Deloitte: 2011 Federal Budget Highlights

Mar 22, 2011 | Corporate Member News

  • Measures concerning businesses
  • Measures concerning individuals
  • Custom tariff measures
  • Other measures

The Minister of Finance, James M. Flaherty, presented his 2011 budget in the House of Commons this afternoon. He announced a projected deficit for 2010-2011 of $40.5 billion which is almost $9 billion less than was projected in budget 2010. The Federal debt to GDP ratio is projected to be just over 34%. This ratio is projected to grow slightly in 2011-2012 and then decline to 29.7% by 2015-2016, roughly the level before the impact of the recession and the measures contained in the last two budgets designed to counteract the recession. While excluding provincial debt, the projected debt to GDP ratio of 29.7% in 2015-2016 is less than half the projected debt to GDP ratio of any of the other G7 countries. The deficit is projected to fall to $29.6 billion in 2011-2012 and continue to decline each year until 2015-2016, when a surplus is projected.

The budget reflects the recovery in the global economy and demonstrates that the near-term global economic outlook has improved since the October 2010 Update of Economic and Fiscal Projections. However, only moderate growth is expected in Canada and most of the advanced economies going forward. The finance minister predicts real growth in the economy of 2.9% in calendar year 2011 and 2.7% in 2012. Average growth over the next five years is projected to be just under 2.7%. Growth in the US economy is expected to be stronger over the same term with the average growth in real GDP over the next five years projected at just less than 3.2%.

Unemployment is expected to continue to decline over the next five years from 7.5% in 2011 to 6.5%. Inflation is projected to remain around 2% over the next five years with 2011 projected to be at 2.4%. Similarly, the value of the Canadian dollar is projected to be just below par compared to the U.S. dollar for the next five years. Short-term and long-term interest rates are projected to increase over the next five years with the biggest increases being in 2011 and 2012.

There are no tax increases contained in the budget, nor any changes to previously promised tax rate reductions. Government expenditures will continue to grow, although there are expected savings from strategic reviews of government departments and agencies and continued restraint in government wage increases. There were no tax rate reductions for individuals announced in the budget but some small tax credit enhancements were announced for families. We continue to believe that the highest personal tax rate is too high and the level at which that rate becomes effective is too low and hurts Canada’s global competitiveness for top talent. While there were some limited enhancements to support retirement savings such as the increase to the Guaranteed Income Supplement for low-income seniors, there were no enhancements to the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Plan (TFSA) regimes, which we feel are necessary as more and more Canadians are funding their own retirement.

The minister did find some savings by eliminating what he calls tax loopholes. These included preventing the deferral of tax by the use of partnerships and eliminating the ability to avoid capital gains tax when flow-through shares are donated to a charity.

No changes are proposed for the Scientific Research and Experimental Development tax credit system. Many companies performing research and development who are not entitled to refundability of the tax credits were hoping that the program would be expanded to give some relief in this area. This is an opportunity to assist these companies who are trying to further the country’s innovation agenda and improve productivity. The minister may have decided to defer such changes pending completion of its review of this area. There were also no provisions to encourage so-called angel investing in startup companies. We had encouraged the creation of an angel investment tax credit but this was not proposed in the budget.

Another area where we expected some more definitive plans was for pooled registered retirement pension plans or other enhancements to encourage saving. The budget indicates that the federal government is continuing to work with the provinces and territories to implement the pooled plans. No other measures were introduced to encourage savings or to raise the RRSP or TFSA limits.

The following is a summary of the highlights contained in the budget. We also invite you to join our tax leaders for their insights and reactions to the federal budget on our webcast tomorrow, March 23 at 10:30 am ET.

Measures concerning businesses

The budget proposes to extend the temporary incentive for accelerated capital cost allowance for machinery and equipment primarily for use in Canada for the manufacturing or processing of goods for sale or lease for an additional two years. This measure will apply to eligible machinery and equipment purchased before 2014.

