Well, welcome to the first edition of Moodys LLP Tax Advisors blog entries. We hope this entry is the first of many where many difficult tax issues are translated into plain English and any breaking news is quickly released onto the blog. Accordingly, we encourage you to come back and visit us often.
As you no doubt know by now, the Conservative Minority Government released its 2008 Budget on February 26, 2008. From a tax perspective, the Budget contains little in terms of great tax savings. Not much ink will be spilt on this entry regarding all of the finer details of the Budget given that much has been written in the last few days. Instead, we will focus on a few of the issues that haven’t received too much attention yet but certainly will into the future.
One of the better changes that has been made in the last couple of years has been the introduction of the so called “eligible dividend” rules. These rules bring tax integration more in line when using a corporate vehicle to carry out a business operation. In the past, corporations were inherently a double tax vehicle. Public corporations lived with this concept until the flurry of the Income Trust structures which were specifically designed to avoid the double tax nature of a corporation. In order to achieve better tax integration, the eligible dividend rules, very generally, are intended to reduce the personal taxation on dividends that are paid out of high after tax corporate business income. In the October 2007 Economic Statement, the Conservatives proposed to reduce corporate taxation rather aggressively. This move was somewhat of a surprise to many tax practitioners. In the October Economic Statement, the Conservatives also announced that they would consider adjusting the taxation of eligible dividends (and specifically the dividend tax credit and gross-up calculations) because of the corresponding reduction in corporate tax rates. True to their word, the 2008 Federal Budget reduces the dividend tax credit for eligible dividends. For Alberta resident taxpayers, the highest marginal tax rate on eligible dividends was proposed to be 14.55% for 2009 and thereafter. However, our calculations as a result of the Budget proposals now show that for Alberta resident taxpayers the following marginal rates, at the highest level, will be applicable for Alberta resident individual taxpayers who are in receipt of eligible dividends:
- 2008 – 16.0%
- 2009 – 14.55%
- 2010 – 15.88%
- 2011 – 17.27%
- 2012 – 19.29%
As you can see, the increase in the marginal tax rate for eligible dividends is rather significant from 2009 to 2012. Accordingly, this should cause taxpayers and their advisors to take a second look at remuneration and surplus distribution planning. Taxpayers may want to consider removing as much surplus as possible, to the extent that it makes sense, in 2009. Such a proposed change will also impact many other types of planning involving private corporations such as planning for eventual death, planning for sale, planning for an exit from Canada and other types of planning that involve dispositions of property such as corporate assets or shares.
In another significant move, the Government proposes to ease certain administrative burdens that are involved when non-residents dispose of”taxable Canadian property.” Presently, to the extent that a non-resident disposes of taxable Canadian property, such as Canadian real estate, the purchaser must withhold a portion of the amount paid to the non-resident and remit it to the Canadian Government on account of the non-resident vendor’s possible Canadian tax liability. However, the purchaser’s obligation to withhold does not apply if the non-resident vendor obtains a”clearance certificate” from the Canada Revenue Agency (“CRA” ). However, as most practitioners know, obtaining a clearance certificate is a significant administrative burden. Lately, it is taking the CRA many months to issue clearance certificates which is causing significant problems in order to close certain business transactions. While the proposals are welcome, in our view, the proposals do not go far enough. We would encourage the readers to go here for further information on this topic.
While there are other proposed tax changes in the Budget such as the introduction of tax free savings accounts (which will be the subject of another blog entry), changes to certain capital cost allowance rates, changes to certain charitable donation rules, proposed changes to certain private foundation rules, proposals to improve the scientific research and experimental development tax credit rules and miscellaneous other proposed changes, the bulk of the proposed changes do not warrant much discussion. Notwithstanding, to the extent that the reader is interested, please again refer here for a thorough review of the Budget.