2012 Federal Budget March 29, 2012 2012 FEDERAL BUDGET SUMMARY INTRODUCTION
On March 29, 2012, The Honourable Jim Flaherty, Canada Minister of Finance, introduced his budget. The highlights of the budget are set out below:
PERSONAL INCOME TAX MESURES Medical expense tax credit
The budget proposes to add to the list eligible to the credit blood coagulation monitors for use by individuals who require anti-coagulation therapy, including associated disposable peripherals such as pricking devices, lancets and test strips. This measure will apply to expenses incurred after 2011.
Registered disability savings plans (RDSP) Plan holders
The budget proposes to allow, on a temporary basis, certain family members to become the plan holder of the RDSP for an adult individual who might not be able to enter into a contract. This measure will apply from the date of Royal Assent to the enacting legislation until the end of 2016. A qualifying family member who becomes a plan holder under this measure will be able to remain the plan holder after 2016.
Proportional repayment rule
The budget proposes to introduce a proportional repayment rule that will apply when a withdrawal is made from an RDSP. This rule will replace the 10-year repayment rule only in respect of RDSP withdrawals. The existing 10-year repayment rule will continue to apply where the RDSP is terminated or deregistered, or the RDSP beneficiary ceases to be eligible for the disability tax credit (DTC) or dies. This measure will apply to withdrawals made from an RDSP after 2013.
Maximum and minimum withdrawals
The budget proposes to increase the maximum annual limit for withdrawals from primarily government-assisted plans to the greater of the amount determined by the lifetime disability assistance payment (LDAP) formula and 10 per cent of the fair market value of plan assets at the beginning of the calendar year. A primarily government-assisted plans beneficiary will continue to be eligible for the existing exemption from the maximum annual limit for withdrawals if a medical doctor
2012 FEDERAL BUDGET SUMMARY
certifies in writing that the beneficiary’s state of health is such that, in the doctor’s opinion, the beneficiary has a life expectancy of five years or less. These measures will apply after 2013.
Rollover of RESP Investment Income
The budget proposes to allow investment income earned in a registered education savings plan (RESP) to be transferred on a tax-free (or “rollover”) basis to an RDSP if the plans share a common beneficiary. This measure will apply to rollovers of RESP investment income made after 2013.
Termination of an RDSP following cessation of eligibility for the Disability Tax Credit
The budget proposes to extend, in certain circumstances, the period for which a RDSP may remain open when a beneficiary becomes DTC-ineligible.
Mineral exploration tax credit for flow-through share investors
The budget proposes to extend eligibility for the mineral exploration tax credit for one year to flow-through share agreements entered before April 1st, 2013.
Eligible dividends – split-dividend designation and late designation
The budget proposes to simplify the manner in which a corporation resident in Canada pays and designates eligible dividends by allowing the corporation to designate, at the time it pays a taxable dividend, any portion of the dividend to be an eligible dividend. The portion of a taxable dividend that is designated to be an eligible dividend will qualify for the enhanced dividend tax credit (DTC), and the remaining portion will qualify for the regular DTC. The budget also proposes to allow the Minister of National Revenue to accept a corporation’s late designation of a taxable dividend to be an eligible dividend. These measures will apply to taxable dividends paid on or after March 29, 2012.
Group sickness or accident insurance plans
The budget proposes to include the amount of an employer’s contributions to a group sickness or accident insurance plan in an employee’s income for the year in which the contributions are made to the extent that the contributions are not in respect of a wage-loss replacement benefit payable on a periodic basis. This measure will apply in respect of employer contributions made on or after March 29, 2012 to the extent that the contributions relate to coverage after 2012,
2012 FEDERAL BUDGET SUMMARY
except that such contributions made on or after March 29, 2012, and before 2013 will be included in the employee’s income for 2013.
Retirement Compensation Arrangements (RCA)
The budget proposes new prohibited investment and advantage rules to directly prevent RCAs from engaging in non-arm’s length transactions. These rules will be based very closely on existing rules for Tax-Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSPs). As well, the budget proposes a new restriction on RCA tax refunds in circumstances where RCA property has lost value.
The budget proposes that the new prohibited investment rules apply in respect of RCAs that have a “specified beneficiary”. This measure will apply in respect of investments acquired, or that become prohibited investments, on or after March 29, 2012.
