On March 22, 2011, Canada's Minister of Finance, Jim Flaherty, announced the 2011 Federal Budget, “A Low-Tax Plan for Jobs and Growth”, and the sixth budget of the current government. At this time, it is uncertain if the minority Conservative government will attract enough support to pass this budget in Parliament. Should the government be defeated within the next several days, it is likely that many of the proposals outlined in the budget will not be enacted as planned, and a general election will be called. However, notwithstanding this possibility, the most significant income and commodity tax changes announced in this year’s budget have been summarized below.
Income Tax Measures
There were no changes to corporate income tax rates announced in Federal Budget 2011. The general corporate income tax rate is set at 16.50% for 2011, and this rate is scheduled to decrease to 15% on January 1, 2012. The budget did, however, announce a number of measures to deal with perceived corporate income tax abuses, as well as encourage investment in manufacturing and “clean energy” equipment.
If a corporation is a member of a partnership and has a different year-end than the partnership, the taxation of the partnership’s income may be deferred by up to a year. A corporate partner includes in its income for a particular taxation year any income allocated to it by a partnership for the fiscal period of the partnership that ends within that year. The budget has proposed changes to this deferral, which the government views as inequitable.
The budget proposes to require a corporation (which was entitled to more than 10% of the partnership’s income) to accrue income from the partnership for the portion of the partnership’s fiscal period that falls within the corporation’s taxation year. These proposed new rules would apply to taxation years of corporations that end after March 22, 2011. The budget proposal provides mechanisms for determining the amount of the accrual, as well as penalties if the corporate partner instead chooses to include a different amount and the corporation’s estimate is too low.
Recognizing that these proposed new rules could result in the inclusion of a significant amount of additional partnership income in the first year, the budget proposes transitional relief to require no additional taxes to be paid in the first corporate taxation year. The additional partnership income from the first taxation year would generally be brought into the corporation’s income over the following five taxation years. For the 2012 taxation year, the corporation would report 15% of this additional income, with 20% reported in years 2013 to 2015, and the final 25% in 2016.
Recognizing the additional administrative burden required by these rules, the budget also proposes to allow a one-time election to enable a partnership to change its fiscal period, subject to certain conditions. A more complex set of rules for multi-tiered partnerships has also been proposed.
Stop-loss Rules on Redemption of Shares
The stop-loss rules were created to prevent the deduction by a corporation of a loss on the disposition of shares of a corporation by the amount of tax-free dividends previously received from that corporation. The budget proposes to extend the application of the stop-loss rules to any dividend deemed to be received on the redemption of shares held by a corporation, other than deemed dividends between private corporations. This change is intended to stop a perceived abuse of the current deemed dividend rules, and will apply to transactions occurring on or after March 22, 2011.
Accelerated Capital Cost Allowance (“CCA”)
Federal Budget 2011 proposes to extend the 50% CCA rate for newly acquired manufacturing and processing equipment used primarily in Canada by two years, such that equipment acquired prior to 2014 will qualify for the accelerated rate. This equipment will be included in Class 29, and subject to the half-year rule.
The budget also expands the type of equipment which qualifies for inclusion in Class 43.2, which is for specified clean energy generation and conservation equipment. The budget proposes to expand this class, which was introduced in 2005, to include equipment that is used to generate electrical energy in a process in which substantially all of the energy input is from waste heat. This includes electrical generating equipment, control, feedwater and condensate systems, and other ancillary equipment.
Qualifying Environmental Trusts
The Qualifying Environmental Trust (“QET”) rules were introduced for trusts created by operators of mines, quarries or waste disposal sites who were required to pre-fund the costs of reclaiming or restoring the site. The budget proposes to: expand the range of eligible investments for QETs; set the rate of tax payable by QETs to be the same as the general corporate income tax rate; and align the deduction of intangible costs in the oil sands sector with those in the conventional oil and gas sector.
From a commodity tax perspective, the budget contains no new measures, but reaffirms a number of initiatives that were previously announced.
This year’s budget confirmed the government’s plan to proceed with certain GST/HST rule changes relating to financial institutions that were previously announced on January 28, 2011.
Under the proposed rules, tax on the deemed supply to a pension plan by an employer under section 172.1 will be included for the purposes of determining if the pension plan exceeds the small plan threshold of less than $10,000 in GST paid in the prior year, which is used to determine if a pension plan is subject to the new rules for selected listed financial institutions (“SLFIs”). However, this change will not apply until the first fiscal year of a pension plan entity beginning after January 28, 2011. As a result of this change, it is expected that more plans will be exempted from the SLFI rules for 2010 (and potentially 2011).
Furthermore, investment plans, including pension plans, that are SLFIs and register for GST/HST purposes (and are, therefore, required to file a special attribution method (“SAM”) return), will not be required to file the GST Annual Information Return.
Additional information on the proposed changes included in this announcement is available on the Ryan Tax Developments web page at: Department of Finance Notice 2011-009 GST/HST Rules for FIs.
Personal GST/HST Credit
To provide improved administrative efficiency in the delivery of payments to individuals, the budget proposes to increase the advance payment threshold for the GST/HST Credit to $50 per quarter.
Relief on Poppy Purchases
The government confirmed its intention to provide full GST/HST relief for the Royal Canadian Legion on purchases of Remembrance Day poppies and wreaths from private sector suppliers, as previously announced on October 28, 2010.
Other Tax Measures
Aboriginal Tax Policy
Consistent with prior years, the federal government has confirmed its continued support for direct taxation arrangements in which Indian bands and self-governing Aboriginal groups levy a sales tax within their jurisdictions. The government notes that, to date, it has entered into 32 sales tax arrangements of this nature. Additionally, 12 agreements respecting personal income taxes are in effect with self-governing native groups under which they impose a personal income tax on all residents within their reserve.
Further details on Federal Budget 2011 are available from the Department of Finance Canada web site at:
Federal Budget 2011.