Registered Disability Savings Plans
Budget 2012 proposes a number of changes to the rules governing Registered Disability Savings Plans (RDSPs).
Group Sickness or Accident Insurance Plans
The Income Tax Act identifies specific benefits that are to be included in a taxpayer's income from an office or employment. The general rule is that employment benefits, provided either in cash or in-kind, are generally to be considered taxable to the employee. The current tax treatment of group sickness or accident insurance plans is such that employer contributions are not deductible and, subject to certain exceptions, an amount is included in an employee’s income either at the time of the employer’s contribution to the plan or when the benefits are received by the employee. Where benefits are payable on a periodic basis out of a group sickness or accident insurance plan to a taxpayer in order to compensate for the loss of the taxpayer's employment, these amounts are included in income when received by the employee.
From a policy perspective, Budget 2012 addresses two perceived shortcomings in the rules, which do not apply to benefits that are not payable on a periodic basis, or to benefits payable in respect of a sickness or accident when there is no loss of employment income. Budget 2012 proposes to remedy these perceived problems by providing that an employer’s contribution to a group sickness or accident insurance plan in a year will be included in the employee’s income to the extent the contributions are not related to a wage-loss replacement benefit payable on a periodic basis.
Retirement Compensation Arrangements
A “retirement compensation arrangement” (“RCA”) is an employer-funded retirement plan with its own scheme of taxation. Specifically, employer contributions to an RCA are deductible to the employer, and distributions from the RCA are taxable to the employee only when received. A special refundable tax equal to 50% of the amount of the contributions by the employer is payable within the RCA Income realized within the RCA is also subject to the 50% refundable tax. When taxable distributions are made out of the plan, for example, to a retired employee, the refundable tax is refunded at the rate of $1 for every $2 distributed. There are some arrangements that are perceived as tax-motivated abuses. They are said to involve the deduction of large contributions that are indirectly returned to the contributors through a series of steps ending with the purported RCA having few or no assets, but still being able to claim the refundable tax. Other arrangements use insurance products to allocate costs to the arrangement for benefits that arise outside the arrangement. For this reason, the Budget proposes that RCAs will now be subject to “prohibited investment” , “advantage” and “stripping” rules very similar to those recently enacted into law in December 2011 applicable to RRSPs and RRIFs.
If an RCA has a specified beneficiary, the RCA will be subject to an additional tax equal to the fair market value of any advantage obtained by the specified beneficiary or a non-arm’s length person (the “Advantage Tax”). Furthermore, the RCA will be subject to tax equal to 50% of the fair market value of a prohibited investment acquired or held by the RCA (the “Prohibited Investment Tax”). Lastly, and perhaps most importantly, the specified beneficiary of an RCA will be jointly and severally, or solitarily, liable, for the Advantage Tax and Prohibited Investment Tax.
Employees Profit Sharing Plans
Employees Profit Sharing Plans (“EPSPs”) are trust arrangements that allow employers to make tax-deductible contributions to a trust and require trustees to allocate to employees each year all of the employer contributions, profits from trust property, capital gains and losses, and certain amounts in respect of forfeitures. Employees must include these allocations in their income.
There was concern that EPSPs have increasingly been used as a vehicle for business owners to direct business profits to members of their families to reduce or defer payment of income tax on these profits. There were also concerns that EPSPs have been used in certain situations to eliminate employee withholding requirements, as well as EI and CPP payments.
To address these concerns, and reduce excessive employer contributions, a special tax is proposed. The special tax is payable by a “specified employee” on an “excess EPSP amount. A “specified employee” is generally defined to include an employee who has a significant equity interest in the employer, or who does not deal with the employer at arm’s length. Generally an “excess EPSP amount” will be the portion of the employer’s EPSP contribution, allocated by the trustee to a specified employee, that exceeds 20% of the specified employee’s salary for the year. This measure will apply to EPSP contributions made by an employer on or after Budget Day. However, in the case of contributions to an EPSP pursuant to a legal agreement entered into before Budget Day, this measure will only apply to contributions made as of 2013.
Scientific Research and Experimental Development
Changes to the scientific research and experimental development (SR&ED) tax incentive program were anticipated for this Budget, owing largely to an Expert Review Panel on SR&ED which submitted its report to the Government in October 2011. The Panel suggested a “simplified and more focused approach” to improve the SR&ED program, which includes the investment tax credit system. According to the Budget documents, the changes introduced in the Budget support these objectives, and make the program “more cost effective and predictable.” Details of the tax changes are laid out in the Budget Plan.
Gifts to Foreign Charitable Organizations
Subject to certain exceptions, a gift made by a Canadian taxpayer to a foreign charity is not eligible for the donation tax credit (or deduction in the case of a corporation) that would otherwise be available if the gift was made to a registered charity. Currently, a foreign charity that has received a gift from the Government of Canada during the year (or the twelve month period preceding the year) can become a “qualified donee” and thereby become able to issue charitable donations receipts. In order to allow Canadians to receive tax relief for donations to charitable entities undertaking activities of significance to and in the interest of the Canadian public, the ability to obtain “qualified donee” status is to be amended in Budget 2012. In particular, where a foreign charitable organization has received a gift from the Government, such organization may apply for “qualified donee” status if it pursues activities that are related to disaster relief, urgent humanitarian aid, or the national interest of Canada.