The budget also proposes that the definition of “advantage” be adapted to address the specific forms of tax planning that have been identified in relation to RCAs. An RCA advantage will be subject to a special tax equal to the fair market value of the advantage. The special tax will generally apply to advantages extended, received or receivable on or after March 29, 2012, including advantages that relate to RCA property acquired, or transactions occurring, before March 29, 2012. However, advantages that relate to property acquired, or transactions occurring, before March 29, 2012 will be eligible for special transitional rules on an elective basis, as is the case under the existing advantage rules.
Employees Profit Sharing Plans (EPSPs)
The budget proposes a targeted measure to discourage excessive employer contributions. This proposal introduces a special tax payable by a specified employee1 on an “excess EPSP amount”. In general terms, an “excess EPSP amount” will be the portion of an employer’s EPSP contribution, allocated by the trustee to a specified employee, that exceeds 20 per cent of the specified employee’s salary received in the year by the specified employee from the employer. This measure will apply in respect of EPSP contributions made by an employer on or after March 29, 2012, other than contributions made before 2013 pursuant
1 “Specified employee” is defined in subsection 248(1) of the Income Tax Act and generally includes an employee who has a significant equity interest in their employer or who does not deal at arm’s length with their employer.
2012 FEDERAL BUDGET SUMMARY
to a legally binding obligation arising under a written agreement or arrangement entered into before March 29, 2012.
Salary of the Governor General of Canada
Following consultations between the Governor General and the Government, both have agreed that the income tax exemption for the Governor General’s salary should end and that the Governor General’s salary, as adjusted, paid under the Governor General’s Act should be subject to tax in the same manner as the salary of other Canadians. This measure will apply to the 2013 and subsequent taxation years.
Life insurance policy exemption test
The budget proposes to implement changes to the life insurance policy exemption test. Over the coming months, the Government will undertake consultations with key stakeholders on the proposed technical improvements and the recalibration of the Investment Income Tax (IIT) base. Amendments to the tax provisions arising from these consultations will apply to life insurance policies issued after 2013.
Old Age Security (OAS) Old Age Security Age of Eligibility
The age of eligibility for OAS and Guaranteed Income Supplement (GIS) will be gradually increased from 65 to 67, starting in April 2023, with full implementation by January 2029. Thus, individuals who were born on March 31, 1958 or earlier will not be affected. The age of eligibility of those born on, or after, February 1, 1962 will be 67 years of age, and the age of eligibility of those born between April 1, 1958 and January 31, 1962 will be between 65 and 67 years.
Option to Defer the OAS Pension
Starting on July 1, 2013, the Government will allow for the voluntary deferral of the OAS pension, for up to five years.
2012 FEDERAL BUDGET SUMMARY BUSINESS INCOME TAX MEASURES Clean energy generation equipment: accelerated capital cost allowance Waste-fuelled thermal energy equipment
The budget proposes to expand Class 43.2 by removing the requirement that the heat energy generated from the equipment is used in an industrial process or a greenhouse.
Equipment of a district energy system
The budget also proposes to expand Class 43.2 by adding equipment that is part of a district energy system that distributes thermal energy primarily generated by waste-fuelled thermal energy equipment (that is itself eligible for inclusion in Class 43.2).
Energy generation from residue of plants
The budget proposes to add the residue of plants to the list of eligible waste fuels (i.e., biogas, bio-oil, digester gas, landfill gas, municipal waste, pulp and paper waste, and wood waste) that can be used in waste-fuelled thermal energy equipment included in Class 43.2 or a cogeneration system included in Class 43.1 or Class 43.2.
The budget proposes that equipment using eligible waste fuels not be eligible under Class 43.1 or Class 43.2 if the applicable environmental laws and regulations of Canada or of a province, territory, municipality, or a public or regulatory body are not complied with at the time the equipment first becomes available for use. This measure will apply to assets acquired on or after March 29, 2012 that have not been used or acquired for use before that date.
Scientific research and experimental development program (SR&ED) SR&ED Investment tax credit rate
The budget proposes to reduce the general 20 % SR&ED investment tax credit rate applicable to SR&ED qualified expenditure pool balances at the end of a taxation year to 15 %. The 15 % investment tax credit rate will apply in respect of taxation years that end after 2013, except that, for a taxation year that includes January 1, 2014, the 5-percentage-point reduction in the investment tax credit rate will be pro-rated based on the number of days in the taxation year that are after 2013. The enhanced 35 % SR&ED investment tax credit rate applicable in respect of eligible CCPCs will remain unchanged on up to $3 million of qualified SR&ED expenditures annually.