The budget proposes to expand Class 43.2 (specified clean energy generation and conservation equipment – declining balance capital cost allowance (CCA) rate of 50%) to include equipment that is used to generate electrical energy in a process in which all or substantially all of the energy input is from waste heat. This measure will apply to eligible assets acquired on or after March 22, 2011, that have not been used or acquired for use before that date.

The budget proposes that the rules governing qualifying environmental trusts (QETs) be extended to apply to a trust that otherwise meets the conditions of the Income Tax Act for being a qualifying environmental trust that is (a) created after 2011 in connection with the reclamation of property primarily used for the operation of a pipeline; and (b) required to be maintained by order of a tribunal constituted by a law of Canada or a province. The budget also proposes to expand the range of eligible investments that a qualifying environmental trust may hold. Lastly, the budget proposes to set the rate of tax payable by a QET to the corporate income tax rate generally applicable for the 2012 and later taxation years. These changes will apply to the 2012 and subsequent taxation years.

Currently, the cost of oil sands leases and other oil sands resource property can be treated as Canadian development expense (CDE) which is deductible at the rate of 30% per year. In order to better align the deduction rates for intangible costs in the oil sands sector with rates in the conventional oil and gas sector, the budget proposes that these costs be treated as Canadian oil and gas property expense (COGPE) which is deductible at 10% per year. This measure will be effective for acquisitions made on or after March 22, 2011.

Currently, development expenses incurred for the purpose of bringing a new oil sands mine into production in reasonable commercial quantities are treated as Canadian exploration expense (CEE) which can be deducted in full in the year incurred. In order to better align the deduction rates for pre-production development costs in oil sands mines with rates applicable to in situ oil sands projects and the conventional oil and gas sector, the budget proposes that these costs be treated as CDE which is deductible at the rate of 30% per year. This measure will be effective after 2015 for new mines on which major expenses construction began before March 22, 2011. For other expenses, the transition from CEE to CDE will be phased in on a gradual basis, becoming fully phased in by 2016.

The budget proposes to extend the application of the stop loss rules that apply to reduce, in certain cases, the amount of a loss otherwise realized by a corporation on a disposition of shares by the amount of tax free dividends that have been received or deemed to have been received on those shares on or before the disposition to include any deemed dividends to be received on the redemption of shares held by a corporation, except where the dividends deemed to have been received were from the redemption of shares of the capital stock of a private corporation that are held by a private corporation. This measure applies to redemptions that occur on or after March 22, 2011.

The budget proposes to limit the deferral opportunities for corporations with a significant interest in a partnership that has a different fiscal period that the corporation’s taxation year. In computing the corporation’s income for the taxation year, it will be required to accrue income from the partnership for the portion of the partnership’s fiscal period that falls within the corporation’s taxation year. The additional income for the first year will be brought into the corporation’s income over a five year period. This measure will apply to taxation years of a corporation that end after March 22, 2011.

The government plans to review the existing rules relating to Employee Profit Sharing Plans to ensure that employers are using these plans for their intended purpose, rather than, for example, to direct profit participation to family members. Before proceeding with any changes, the government will consult with stakeholders.

The AgriInvest program, which provides an incentive to farmers to set aside savings through government-matched contributions, is being supplemented in Quebec by the Agri-Québec program. The budget proposes to provide the same tax treatment to the Agri-Québec program as the federal program.

The budget proposes a one-time credit of up to $1,000 against a small firm’s increase in its 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.

Measures concerning individuals

The budget proposes a new 15% non-refundable Children’s Art Tax Credit for eligible expenses up to $500. The credit will be available in respect of a child who is under 16 years of age at the beginning of the year who is enrolled in an eligible artistic, cultural, recreational or developmental activity. This credit will be structured in the same manner as the existing Children’s Fitness Tax Credit. The credit will apply to eligible expenses paid in the 2011 and subsequent taxation years, and will be able to be claimed by either parent, or shared by both parents.

A Family Caregiver Tax Credit is proposed for a caregiver of a dependent person who has a mental or physical infirmity. The credit will be integrated into the existing dependency-related credits and will be based on an amount of $2,000. The credit will apply beginning in 2012.

