Federal Budget 2010 (March 4, 2010)
Commodity Tax Changes
GST/HST simplification for direct selling industry
The budget confirms the government’s intention to implement the 2009 budget’s proposals to simplify the GST/HST for the direct selling industry and proposes additional enhancements and clarifications to the previously announced measure:
- a clarification that new entrants in the direct selling industry, who meet the qualification criteria and who have never before made a supply of a select product, may apply to the Minister of National Revenue at any time during a fiscal year for approval to use the special GST/HST accounting method for network sellers
- a clarification that the supply of host gifts by a network seller to hosts would not be subject to the GST/HST
- a "safety mechanism" for a network seller that does not meet the qualification criterion concerning the commissions paid by the network seller to its sales representatives for a particular fiscal year; as a result of this "safety mechanism", there would be no adjustment to the GST/HST net tax of a network seller in respect of:
- the first fiscal year that the network seller fails to meet the requirement that all or substantially all of its sales representatives have annual commissions not exceeding $30,000, provided that at least 80 per cent of the sales representatives have annual commissions from the network seller not exceeding $30,000 in that first fiscal year; or
- the second fiscal year that the network seller fails to meet the above-noted requirement, provided that the network seller requests in writing, within the first six months of that second fiscal year, that the Minister of National Revenue revoke its approval to use the special GST/HST accounting method and provided that at least 80 per cent of the sales representatives have annual commissions from the network seller not exceeding $30,000 in that second fiscal year.
Tariff Reductions on Manufacturing Inputs and Machinery and Equipment
The budget proposes to eliminate the remaining tariffs on manufacturing inputs and machinery and equipment. The measure will assist Canadian businesses by lowering the costs of manufacturing inputs and machinery and equipment that are imported from outside North America.
- Tariffs on the affected goods vary from two percent to 15.5 percent and represent a non-recoverable tax on production inputs and on new investments that companies make in order to enhance their competitiveness and productivity.
- The reductions apply to 1,541 tariff items as currently listed in the Schedule of Customs Tariff.
- 1,160 tariff items will have the MFN rates of duty reduced to "Free" as of March 5, 2010; and
- 381 tariff items will have the MFN rates of duty gradually reduced, beginning as of March 5, 2010 and going to "Free" by no later than January 1, 2015.
The tariff reductions will be given effect by amendments to the Customs Tariff and will have effect for goods imported into Canada on or after March 5, 2010.
Business Income Tax Measures
Capital cost allowance changes
Accelerated CCA for heat recovery equipment
Budget 2010 proposes to expand Class 43.2 to include:
- Heat recovery equipment used in a broader range of applications; and
- Distribution equipment used in district energy systems that rely primary on ground source heat pumps, active solar systems or heat recovery equipment.
Class 43.2 provides accelerated capital cost allowance at a rate of 50% per year on a declining balance basis. Class 43.1 also provides accelerated CCA, at the rate of 30% per year, for assets acquired before February 23, 2005. A higher efficiency standard is required for Class 43.2 than for Class 43.1 Systems that only meet the lower efficiency standard are eligible for Class 43.1.
These measures will apply to eligible assets acquired on or after March 4, 2010 that have not been used or acquired for use before that date.
Distribution Equipment of a District Energy System
The budget also broadens Class 43.1 (30%) and Class 43.2 to include specified thermal energy distribution equipment that is part of a district energy system used by the taxpayer to provide district heating or cooling through the use of specified renewable energy technologies. This measure applies to eligible assets acquired on or after March 4, 2010 that have not been previously used or acquired for use.
Canadian Renewable and Conservation Expenses
In order to transfer or “renounce” Canadian Renewable and Conservation Expenses to an investor using flow-through shares, a corporation must be a “principal-business corporation”. The budget proposes to amend the definition of “principal-business Corporation” to clarify that flow-through share eligibility extends to corporations the principal business of which is producing fuel or generating or distributing energy, using Class 43.1 or Class 43.2 property. This measure will apply in respect of taxation years ending after 2004.
Television Set-top Boxes – Capital Cost Allowance
The budget proposes that satellite and cable set-top boxes that are acquired after March 4, 2010 and that have neither been used nor acquired for use before March 5, 2010 be eligible for a declining balance CCA rate of 40%.
