June 6, 2011 Update to the 2011 Federal Budget

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On March 22, 2011, the Government tabled Budget 2011, the Next Phase of Canada's Economic Action Plan-A Low-Tax Plan for Jobs and Growth, in the House of Commons. However, that budget was not adopted prior to the dissolution of Parliament on March 26, 2011.

The Honourable Jim Flaherty, Minister of Finance, tabled an update of Budget 2011 on June 6, 2011 which includes all of the measures that were previously announced on March 22.

In addition to those measures, a provision was made in 2011-12 for $2.2 billion in support of the conclusion of a satisfactory agreement between Canada and Quebec on sales tax harmonization; and the Government announced the phase-out of quarterly allowances for political parties.

The update of Budget 2011 takes into account the latest information available on the economy and the Government's fiscal situation.

After accounting for the new measures and adjustments, the projected budgetary deficit has fallen from $40.5 billion to $36.2 billion in 2010-11 and has increased from $29.6 billion to $32.3 billion in 2011-12, for a cumulative reduction of $1.6 billion in the projected deficit over those two years. The budgetary balance for the remaining years of the forecast period is largely unchanged.

The Government reaffirmed its commitment to balancing the budget one year earlier, by 2014-15.

Updates to Budget 2011

There have been no substantive updates to the tax measures contained in Budget 2011.
References in respect of "Budget Day" have been replaced with references to March 22, 2011 or the relevant date.
The deadline to provide certain feedback has been changed from June 30, 2011 to August 31, 2011.
The Budget documents have been updated to indicate that the Government will ask the House of Commons Standing Committee on Finance to undertake a study of charitable donation incentives in the first session of this Parliament.
In addition, the Notice of Ways and Means Motion to Amend the Excise Act, 2001 and the Excise Tax Act has been modified to ensure greater consistency between these Acts.

Collins Barrow's commentary on the March 22, 2011 Federal Budget is provided below.

Introduction

The Honourable Jim Flaherty, Minister of Finance, today tabled a budget plan that launches the Next Phase of Canada's Economic Action Plan - A Low-Tax Plan for Jobs and Growth, which keeps the Government on track to return to balanced budgets by 2015.

Budget 2011 supports job creation and continues to lay the foundation for sustainable economic growth.

The budget plan has four main objectives:

Supporting Job Creation by helping businesses and entrepreneurs succeed, keeping taxes low, investing in projects of national importance, and maintaining Canada's brand as one of the best places to invest.
Supporting Families and Communities so that all Canadians enjoy a high standard of living and our communities stay vibrant and safe.
Investing in Innovation, Education and Training to promote research in leading-edge technologies and to provide Canadians with the opportunity and incentives to acquire the skills needed for jobs in today's labour market.
Preserving Canada's Fiscal Advantage in order to be able to invest in the priorities of Canadians, to keep Canada's economy growing strongly, and to maintain low interest rates.

Personal Tax Measures

Individual Pension Plans - Minimum Withdrawals and Funding Requirements Introduced

Budget 2011 proposes two new tax measures that will apply to individual pension plans (IPPs).

Firstly, annual minimum amounts will be required to be withdrawn from IPPs, similar to current minimum withdrawal requirements from Registered Retirement Income Funds (RRIFs), once a plan member attains the age of 72.

It is proposed that the requirement for these RRIF-like withdrawals apply to the 2012 and subsequent taxation years.

Secondly, contributions made to an IPP that relate to past years of employment will, in effect, be required to be funded first out of a plan member's existing Registered Retirement Savings Plan (RRSP) assets or by reducing the individual's accumulated RRSP contribution room before new deductible contributions in relation to the past service may be made.

This measure will apply to IPP past service contributions made after Budget Day, except that it will not apply to IPP past service contributions made in respect of past service that was credited to an IPP member before Budget Day under terms of the IPP submitted for registration on or before Budget Day.

Tax on Split Income - Capital Gains Subject to Kiddie Tax

Budget 2011 proposes a targeted measure to maintain the integrity of the tax on split income regime. The measure will extend the tax on split income to capital gains realized by, or included in the income of, a minor from a disposition of shares of a corporation to a person who does not deal at arm's length with the minor, if taxable dividends on the shares would have been subject to the tax on split income. Capital gains that are subject to this measure will be treated as dividends and, therefore, will not benefit from capital gains inclusion rates nor qualify for the lifetime capital gains exemption.

This measure will apply to capital gains realized on or after Budget Day.

RRSPs - Anti-Avoidance Rules Enhanced

Budget 2011 proposes to enhance the existing RRSP anti-avoidance rules. The rules fall into three general categories:

Advantage rules
Prohibited investment rules
Non-qualifying investment rules

In general the rules are similar to those applying to the Tax Free Savings Accounts (TFSA).

