FEDERAL BUDGET 2011

On June 6, Finance Minister James Flaherty tabled the 2011 Federal Budget. This budget is essentially the same as the one from March 22 with a few tweaks.

PERSONAL TAX MEASURES

CHILDREN’S ARTS TAX CREDIT

Effective for the 2011 tax year parent’s will be able to claim a tax credit on up to $500 of expenses paid for registration or membership in programs of artistic, cultural, recreational or developmental activities for each child under age 16 at the beginning of the year. The eligible expenditures are doubled for children eligible for the Disability Tax Credit under the age of 18 at the beginning of the tax year.

VOLUNTEER FIREFIGHTERS TAX CREDIT

Volunteer firefighters who perform a minimum of 200 hours of volunteer services will be eligible for federal tax credit of $450. This measure is effective for the 2011 tax year.

FAMILY CAREGIVER TAX CREDIT

Beginning in 2012 a federal tax credit of $300 will provided to caregivers of dependants currently also eligible to the Spousal Credit, Child Tax Credit, Eligible Dependant Credit, Caregiver Credit and Infirm Dependant Credit.

MEDICAL EXPENSE TAX CREDIT FOR DEPENDANTS

This provision will remove the $10,000 limitation for medical expenses paid for dependant relatives effective for 2011. A dependant relative is a child 18 or older, grandchild, parent, grandparent, brother, sister, uncle, aunt, niece or nephew who is dependent on the taxpayer for support.

TUITION TAX CREDIT

The definition of tuition has been expanded to include examination fees paid to education institutions, professional associations or other institutions to obtain a professional status recognized by federal or provincial statute or to be licensed or certified to practice a trade or profession in Canada.

Additional changes have been made to reduce the minimum course duration at educational institutions outside Canada from 13 weeks to 3 consecutive weeks.

These amendments will be effective for 2011.

TAX ON SPLIT INCOME – KIDDIE TAX

The kiddie tax has been extended to include capital gains from the disposition of shares of a corporation to a non-arm’s length person if dividends on these shares would have been subject to the kiddie tax. The capital gains will be deemed dividends and also will not be eligible for the lifetime capital gains exemption. This change is effective March 22, 2011.

CORPORATION TAX MEASURES

PARTNERSHIPS

Effective March 22, 2011 the taxation of income from a partnership will be changed to limit the deferral of tax through the use of staggered year-ends or multi-tiered partnerships. In the case of a single-tier partnership the new rules will require all corporate partners to accrue the stub-period earnings from the partnership year-end to the corporate partner’s year end. In the alternative a partnership will be permitted to change its year end to that of the corporate partners but this is only useful if all of the partners have the same fiscal period.

In multi-tier partnerships all partnerships must adopt the same fiscal period and then the accrual formula will be applied.

The formula will be phased in over a 5 year period and it only applies to a corporate partner with an income entitlement of greater than 10% of the partnerships total income.

Although the budget was silent on the treatment of joint ventures it is expected that rules will be introduced in the future to include joint venture arrangements in this regime.

OTHER MEASURES

CHARITABLE SECTOR

In an effort to limit the abuse of the charitable donation tax credit through various “charity deals”, the government is imposing tighter rules to reduce abuses including matters related to donated property, non-qualifying securities, options and tougher registration requirements.

In addition the budget proposes to restrict the benefits of donating flow-through shares by restricting the exemption from the capital gain available for donated securities. In addition the calculation of the capital dividend account will be amended to exclude the notional gain on donations of publicly-listed flow-through securities. These measures are effective March 22, 2011.

CAPITAL COST ALLOWANCE

Machinery and equipment used in manufacturing and processing are included in class 29 and are eligible to be depreciated for tax purposes equally over 2 years. This rate was expected to revert to 30% declining balance but has been extended for all acquisitions before 2014.

GUARANTEED INCOME SUPPLEMENT

The previously announced increase in those seniors eligible for the GIS in the amount of $600 per year for singles and $840 for couples will be put into effect for 2011.

ECOENERGY RETROFIT

The previously announced re-introduction of this program will go forward with further details to be made public shortly.