Federal 2013-2014 Budget: New Legislation for Personal Income Tax Measures

On March 21, 2013, the Federal Minister of Finance announced the 2013-2014 Federal budget. For all of the details see the related Supplementary Information and Notice of Ways and Means Motion (NWMM).

The personal income tax measures are summarized below:

Adoption Expense Tax Credit

For adoptions finalized after 2012, the Budget proposes to extend the adoption period by treating the time at which the adoption period begins as: (1) the time that an adoptive parent makes an application to register with a provincial ministry responsible for adoption or with an adoption agency licensed by a provincial government; or (2) if an adoption-related application is made to a Canadian court at an earlier time, that earlier time.

First-Time Donor’s Super Credit

The Budget proposes to introduce a temporary First-time Donor’s Super Credit (FDSC). The FDSC will supplement the CDTC with an additional 25-per-cent tax credit for a first-time donor on up to $1,000 of donations. First-time donors will be entitled to a 40-per-cent federal credit for donations of $200 or less, and a 54 percent federal credit for the portion of donations over $200 but not exceeding $1,000. Only donations of money will qualify for the FDSC. An individual will be considered a first-time donor if neither the individual nor the individual’s spouse or common-law partner has claimed the CDTC or FDSC in any taxation year after 2007. The FDSC will be available in respect of donations made on or after Budget Day and may be claimed only once in the 2013 or a subsequent taxation year before 2018.

Lifetime Capital Gains Exemption

The Budget proposes to increase the LCGE by $50,000 so that it will apply on up to $800,000 of capital gains realized by an individual on qualified property, effective for the 2014 taxation year. In addition, the LCGE will be indexed to inflation for taxation years after 2014.

Deduction for Safety Deposit Boxes

The Budget proposes to make the cost to a taxpayer of renting a safety deposit box from a financial institution non-deductible for income tax purposes. This measure will apply to taxation years that begin on or after Budget Day.

Dividend Tax Credit

The Budget proposes to adjust the gross-up factor applicable to non-eligible dividends from 25 per cent to 18 percent and the corresponding DTC from 2/3 of the gross-up amount to 13/18. Expressed as a percentage of the grossed-up amount of a non-eligible dividend, the effective rate of the DTC in respect of such a dividend will be 11 per cent. This measure will apply to non-eligible dividends paid after 2013.

Registered Pension Plans: Correcting Contribution Errors

The Budget proposes to enable administrators of RPPs to make refunds of contributions in order to correct reasonable errors without first obtaining approval from the CRA, if the refund is made no later than December 31 of the year following the year in which the inadvertent contribution was made. This measure will apply in respect of RPP contributions made on or after the later of January 1, 2014 and the day of Royal Assent to the enacting legislation.

Extended Reassessment Period: Tax Shelters and Reportable Transactions

The Budget proposes to extend the normal reassessment period in respect of a participant in a tax shelter or reportable transaction where an information return that is required for the tax shelter or reportable transaction is not filed on time. In particular, the normal reassessment period in respect of the tax shelter or reportable transaction will be extended to three years after the date that the relevant information return is filed. This measure will apply to taxation years that end on or after Budget Day.

Taxes in Dispute and Charitable Donation Tax Shelters

The Budget proposes to modify the prohibition on the CRA from taking collection action in questionable charitable donation tax shelters cases. If a taxpayer has objected to an assessment of tax, interest or penalties that results from the disallowance of a deduction or tax credit claimed in respect of a tax shelter (as reported by the taxpayer or determined by the Minister of National Revenue) that involves a charitable donation, the CRA will be permitted, pending the ultimate determination of the taxpayer’s liability, to collect 50 per cent of the disputed tax, interest or penalties. This measure will apply in respect of amounts assessed for the 2013 and subsequent taxation years.

Extension of the Mineral Exploration Tax Credit for Flow-Through Share Investors

The Budget proposes to extend eligibility for the Mineral Exploration Tax Credit for one year, to flow-through share agreements entered into on or before March 31, 2014.

Labour-Sponsored Venture Capital Corporations Tax Credit

The Budget proposes to phase out the federal LSVCC tax credit. The federal LSVCC tax credit will remain at 15 per cent when it is claimed for a taxation year that ends before 2015 and will be reduced to 10 percent for the 2015 taxation year and 5 percent for the 2016 taxation year. The federal LSVCC tax credit will be eliminated for the 2017 and subsequent taxation years.

The Budget also proposes to end new federal LSVCC registrations, as well as the prescription of new provincially registered LSVCCs in the Income Tax Act. An LSVCC will not be federally registered if the application for registration is received on or after Budget Day. A provincially registered LSVCC will not be prescribed for purposes of the federal LSVCC tax credit unless the application was submitted before Budget Day.

The Federal government has also taken direct aim at certain “artificial tax management” arrangements that they clearly don’t like including: Synthetic Dispositions; Character Conversion Transactions; and Trust Loss Trading.

Non-Resident Trusts

In response to the decision of the Federal Court of Appeal in Sommerer (2012 FCA 207), the Budget proposes to amend the deemed residence rules to apply if a trust holds property on conditions that grant effective ownership of the property (as described above in the context of the trust attribution rule) to such a taxpayer. In these circumstances, any transfer or loan of the property (regardless of the consideration exchanged) made directly or indirectly by the Canadian-resident taxpayer will be treated as a transfer or loan of restricted property (as defined in the tax rules) by the taxpayer. As a result, the Canadian-resident taxpayer will generally be treated as having made a contribution to the trust and the deemed residence rules will apply to the trust. As well, the rule described above with respect to trust distributions will be extended to apply to the trust.

The Budget also proposes to restrict the application of the trust attribution rule so that it applies only in respect of property held by a trust that is resident in Canada (determined without regard to the deemed residence rules).

Consultation on Graduated Rate Taxation of Trusts and Estates

The Budget announced the Government’s intention to consult on possible measures to eliminate the tax benefits that arise from taxing at graduated rates grandfathered inter vivos trusts, trusts created by will, and estates (after a reasonable period of estate administration).

 

Tags: Articles; Individual Tax Planning; William (Bill) H. Cooper