Draft Legislative Proposals Usher In February 26, 2008 Federal Budget

The Department of Finance tabled draft legislative proposals to implement the remaining tax measures this spring's budget, along with several previously announced tax initiatives on July 14. Students of courses in the Knowledge Bureau Tax Services Specialist, Certified Bookkeeping Specialist and Tax Efficient Retirement Income Specialist programs will find a detailed synopsis posted on their Net Tools site.

In brief, the proposals released draft legislation as follows:

Personal Tax Provisions

• Implementation of many of the Tax Free Savings Account rules

  • S. 18(1)(u) prohibits the deduction of fees related to an TFSA

  • S. 18(11) prohibits the deduction of interest on money borrowed to contribute to a TFSA

  • S. 40(2)(g) extends the stop-loss rule that applies to transfers to an RRSP or RRIF at a loss to transfers to a TFSA

  • S. 74.5(12) adds an exception to the attribution rules for assets transferred to a spouse or common-law partner if those assets are contributed to that spouse's TFSA (and are not excess contributions).

  • S. 104.4(1)(j) is amended to allow for the tax-free transfer between TFSAs

  • S. 115.1(5.3) allows a charitable donation credit in the year of death for a donation of an individual's TFSA via a direct designation to a charity

  • S. 128.1 is amended to include TFSAs in the list of assets that are not deemed disposed of on emigration

  • S. 138.1(7) is amended to ensure that amounts payable out of a segregated fund policies held within a TFSA are not subject to taxation.

  • S. 146.2 sets out the basic rules for TFSAs

  • S. 149(1) makes a trust governed by a TFSA non-taxable

  • Part XI.01 imposes a penalty tax on excess TFSA contributions, non-qualifying and prohibited investments, and on contributions made to a TFSA while the individual is a non-resident. 

  • S. 207 also imposes taxes on excess TFSA contributions,  non-qualifying and prohibited investments, and on contributions made to a TFSA while the individual is a non-resident and includes the definitions of those terms

  • S. 207.06 also allows the minister to waive those taxes in such cases as reasonable error or when penalties are imposed under Part XI.01 and S. 207

Business Tax Provisions

• The sharing of Business Number-related information in connection with government programs and services by more government entities

• Adjustments to the scientific research and experimental development investment tax credit rules

  • S. 37(1.4) provides that certain SR&ED expenditures made outside Canada will be treated as having been made in Canada according to the rules set out in S. 37(1.5) and S. 37(9)(b)

  • S. 37(2)(a) is amended to ensure that those expenses being treated as having been made in Canada under S. 37(1.4) cannot also be deducted as a current expense by virtue of having been made outside Canada

• An enhanced carry-forward for investment tax credits;

• Changes to computations of "eligible dividends", and the dividend tax credit to reflect lower corporate income tax rates in the future;

  • S. 82(1)(b) adjusts the gross-up of eligible dividends to 44% for 2010, 41% for 2011, and 38% for 2012 and later years

  • S. 121(b) adjusts the dividend tax credit for eligible dividends from 11/18 which is applicable to 2008 and 2009 to 10/17 for 2010, 13/23 for 2011 and 6/11 for 2012 and later years

• The extension of capital gains and losses treatment on an acquisition of control of a corporation to gains and losses that result from fluctuations in foreign exchange rates in respect of debt denominated in foreign currency;

• A clarification of the application of the excess corporate holdings rules for private foundations;

• Revised draft amendments relating to the computation of income, gains and losses of a foreign affiliate;

• Revised draft regulations that modify the tax treatment of foreign affiliate active business income earned in a jurisdiction with which Canada has concluded a tax information exchange agreement.

• New rules for the conversion of specified investment flow through (SIFT) trusts (often referred to as "income trusts") into corporations.

• Draft amendments to take into account financial institution accounting changes;

Other provisions of the February 26, 2008 Budget were tabled on March 14, were passed in the House and received Royal Assent on June 18. The significant income tax provisions in that document included the legislative details behind the following:

• Tax-Free Savings Account investment details to begin in 2009. Notably, Investment income earned within the account will not be taxed and withdrawals will be tax-free. Related provisions included limitation of interest deductions, the extension of stop loss rules on the disposition of capital to a TFSA, softening of the Attribution Rules for property invested to a spouse or common-law partner's TFSA or that of a trust and rules relating to life insurance policies issued as a TFSA.

• Clarification of rules for the deductibility of over-the-counter medical costs including insulin purchases

• Changes to RESP contribution limits and time frames

• New rules relating to the Registered Disability Savings Plans (RDSPs)

• The Guaranteed Income Supplement earnings exemption increase

• The Northern Residents Deduction, which was increased by 10%, effective for the 2008 tax year.

• Reduction of the Dividend Gross up and related dividend tax credit on eligible dividends over the years 2010 to 2012

• Rules regarding the donation of eligible medical gifts for the purposes of charitable activities outside of Canada

• Rules regarding donations resulting from the transfer of money from a deceased individual's RRSP or RRIF or TFSA.

• Disposition of Taxable Canadian Properties to afford ìsafe harbour protectionî to purchasers of property from non-resident vendors, a fine-tuning of rules surrounding withholding requirements has been tabled

• Other rules relating to changes in residency

• New rules surrounding taxes payable by SIFTs

• New rules surrounding Investment Tax Credits (ITCs)

• Details on the deduction of SR&ED expenditures incurred outside Canada

• Gifts of certain exchanged interest in a partnership for publicly traded shares which are then donated to a qualified donee within 30 days of the exchange

The remaining tax measures to be implemented from Budget 2008 include numerous changes relating to the application of the GST/HST. These include a number of amendments of GST and HST with respect to health care services, including training for individuals with autism and other disabilities, prescription drugs, medical devices and the treatment of long-term residential care facilities. More details to follow in next week's issue.