The prohibited investment concept imposes a special tax equal to 50% of the fair market value of the prohibited investment when acquired by their RRSP. This amount will be refunded if disposed of by the RRSP by the end of the year following acquisition unless the annuitant was aware of the prohibition.

These new rules will apply to transactions on or after Budget Day.

RESPs - Asset Sharing Among Siblings Extended

To provide subscribers of separate individual plans with the same flexibility to allocate assets among siblings as exists for subscribers of family plans, Budget 2011 proposes to allow transfers between individual Registered Education Savings Plans (RESPs) for related children. This will not trigger repayment of Canada Education Savings Grants, provided that the beneficiary of a plan receiving a transfer of assets had not attained 21 years of age when the plan was opened.

These measures will apply to asset transfers that occur after 2010.

RDSPs - Shortened Life Expectancy Allows Early Withdrawals

Budget 2011 proposes to allow Registered Disability Savings Plan (RDSP) beneficiaries who have shortened life expectancies to withdraw more of their RDSP savings by permitting annual withdrawals without triggering the 10-year repayment rule, subject to specified limits and certain conditions.

If a plan holder decides to take advantage of this measure, the plan holder will be required to elect in prescribed form and submit the election with the medical certification to the RDSP issuer.

Under the proposal, withdrawals made at any time following an election will not trigger the repayment of Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) provided that the total of the taxable portions of the withdrawals does not exceed $10,000 annually. Accordingly, total annual withdrawals may exceed $10,000 due to non-taxable portions.

As well, under the proposal, once an election has been made, the following rules will apply:

No further contributions to the plan will be allowed with some exceptions
No new CDSGs or CDSBs will be paid into the plan
No CDSG or CDSB entitlements will be carried forward in respect of years under election, other than for the year in which the election is made.
The minimum withdrawal requirements that ordinarily apply in the year in which a beneficiary attains 60 years of age will apply to the plan starting in the year following the election, regardless of the age of the beneficiary.

Generally, these rules will apply to the plan on an ongoing basis unless a plan holder reverses the election.

If withdrawals of taxable amounts exceed the annual $10,000 limit, the normal 10-year repayment rule will apply, to the extent that grants and bonds and other assets remain in the plan to satisfy that requirement.

This measure will apply after 2010 to withdrawals made after Royal Assent to the enacting legislation. However, as a transitional rule, beneficiaries making an election under this measure will be permitted to utilize their 2011 withdrawal limit in 2012 provided that the required medical certification was obtained before 2012.

Mineral Exploration Tax Credit Extended

Budget 2011 proposes to extend eligibility for the mineral exploration tax credit for one year, to flow-through share agreements entered into on or before March 31, 2012. This tax credit applies to individuals and is equal to 15 percent of specified mineral exploration expenses incurred in Canada and renounced to flow-through investors.

Children's Arts Tax Credit - Recognition of the Arts and Culture

The proposed Children's Arts Tax Credit will allow parents to claim a 15 percent non-refundable tax credit based on an amount of up to $500 in eligible expenses per child paid in a year. The credit will be available for the enrolment of a child, who is under 16 years of age at the beginning of the year, in an eligible program of artistic, cultural, recreational or developmental activities. For a child who is under 18 years of age at the beginning of the year and is eligible for the Disability Tax Credit, the 15 percent non-refundable tax credit may be claimed on an additional $500 disability supplement amount when a minimum of $100 is paid in eligible expenses.

Other than the definition of eligible activities, the parameters of the Children's Arts Tax Credit will be based on those of the Children's Fitness Tax Credit.

This measure will apply to eligible expenses paid in the 2011 and subsequent taxation years.

Family Caregiver Tax Credit

To provide new support to caregivers of dependants with a mental or physical infirmity, Budget 2011 proposes to introduce a Family Caregiver Tax Credit. This 15 percent non-refundable credit will be based on an amount of $2,000 and will apply beginning in 2012.

The Family Caregiver Tax Credit amount will be indexed to account for inflation for 2013 and subsequent taxation years.

Budget 2011 also proposes to increase for 2012 the threshold at which the Infirm Dependant Credit begins to be phased out, so that the enhanced amount is fully phased out at the same income level as the 2012 enhanced Spousal or Common-Law Partner Credit.

Medical Expense Tax Credit for Other Dependants - Limitation Removed

Currently, a caregiver may only claim the eligible expenses of a dependent relative that exceed the lesser of 3 percent of the dependant's net income and an indexed dollar threshold ($2,052 in 2011), to a maximum of $10,000. In contrast, there is generally no limit on the amount of eligible expenses a taxpayer can claim for himself or herself, a spouse or common-law partner or a child under 18 years of age.

