On March 29, 2012, Federal Minister of Finance, Jim Flaherty, introduced his government’s “Economic Action Plan 2012”. This year’s budget was created with a focus on future generations, rather than the next several years, which is typically the aim of a budget. Accordingly, the budget looks to address the challenges that have been placed on the Canadian economy by the global recession that has its grips on most of the world’s industrialized nations by supporting jobs growth and economic opportunities for Canadians, ensuring the country has sustainable social programs, and developing responsible expenditure management policies.
This year’s budget proposes a number of interesting changes, including the elimination of the penny, as well as several noteworthy tax changes which have been summarized below.
Corporate Income Tax Measures
Corporate Income Tax Rate
There were no changes announced to corporate income tax rates. The general corporate income tax rate decreased (as previously announced) to 15% on January 1, 2012, and the small business tax rate remains at 11%.
Scientific Research and Experimental Development (“SR&ED”)
The budget proposes to reduce the basic tax credit rate for qualified expenditures from 20% to 15%, effective January 1, 2014. The refundable portion of the tax credit and the rate of 35% for small Canadian-Controlled Private Corporations (“CCPCs”) will remain unchanged.
The base for qualified expenditures will also be changed to exclude all capital expenditures. Currently, where all or substantially all of the expected useful life or economic value of a capital expenditure is consumed in SR&ED activities, the capital expenditure would be eligible for the SR&ED tax credit.
Corporations claiming SR&ED expenditures can currently claim specific overhead expenses incurred in SR&ED activities, or use a prescribed proxy amount of 65% of eligible labour expenditures instead. The budget proposes to reduce the prescribed proxy amount to 60% in 2013, and to 55% for years thereafter.
In addition, only 80% of payments made to another person to perform SR&ED activities will be eligible for the tax credit under the budget proposals. Presently, the entire payment made to arm’s length parties may be included in eligible SR&ED expenditures.
Perhaps to compensate for any perceived lack of support for research and development, the government announced increased funding for a number of existing and new programs aimed at encouraging research and development activities in Canada.
Interestingly, the government also used the budget as an opportunity to express its concern over contingency fees charged by tax credit claim preparers, and announced that it will conduct a study over the next year in an effort to understand why businesses choose to hire tax consultants on a contingency-fee basis, with a view to determining whether any government action is required in this area.
Atlantic Investment Tax Credit
Investment in new buildings, machinery and equipment in the Atlantic region used for oil and gas and mining is currently eligible for a 10% tax credit. The budget proposes to phase out this tax credit over a four-year period.
Mineral Exploration and Development Tax Credit
The budget proposes to phase out the 10% Corporate Mineral Exploration and Development Tax Credit. This credit for exploration expenses will decrease to 5% for 2013, and 0% thereafter. Similarly, the credit for pre-production development expenses will decrease to 7% in 2014, 4% in 2015, and 0% thereafter.
Thin Capitalization Rules
The thin capitalization rules are intended to limit the interest deduction available to Canadian corporations financed by debt from non-resident corporations. The budget proposes to reduce the current 2:1 debt-to-equity ratio to 1.5:1 for taxation years that begin after 2012. The thin capitalization rules will also be extended to include partnerships of which a Canadian-resident corporation is a partner.
The budget also proposes to correct an area of potential double-taxation by excluding the application of the thin capitalization rules to any interest expense that is included in calculating a corporation’s Foreign Accrual Property Income (“FAPI”).
Eligible Dividends
Currently, corporations must designate dividends paid to each shareholder as eligible dividends, which benefit from an enhanced tax credit. The budget proposes to allow a corporation to designate all or a portion of a dividend as an eligible dividend at the time it is paid. This change is being made to reduce the administrative burden on corporations which have to separately designate each eligible dividend.
Additionally, the Minister will have the discretion to accept late eligible dividend elections, up to three years after the payment of the dividend. These measures apply to dividends paid on or after May 29, 2012.