The Medical Expense Tax Credit in respect of a dependent relative (other than a child who has not reached the age of 18 years before the end of the taxation year) is proposed to be amended to remove the current $10,000 limit on eligible expenses that can be claimed. This measure will apply to the 2011 and subsequent taxation years.

The Registered Disability Savings Plan (RDSP) rules are proposed to be amended to enhance the ability for a beneficiary with a shortened life expectancy to withdraw amounts from the RDSP without triggering the 10-year repayment rule in respect of Canada Disability Savings Grants and Canada Disability Savings Bonds. This measure will apply, subject to a transitional measure, after 2010 to withdrawals made after Royal Assent.

The budget proposes to allow for greater flexibility with respect to the allocation of Registered Education Savings Plan (RESP) assets among siblings by expanding the ability to transfer between individual RESPs for siblings, without tax penalties or triggering the repayment of Canada Education Savings Grants, to individuals who are not connected by blood or adoption, such as aunts or uncles. This proposal will apply to asset transfers that occur after 2010.

The Tuition Tax Credit is proposed to be amended to include certain occupational, trade or professional examination fees and ancillary fees and charges as eligible fees for the credit. This amendment will apply to eligible amounts paid in respect of examinations take in the 2011 and subsequent taxation years.

The Tuition, Education and Textbook Tax Credits, as well as eligibility for Educational Assistance Payments (EAPs) from an RESP, are proposed to be amended to accommodate the fact that many programs at foreign universities are based on semesters that are shorter than 13 weeks. The minimum course duration for these purposes is proposed to be reduced from 13 weeks to three consecutive weeks. This amendment will apply with respect to tuition paid for courses taken in the 2011 and subsequent taxation years and to EAPs made after 2010.

The RRSP rules are proposed to be amended to address certain perceived abuses, a number of which involved accessing RRSP without a corresponding income inclusion. Measures similar to those recently implemented in respect of TFSAs are proposed to be introduced for RRSPs. Subject to certain exceptions, these measures are proposed to apply to transactions occurring and investments acquired after March 22, 2011. (For these purposes investment income earned after March 22, 2010 on previously acquired investments will be considered a transaction occurring after March 22, 2010.)

The budget proposes two amendments in respect of Registered Pension Plans that are considered Individual Pension Plans (IPPs).

Similar to the requirements applicable to a Registered Retirement Income Fund, annual minimum amounts will be required to be withdrawn from an IPP once a plan member reaches 72 years of age. This measure is proposed to be applicable to the 2012 and subsequent taxation years.

Contributions to an IPP that relate to past years of employment will be required to be funded first out of RRSP assets or a reduction in RRSP contribution room before a deductible contribution can be made. This measure is proposed to be generally applicable to past service contributions made after March 22, 2011.

The Canada Revenue Agency (CRA) will clarify the application of the pension tax rules with respect to the tax treatment of lump sum amounts received by former employees in lieu of their rights to health and dental coverage from employers who have become insolvent and whose underfunded pension plans were wound up. These amounts will not be treated as income for tax purposes in relation to insolvencies arising before 2012.

The tax on split income, also known as the “kiddie tax”, is proposed to be amended to extend the application of the 29% tax to certain capital gains. The provision is proposed to apply to capital gains realized on the disposition of shares of a corporation to a person who does not deal at arm’s length with the minor, if taxable dividends on those shares would have been subject to the “kiddie tax”. If this provision applies, the capital gains will be treated as dividends and neither the capital gains inclusion rate nor the lifetime capital gains exemption will apply. This measure is proposed to apply to capital gains realized on or after March 22, 2011.

Eligibility for the Mineral Exploration Tax Credit is extended for one year to flow-through share agreements entered into on or before March 31, 2012.

A new 15% non-refundable Volunteer Firefighters Tax Credit is introduced. This credit is based on an amount of $3,000 and is proposed to 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 in respect of firefighting. This credit will apply to the 2011 and subsequent taxation years.

