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Tuesday, March 20, 2007

2007 Federal Budget Business Tax Updates

Business Tax Updates:
Increased Capital Cost Allowance ("CCA") for Buildings - Non-residential buildings are eligible for a CCA rate of 4% under Class I of Schedule II to the Income Tax Regulations. The Federal Budget proposes that the CCA rate for buildings used for manufacturing or processing in Canada of goods for sale or lease be increased to 10% and that the CCA rate for other non-residential buildings be increased to 6%. Eligibility requirements for either of the 2 new classes:
1.) the building must be placed into a separate class, and
2.) at least 90% of the building (measured by square footage) must be used for the designated purpose at the end of the taxation year. These new rules apply for properties acquired on or after March 19, 2007 or where the building was under construction on or after March 19, 2007.
Increased CCA Rate for Computers - Class 45 is presently eligible for a CCA rate of 45%. This rate will increase to 55% for assets acquired on or after March 19, 2007.
Increased Installment Threshold - The Federal Budget proposes to increase the minimum threshold from $1,000 (based on the prior year's corporate income tax liability) to $3,000 beginning for taxation years that commence in 2008. For Canadian Controlled Private Corporations, the Budget proposes that the installment frequency be reduced from monthly installments to quarterly installments to the extent that the taxable income of the Canadian Controlled Private Corporation for either the current or previous year does not exceed $400,000, the corporation qualifies for the small business deduction for either the current or previous year, the taxable capital employed in Canada of the corporation does not exceed $10 million in either the current or previous year and the corporation has no compliance irregularities under the Income Tax Act and the Excise Tax Act for the preceding 12 months.
GST Filing for Small Businesses - Currently, GST registrants with taxable supplies that do not exceed $500,000 in a fiscal year may elect to have reporting periods that are fiscal years which enables them to file an annual GST return and make quarterly installment payments. The Federal Budget proposes to triple the taxable supplies threshold to $1,500,000.

Budget 2007 proposes a new Vehicle Efficiency Incentive (VEI) structure that will cover the full range of passenger vehicles available today. The VEI will have three distinct components and come into effect March 20, 2007:
1. A performance-based rebate program offering up to $2,000 for the purchase of a new fuel-efficient vehicle.
2. Neutral treatment of a broad range of vehicles with average fuel efficiency that are widely purchased by Canadians.
3. A new Green Levy on fuel-inefficient vehicles. These measures, together with a new initiative to encourage Canadians to retire older, more polluting vehicles, will be broadly revenue-neutral.

