Special Budget Edition
For Investors Group Clients
On December 10, 2001 Federal Finance Minister Paul Martin presented a budget designed to address the events of September 11, 2001 and the slowing economy. The measures introduced did not vary much from pre budget predictions.
Most Canadians did not anticipate any further tax reductions and this proved to be true. Fortunately there have been no tax increases other than an airport user fee.
The government has committed additional resources to security and intelligence in light of the events of September 11, 2001. Money is also being committed to border controls and to create a Strategic Infrastructure Foundation. Despite the new spending measures, Mr. Martin indicated that he is honoring previous commitments on health care spending and tax cuts. Instead, he has chosen to utilize the rainy day fund to finance the additional spending.
No deficit is projected for the next three years.
Some sectors may see increased activities as a result of the budget spending, but overall, there were few measures directly focused at boosting the economy.
Provisions Affecting Corporations and Their Shareholders
Deferral of Corporate Tax Instalments for Small Businesses
In order to provide a cash flow benefit to small corporations in light of the slowed economy, the budget proposes a deferral of federal corporate tax instalments. Instalments for the months of January, February and March 2002 are deferred for a period of at least six months, without payment of interest or the assessment of penalties. For example, corporations with a December 31st year end, will have their January, 2002 instalment deferred to July, 2002, their February, 2002 payment deferred to August, 2002 and their March, 2002 payment deferred until September, 2002.
Also, in order to ensure that corporations benefit from at least a six-month deferral, corporations which were to make their final payment of taxes owed for a taxation year on a date (their “balance due date”), which would have occurred before a deferred instalment date, will have their balance due date extended. For example, corporations with a January 31, 2002 year end, which normally would have had to pay their balance due by March 30, 2002, will have their balance due date extended to July, 2002.
In order to qualify for this deferral, the corporation must be resident in Canada and not have more than $15 million of taxable capital employed in Canada in the previous taxation year. The $15 million threshold is calculated by totaling the taxable capital of all corporations associated with the taxpayer. Both federal income and capital tax instalments will be deferred, as will provincial taxes in all provinces except Alberta, Ontario and Quebec which do not have tax collection agreements with the Federal government.
Construction Work Camps
The budget proposes to increase the tax deductibility of the cost of meals provided to an employee at a temporary work camp from 50% to 100%. The camp must be a temporary facility, the purpose of which is to provide meals and lodging to employees performing duties at the site.
This measure will apply to expenses incurred after 2001.
Individual Tax Measures
Provisions regarding individual income tax introduced in this budget were very limited in scope.
Air Travelers Security Charge
To finance the new air security expenditures, the budget introduces a user fee for air travelers called the “Air Travelers Security Charge”. This charge will apply to flights originating in Canada on or after April 1, 2002 (other than connecting flights), with certain exemptions for small planes and air ambulances.
In general, the amount of the charge will be $12, to a maximum of $24 per ticket, for trips within Canada, or between Canada and the continental US or the Islands of St. Pierre and Miquelon. For travel between Canada and other international destinations, it will be $24 per ticket.
Adult Basic Education
The budget proposes that individuals may deduct the amount of tuition assistance received for certain adult basic education.
In order to qualify for the deduction, the assistance must be included in the individual's income and the related tuition fees must not qualify for the tuition tax credit. In addition, the tuition assistance must be provided under:
· Part II of the Employment Insurance Act (or a similar program provided by a province or territory), or
· Another training program established under the authority of the Minister of Human Resources Development.
This measure is retroactive to eligible tuition assistance received after 1996. Details will be announced in the coming months on procedures to allow taxpayers to be able to request adjustments to prior years’ tax returns.
The education tax credit cannot currently be claimed by students who receive financial assistance for post-secondary education under government training programs. Effective January 1, 2002, the budget proposes to extend access to the education tax credit to students who receive taxable assistance for post-secondary education from the sources outlined above.
Goods and Services Tax Credit (GSTC) Responsiveness
Beginning with benefits payable for July 2002, an individual’s quarterly GSTC entitlement will be based on the individual’s family circumstances at the end of the preceding quarter, instead of at the end of the previous calendar year. Changes in family circumstances include births, deaths, marriages, reaching the age of 19 and becoming or ceasing to be resident in Canada.
In general, when capital property is sold or gifted to a child, either during one’s lifetime or on death, there is a deemed disposition at fair market value for income tax purposes and a capital gain or loss results. There is an exception to this general rule if the capital property has previously been used in a farming business by a parent or a child who was actively involved. The budget proposes to extend similar treatment to the inter-generational transfer of woodlots that are used in a forestry related business carried on by the family. A woodlot is considered to be treed land held primarily as a source of fuel, posts, logs or trees whether the trees are grown with or without human intervention.
Consistent with the provision relating to intergenerational transfer of farm property, the proposed rules will include a tax free rollover of private corporation shares or a partnership interest to children, where the woodlot is so owned.
The proposed changes are effective for transfers occurring after December 10, 2001.
Apprentice mechanics’ deduction
After 2001, certain registered vehicle and aircraft mechanic apprentices may deduct part of the cost of new tools acquired for use in their apprenticeship. The employer must certify that the tools are required. The maximum deduction will be the total cost of the new tools acquired in a taxation year, less the greater of $1,000 and 5% of the individual’s apprenticeship income for the year.
Some measures introduced prior to the budget were also highlighted in the budget speech.
Donations of Publicly Traded Securities
A gift of publicly traded securities such as shares, mutual funds, and segregated funds to a charity is a disposition for tax purposes, which could potentially trigger capital gains. The Income Tax Act currently provides special tax treatment for such donations, by reducing the capital gain inclusion rate on this type of “in-kind” donation to 25%, or one-half of the normal capital gains inclusion rate, provided that the gift is made on or before December 31, 2001.
The Budget confirmed the Government’s previously stated intention to make this measure permanent. At the same time, the Budget also confirmed the Government’s intention to make permanent a similar feature in respect of the donation of publicly traded shares acquired through an employee stock option.
The Budget confirmed the personal and corporate tax reductions announced in the 2000 Budget including the full indexation of the personal income tax system.The indexation factor for 2002 is 3%.
Key indexed amounts for 2001 and 2002
For further information on tax and financial planning strategies, call your Investors Group Consultant.
The purpose of this bulletin is to inform you of current developments, not to provide legal or tax advice. Clients should consult their professional advisers for advice based on their specific circumstances.