FEDERAL BUDGET 2010

On March 4, 2010 Finance Minister Jim Flaherty introduced the Federal Budget for 2010 with an expected deficit for coming year of $53.8 billion. Generally speaking the budget does not call for any tax increases or tax cuts.
The government will go ahead with the planned second half of the stimulus package of $19 billion. This includes $3.2 billion for personal tax relief for low income families, $4 billion for job training and EI premium relief and $7.7 billion for infrastructure.
Savings are expected from government spending cuts including wage freezes for public employees and all MPs, reductions in defence spending and closing of tax loopholes.
There will be no cuts to provincial transfer payments.
The government projects that the deficit will reduce to $1.8 billion by 2015.

PERSONAL TAX

Canada Child Tax Benefit (CCTB) and Universal Child Care Benefit (UCCB) These amounts are currently received by one supporting parent. The budget proposes that, in the case of separated parents who share custody, they will be able to each receive half of these payments. This change becomes effective July 2011.
UCCB is currently included in the income of the lower-income spouse or common-law partner. When it is a single parent the benefit is included in their income for tax purposes. The budget proposes giving the single parent the option to include the benefit in the income of the child. This will be effective for 2010.

 

Medical expense Changes will no longer allow cosmetic medical or dental procedures in calculating the medical expenses unless there is a clinical medical or reconstructive purpose. This includes liposuction, hair replacement, botox and teeth whitening and is effective for procedures after March 4, 2010.

 


RRSP and RDSP Currently RRSPs, RRIFs and RPPs can be transferred, tax-free, to a spouse, common-law partner or dependent child or grandchild. The budget will extend the tax-free rollover to an RDSP up to the lifetime maximum of $200,000 effective for a taxpayer who dies after March 4, 2010. There will also be a transitional rule allowing the executors to elect a transfer for anyone who has passed away after 2007 and before budget date.
Contributions to an RDSP can result in annual government grants of up to $3,500 and bonds of up to $1,000 for moderate-income families. However, currently the grants and bonds are lost if contributions are not made in the year. The changes will allow the plan to receive the grants and/or bonds in future years by tracking the carry forward of contribution amounts for up to 10 years. This change is effective for 2011.

 

Scholarship Exemptions and Education Tax Credits Grants, fellowships and bursaries are generally completely tax exempt for any post-secondary program. The new rules will restrict the exemption for post-doctoral programs to the amount paid for tuition with the exception of a student who qualifies for the Disability Tax Credit. The full exemption will continue for any program resulting in a college diploma or bachelor, masters or doctoral degrees. This is effective for 2010.

 


Employee Stock Options Currently the options are taxed as an employment benefit based on the difference between the fair market value at the time the option is exercised and the amount paid for the security by the employee and generally the employee gets a stock option deduction of half of the employment benefit. If the company gives the employee the option to cash-out, (receive a cash payment) the current treatment allows the employee to take the stock option deduction and the company to get a full deduction for the cash payment, resulting in a double deduction. Changes will allow the employee to take the stock option deduction only if the employer elects not to deduct the cash payment. This will be effective March 4, 2010.
There is also a stock option tax deferral available for employees who receive public company stock options allowing them to request a deferral on the taxation of the options up to an annual maximum deferral of $100,000 per year of benefit that will not be taxed until the security is sold by the employee. Currently, if the security value drops before the employee sells the shares resulting in reduced cash, it may leave the employee in the positions of less cash proceeds than the tax on the benefit. The budget repeals the deferral election effective March 4, 2010.
A special election will be allowed to taxpayers who have previously filed the tax deferral. This will limit the tax liability on the benefit to the amount of the liability on the sale of the securities. If the securities were sold before 2010 then the election can be filed no later than the due date for the 2010 tax return, generally April 30, 2011. If the shares are not sold the taxpayer has until December 31, 2014 to sell and file the election by April 30, 2015.

 

US Social Security Currently 85% of US Social Security benefits received by Canadian taxpayers is taxable in Canada. The budget reinstates the previous 50% inclusion but only for those who were receiving the benefits before 1996 including spouses receiving survivor benefits. This is effective for 2010.

 


Mineral Exploration Tax Credit The flow through program for mining exploration has been extended another year until March 31, 2011.

CORPORATE AND BUSINESS TAX

Manufacturing Eliminating all customs tariffs on manufacturing machinery & equipment reducing the cost of production in Canada.

 

Interest on Corporate Overpayments Interest paid on corporate tax, GST/HST, payroll, excise tax and duties will be based on the 3-month T-bill rate which is a reduction of 2 percentage points from the current rate.

 

Clean Energy Equipment The 50% capital cost allowance for this equipment is being expanded to include heat recovery and energy distribution equipment.

 

Consolidated Tax Reporting The Minister has announced a review to consider allowing for consolidated tax reporting for a corporate group. This would permit the sharing of losses between corporations within a group, similar to US corporate tax rules.

 

INTERNATIONAL TAX

Currently, a non-resident vendor of taxable Canadian property (TCP), which includes real estate and shares of Canadian corporations other than listed public companies, must file a section 116 clearance certificate request in order to get a waiver or reduction of the withholding tax. This has been a substantial problem because of the delays in obtaining the clearance certificates resulting in issues with potential buyers. The budget amends the definition of TCP to exclude shares of Canadian corporations unless their value is principally real estate or other immovable property. This is effective for transactions after March 4, 2010.

ANTI-AVOIDANCE RULES

Various rules are being introduced related to foreign tax credit manipulations meant to reduce or eliminate the tax on Foreign Accrual Property Income. Also, additional rules are being introduced related to offshore investment funds and beneficiaries of non-resident trusts including making the contributors and beneficiaries of the trusts jointly and severally liable for Canadian tax.

GST/HST

Cosmetic medical and dental procedures are taxable procedures. In addition all equipment, services, devices and supplies used in cosmetic procedures are also to be subject to GST/HST.


Direct selling network sellers (commissioned agents) can elect the simplified accounting method. Also, host gifts will be exempt from GST.

CHARITIES

Changes are made to the expenditure rules to ease the restrictions for smaller charities and eliminating the disbursement quota.

TAX AVOIDANCE

Aggressive actions by the Canada Revenue Agency are being proposed to fight perceived aggressive tax planning by making more potential transactions reportable. It is also proposed to strengthen rules to fight proceeds from crime and money-laundering.