Class 43.2 Clean Energy Generation Equipment
The budget proposes to expand Class 43.2 (a 50% rate) to include waste-fuelled thermal energy equipment used for space and water heating applications, as well as equipment that uses the residue of plants (e.g., straw) to generate electricity and heat.
Transfer Pricing
A primary transfer pricing adjustment changes the allocation of taxable profits of a group, but does not alter the fact that the excess profits represented by the adjustment are not consistent with the result that would have occurred had the transactions taken place on an arm’s length basis. Certain countries have taken to legislating that a secondary transaction or adjustment has occurred, whereby the excess profits resulting from the primary adjustment are treated as being transferred in some other form and taxed appropriately.
The budget proposes to treat secondary adjustments as the payment of a dividend for withholding tax purposes, equal to the amount of the primary adjustment. This treatment applies whether or not the non-resident is a shareholder of the Canadian corporation. These measures will apply to transactions occurring on or after March 29, 2012.
Foreign Affiliates
The budget has proposed several rules to reduce the “surplus stripping” of Canadian corporations through paid-up capital and contributed surplus created on certain share exchanges. Recent court decisions have focused attention on this type of tax planning, and the budget proposes various steps to reduce the tax benefits that might be realized.
Commodity Tax Measures
Health Measures
Under the GST/HST, basic health services are treated as exempt supplies. Therefore, providers of exempt health care services do not charge GST/HST to patients, but they cannot claim input tax credits for tax paid on inputs related to making these supplies. In addition, certain medical devices, prescription drugs and other drugs used to treat life-threatening conditions are zero-rated, meaning that no tax is collected on the sale of these zero-rated supplies. In contrast to exempt supplies, suppliers making zero-rated supplies are entitled to claim input tax credits on related inputs.
In order to reflect the evolving nature of the health care sector, the budget proposes to amend the application of GST/HST to a number of health care services, drugs and medical devices, as outlined below.
Pharmacist Services and Zero-rated Drugs
Since the inception of the GST, both prescription drugs and drug dispensing services performed by pharmacists have been zero-rated to ensure that no tax applies to the purchase of prescription drugs by patients. However, as part of the evolution of health care in Canada, a number of provincial governments have expanded, or are considering expanding, the health care services that pharmacists are authorized to perform as part of their professional practice.
This year’s budget proposes to exempt services rendered by pharmacists within a pharmacist/patient relationship with respect to the promotion of a patient’s health, or for the prevention or treatment of a disease, disorder or patient dysfunction. This will result in the exemption from GST/HST of certain non-dispensing health care services that pharmacists are authorized to perform in a particular province in the course of their professional practice.
Examples of non-dispensing health care services that pharmacists are authorized to perform in certain provinces include:
- ordering and interpreting lab tests (e.g., to determine if a medication is creating an adverse reaction);
- administering medications and vaccinations (e.g., flu shots);
- changing drug dosages; and
- prescribing drugs for minor ailments.
For instance, injections and immunizations currently being offered by certified pharmacists in Alberta, British Columbia and New Brunswick will become exempt services under this new measure.
In addition, the budget proposes to expand the exemption for diagnostic services ordered by certain health care professionals, such as physicians or registered nurses, to include those ordered by pharmacists, where pharmacists are authorized to issue such orders under the laws of a province.
Furthermore, the budget proposes to add the drug “Isosorbide-5-mononitrate” to the list of zero-rated drugs used to treat life threatening illnesses. This drug is similar to the currently listed drug “Isosorbide dinitrate” and is used to treat congestive heart failure.
These changes will apply to supplies made after March 29, 2012. However, the measure to include “Isosorbide-5-mononitrate” to the list of zero-rated drugs will also apply to supplies made on or before March 29, 2012, if GST/HST was not charged, collected or remitted.
Medical and Assistive Devices
Another area where provincial laws have expanded the scope of health care professionals is with respect to the dispensing of corrective eyewear. Recently, under provincial law changes, opticians have been authorized, in certain situations, to conduct vision assessments and produce records of the assessments to authorize the dispensing of corrective eyewear. The budget proposes to zero-rate corrective eyeglasses or contact lenses supplied by a person who is authorized under the laws of the province in which the person practices to produce the record of such an assessment in order to authorize the dispensing of corrective eyewear.
