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Federal Budget Highlights

On June 6, 2011, the federal government tabled its federal budget. The budget carries forward the income tax measures announced in the prior budget of March 22, 2011, which was introduced by the previous minority Conservative government.

The following are some notable tax highlights from the budget:

Children's arts tax credit – starting with the 2011 year, this is a 15% credit on up to $500 (maximum $75) of eligible expenses per child paid in a year. The credit is 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 at the beginning of the year and is eligible for the disability tax credit, an additional 15% credit of $500 ($75) is available when a minimum of $100 is paid in eligible expenses. Specific criteria are provided for the eligible expenses and programs. The credit can be shared by parents or claimed by either parent.

Volunteer firefighters tax credit – starting in 2011, a non-refundable tax credit equal to 15% of $3,000 ($450) is available for volunteer firefighters, who must generally perform at least 200 hours of volunteer firefighting services.

Family caregiver tax credit – starting in 2012, a new credit of 15% of $2,000 ($300) will be available for caregivers of dependants with a mental or physical infirmity, including spouses, common-law partners and minor children. The new credit will apply in conjunction with existing dependency-related credits. The credit will be phased out in most cases where the dependant's income reaches an income threshold (except where claimed with the minor-child tax credit). The credit will be indexed to account for inflation in future years.

Medical expense credit for adult dependants – until now, there was a $10,000 annual limit of medical expenses that qualify for the medical expense credit if incurred in respect of dependants 18 years or older (other than spouses or common-law partners). The $10,000 limit is removed, starting in 2011.

Expansion of tuition tax credit – starting in 2011, the tuition credit will apply to 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.

Tuition and education tax credits for foreign study – currently, there is a requirement that a foreign course for full-time students be at least 13 consecutive weeks in duration. Starting in 2011, the minimum is changed to 3 consecutive weeks.

Greater flexibility in sharing of RESPs between siblings – in general terms, transfers will be allowed between individual registered education savings plans (RESPs) for siblings, without tax penalties and without triggering the repayment of Canada education grants, provided that the beneficiary of the plan receiving the transfer was under 21 when the plan was opened. This brings individual plans more in line with the current rules applying to family plans.

Registered disability savings plan (RDSP) – in general terms, the budget introduced measures that will allow RDSP beneficiaries with shortened life expectancies (generally, five years or less) to withdraw more from their RDSPs without triggering adverse tax consequences.

RRSP and RRIF anti-avoidance rules – various new rules will apply to registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs), which largely piggy-back on the current rules applicable to tax-free savings plans (TFSAs). There will be a 100% tax on "advantages", a broadly defined term. A 50% tax on "prohibited investments" will also apply, as will a 50% tax on "non-qualified investments" (both may be refunded if the investments are disposed of within a certain time period). The taxes are payable by the annuitant of the plan. These new rules generally apply to transactions occurring and investments acquired after March 22, 2011, with some limited "grandfathering" exceptions.

Extension of "kiddie tax" – currently, this tax applies at the highest marginal federal rate (29%) on certain types of income received by children under the age of 18, including dividends and shareholder benefits from private or unlisted corporations. The budget provides that the kiddie tax will also apply to capital gains realized by a minor child 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 kiddie tax. The capital gains will be treated like dividends and therefore not eligible for the regular one-half inclusion rule for taxable capital gains or the capital gains exemption. This new measure applies to capital gains realized after March 22, 2011.

Charitable donations of flow-through shares – holders of these shares can deduct certain expenses "flowed through" to them, so that in effect their full investment becomes deductible. The cost of the shares is deemed to be zero for tax purposes rather than original cost. In the past, capital gains from donations of these shares (if listed on a stock exchange) were completely exempt from tax. The government felt that this treatment was inappropriate, as it allowed flow-through shares to be donated to charity with a cost to the taxpayer of only 5-15% of the donation. Basically, the budget proposes that the exempt portion of a capital gain on a donation of such shares will include only the portion of the gain exceeding the original cost of the shares. This measure will apply to shares issued pursuant to a flow-through share agreement entered into on or after March 22, 2011.

Elimination of tax deferral for corporate partners – corporations have been able to defer taxes by a year or more, generally by being partners in partnerships that had fiscal year ends that differed from that of the corporation. The budget will eliminate the deferral, effective for taxation years of a corporation that end after March 22, 2011. (A similar deferral for individual members of partnerships was eliminated in 1995.) To prevent the adverse "stacking" of income in a corporation's first affected taxation year, transitional relief will allow the additional income of that year (resulting from the elimination of the partnership deferral) to be spread out over the following 5 taxation years


Last Updated ( Sunday, 18 September 2011 10:46 )