Federal Budget – January 27, 2009: Income tax measures

Well, Canadian taxpayers got a grab bag of tax goodies in the Federal Budget (the “Budget”). Here are the highlights:

1. Personal income tax measures

a) Basic personal amount

For 2009, the basic personal amount will be increased from $9,600 in 2008 to $10,320 and be indexed to inflation in subsequent taxation years.

b) Personal income tax brackets

Without going into a lot of detail, the various personal tax brackets that are currently in place are being slightly modified. For example, the highest tax bracket for 2008 is applicable for taxable income in excess of $123,184. The highest tax bracket for 2009 is now being increased to be applicable for taxable income in excess of $126,264. However, with scheduled indexation for 2009, this amount has not changed. As another example, the amount of taxable income that was subject to the lowest federal tax bracket of 15% (for taxable income that was equal to or less than $37,885 for 2008), will now be 15% for amounts that are equal to or less than $40,726 (which is a slight increase from what it was scheduled to be for 2009).

c) Age credit

The amount of the age credit that can be utilized by seniors (age 65 or older) is being increased by $1,000 to $6,408 for 2009. The age credit is income sensitive and is completely phased out when income levels of the senior reach roughly $75,000.

d) First-time home buyers’ tax credit

The Budget proposes to introduce a new non-refundable tax credit based on an amount of $5,000 for first-time home buyers who acquire a qualifying home after January 27, 2009. The credit will be based upon the lowest personal income tax rate (currently 15%) and is claimable for the taxation year in which the home is acquired. The new credit will also be available for individuals who are eligible for the disability tax credit (“dtc”), or by an individual for the benefit of a related individual who is dtc eligible, if the home is acquired to enable the dtc eligible individual to live in a more accessible dwelling or in an environment better suited to the needs and care of that person.

e) RRSP/RRIF losses after death

In a welcome move, the Budget proposes to allow, upon the final distribution of property from a deceased annuitant’s RRSP or RRIF, the amount of post-death decreases in value of the registered plan to be carried back and deducted against the year of death RRSP/RRIF income inclusion. Current tax rules require that the fair market value of an RRSP or RRIF, with certain rollover exceptions, must be included in the deceased annuitant’s final income tax return in the year of death. However, there is currently no income tax provision that allows a carry back of losses that may have been realized in the RRSP or RRIF upon an ultimate distribution to the beneficiaries. This will now obviously change for final distributions that occur after 2008.

f) Home renovation tax credit

The Budget proposes to introduce a temporary home renovation tax credit. Generally, individuals will be able to claim a 15% non-refundable tax credit for eligible expenditures made in respect of eligible dwellings. The credit will apply to expenditures in excess of $1,000 but not more than $10,000 resulting in a maximum credit of $1,350.

The credit will apply only to the 2009 taxation year and for expenditures or work performed or goods acquired after January 27, 2009 and before February 1, 2010. For purposes of this credit, eligible individuals will generally be defined to consist of an individual, an individual’s spouse or common-law partner and their children who were, throughout 2009, under the age of 18 years. Family members will be subject to a single limit based on their pooled expenditures. Eligible expenditures will generally be defined to include amounts in relation to a renovation or alteration of an eligible dwelling (including land that forms part of the eligible dwelling) provided that the renovation or alteration is of an enduring nature and is integral to the eligible dwelling. Amounts that are routine repairs or maintenance or for appliances, audio/visual electronics or financing costs associated to the renovation will not be considered eligible expenditures. Alterations or other items such as furniture or draperies and other indirect expenditures will not be eligible.

2. Business tax measures

a) Small business limit

The amount of the Federal small business limit, applicable for Canadian controlled private corporations (“CCPCs”) that earn active business income, is being increased to $500,000, from $400,000, effective January 1, 2009. Such access to the increased small business limit will be pro-rated for corporations with taxation years that do not coincide with a calendar year.

This is an interesting move when one considers that the Alberta Government recently introduced measures – the Alberta Over Integration Tax – that will force Alberta-based CCPCs to pay an additional tax to the extent that eligible dividends are paid in certain circumstances. This is because, for Alberta purposes, the small business limit was already $500,000 and Alberta wanted to ensure that Alberta corporations were not at an advantage when eligible dividends were paid out of income that was taxable between $400,000 and $500,000 of profits. It will be interesting to see whether or not the Alberta Government will now amend such recently implemented legislation.

In addition, this measure will continue to cause practitioners to tinker with remuneration and estate planning for owner/managers of private corporations.

b) Capital Cost Allowance (“CCA”) for manufacturing and processing equipment

Recent Federal budgets have amended the various CCA rates for manufacturing and processing equipment used primarily in Canada for manufacturing and processing goods for sale or lease. The Budget proposes to extend the temporary 50% straight-line CCA rate for M&P equipment acquired after March 19, 2007 and before 2010. The half year rule will apply to such assets.

c) Accelerated CCA for computers

Computer equipment and system software acquired after January 27, 2009 will now be subject to a CCA rate of 100% and not subject to the half year rule. This measure is intended to be temporary and will revert to the normal 55% CCA rate from February 2011 onward.

This is an interesting proposal and one that business owners should take serious note of.

3. Other measures

a) International taxation

As noted in our blog entry of December 15, 2008, the Federal Government received the final report of the Advisory Panel on Canada’s System of International Taxation. The Budget notes that the Government is studying the report and will provide a response in due course on which consultations will be held.

b) Interest Deductibility – Proposed Section 18.2

In a controversial move, the Government introduced proposed section 18.2 in the 2007 Federal Budget. It was scheduled to come into force in 2012 and 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 the foreign jurisdiction. Many tax practitioners had provided views that such proposed section 18.2 should repealed. The Budget confirms that proposed section 18.2 will not come into force.

c) Non-resident (“NRT”) and foreign investment entity (“FIE”) proposals

As noted in our December 15, 2008 blog entry, the NRT and FIE proposals, which were first introduced in the 1999 Federal Budget, are problematic. The Budget confirms that the Federal Government has received submissions, including the Panel’s recommendations on the proposals. The Federal Government supports the fundamental policy objective of ensuring that Canadian taxpayers should not be able to avoid paying their fair share of income tax through the use of foreign intermediaries. However, the Federal Government confirms that they will review the existing proposals in light of these submissions before proceeding with them. Hopefully, this means a more sober response by the Federal Government.

d) Subsection 256(9) – Timing of the acquisition of control of a corporation

Our October 21, 2008 blog entry highlighted the timing problem with this issue. Very generally, to the extent that shares of a CCPC were sold to a non-resident or publicly traded entity, this could cause problems in the utilization of the $750,000 capital gains deduction. The Federal Government recognizes this issue and proposes that the deeming rule in subsection 256(9) of the Act be amended to ensure that it does not affect the status of the corporation as a CCPC at the time of the transaction that caused the acquisition of control (and thus will preserve the availability of the capital gains deduction in such circumstances). This is good news! The proposed amendment will apply in respect of acquisitions of control that occur after 2005 except in certain limited circumstances.

e) Corporate electronic filing

Certain corporations that are currently eligible to electronically file their T2 income tax returns with the Canada Revenue Agency will be required to file their income tax returns electronically for taxation years that end after 2009. In addition, the Budget proposes to introduce a penalty for filing a corporate income tax return in an incorrect format and to reduce the penalties applicable for late filed or incorrectly filed information returns.

Moodys LLP Tax Advisors would be pleased to discuss the Budget proposals with you.