To better recognize the impact that extraordinary medical expenses can have on a caregiver's ability to pay tax, Budget 2011 proposes to remove this $10,000 limit on eligible expenses that can be claimed under the Medical Expense Tax Credit in respect of a dependent relative.

This measure will apply to the 2011 and subsequent taxation years.

Volunteer Firefighters Tax Credit

In recognition of the important role played by volunteer firefighters in contributing to the security and safety of Canadians, the Volunteer Firefighters Tax Credit proposes to allow eligible volunteer firefighters to claim a 15 percent non-refundable tax credit based on an amount of $3,000.

An eligible individual will be a volunteer firefighter who performs at least 200 hours of volunteer firefighting services in a taxation year.

This measure will apply to the 2011 and subsequent taxation years.

Tuition Tax Credit - Additional Examination Fees Recognized

Budget 2011 proposes to amend the Tuition Tax Credit to recognize fees paid to an educational institution, professional association, provincial ministry or other similar institution to take an examination that is required to obtain a professional status recognized by federal or provincial statute, or to be licensed or certified in order to practice a profession or trade in Canada.

These amendments will not apply to fees in respect of examinations taken in order to begin study in a profession or field, such as a medical college admission test.

This measure will apply to eligible amounts paid in respect of examinations taken in 2011 and subsequent taxation years.

Education Tax Measures - Studies Abroad Recognized

To improve the tax recognition of education costs and access to Educational Assistance Payments (EAPs) for Canadian post-secondary students who study outside Canada, Budget 2011 proposes to reduce the minimum course-duration requirement that a Canadian student at a foreign university must meet in order to claim the Tuition, Education and Textbook Tax Credits to three consecutive weeks from 13 consecutive weeks. It is also proposed that the 13 consecutive week requirement for EAP purposes be reduced to three consecutive weeks when the student is enrolled at a university in a full-time course.

This measure will apply with respect to tuition fees paid for courses taken in the 2011 and subsequent taxation years and to EAPs made after 2010.

Agri-Québec

Budget 2011 proposes amendments to provide the same income tax treatment to investments made under the Agri-Québec program as is currently provided to investments under the AgriInvest program.

These amendments will apply for the 2011 and subsequent taxation years.

Employee Profit Sharing Plans Under Review

To ensure that Employee Profit Sharing Plans (EPSPs) continue to be a useful vehicle for employers that are used for their intended purpose, the Government will review the existing rules for EPSPs to determine whether technical improvements are required in this area.

Before proceeding with any proposals, the Government will undertake consultations to seek the views of stakeholders, and ensure that any amendments to the tax rules applicable to EPSPs continue to accommodate the appropriate use of such plans.

Charity Income Tax Measures

Regulatory Regime for Qualified Donees Enhanced

To safeguard the tax system from abuse and to ensure compliance by those organizations given the privilege of issuing official donation receipts, Budget 2011 proposes to extend to the following qualified donees certain regulatory requirements that apply to registered charities in the interest of fairness and consistency:

registered Canadian amateur athletic associations (RCAAAs);
municipalities in Canada;
municipal and public bodies performing a function of government in Canada;
housing corporations in Canada constituted exclusively to provide low-cost housing for the aged;
universities outside of Canada, the student body of which ordinarily includes students from Canada; and
certain other charitable organizations outside of Canada that have received a gift from Her Majesty in right of Canada.

Details of the regulatory requirements that will apply to qualified donees include:

A qualified donee will be required to be on a publicly accessible list maintained by the CRA in order to be eligible to issue official donation receipts.
If a qualified donee issues a donation receipt other than in accordance with the Income Tax Act and its regulations, then the CRA will be authorized to suspend the receipting privileges of the qualified donee or revoke its qualified donee status.
The monetary penalties associated with improper issuance of receipts that apply to registered charities will be extended to RCAAAs.
A qualified donee will be required to maintain proper books and records and provide access to those books and records to the CRA when requested.
The monetary penalties associated with failing to file an information return that apply to registered charities will be extended to RCAAAs.

In addition, Budget 2011 proposes to extend to RCAAAs additional regulatory requirements that apply to registered charities.

These measures will apply on or after the later of January 1, 2012 and Royal Assent to the enacting legislation.

Safeguard Charitable Assets through Good Governance

Budget 2011 proposes to give the Minister of National Revenue the discretion to refuse or to revoke the registration of an organization, or to suspend its authority to issue official donation receipts on the basis of the criminal history or other past misconduct of a member of the board of directors, a trustee, officer or equivalent official, or any individual who otherwise controls or manages the operation of the organization.