Eligibility for the 15% non-refundable Child Tax Credit (based on an indexed amount – $2,131 in 2011) is proposed to be modified to eliminate the restriction that only one credit may be claimed per domestic establishment. This will ensure that where two or more families share a home, each eligible parent will still be entitled to claim the credit. This measure will apply to the 2011 and subsequent taxation years.

In order to prevent taxpayers from acquiring and donating flow-through shares at little or no after tax cost, the budget proposes to allow the exemption from capital gains tax on donations of flow-through shares only to the extent that cumulative capital gains in respect of dispositions of shares of that class exceed the original cost of the flow-through shares. This measure applies for shares issued pursuant to a flow-through share agreement entered into on or after March 22, 2011.

The budget proposes to clarify that the Charitable Donations Tax Credit or Deduction is not available to a taxpayer in respect of the granting of an option to a qualified donee to acquire a property of the taxpayer until such time that the donee acquires the property that is the subject of the option. The taxpayer will be allowed a credit or deduction at that time based on the amount by which the fair market value of the property exceeds the total amount, if any, paid by the donee for the option and the property. This measure will apply in respect of options granted on or after March 22, 2011.

The budget proposes that the tax recognition of the donation of a non-qualifying security of a donor, for the purposes of determining eligibility for the Charitable Donations Tax Credit or Deduction, will be deferred until such time, within five years of the donation, that the qualified donee has disposed of the non-qualifying security for consideration that is not another non-qualifying security. This measure will apply in respect of securities disposed of by donees on or after March 22, 2011.

The government intends to renew two EI pilot projects for one year. The Working While on Claim pilot project, available across Canada, will allow EI claimants to earn additional money while receiving income support. It will be renewed until August 2012. The Best 14 Weeks pilot project, which allows claimants in 25 regions of higher unemployment to have their EI benefits calculated based on the highest 14 weeks of earnings over the year preceding a claim, will be renewed until June 2012.

Custom tariff measures

The budget announces that the Government is initiating a process to simplify the Customs Tariff in order to facilitate trade and lower the administrative burden for businesses. The changes include a reduction of customs processing burden for businesses, modification of the structure of the Customs Tariff, and technical modernization of the Customs Tariff.

The budget proposes the introduction of three new tariff items to facilitate the processing of low value non-commercial imports arriving by post or by courier. These new items will apply generic Most-Favoured-Nation tariff rates of 0%, 8% or 20%, depending on the description of the goods

Other measures

The budget proposes a number of measures relating to charities, including: the requirement that qualified donees be included on a publicly available list maintained by the CRA; the potential suspension of receipting privileges, revocation of qualified donee status or monetary penalties associated with improper issuance of receipts; the extension of monetary penalties associated with the failure to file information returns to registered Canadian amateur athletic associations (RCAAAs); the extension to RCAAAs of other key regulatory requirements that apply to registered charities; and the ability of the Minister of National Revenue to refuse or revoke the registration of an organization if certain offenses are committed by certain members of the organization.

The budget proposes that when property in respect of which a taxpayer received a donation receipt is returned to the donor, the qualified donee must issue a revised donation receipt and must forward a copy to the CRA if the amount of the receipt has changed by more than $50. This measure will apply in respect of gifts or property returned on or after March 22, 2011.

The government has committed $400 million in 2011-12 for the ecoENERGY Retrofit – Homes program to help homeowners make their homes more energy efficient and reduce high energy costs. Further details will be announced in the near future.

For further details, we refer you to the Department of Finance website, where you can access the official budget documents without charge.

This publication is produced by Deloitte & Touche LLP as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors. Your use of this document is at your own risk.

About Deloitte:

Deloitte, one of Canada’s leading professional services firms, provides audit, tax, consulting, and financial advisory services through more than 7,600 people in 57 offices. Deloitte operates in Québec as Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Deloitte & Touche LLP, an Ontario Limited Liability Partnership, is the Canadian member firm of Deloitte Touche Tohmatsu Limited.

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

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