Finance Minister Jim Flaherty delivered the government’s 2013 federal budget on March 21st, 2013. The Budget targets numerous proposed amendments that would reduce aggressive tax planning and avoidance transactions. Some highlights of the budget’s tax measures include:
Personal Tax Measures
- Non-eligible dividends tax increase – the gross-up factor will be decreased from 13.33% to 11%, resulting in an effective federal tax rate of 21.22% (from 19.58%).
- Lifetime capital gains exemption increase – the lifetime capital gains exemption on dispositions of qualified small business corporation shares and qualified farm and fishing property will be increased from $750,000 to $800,000. The amount will be indexed for inflation for tax years after 2014 and will apply to all individuals, including those who previously used the capital gains exemption.
- Non-resident trusts – in response to the Federal Court of Appeal’s decision in Sommerer (which we wrote about previously), non-resident trusts that hold property on conditions that grant ownership of that property will be deemed resident trusts.
- No deduction for safety deposit boxes – the cost to a taxpayer to rent a safety deposit box from a financial institution will be non-deductible for income tax purposes.
- Adoption expense tax credit – a maximum of $11,669 per child for expenses in 2013 will be deductible to those with eligible adoption expenses.
- Leveraged life insurance annuities – the budget proposes to eliminate the benefits of leveraged insured annuities. Leveraged insured annuities where all borrowing was entered into prior to March 21, 2013 will be grandfathered and not subject to the new rules.
- 10/8 life insurance policies – where a life insurance policy is assigned as security on a borrowing and the rate is determined by reference to the amount or rate of borrowing, the interest paid and premiums will no longer be deductible, and the increase in the capital dividend account by the amount of the death benefit will be denied.
- Numerous loss trading rules.
Business Tax Measures
- Temporary hiring credit for small businesses – will be extended for one year.
- Scientific research & experimental development – additional information requirements will be required of third-party preparers. A new penalty of $1,000 will be imposed in respect of each SR&ED claim that is missing, incomplete or inaccurate. A preparer will be jointly and severally liable, and may be held personally liable, for the penalty.
- Reporting requirements for GST/HST registrants – GST/HST registrants need to provide the CRA with business identification information. The CRA will now have the authority to withhold GST/HST refunds until all the required business identification information is provided.
International Tax Measures
- Thin capitalization rules – the “thin-cap” rules will be extended to apply to debts owned by partnerships of which a Canadian corporation is a partner, non-resident beneficiaries of a Canadian trust and non-resident corporations and trusts that carry on business in Canada.
- Electronic fund transfers – certain intermediaries must now report international electronic transfers of $10,000 or more to the CRA.
- Stop international tax evasion program – a new whistleblower program will be introduced (similar to what the IRS has done in the USA). Individuals who report international tax non-compliance that results in assessments exceeding $100,000 can recover up to 15% of federal income tax collected as a result of the information provided (although this payment will be considered income and will be taxed as well).
- Additional foreign reporting requirements – taxpayers that file form T1135 will be required to provide more detailed information regarding foreign-held funds. The normal reassessment period will be extended by three years if the taxpayer fails to report foreign income as required.
- Synthetic dispositions – certain “synthetic disposal transactions” will be treated as dispositions.
TaxChambers LLP will have a more detailed review of the federal budget and its implications in the coming days.