to FBC Members are summarized below.

Personal Tax Measures

Universal Child Care Benefit for Single Parents – In two-parent families, the $100 a month Universal Child Care Benefit (UCCB) is included in the income of the lower-income spouse or common-law partner. In a single parent family, the UCCB is generally included in the single parent’s income. As a result, a single parent can pay more tax on UCCB amounts than a single-earner couple. To alleviate this inequity, beginning in 2010, a single parent will have the option of including the total UCCB amounts for all of their children in their income, or in the income of the dependant for whom an Eligible Dependant Creditis claimed. Single parents unable to claim this credit will have the option of including the total UCCB amount in the income of one of the children for whom the UCCB is paid.

Child Benefits – Shared Custody – Under existing rules, only one individual can receive the Canada Child Tax Benefit and UCCB for a qualified dependant each month. This restriction also applies to the child component of the quarterly GST/HST credit amounts. Effective for benefits payable starting in July 2010, a proposed new measure will allow two eligible individuals to share these benefits (one-half each) in respect of a child. This policy applies when a child lives more or less equally with two individuals who live separately.

Medical Expenses for Purely Cosmetic Procedures – After March 4, 2010, expenses incurred for purely cosmetic procedures (including related services and other expenses such as travel) will be ineligible for the Medical Expense Tax Credit. This generally includes surgical and non-surgical procedures purely focused on enhancing one’s appearance such as liposuction, hair replacement procedures, Botox injections, and teeth whitening. Cosmetic procedures for medical or reconstructive purposes continue to qualify.

Rollover of RRSP Proceeds to a Registered Disability Savings Plan (RDSP – For deaths occurring after March 3, 2011, the existing RRSP rollover rules will be extended to allow a rollover of a deceased individual’s RRSP proceeds to the RDSP of a financially dependent infirm child or grandchild. The amount eligible for transfer is limited to the beneficiary’s available RDSP contribution room which has a lifetime maximum of $200,000. Transitional rules will be put in place to effectively allow this measure to apply as of January 1, 2008.

Carry-Forward of RDSP Grants and Bonds – RDSPs are supported by the federal government in the form of Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs). The CDSG and CDSB are limited annually based on the beneficiary’s family income and lifetime capped limits, and beneficiaries are currently unable to carry forward unused entitlements to future years. In recognition of the fact that families of children with disabilities may not be able to contribute regularly to their plans, it is proposed to allow a 10-year carry-forward of CDSG and CDSB entitlements, starting in 2011.

Scholarship Exemption and Education Tax Credit – Effective for 2010, a post-secondary program that consists principally of research will be eligible for the Education Tax Credit, and the scholarship exemption, only if it leads to a college or CEGEP diploma, or a bachelor, masters or doctoral degree (or an equivalent degree). Thus, post-doctoral fellowships will be taxable.

Employee Stock Options – Budget 2010 proposes the following three significant changes to employee stock option rules:

• Stock Option Cash Outs – If an employee acquires a security of his or her employer under a stock option agreement, the difference between the fair market value of the security at the time the option is exercised and the amount paid by the employee to acquire the security is treated as a taxable employment benefit. If certain conditions are met, the employee is entitled to a deduction equal to one-half of the employment benefit (the stock option deduction). In this situation, employers cannot claim a tax deduction for the issuance of the security. However, if an employee disposes of, or “cashes out,” their stock option rights for a cash payment from their employer, the employment benefit is still eligible for the stock option deduction and the cash payment is fully deductible by the employer. It is proposed that the stock option deduction will still generally be available to employees where they exercise their options by acquiring securities of their employers. It will also be available under the cash-out scenario, provided the corporation elects to forgo the deduction for the cash payment. This measure will apply to dispositions of employee stock options that occur after 4:00 p.m. EST on March 4, 2010.
• Tax Deferral Election and Remittance Requirement – Under certain conditions, an employee of a publicly-traded company who acquires shares under a stock option agreement may elect to defer the recognition of the employment benefit up to $100,000 annually until the disposition of the optioned securities. This deferral election will be repealed for stock options exercised after 4:00 p.m. EST on March 4, 2010. The deferral for most Canadian-controlled private corporation options will continue to be permitted. Also, withholding tax remittances will be required by the employer on stock-based compensation to prevent situations in which an employee is unable to meet his or her tax obligation as a result of a decrease in the value of the securities.
• Special Relief for Tax Deferral Elections - Individuals who have previously elected to defer the taxation of their optioned securities and who have experienced financial difficulties as a result of the decline in the value of optioned securities will be eligible for special elective tax relief for dispositions occurring before 2015. If the disposition is after 2009, individuals need to make this election on or before their tax return filing deadline for the year of disposition. This special election will generally ensure that the tax liability on a deferred stock option will not exceed the proceeds of the disposition of the optioned securities, taking into account the tax relief resulting from the use of capital losses on optioned securities being applied against capital gains from other sources. The special election is also available retroactively for individuals who dispose of their securities before 2010 and elect on or before their 2010 tax return filing deadline.