2012 FEDERAL BUDGET SUMMARY SR&ED capital expenditures
The budget proposes to exclude expenditures of a capital nature (including payments in respect of the use or the right to use property that would, if it were acquired by the taxpayer, be capital property of the taxpayer) from eligibility for SR&ED deductions and investment tax credits. This measure will apply to property acquired on or after January 1, 2014, and to amounts paid or payable in respect of the use of, or the right to use, property during any period that is after 2013.
SR&ED Overhead Expenditures
The budget proposes to reduce the rate at which the prescribed proxy amount is calculated to 60 % (from 65 %) for 2013 and to 55 % in subsequent years. The proxy rate that will apply for taxation years that include days in 2012, 2013 or 2014 will be pro-rated based on the number of days in the taxation year that are in each of those calendar years.
SR&ED contract payments
The budget proposes to disallow from the expenditure base for investment tax credits the profit element of arm’s length SR&ED contracts. For simplicity, it is proposed that this be achieved by way of a proxy, under which only 80 % of the cost to a payer of arm’s length SR&ED contracts will be eligible for SR&ED investment tax credits. This measure will apply to expenditures incurred after December 31, 2012. Expenditures that have been excluded because of this measure from the SR&ED tax incentives will be accorded the treatment otherwise applicable to such expenditures under the Income Tax Act.
The budget proposes that a single designated partner of a partnership may also be empowered to waive, on behalf of all its partners, the three-year time limit for making a determination. This measure will apply on Royal Assent to the enacting legislation.
Extending the Hiring Credit for Small Business
The Economic Action Plan of 2012 proposes to extend the temporary Hiring Credit for Small Business to further encourage companies to hire new workers. A credit of up to $1,000 against a small employer’s increase in its 2012 EI premiums over those paid in 2011 would be provided.
2012 FEDERAL BUDGET SUMMARY INTERNATIONAL TAXATION Transfer pricing secondary adjustments
The budget proposes to amend section 247 of the Income Tax Act to confirm that secondary adjustments will be treated as dividends for Part XIII tax purposes. The budget also proposes, consistent with CRA administrative practice, to clarify that a non-resident is allowed to repatriate to a Canadian corporation that has been subject to a primary adjustment an amount equal to the portion of the primary adjustment that relates to the non-resident. This measure will apply to transactions (including transactions that are part of a series of transactions) that occur on or after March 29, 2012.
Thin capitalization rules
The budget proposes to improve the integrity and fairness of the thin capitalization rules by: reducing the debt-to-equity ratio from 2-to-1 to 1.5-to-1; extending the scope of the thin capitalization rules to debts of partnerships of
which a Canadian-resident corporation is a member;
treating disallowed interest expense under the thin capitalization rules as
dividends for Part XIII withholding tax purposes; and
preventing double taxation in certain circumstances where a Canadian
resident corporation borrows money from its controlled foreign affiliate.
Debt-to-Equity Ratio and disallowed interest treated as dividends
This measure will apply to corporate taxation years that begin after 2012.
This measure will apply in respect of debts of a partnership that are outstanding during corporate taxation years that begin on or after March 29, 2012.
Foreign affiliate loans
This measure will apply to taxation years, of Canadian-resident corporations, that end on or after March 29, 2012.
Overseas Employment Tax Credit (OETC)
The budget proposes to phase out the OETC over four taxation years, beginning with the 2013 taxation year. During the phase-out period, the factor, which is currently 80 %, applied to an employee’s qualifying foreign employment income in determining the employee’s OETC will be reduced to 60 % for 2013, 40 % for
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2014 and 20 % for 2015. The OETC will be eliminated for the 2016 and subsequent taxation years. These phase-out rules will not apply with respect to qualifying foreign employment income earned by an employee in connection with a project or activity to which the employee’s employer had committed in writing before March 29, 2012.
SALES AND EXCISE TAX MEASURES GST/HST health measures
The budget proposes to improve the application of the GST/HST to a number of health care services, drugs and medical devices to reflect the evolving nature of the health care sector.
The budget proposes to exempt from the GST/HST services rendered by pharmacists within a pharmacist-patient relationship for the promotion of the patient’s health or for the prevention or treatment of a disease, disorder or dysfunction of the patient. These measures will apply to supplies made after March 29, 2012.