Generally, certain medical and assistive devices are eligible for zero-rating when supplied on the written order of a medical practitioner. Currently, registered nurses, occupational therapists and physiotherapists are not considered medical practitioners for purposes of the application of these zero-rating provisions. The budget proposes to expand this zero-rating provision to include qualifying medical and assistive devices supplied under the written order of a person who is a member of one of these groups, where it is provided as part of their professional practice.
The list of zero-rated medical and assistive devices currently includes certain monitoring or metering devices (e.g., blood-glucose monitoring or metering devices). The budget proposes to add blood coagulation monitoring or metering devices and associated test strips and reagents to the zero-rated medical device list. For example, devices that may be used by an individual to determine appropriate levels of medications which alter their rate of blood coagulation in order to prevent strokes caused by blood clots will now be considered zero-rated medical devices.
These measures will take effect for supplies made after March 29, 2012, and in the case of corrective eyewear supplied by an authorized optician, also to supplies made on or before that date if GST/HST was not charged, collected or remitted in respect of the supply.
GST Rebate for Certain Books Given Away
The Excise Tax Act (“ETA”) currently provides a rebate of GST (and the federal component of the HST) on certain printed books, including audio recordings of printed books and printed versions of religious scriptures purchased by public libraries, educational organizations and prescribed charities and qualifying non-profit organizations. Unfortunately, printed books and qualifying materials acquired for sale or to be given away do not qualify for the existing rebate. In keeping with its efforts to promote literacy, the federal government is proposing to extend the printed books rebate to include printed books and qualifying materials acquired by a prescribed charity or qualifying non-profit organization to be given away. This measure will apply to tax that becomes payable in respect of eligible items after March 29, 2012.
GST/HST Streamlined Accounting Thresholds
To simplify GST/HST compliance, where elected, the Quick or Special Quick Method of accounting is available for use by most small businesses and public service bodies (“PSBs”) to determine their GST/HST remittances. Similarly, these organizations may also elect to use the Streamlined Input Tax Credit Method to calculate their input tax credits. Another simplified method, the Prescribed Method for Calculating Rebates, is also available to many PSBs for calculating their public service body rebate entitlement. Rather than tracking the GST/HST paid or collected on certain transactions, these methods allow small businesses and PSBs to apply specified rates or factors when calculating their net tax liabilities or rebates.
However, in order to qualify to use these methods (other than the Special Quick Method), businesses and PSBs must have annual taxable sales and, in some cases, annual taxable purchases at or below certain thresholds. For reporting periods beginning in 2013, the federal government is proposing to double the existing thresholds as follows:
- the annual taxable sales threshold for eligible businesses electing to use the Quick Method will increase to $400,000 (from $200,000) of GST/HST-included sales; and
- the annual taxable sales and purchases thresholds for eligible businesses or PSBs electing to use the Streamlined Input Tax Credit Method, and PSBs electing to use the Prescribed Method for Calculating Rebates, will increase to $1,000,000 (from $500,000) of taxable sales, and to $4,000,000 (from $2,000,000) of taxable purchases.
Foreign-Based Rental Vehicles Temporarily Imported by Canadian Residents
The budget has proposed changes to the tax treatment of foreign-based rental vehicles temporarily imported into Canada by residents. These changes, which are effective on or after June 1, 2012, will only apply to vehicles imported into Canada for a period not exceeding 30 days.
Under the proposals, GST/HST will not apply to foreign-based rental vehicles temporarily imported by Canadians who have been outside Canada for at least 48 hours. In addition, GST/HST will only be partially levied on foreign-based rental vehicles that are temporarily imported into Canada by residents who have not been outside of the country for at least 48 hours.