Gifts Returned to a Donor

To ensure that tax assistance is not improperly retained, Budget 2011 proposes to permit reassessments to disallow a taxpayer's claim for a credit or deduction, as the case may be, in any case where property is returned to a donor.

When property for which the taxpayer received an official donation receipt is returned, the qualified donee must issue to the taxpayer a revised receipt. Budget 2011 proposes that in these circumstances the qualified donee be required to send a copy of the revised receipt to the CRA when 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 Budget Day.

Gifts of Non-Qualifying Securities

Budget 2011 proposes that tax recognition of the donation of a non-qualifying security (NQS) of a donor, for the purpose of determining eligibility for a Charitable Donations Tax Credit or Deduction to the donor, will be deferred until such time, within five years of the donation of the NQS, as the qualified donee has disposed of the NQS for consideration that is not, to any person, another NQS.

An NQS of a taxpayer is defined, generally, as a share, debt obligation or other security issued by the taxpayer or by a person not dealing at arm's length with the taxpayer.

Budget 2011 also proposes an anti-avoidance rule to ensure that, if as a result of a series of transactions, a particular person holds an NQS of a donor and the donee has acquired, directly or indirectly, an NQS of the particular person or of the donor, the gift of the donor will be subject to the NQS rules until such time (within five years of the donation) as the donee has disposed of the NQS for consideration that is not, to any person, another NQS.

These measures will apply in respect of securities disposed of by donees on or after Budget Day.

Granting of Options to Qualified Donees

Budget 2011 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 property of the taxpayer that is the subject of the option. The taxpayer will be allowed a credit or deduction at the time of acquisition by the donee based on the amount by which the fair market value of the property at that time exceeds the total of amounts, if any, paid by the donee for the option and the property. Consistent with previously proposed measures concerning split receipting, a Charitable Donations Tax Credit or Deduction generally will not be available to the taxpayer if the total amount paid by the qualified donee for the property and the option exceeds 80 per cent of the fair market value of the property at the time of acquisition by the donee.

This measure will apply in respect of options granted on or after Budget Day.

Donations of Publicly Listed Flow-Through Shares

Budget 2011 proposes, in general terms, to limit the exemption from capital gains tax on donations of shares of a class in which a taxpayer acquired shares issued pursuant to a flow-through share agreement entered into on or after Budget Day to the excess of the cumulative capital gains in respect of dispositions of shares of that class over the original cost of the flow-through shares.

Business Income Tax Measures

Accelerated Capital Cost Allowance Class Changes

Manufacturing and Processing Sector

Budget 2011 proposes to extend the temporary accelerated capital cost allowance (CCA) rate of 50 per cent on a straight line basis (subject to the application of the "half-year rule") under Class 29, for two years, to eligible machinery and equipment acquired before 2014.

Clean Energy Generation Equipment

Budget 2011 proposes to amend Class 43.2 to include equipment that is used by the taxpayer, or by a lessee of the taxpayer, to generate electrical energy in a process in which all or substantially all of the energy input is from waste heat.

Eligible equipment will include electrical generating equipment, control, feedwater and condensate systems, and other ancillary equipment, but not buildings or other structures, heat rejection equipment (such as condensers and cooling water systems), transmission equipment or distribution equipment.

This measure will apply to eligible assets acquired on or after Budget Day that have not been used or acquired for use before that date.

Qualifying Environmental Trusts Eligibility Expanded

Budget 2011 proposes to expand the range of trusts eligible for QET treatment to include trusts that are required to be established in the context of pipeline abandonment.

One of the existing conditions for a trust to qualify for tax treatment as a QET is that the trust be mandated under the terms of a contract entered into with the Crown in right of Canada or a province or under a law of Canada or a province. Budget 2011 also proposes to modify this condition for all QETs to include trusts that are created after 2011 and mandated by order of a tribunal (such as the NEB) constituted by a law of Canada or a province.

Budget 2011 also proposes to expand the range of eligible investments for QETs to include debt obligations described in paragraphs (c) and (c.1), and securities described in paragraph (d), of the definition "qualified investment" in section 204 of the Income Tax Act. This will generally include debt of public corporations, investment-grade debt and securities that are listed on a designated stock exchange.

Budget 2011 also proposes to set the rate of tax payable by a QET under Part XII.4 of the Income Tax Act 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.

Intangible Capital Expenses in Oil Sands Projects - Fairness and Neutrality

Budget 2011 proposes that the cost of oil sands leases and other oil sands resource property be treated as COGPE and thus be eligible for deduction at 10 per cent per year.