The budget proposes to zero-rate corrective eyeglasses or contact lenses supplied under the authority of an assessment record produced by a person who is entitled under the laws of the province in which the person practices to produce the record authorizing dispensing of corrective eyewear. This measure will apply to supplies made after March 29, 2012 and to supplies made on March 29, 2012 or before that day if GST/HST was not charged, collected or remitted in respect of the supply.
Medical and assistive devices Blood coagulation monitoring devices
The budget proposes to add blood coagulation monitoring or metering devices and associated test strips and reagents to the zero-rated medical device list. This measure will apply to supplies made after March 29, 2012.
Medical and assistive devices supplied on written order 2012 FEDERAL BUDGET SUMMARY
The budget proposes to zero-rate supplies of the devices, that currently qualify for zero-rating only when supplied on the written order of a medical practitioner, when supplied on the written order of a registered nurse, occupational therapist or physiotherapist as part of their professional practice. This measure will apply to supplies made after March 29, 2012.
The budget proposes to add the drug “Isosorbide-5-mononitrate” to the list of zero-rated non-prescription drugs. This measure will apply to supplies made after March 29, 2012 and to supplies made on or before March 29, 2012 if GST/HST was not charged, collected or remitted in respect of the supply.
GST rebate for books to be given away for free by prescribed literacy organizations
The budget proposes to allow charity and qualifying non-profit literacy organizations prescribed by regulation to claim a rebate of the GST (and the federal portion of the HST) they pay to acquire printed books to be given away. This measure will apply to acquisitions and importations of printed books in respect of which tax becomes payable after March 29, 2012.
Doubling GST/HST streamlined accounting thresholds
The budget proposes to double the existing streamlined accounting thresholds. Specifically: •
the annual taxable sales threshold at or below which eligible businesses can elect to use the Quick Method will increase to $400,000 (from $200,000) of GST/HST-included taxable sales; and
the annual taxable sales and taxable purchases thresholds at or below which eligible businesses or public service bodies (PSBs) can elect to use the Streamlined Input Tax Credit Method and eligible PSBs can elect to use the Prescribed Method for Calculating Rebates will increase: to $1,000,000 (from $500,000) of taxable sales, and to $4,000,000 (from $2,000,000) of taxable purchases.
This measure will be effective in respect of a GST/HST reporting period of a person (or a claim period of a person, in the case of the Prescribed Method for Calculating Rebates) beginning after 2012.
2012 FEDERAL BUDGET SUMMARY OTHER TAX MEASURES Gifts to foreign charitable organizations
The budget proposes to modify the rules for registering certain foreign charitable organizations as qualified donees. Foreign charitable organizations that receive a gift from the Government may apply for qualified donee status if they pursue activities: related to disaster relief or urgent humanitarian aid; or in the national interest of Canada. This measure will apply to applications made by foreign charitable organizations on or after the later of January 1, 2013 and Royal Assent to the enacting legislation.
Charities – Enhancing Transparency and Accountability
The budget also proposes to provide additional enforcement tools to the Canada Revenue Agency (CRA). These measures will also apply to registered Canadian amateur athletic associations. These measures will apply on Royal Assent to the enacting legislation.
Tax shelter administrative changes
The budget proposes to encourage tax shelter registration and reporting by: modifying the calculation of the penalty applicable to a promoter when a
person participates in an unregistered charitable donation tax shelter;
introducing a new penalty for a promoter who fails to meet their reporting
obligations with respect to annual information returns; and
limiting the period for which a tax shelter identification number is valid to one
CUSTOMS TARIFF MEASURES Trade measures to support the energy industry
The budget will eliminate the 5 % Most-Favoured-Nation (MFN) rate of duty on certain imported oils used as production inputs in gas and oil refining as well as electricity production. This tariff elimination will be given effect by amendments to the Customs Tariff and will be effective in respect of goods imported on or after March 30, 2012.
2012 FEDERAL BUDGET SUMMARY Travellers’ exemptions
The budget proposes to increase the travellers’ exemption to $200 from $50 for returning Canadian residents who are out of the country for 24 hours or more. The budget similarly proposes to increase exemption levels for travellers who are out of the country for 48 hours or more to $800. This new threshold will replace the current 48-hour exemption of $400 and the current 7-day exemption of $750. The new exemption levels, to be given effect by amendments to the Customs Tariff, will be effective in respect of travellers returning to Canada on or after June 1, 2012.
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