In the latter case, tax will be imposed based on the number of full or partial weeks that the vehicle is in Canada, and calculated using weekly rates of: $200 for cars; $300 for pick-up trucks, sports utility vehicles and vans; and $1,000 for recreational vehicles, such as motor homes. The weekly rates are intended to approximate the typical cost of a weekly rental of each type of vehicle in Canada. Note that the GST/HST rate imposed will be based on the rate applicable in the province in which the vehicle enters Canada.
Furthermore, the Green Levy and automobile air conditioner excise tax will not apply to any temporarily imported foreign-based rental vehicles.
Green Levy for Fuel-Inefficient Vehicles
As a result of the February 17, 2012 announcement by the Minister of Natural Resources regarding proposed changes to the vehicle fuel consumption testing requirements, amendments to the ETA will be made in order to ensure that the Green Levy, which applies to certain fuel-inefficient vehicles, will continue to be applied based on fuel consumption ratings derived using the current testing method. The Green Levy generally applies to vehicles with a weighted average fuel consumption rating of 13 or more litres per 100 kilometres.
Previously Announced Measures
The federal government also confirmed its intention to proceed with various previously announced commodity tax measures, including:
- measures announced on February 17, 2012, regarding the transitional rules for the elimination of the HST in British Columbia (see our tax development at: Transitional Rules to Eliminate the British Columbia HST);
- proposed changes to certain GST/HST rules relating to financial institutions (see our tax development at: Proposed Changes to Certain GST/HST Rules for Financial Institutions);
- automobile expense amounts for 2012 (see our tax development at: Government Announces 2012 Automobile Deduction Limits and Expense Benefit Rates for Business);
- legislative proposals released on October 31, 2011, related to various technical clarifications, including those involving the recapture of input tax credit requirements in Ontario and British Columbia; and
- GST/HST amendments related to the introduction of Pooled Registered Pension Plans.
Customs Tariff Measures
Energy Industry Trade Measures
In keeping with its commitment to make Canada a tariff-free zone for industrial manufacturers, the federal government has proposed the elimination of the 5% Most-Favoured-Nation rate of duty on certain imported oils used as production inputs in gas and oil refining, and electricity production. This measure is in support of the energy industry and will improve the competitiveness of certain manufacturers.
This change will be effective for goods imported on or after March 30, 2012.
Exemptions for Travellers
Effective on or after June 1, 2012, the federal government is proposing to increase the travellers’ exemptions currently available to Canadian residents returning to Canada. Under the current exemptions, Canadian travellers returning to Canada, who have been outside of the country for 24 hours or more, may qualify for an exemption from duties and taxes on goods valued up to specific dollar limits brought back into Canada. The following are the proposed increases:
- for absences of 24 hours or more (up to 48 hours), the exemption limit will be increased to $200 (from the current $50); and
- for absences of 48 hours or more, the exemption limit will be increased to $800 (from the current $400).
Note that the current 7-day exemption limit of $750 will be replaced by the new 48 hour exemption limit.
There are currently no duty or tax exemptions for absences less than 24 hours. This will remain unchanged. Volume and quantity limits on alcohol and tobacco products will also remain unchanged.
Payroll Tax Measures
The budget proposes to include employer contributions to group sickness or accident insurance plans in employees’ income, to the extent that the contributions are not in respect of a wage-loss replacement benefit payable on a periodic basis. This measure will apply to contributions made on or after March 29, 2012.
In addition, the government has proposed to limit increases to Employment Insurance (“EI”) premiums to five cents per year, until the operating account for the program has been balanced.
Aboriginal Tax Policy
Consistent with prior years, the federal government has confirmed its continued support for direct taxation arrangements in which self-governing Aboriginal groups levy a sales tax within their jurisdictions. The government notes that, to date, it has entered into 33 such sales tax arrangements of this nature. Additionally, 12 agreements respecting personal income taxes are in effect with self-governing Aboriginal groups, under which they impose a personal income tax on all residents within their settlement lands.
Further details on the 2012 Federal Budget are available from the Department of Finance Canada web site at:
2012 Federal Budget.