Charities – Transparency and Accountability
Charities are required to operate exclusively for charitable purposes and to devote their resources exclusively to charitable activities. Notwithstanding the foregoing, a registered charity can engage in political activities, but only so long as such activities utilize a very limited amount of the charity’s resources, and meet certain other criteria. The Budget states that, despite these restrictions, concerns have been raised regarding the political activities undertaken by certain registered charities. Accordingly, it proposes to introduce sanctions. The CRA will have the authority to suspend registered charities (and registered Canadian amateur athletic associations) that violate restrictions on political activities from issuing donation receipts for a period of one year.
Salary of the Governor General of Canada
Budget 2012 proposes to end the income tax exemption for the salary of the Governor General of Canada, effective for the 2013 and later taxation years.
Capital Cost Allowance: Clean Energy Generation and Conservation Equipment
Under the capital cost allowance (“CCA”) system, an accelerated CCA rate (50% per year on a declining balance basis) is provided for investments in specified clean energy generation and conservation equipment. The 50% rate is fairly high in the Canadian tax system and the Department of Finance notes in Budget 2012 that this rate is an exception to the general practice of setting CCA rates based on the useful life of assets. In Budget 2012 the government proposes to expand the class of assets eligible for the accelerated rate to include waste-fuelled thermal energy equipment used for a broader range of applications then is presently permitted. The Budget also proposes to add the residue of plants to the list of eligible waste fuels that can be used in such equipment, and to remove the existing requirement that heat energy generated from the equipment be used in an industrial process or a greenhouse.
Medical Expense Tax Credit
The medical expense tax credit provides federal income tax relief equal to 15% of eligible medical and disability-related expenses in excess of an amount that is the lesser of (a) 3% of the taxpayer’s net income and (b) an indexed dollar amount ($2,109 in 2012). Specific expenses eligible for the medical expense tax credit are listed in the Income Tax Regulations. Budget 2012 proposes to add to this list blood coagulation monitors for use by individuals who require anti-coagulation therapy, including associated disposable peripherals such as pricking devices, lancets and test strips. The cost of these devices will be eligible for the medical expense tax credit when they are prescribed by a medical practitioner.
CPP Contribution Rate
The Budget announced that the 2010–2012 triennial review of the CPP confirms the financial sustainability of the Plan for at least the next 75 years at the current contribution rate of 9.9 per cent of pensionable earnings. Accordingly, there will be no change to the contribution rate.
EI Premium Rates
EI premium rate increases will be limited to 5 cents each year until the EI Operating Account is in balance, and then move to a seven-year break-even rate.
Extending the Hiring Credit for Small Business
In recognition of the challenges faced by small businesses across the country, the 2011 Budget announced a temporary Hiring Credit for Small Business of up to $1,000 per employer. This credit was applied against an increase in a small employer’s EI premiums for 2012 over those paid in 2011. The 2012 Budget proposes to extend the Hiring Credit for Small Business for one year.
Graduated Penalties for Late Filing
Budget 2011 announced a CRA review of the penalty structure for late-filed information returns. After working with the Canadian Federation of Independent Business and other organizations representing small businesses, the CRA has instituted a new administrative policy to ensure that these penalties are charged in a manner that is both fair and reasonable. Where a business is unable to comply in a timely manner with a reporting obligation related to certain information returns, such as T4s, reduced penalties will be applied when the number of late-filed returns is small.
Wage Earner Protection Program
The Budget proposes $1.4 million annually for the Wage Earner Protection Program (WEPP). WEPP was introduced in 2008 to provide compensation to workers for unpaid wages and vacation pay earned in the six months preceding an employer bankruptcy or receivership. In Budget 2009, WEPP was expanded to include severance and termination pay, and in Budget 2011 it was again expanded to cover employees who lose their jobs when their employer’s attempt at restructuring takes longer than six months and is subsequently unsuccessful.
Fair Compensation for Employers of Canada’s Reservists
The Budget proposes to provide financial support to employers of reservists, to offset costs incurred when part-time reservists sign up for full-time duty. Details of this program will be announced by the Government in the coming months.
Old Age Security Age of Eligibility
The age of eligibility for OAS and GIS will be gradually increased from 65 to 67, starting in April 2023, with full implementation by January 2029. An 11-year notification period, followed by a 6-year phase-in period, is being provided to ensure that individuals have significant advance notification to plan their retirement and make adjustments. This proposed legislative change to the age of OAS/GIS eligibility will not affect anyone who is 54 years of age or older as of March 31, 2012. Thus, individuals who were born on March 31, 1958 or earlier will not be affected.
Option to Defer the OAS Pension
To improve flexibility and choice in the OAS program, starting on July 1, 2013, the Government will allow for the voluntary deferral of the OAS pension, for up to five years, allowing Canadians the option of deferring take-up of their OAS pension to a later time and receiving a higher, actuarially adjusted, annual pension. For example, individuals could continue to work longer and defer taking up their OAS pension beyond age 65, resulting in an adjusted pension starting in a subsequent year.