FBC – Canada's Small Business Tax Specialist

On March 22, 2011, federal Finance Minister Jim Flaherty tabled the federal government’s budget under the theme A Low-Tax Plan for Jobs and Growth.  The projected deficit for 2010-2011 is $40.5 billion, which is almost $9 billion less than was projected in budget 2010. 

Budget 2011 forecasts a fall in the deficit to $29.6 billion in 2011-2012 with continuing declining deficits each year until 2015-2016, when a surplus is expected.

At this time, it looks likely that the House vote on the budget could be defeated, bringing down the minority government and triggering a spring federal election.   

There are no tax increases contained in this budget, nor any changes to previously announced tax rate reductions.  Highlights of the budget’s tax and other measures of particular interest to FBC Members are summarized below. 

Personal Tax Measures

Children’s Art Tax Credit – For 2011, a new 15% non-refundable Children’s Art Tax Credit is introduced for eligible enrolment expenses up to $500.  The credit will be available for children under 16 at the beginning of the year who are enrolled in an eligible artistic, cultural, recreational or developmental activity.  Examples of eligible activities include classes in art, music, crafts, drama, painting, photography and languages, as well as other activities such as scouting.  The credit is structured in the same manner as the existing Children’s Fitness Tax Credit and will be claimable by either parent or shared by both parents.  A related, additional disability supplement amount of $500 may be claimed for children under 18 who are eligible for the Disability Tax Credit, where a minimum of $100 is paid in eligible expenses. 

Family Caregiver Tax Credit – Starting in 2012, a new 15% Family Caregiver Tax Credit is proposed for a caregiver of a dependent person who has a mental or physical infirmity and will be based on an amount of $2,000. The credit will be an enhanced amount for an infirm dependant under one of the following existing credits: the Spouse or Common-Law Partner Credit, the Child Tax Credit, the Eligible Dependant Credit, the Caregiver Credit or the Infirm Dependant Credit. It also will result in an increase in the dependant’s income threshold at which the combined credit amount is phased out. 

Volunteer Firefighters Tax Credit – Effective 2011, a new 15% non-refundable Volunteer Firefighters Tax Credit is introduced based on an amount of $3,000.  The credit will be available to individuals who perform at least 200 hours of volunteer firefighting in a taxation year.  Volunteer service hours will not qualify if the firefighter also performs non-volunteer services to a particular fire department. An individual who claims this credit will not be eligible for the current $1,000 tax exemption for honoraria paid for volunteer firefighting duties. 

Medical Expense Tax Credit for Other Dependants – Effectivefor the 2011 tax year, the current$10,000limit on eligible medical expenses for a dependant relative will be removed.  A dependent relative includes a child who is 18 or older, a grandchild, parent, grandparent, brother, sister, uncle, aunt, niece, or nephew who is dependent on the taxpayer for support.

Child Tax Credit– The rule that limits the claim for the 15% non-refundable Child Tax Credit (CTC) ($2,131 in 2011) to one parent per household will be removed starting 2011.  This change ensures that otherwise-eligible parents from two or more families sharing a home are not prevented from claiming the CTC in respect of their children. 

Registered Disability Savings Plan (RDSP) – Changes to theRDSP rules will enhance the ability for a beneficiary with a shortened life expectancy to withdraw amounts from a RDSP without triggering the 10-year repayment rule for Canada Disability Savings Grants and Canada Disability Savings Bonds.  The RDSP holder must make an election and submit it with a medical certification in order to take advantage of this measure.  Subject to a transitional measure, this amendment will apply after 2010 to withdrawals made after Royal Assent.

Registered Education Savings Plans (RESPs)– Asset Sharing Among Siblings – For 2011, transfers between RESPs for siblings will be allowed without tax penalties and without triggering the repayment of the Canada Education Savings Grants.  This transfer is available provided the individual receiving the transferred asset had not attained the age of 21 when the RESP was opened.                                                                

Tuition Tax Credit- Examination Fees – For 2011, the Tuition Tax Credit will be expanded to include examination fees over $100 paid to an educational institution, professional association, provincial ministry or other similar institution to obtain professional status or to be licensed or certified to practice a profession or trade in Canada.  Fees for admission examinations to begin study in a professional field do not qualify.

Education Tax Measures for Study Abroad– The minimum course duration requirement for access to the Tuition, Education and Textbook Tax Credits for Canadian students studying abroad is reduced from 13 to 3 consecutive weeks.

Mineral Exploration Tax Credit (METC)– The METC has been extended to flow-through share agreements entered into by March 31, 2012.  The METC was previously scheduled to expire at the end of March 2011.

Individual Pension Plans (IPPs)– The budget proposes two new measures that will apply to IPPs. First, annual minimum amounts must be withdrawn from IPPs (similar to RRIFs) once a plan member attains the age of 72.  The second proposal requires that contributions made to an IPP for past years of employment will be required to be funded first out of a plan member’s existing RRSP assets or by reducing the individual’s accumulated RRSP contribution room before any new deductible past service contributions can be made.  This measure will generally apply to IPP past service contributions made after March 22, 2011.