U.S Social Security Benefits – The inclusion rate for U.S Social Security benefits received after 2009 will be reduced from 85% to 50% for Canadian residents (and their spouses or common-law partners eligible to receive survivor benefits) who have received U.S. Social Security benefits since before July 1, 1996.

Mineral Exploration Tax Credit (METC) – The METC has been extended to flow-through share agreements entered into by March 31, 2011. The METC was previously scheduled to expire at the end of March 2010.

Business Income Tax Measures

Accelerated Capital Cost Allowance for Clean Energy Generation and Conservation Equipment – Budget 2010 proposes to expand Class 43.2 to include: (a) heat recovery equipment used in a broader range of applications; and (b) distribution equipment used in district energy systems that rely primarily on ground source heat pumps, active solar systems or heat recovery equipment. Class 43.2 provides an accelerated CCA rate of 50% on a declining balance method.

Accelerated Capital Cost Allowance for Television Set-Top Boxes – New satellite and cable set-top boxes acquired after March 4, 2010 will qualify for a 40% declining balance CCA rate. Currently, satellite set-top boxes are eligible for a 20% declining balance CCA rate under Class 8, while cable set-top boxes are eligible for a 30% declining balance CCA rate under Class 10.

Non-residents and Dispositions of Taxable Canadian Property – The budget proposes to exempt non-residents from the requirements to obtain a Section 116 clearance certificate on the disposition of shares of a corporation that does not principally derive its value from real property or resource properties situated in Canada, starting March 5, 2010. Under the old system, any U.S. and foreign investors who sold shares in private Canadian companies were forced to obtain tax clearance certificates, which could take months, and file tax returns in Canada. This impeded investment by foreign private-equity and venture capital firms.

Other Measures

Interest on Overpaid Taxes Reduced – Currently, the interest rate used by the government to calculate interest on overpaid taxes is based on T-bill rates plus 2%. Effective July 1, 2010, the interest rate payable by the government on overpaid taxes for corporations will no longer be increased by 2%. This change will not apply to interest rate calculations for non-corporate taxpayers.

EI Premiums – Although EI premiums are frozen for 2010, it is expected that there will be a significant hike starting in 2011. The maximum allowable annual EI increase is 15 cents per $100 in payroll for employees and 21 cents for employers.

GST/HST for Purely Cosmetic Procedures – The budget clarifies that GST/HST applies to all purely cosmetic (as opposed to medical) procedures, to devices or other goods used or provided with cosmetic procedures and to services related to cosmetic procedures.

Charities Disbursement Quota – For fiscal years that end after March 3, 2010, the budget proposes to eliminate all disbursement quota requirements except those related to the requirement to annually disburse a percentage of investments held.

Customs Tariff Measure – The budget proposes a gradual reduction and elimination of the remaining tariffs on manufacturing inputs and machinery and equipment applicable to goods imported into Canada. The most-favoured nation duty rate will be “free” for 1,160 tariff items effective March 4, 2010, and the most-favoured nation rate on an additional 381 items will gradually be reduced to “free” over a period starting March 4, 2010 and ending January 1, 2015.

Tax Avoidance – The government announces public consultation on a proposed regime requiring taxpayers to report aggressive tax planning transactions that meet certain conditions to CRA. The “reportable transaction” will apply to transactions entered into after 2010 or those that were a part of a series of transactions completed after 2010. A reportable transaction would feature at least two of the following three “hallmarks”:

1. a promoter or tax advisor is entitled to fees that are attributable to the amount of, or contingent upon the obtaining of, a tax benefit;
2. a promoter or tax advisor requires “confidential protection”;
3. the taxpayer or he person who entered into the transaction for the benefit of the taxpayer obtains “contractual protection”.

Online Notices – Currently, taxpayers can receive notices, such as Notices of Assessment under the Income Tax Act, from the CRA only through the mail system or personally. The budget proposes that the Income Tax Act, Excise Act, 2001, Air Travellers Security Charge Act, Canada Pension Plan and Employment Insurance Act be amended to allow for the electronic issuance of these notices. Notices that are specifically required to be served personally or by registered or certified mail will not be eligible to be transmitted electronically.

Note: If you have any questions about how these tax changes will impact your unique situation, please give FBC a call at 1-800-265-1002.