Administrative Tax Measures
Interest on Overpaid Taxes
Budget 2010 proposes that, effective July 1, 2010, the interest rate payable by the Minister of National Revenue to corporations will be set at the average yield of three-month Government of Canada Treasury Bills sold in the first month of the preceding quarter, rounded up to the nearest percentage point. This new rate for corporations will apply in respect of income tax, Goods and Services Tax / Harmonized Sales Tax (GST/HST), employment insurance premiums, Canada Pension Plan contributions, excise tax and duty (except in respect of excise duty on beer), the Air Travelers Security Charge and the softwood lumber products export charge. The interest rate calculations in respect of non-corporate taxpayers will not change.
Federal Credit Unions
Consequential to the Budget 2010 proposal to allow for the establishment of federal credit unions, certain amendments may be required to the Income Tax Act to provide that federal credit unions that satisfy the existing definition "credit union" in the Income Tax Act will be subject to the same income tax rules as other credit unions.
SIFT Conversions and Loss Trading
The Income Tax Act includes provisions intended to allow specified investment flow-through (SIFT) trusts and partnerships – commonly referred to as income trusts and partnerships – to convert their structures into corporate form on a tax-deferred basis. Aggressive schemes have been designed to use these provisions to achieve inappropriate tax loss trading that would not be allowed as between two corporations.
In particular, the ability of a corporation to utilize its tax losses is constrained where control of the corporation has been acquired. In the case of a "reverse takeover" of a public corporation, an existing rule in the Income Tax Act generally deems there to be an acquisition of control of the public corporation in situations where shares of the public corporation are exchanged for shares of another corporation. Budget 2010 proposes to extend this rule to ensure that it also applies to impose restrictions on the use of losses in situations where units of a SIFT trust or SIFT partnership are exchanged for shares of a corporation.
Budget 2010 also proposes to amend the acquisition-of-control rules in the Income Tax Act to ensure that they do not inappropriately restrict the use of losses where a SIFT trust is wound up and distributes the shares of a corporation it holds. The rules will be amended to provide that where a SIFT trust, the sole beneficiary of which is a corporation, owns shares of another corporation, the wind-up of the trust will not cause an acquisition of control of the other corporation and restrict the subsequent use of that corporation's losses.
It is proposed that these amendments apply to transactions undertaken after 4:00 p.m. Eastern Standard Time on March 4, 2010, other than transactions that the parties are obligated to complete pursuant to the terms of an agreement in writing between the parties entered into before that time. A party shall be considered not to be obligated to complete a transaction if the party may be excused from completing the transaction as a result of changes to the Income Tax Act. These amendments will also apply to other SIFT conversion transactions if the parties to the transaction make the appropriate election.
Personal Tax Changes
Employee stock options
For employee stock options disposed after 4:00 p.m. on March 4, 2010:
- The stock option deduction will generally be available only if the employee exercises the options by acquiring the employer’s securities – not when the employee disposes of (cashes-out) the stock options for cash (unless the employer elects not to deduct the cash payment); and
- The tax deferral election will be repealed, subject to relief for stock option benefits for which an election to defer tax has been made, and withholding requirements will be clarified.
Mineral exploration credit
The budget extends the mineral exploration tax credit for flow-through share investors, which was set to expire at the end of March 2010. The credit will continue to be available for flow-through share agreements entered into on or before March 31, 2011.
Medical expense tax credit (METC) - cosmetic procedures
The Budget proposes to change the wording of the Income Tax Act in order to make it clear that medical or dental services or related expenses which are provided for purely cosmetic purposes are not eligible medical expenses for purposes of the medical expense tax credit, unless the services are necessary for medical or reconstructive purposes. This is effective for expenses incurred after March 4, 2010.
Tax-assisted disability and education savings plans
Tax-assisted Registered Disability Savings Plans (RDSP) are enhanced by the following measures:
- A deceased individual’s RRSP funds can be transferred tax-free to the RDSP of a financially infirm child or grandchild, effective for deaths occurring on or after March 4, 2010, subject to the beneficiary’s lifetime contribution limit of $200,000. A special transitional rule applies where an RRSP annuitant dies after 2007 and before 2011.
- Starting in 2011, a 10-year carry forward is introduced for unused entitlements to Canada Disability Savings Grants and Canada Disability Savings Bonds.
Additionally, the budget clarifies that provincial payments into RDSPs and Registered Education Savings Plans made after 2006 will be treated the same way as federal grants and bonds so that the provincial payments will not affect federal payment amounts.
US Social Security benefits
The 50% inclusion rate for Canadian residents who have received US Social Security benefits since before January 1, 1996 (and for their spouses and common-law partners who are eligible to receive survivor benefits) is reinstated for benefits received after 2009.
Scholarship exemption
The budget includes several measures to clarify and tighten eligibility for the tax exemption for post-secondary scholarships, fellowships and bursaries.