Employee Profit Sharing Plans (EPSPs)– The Government plans to review the existing rules applying to EPSPs in order to determine whether technical improvements are required.  The Government is concerned that these plans have increasingly been used as a means for some business owners to direct profit participation to family members with the intent of reducing or deferring taxes on these profits.  Some employers are also using EPSPs to avoid making CPP contributions and paying EI premiums on employee compensation.

RRSPs – Anti-Avoidance Rules– The budget proposes to address the use of RRSPs in tax planning schemes such as “RRSP strips” where the RRSP annuitant or a non-arm’s length person is able to access their RRSP funds without including the appropriate value in income.  Changes have also been proposed to enhance the existing RRSP anti-avoidance rules by introducing rules similar to the advantage, the prohibited investment, and the non-qualified investment rules that currently apply to TFSAs.  These new rules will generally apply to transactions occurring and investments acquired after March 22, 2011.

Donations of Publicly Listed Flow-Through Shares– The budget proposes to limit the exemption from capital gains on donations of publicly listed flow-through shares, acquired after March 21, 2011, to the portion of the capital gain that represents an increase in value from the original cost of the shares (and not on any gain resulting from the flow-through credits that reduces the ACB to zero).

Tax on Split Income – Capital Gains- Tax on split income (or the “kiddie tax”) is extended to capital gains realized by, or included in the income of, a minor from a disposition of shares of a corporation to a person who does not deal at arm’s length with the minor, if taxable dividends on the shares would have been subject to the kiddie tax.  Capital gains that are subject to this measure will be deemed to be a taxable dividend, so that the disposition will neither benefit from the capital gains inclusion rate nor qualify for the lifetime capital gains exemption.  This measure will apply to capital gains realized after March 21, 2011.

Administrative Changes – CCTB and GST/HST Credit– The budget proposes to require an individual who receives the Canada Child Tax Benefit (CCTB) to notify the CRA of a marital status change before the end of the month following the month in which the change in status occurs.  The budget also proposes to increase the advance payment threshold for the CCTB from $10 to $20 per month and for the GST/HST Credit from $25 to $50 per quarter. 

Business Income Tax Measures

Accelerated Capital Cost Allowance for Clean Energy Generation and Conservation Equipment– Budget 2011 proposes to expand Class 43.2 to include new equipment that is used to generate electricity from waste heat.  This measure will apply to eligible assets acquired on or after March 22, 2011.  Class 43.2 provides an accelerated CCA rate of 50% on a declining balance basis.

Accelerated Capital Cost Allowance for Manufacturing and Processing (M&P) Equipment– The budget proposes to extend the temporary incentive for M&P equipment for an additional two years.  The 50% straight-line accelerated rate will apply to eligible M&P equipment (class 29) purchased before 2014.

Partnerships – Deferral of Corporate Tax– New rules will limit the deferral opportunities for corporations with more than a 10% income allocation from a partnership in a year that has a different fiscal period than the corporation’s tax year.  Such corporations will now be required to accrue income from the partnership for the portion of the partnership’s fiscal period that falls within the corporation’s tax year (“stub period income”).

There are relieving measures that will permit corporate partners to spread the additional income for the first year over a 5-year period.  This means that the stub period income otherwise reportable in 2011 will be includable in the partner’s income during 2012-2016 taxation years.  For the 2012 tax year, 15% of the stub period income must be reported, 20% in 2013-2015 and the final 25% in 2016. 

Partnerships may elect to change their next fiscal periods to an earlier date to avoid the application of these new rules.  This measure will apply to taxation years of a corporation that end after March 22, 2011.

Other Measures

Temporary Hiring Credit for Small Business – To encourage hiring by small business,  a one-time credit of up to $1,000 will be available to offset the increase in 2011 Employment Insurance (EI) premiums over those paid in 2010.  This new credit will be available for employers whose EI premiums were at or below $10,000 in 2010.

ecoENERGY Retrofit-Homes Program– This program, which offers homeowners up to $5,000 towards energy-saving renovations, is being extended by the government for one year.  Further details will be announced in the near future.

Guaranteed Income Supplement (GIS) Top-Up– Effective July 1, 2011, eligible seniors will receive an annual GIS benefit top-up of up to $600 for a single senior and $840 for couples who have little or no income other than Old Age Security and the GIS.  The full amount of the benefit will be awarded to individuals who have an annual income of $2,000 or less, excluding OAS and GIS, and to couples with an annual income of $4,000 or less.  For individuals and couples above these income thresholds, the amount of the top-up will be gradually reduced. It will be completely phased out at an income level of $4,400 for singles and $7,360 for couples.
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.