This change will be effective for acquisitions made on or after Budget Day.

To align the deduction rates for pre-production development costs in oil sands mines with the rates applicable to in situ oil sands projects and the conventional oil and gas sector, Budget 2011 proposes that these expenses be treated as Canadian development expense (CDE). CDE is deductible at the rate of 30 per cent per year on a declining balance basis.

In recognition of the long time frames involved in developing oil sands mining projects, the following transitional relief for pre-production development expenses will be provided:

The current CEE treatment will be maintained for expenses incurred before Budget Day, and for expenses incurred before 2015 for new mines on which major construction began before Budget Day. For these purposes, the threshold for major construction for new oil sands mines will be based on subsection 1104(2) of the Income Tax Regulations, which applies to the phase-out of accelerated capital cost allowance for oil sands projects, announced in Budget 2007.
For other expenses, the transition from CEE treatment to CDE treatment will be phased in on a gradual basis. Taxpayers will allocate pre-production development costs proportionally to the two resource expense categories according to the following schedule based on the year in which the expense is incurred:

Year	2011	2012	2013	2014	2015	2016
CEE Proportion	100%	100%	80%	60%	30%	?
CDC Proportion	?	?	20%	40%	70%	100%

This change will also apply to pre-production development expenses in respect of oil shale mines.

Stop-Loss Rules on the Redemption of a Share

In response to certain tax avoidance arrangements, Budget 2011 proposes to extend the application of these stop-loss rules to any dividend deemed to be received on the redemption of shares held by a corporation (whether the shares are held directly or indirectly through a partnership or trust), other than dividends deemed to be received on the redemption of shares of the capital stock of a private corporation that are held by a private corporation (other than a financial institution) whether directly or indirectly through a partnership or trust (other than a partnership or trust that is a financial institution).

This measure will apply to redemptions that occur on or after Budget Day.

Partnerships - Deferral of Corporate Tax

Budget 2011 proposes to limit the deferral of tax by a corporation that has a significant interest in a partnership having a fiscal period different from the corporation's taxation year. In computing the corporation's income for a taxation year, in respect of a fiscal period of the partnership that begins in the taxation year and ends in a subsequent year, the corporation 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 "Stub Period").

In general, the "Stub Period Accrual" in a taxation year of a corporation in respect of a partnership will be determined as follows:

A × B / C

where

A is the corporate partner's share of income, if any, from the partnership (other than dividends) for the fiscal periods that end in the taxation year;

B is the number of days in the Stub Period; and

C is the number of days in the partnership's fiscal periods that end in the taxation year.

This measure will apply to a corporate partner (other than a professional corporation) for a taxation year if:

the corporate partner is a member of a partnership at the end of the taxation year;
the partnership's last fiscal period that began in the taxation year ends in a subsequent taxation year of the corporate partner; and
the corporate partner, together with affiliated and related parties, was entitled to more than 10 per cent of the partnership's income (or assets in the case of wind-up) at the end of the last fiscal period of the partnership that ended in the taxation year.

The proposed measures will apply to taxation years of a corporation that end after Budget Day. In many cases, these measures could result in the inclusion of significant incremental partnership income for a corporation's first taxation year that ends after Budget Day. To mitigate the potential cash-flow impact, transitional relief will be available that will generally result in no additional taxes being payable for that first corporate taxation year. Instead, the additional income will generally be brought into the corporation's income over the five taxation years that follow that first taxation year.

As a result of these measures some partnerships may wish to change their fiscal periods - for example, to align with the taxation year of one or more corporate partners. A one-time election will be provided that will enable a partnership to change its fiscal period provided certain conditions are met.

The tax deferral described in relation to a corporation that is a member of a partnership can be multiplied through the use of a tiered structure where the partnership is itself a member of another partnership with a different fiscal period. Such structures could be several layers deep.

For these reasons, partnerships that are part of a tiered partnership structure will be required to have the same fiscal period.

Specifically, if a partnership has one or more partnerships as members, all of those partnerships will be required to adopt a common fiscal period. In general, partnerships that are not required under existing rules to have a December 31 fiscal period will be allowed, on a one-time basis, to choose a common fiscal period by filing an election in writing with the Minister of National Revenue (the "Multi-tier Alignment Election"). The elected fiscal period must end before the first anniversary of Budget Day and must be no more than 12 months in duration. The election must be filed on behalf of the partnerships on or before the earliest of all filing-due dates for the return of income of any corporate partner of any of the partnerships for the corporate taxation year in which the new fiscal period ends.

2011 Federal Budget - June 6, 2011 Update: A Low-Tax Plan for Jobs and Growth