2012 Federal Budget Summary Published:
NON-INCOME TAX MEASURES
Old Age Security (OAS)
- To ensure that OAS remains sustainable and reflects demographic realities, the Government will adjust the age of eligibility requirement for OAS (as well as Guaranteed Income Supplement (GIS)) from age 65 to 67 beginning in 2023 and fully implemented by 2029. A person 54 years of age or older as of March 31, 2012 will be permitted to receive full OAS benefits at age 65.
- To improve flexibility and choice, starting on July 1, 2013, the Government will allow for the voluntary deferral of the OAS pension, for up to five years, allowing Canadians the option of deferring take-up of their OAS pension to a later time and receiving a higher annual pension.
Elimination of the Penny
The Government will eliminate the penny from Canada's coinage system and no longer distribute pennies as of Fall 2012. However, the penny will retain its value indefinitely and can continue to be used in payments. The penny costs the Government 1.6 cents to produce.
PERSONAL INCOME TAX MEASURES
- The Budget proposes to simplify the manner in which a corporation resident in Canada pays and designates eligible dividends by allowing the corporation to designate, at the time it pays a taxable dividend, any portion of the dividend to be an eligible dividend.
- The Budget also proposes to allow the Minister of National Revenue to accept a corporation's late designation of a taxable dividend to be an eligible dividend. Under the proposal, the Minister will be allowed to accept a late designation of an eligible dividend if the corporation makes the late designation within the three-year period following the day on which the designation was first required to be made. This measure will not affect the tax treatment of private health services plans or other plans described in paragraph 6(1)(a) of the Income Tax Act.
Registered Disability Savings Plan (RDSP)
The budget proposes to allow investment income earned in a Registered Education Savings Plan (RESP) to be transferred on a tax-free (or "rollover") basis to an RDSP if the plans share a common beneficiary, if certain conditions are met.
Group Sickness or Accident Insurance Plans
The Budget proposes to include the amount of an employer's contributions to a group sickness or accident insurance plan in an employee's income for the year in which the contributions are made to the extent that the contributions are not in respect of a wage-loss replacement benefit payable on a periodic basis.
Retirement Compensation Arrangements (RCA)
New prohibited investment and advantage rules are proposed to directly prevent RCAs from engaging in non-arm's length transactions. These rules will be based very closely on existing rules for TFSAs and RRSPs. As well, new restrictions on RCA tax refunds are proposed in circumstances where RCA property has lost value.
Employee Profit Sharing Plans (EPSP)
To ensure that EPSPs are used for their intended purposes and to discourage excessive employer contributions, this proposal introduces a special tax payable by a specified employee (significant equity interest in the employer) on an excess EPSP amount. In general terms, an excess EPSP amount will be the portion of an employer's EPSP contribution, allocated by the trustee to a specified employee, that exceeds 20% of the specified employee's salary received in the year by the specified employee from the employer.
Life Insurance Policy Exemption Test
The Budget proposes to implement changes to the exemption test for determining whether a life insurance policy is an exempt policy. This is expected to put further restrictions on the amount of tax-free income that can be earned in permanent insurance policies. This will apply to life insurance policies issued after 2013.
BUSINESS INCOME TAX MEASURES
Hiring Credit for Small Business
An extension of the Hiring Credit for Small Business for one year, which will provide a credit of up to $1,000 against a small employer's increase in its 2012 EI premiums over those paid in 2011.
- The Budget proposes to reduce the general 20% SR&ED investment tax credit rate applicable to SR&ED qualified expenditure pool balances at the end of a taxation year to 15%. The 15% investment tax credit rate will apply in respect of taxation years that end after 2013, except that, for a taxation year that includes January 1, 2014, the 5% reduction in the investment tax credit rate will be pro-rated based on the number of days in the taxation year that are after 2013. The enhanced 35% SR&ED investment tax credit rate applicable in respect of eligible CCPCs will remain unchanged on up to $3 million of qualified SR&ED expenditures annually.
- The Budget proposes to exclude expenditures of a capital nature (including payments in respect of the use or the right to use property that would, if it were acquired by the taxpayer, be capital property of the taxpayer) from eligibility for SR&ED deductions and investment tax credits. This measure will apply to property acquired on or after January 1, 2014, and to amounts paid or payable in respect of the use of, or the right to use, property during any period that is after 2013.
- The Budget proposes to reduce the rate at which the prescribed proxy amount is calculated to 60% (from 65%) for 2013 and to 55% after 2013. The proxy rate that will apply for taxation years that include days in 2012, 2013 or 2014 will be pro-rated based on the number of days in the taxation year that are in each of those calendar years.
- The Budget proposes to disallow from the expenditure base for investment tax credits the profit element of arm's length SR&ED contracts. For simplicity, it is proposed that this be achieved by way of a proxy, under which only 80% of the cost to a payer of arm's length SR&ED contracts will be eligible for SR&ED investment tax credits. This measure will apply to expenditures incurred on or after January 1, 2013.
Taxation of corporate groups
Discussions with stakeholders for tax consolidation and tax loss transfer rules are ongoing.
Thin capitalization Rules
Budget 2012 proposes to improve the integrity and fairness of the thin capitalization rules by:
- Reducing the debt-to-equity ratio in the thin capitalization rules from 2-to-1 to 1.5-to-1 for years beginning after 2012
- Extending the thin capitalization rules to debts of partnerships of which a Canadian-resident corporation is a member
- Treating disallowed interest expense under the thin capitalization rules as dividends for Part XIII withholding tax purposes and
- Preventing double taxation in certain circumstances where a Canadian corporation borrows money from its controlled foreign affiliate.
Overseas Employment Tax Credit (OETC)
Currently, employees who are residents of Canada and who qualify for the Overseas Employment Tax Credit (OETC) are entitled to a tax credit equal to the federal tax otherwise payable on 80% of their qualifying foreign employment income, up to a maximum foreign employment income of $100,000. The OETC is proposed to be phased out over four taxation years, beginning with the 2013 taxation year. During the phase-out period, the factor (currently 80%) applied to an employee's qualifying foreign employment income in determining the employee's OETC will be reduced to 60% for the 2013 taxation year, 40% for the 2014 taxation year and 20% for the 2015 taxation year. The OETC will be eliminated for the 2016 and subsequent taxation years. These phase-out rules will not apply with respect to qualifying foreign employment income earned by an employee in connection with a project or activity to which the employee's employer had committed in writing before Budget Day.
SALES TAX MEASURES
Doubling HST Streamlined Accounting Thresholds
Budget 2012 proposes to double the existing streamlined accounting thresholds. Specifically:
- the annual taxable sales threshold at or below which eligible businesses can elect to use the Quick Method will increase to $400,000 (from $200,000) of GST/HST-included taxable sales and
- the annual taxable sales and taxable purchases thresholds at or below which eligible businesses or public sector bodies (PSBs) can elect to use the Streamlined Input Tax Credit Method and eligible PSBs can elect to use the Prescribed Method for Calculating Rebates will increase to $1,000,000 (from $500,000) of taxable sales and to $4,000,000 (from $2,000,000) of taxable purchases.
This measure will be effective in respect of a HST reporting period of a person (or a claim period of a person, in the case of the Prescribed Method for Calculating Rebates) beginning after 2012.
Jeremy Doan, MAcc, CA and Chris Bodnar, CA
Date updated: March 29, 2012
This information is provided by Crawford, Smith and Swallow Chartered Accountants LLP for informational purposes only and must not be relied upon as professional advice. Readers should not initiate any action on the basis of this information without the consultation and direction of a qualified professional advisor.
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