New Rebate for Fuel-Efficient Vehicles Manufacturers now offer a number of vehicles that are eligible for the performance-based rebate program. Current models qualifying for the rebate will include hybrid electric vehicles, conventional fuel efficient vehicles and the most efficient of the E-85 fuel and flex fuel vehicles. The list of eligible vehicles will be established by Transport Canada by combining the city and highway fuel-efficiency ratings.The thresholds will be based on a combined 55 per cent city and 45 per cent highway rating. Initially, new automobiles with a combined fuel consumption rating of 6.5 L/100 km or less and minivans, sport utility vehicles (SUVs) and other light trucks with fuel consumption of 8.3 L/100 km or less will be eligible for a rebate. These thresholds will be reviewed periodically. The basic rebate amount will be $1,000, and an additional $500 will be added for each half litre per 100 km improvement in the combined fuel-efficiency rating of the vehicle below these thresholds. The maximum rebate value will be $2,000. Efficient E-85 fuel vehicles will be eligible for a rebate of $1,000. Eligible new vehicle purchases or leases as of March 20, 2007, will qualify for the rebate.More information on the program, including the vehicles eligible for the rebate, will be published on Transport Canada’s website (www.tc.gc.ca). The lists of eligible vehicles will be updated as information on new vehicle fuel-efficiency ratings becomes available. Consumers purchasing or leasing (long-term leasing for a period of at least 12 months) an eligible vehicle should keep a proof of purchase or a copy of the lease agreement. Consumers will be asked to show proof of registration, in Canada, of the new vehicle. While the introduction of rebates for eligible fuel-efficient vehicles is proposed to take effect March 20, 2007, the payment of rebates will be made once administration and delivery systems have been put in place. The Government is aiming to make rebate payments by fall 2007. Budget 2007 commits $160 million over the next two years to provide the performance-based rebate.
New Green Levy on Fuel-Inefficient Vehicles For new passenger vehicles (excluding trucks) with fuel-efficiency ratings of 13.0 L/100 km or more, the incentive structure will include a new Green Levy on these vehicles, payable by the manufacturer or importer when vehicles are delivered into the Canadian market. The fuel-efficiency rating will be based on the same combination of city (55 per cent) and highway (45 per cent) fuel consumption ratings used to establish the parameters for the rebate. The new Green Levy will start at $1,000 for passenger vehicles with combined fuel-efficiency ratings of at least 13.0 L/100 km but less than 14.0 L/100 km. The rate will increase in $1,000 increments for each full litre per 100 km increase in the combined fuel-efficiency rating above the 13.0 L/100 km floor, to a maximum of $4,000, for vehicles with ratings of 16.0 L/100 km or more. The levy will apply to new vehicles delivered by a manufacturer or importer to a purchaser (usually a dealer) after March 19, 2007. Inventories of vehicles held by dealerships will not be subject to the new Green Levy. Certain consumer purchase contracts entered into before March 20, 2007, will also be grandfathered. With the introduction of the new levy, the existing excise tax on heavy vehicles will be eliminated effective March 20, 2007. It is expected that this measure will increase federal revenues by $110 million in 2007/08 and $105 million in 2008/09.

2007 Federal Budget Personal Tax Updates

Personal Income Tax Updates:
New Child Tax Credit - This is a new non-refundable child tax credit for parents in the amount of $2,000 (indexed) for each child under the age of 18 years at the end of a taxation year. Conditions: a child resides together with the child's parents throughout the year, either of those parents may claim the credit. In other cases, the credit will be claimable in respect of a child by the parent who is eligible to claim the wholly dependent person credit for the year in respect of the child. Each $2,000 tax credit will amount to $310 of Federal tax savings. If Alberta introduces this same tax savings rule, each Alberta parent of a child under the age of 18 would receive a combined tax reduction in the amount of $510 per child.
Spousal amounts - The proposal is to slightly increase the income thresholds from what a spouse can currently earn from $7,581 to $8,929 for 2007. A high income earner does not benefit from this credit as these spousal income thresholds are set very low.
Public Transit Tax Credit Expansion - extending the tax credit for public transit passes to innovative fare products, such as electronic fare cards and weekly passes."
Increase to the Lifetime Capital Gains Deduction - The current maximum capital gains deduction on qualified farm, fishing and smll business corporation shares is $500,000. The Budget proposes to increase the maximum to $750,000. The capital gains exemption will increase to $625,000 for dispositions from March 19 2007 to Dec 31 2007. The $750,000 limit will become effective for dispositions from January 1 2008 onwards.
RRSPs - Contribution and conversion age from a RRSP to a RRIF: the Budget proposes to increase the age limit to age 71 from the current age limit of 69.
Introduction of "Registered Disability Savings Plan - This plan will be introduced to assist parents and others to save for the long-term financial security of a child with a severe disability. This will have similar principles as those of a Registered Education Savings Plan.
Donations to Private Foundations - Donations of publicly listed securities to public charities have been eligible for a reduced inclusion rate on capital gains since 1997 and a complete exemption since May 2, 2006. The Federal Budget proposes to eliminate the taxation of capital gains arising from donations of publicly listed securities to private foundations for gifts made on or after March 19, 2007. These proposals have significant tests that must be met and include an anti-avoidance measure to prevent inappropriate planning.
Registered Education Savings Plans (RESP)- Federal budget 2007 proposes to:
1.) Eliminate the $4,000 annual RESP contribution limit and increase the lifetime contribution limit to $50,000 from $42,000
2.) Increase the annual maximum contribution that qualifies for the 20 per cent Canada Education Savings Grant (CESG) incentive to $2,500 from $2,000 - for a yearly maximum CESG of $500, up from $400.
The maximum CESG for a year will increase to $1,000 from $800 if there is unused grant room from previous years - The lifetime CESG limit remains at $7,200.
Increased Income Tax Installment Threshold - Currently, individuals are required to make quarterly installment payments in respect of income taxes if the estimated income tax payable for the current year or the actual income tax payable for either of the two preceding years (that exceeds the amounts withheld at source) is greater than $2,000. The Federal Budget proposes to increase this installment threshold amount to $3,000 starting with the 2008 taxation year.
· Working Income Tax Benefit - The Federal Budget announced a new refundable tax credit for low income working Canadians. This credit will be a maximum of $500 for single individuals and $1,000 for families. It will be computed as 20% of earned income in excess of $3,000 to the maximums mentioned. The credit is reduced by 15% of net family income in excess of $9,500 for single persons and $14,500 for families.
Scholarships/Bursaries - The proposal is to recognize all amounts received in the taxation year on account of scholarships and bursaries related to the individual's enrollment in an elementary or secondary school as exempt income (not reported as income).

Tuesday, March 13, 2007

Qualified Small Business Corporation Criteria

Individuals can still claim a $500,000 exemption against capital gains from qualifying shares of a small business corporation.

To qualify for this exemption, individuals must meet the following conditions:

1) Determination test - The corporation must be an SBC at the time of the sale, all or substantially all (greater than 90%) of its assets must be business assets.
2) Ownership period test - The shares must not have been owned by anyone other than the taxpayer or someone related to the taxpayer during the 2 month period immediately before the sale.
3) Holding period asset test - More than 50% of the corporation's assets (on the basis of fair market value) must have been used in an active business carried on primarily in Canada throughout the 24 month period immediately before the sale.

Full details are described under the Income tax act (ITA) subsections within 110.6.

Eligible vs. Non-eligible dividends

Eligible dividends are taxed at a reduced federal rate, by way of an enhanced gross-up (45%) and tax credit(27.5%) for these dividends received by individuals and trusts. This helps to balance out the inequitable tax treatment between a non-CCPC and a CCPC.

Ineligible dividends are those that have existed up to this point, based on an assumed 32% corporate tax rate, the existing gross-up of 25% and tax credit of 16.667% of actual dividends. These rates will continue to apply.

For CCPC's (Canadian Controlled Private Corporation), an eligible dividend is: a dividend that is paid out of the corporation's general rate income pool (GRIP). For calculation purposes, the total eligible dividends declared for the year will be compared to the GRIP balance at the end of the year. This eligible dividend designation is at the discretion of the company paying the dividend, as long as the GRIP balance covers this amount. The designation must be made on the entire dividend: either eligible or not AND this designation would apply to all shareholders.

T5 forms now have boxes available for ineligible (box 10) and eligible dividends (box 24).

For non-CCPC's the situation is the opposite. All dividends will be eligible dividends unless the corporation has a 'low rate income pool' (LRIP). An important difference is that these non-CCPC's do not have discretion as to whether the dividend is eligible or not. The LRIP balance MUST be paid out first as an ineligible dividend before eligible dividends can be paid.

If an eligible dividend is designated when the LRIP has a positive balance then the excess dividend tax will apply.
Note: A non-CCPC generally won't generate its own low-rate income. Therefore, the assumption is that all taxable dividends will be eligible. The exception is if a LRIP pool exists.

Child Care Expense: Check your Earned Income amount

Child Care Expense CRA rules:

The lower income earner has to claim the child care expenses. These expenses are allowed to a maximum of 2/3rds of earned income (rental, business, salary, bonuses). Dividends are not earned income so these payments are not included. The lower income earner should consider drawing a salary, if possible, to allow for the deduction of the incurred Child Care expenses. In other words, 1.5 multiplied by the annual child care expenses incurred would be the minimum income amount desired in order to fully claim this expense.