Tax Changes: Vanity, Executives and Corporations Bear The Brunt

The savings government has booked for itself in this budget include the removal of a significant tax savings measure for executives as well as a change in the computation of interest on overpaid taxes owed by government to corporations.

Vain Canadians are targeted too, as botox, hair replacement therapies, liposuction and teeth whitening are removed from the list of allowable medical expenses. In addition there is important news for investors in RRSPs, RESPs and RDSPs, students and those receiving US Social Security Benefits. Here's an overview of the changes:

There are four significant tax changes:

Joint Access to Child Tax Benefits, Universal Child Care Benefits and Child GST Benefits in Joint Custody situations

UCCB for Single Parents: The parent may elect to exclude the UCCB from their income and instead include it in income of the child who was claimed under the amount for an eligible dependant (formerly known as the equivalent-to-spouse amount), resulting in the elimination of tax on the benefit in most cases.

Medical Expenses: For expenses incurred after March 4, 2010, expenses for procedures done for purely cosmetic purposes are not claimable, unless the services are necessary for medical or reconstructive purposes.

US Social Security Survivor Benefits: For US Social Security Benefits received after January , 2010, including Tier 1 Railroad Retirement Benefits, recipients of benefits dating to service prior to January 1, 1996 will use a 50% income inclusion rate, rather than the post 1995 inclusion rate of 85%.

Online Notices. Taxpayers will be allowed to authorize CRA to provide them with certain Notices, including Notices of Assessment and Reassessment, online.

B. FOR STUDENTS:

Scholarship Exemption: Where a scholarship, fellowship, or bursary is received in connection with a part-time program, beginning in 2010, the scholarship exemption will be limited to the amount of the tuition paid for the program plus the cost of program-related materials. This limitation does not apply to students who are entitled to the Disability Tax Credit.

Programs that are research-based and qualifying for the education amount, and leading to a degree or diploma will qualify for the exemption.

Post doctoral fellowships will however, be taxable.

Education Amount: The budget clarifies that a post-secondary program that consists principally of research will be eligible for the Education Amount (and scholarship exemption) only if it leads to a college or CEGEP diploma, or a bachelor, masters or doctoral degree (or an equivalent degree). Post-doctoral fellowships will not be eligible.

C. FOR INVESTORS

RRSP Rollovers to RDSPs (Registered Disability Savings Plans): As of March 5, 2010, the rollover rules for RRSPs at death are extended to allow tax-free rollovers from the deceased taxpayer's RRSP to the RDSP of a surviving child or grandchild. Such rollovers are limited to the recipient's RDSP contribution room and will generate a Canada Disability Savings Grant. Such rollover contributions will not be allowed until July 2011 to give the government and financial institutions time to adjust their systems to deal with such rollovers. Where the taxpayer died after 2007 and before March 5, 2010, transition rules will be available to allow similar rollovers.

Catch-Up of RDSP Grants and Bonds: Starting in 2011, When an RDSP is opened, CESG and CDSB entitlements will be calculated for the 10 years prior to the opening date (but after 2008) based on the beneficiary's income in those years.

Provincial Support of RESP and RDSP Plans: The budget proposes to clarify that all payments made by provincial or territorial governments will not affect the amount for federal grants or bonds.

D. FOR EXECUTIVES

Employee Stock Options: There are three important changes:

Cash Outs: For options exercised after March 4, 2010, the stock option deduction will only be available when the employee actually acquires the shares. Employees who cash out their options with their employer will not be eligible for the deduction. This closes a loop-hole where the employer could deduct the amount paid to the employee while the employee effectively paid tax on the cash at one-half the normal rate.

Election to Defer Taxable Benefit: The budget proposes to eliminate the deferral of the stock option taxable benefit currently available using form T1212 on all stock options exercised after March 4, 2010. As of 2011, employers will be required to withhold tax on the taxable benefit like all other taxable benefits. This change will accelerate the payment of tax on such stock options and discourage employees from exercising options and retaining the shares. For many employees, the cash to pay the tax on the taxable benefit will only be available if the stocks are sold immediately.

Special Tax Relief for Taxpayers who Deferred the Taxable Benefit: The budget proposes that, in a year in which a taxpayer is required to include in income a deferred stock option benefit, the taxpayer may elect to pay a tax equal to the taxpayer's proceeds of disposition of the optioned shares. In Quebec the tax is 2/3 of the proceeds. This election is not available for shares disposed of after 2014. The election will only make sense where the proceeds from the sale of the stock are less than the tax on the taxable benefit.

E. FOR BUSINESSES

Interest Paid to Corporations on Overpaid Taxes: Effective July 1, 2010, the interest rate payable by the CRA to corporations on overpaid taxes, GST/HST, EI premiums, CPP, excise tax and duty will be set at the average yield of three-month Government of Canada Treasury Bills sold in the first month of the preceding quarter, rounded up to the nearest percentage point.

Reportable Anti-Avoidance Transactions: To help identify aggressive tax planning, leading to abusive tax avoidance transactions, the government is proposing that a new regime be introduced under which a tax "avoidance transaction" that features at least two of three "hallmarks" would be a "reportable transaction" that must be reported to the Canada Revenue Agency. Consultations on the matter will be held.

CCA Changes: There are four changes of note for the depreciation of Television Set-top Boxes as well as clean energy generation, heat recovery equipment and distribution equipment in Class 43.1 and 43.2

Mineral Exploration Tax Extension: Budget 2010 proposes to extend eligibility for the mineral exploration tax credit for one year, to flow-through share agreements entered into on or before March 31, 2011.

F. INTERNATIONAL TAXATION

Taxable Canadian Property: After March 4, 2010, Section 116 compliance obligations forthese properties will be eliminated.

Tax Refund Availability: Section 164 of the Income Tax Act will be amended to permit, for returns filed after March 4, 2010, the refund of an overpayment of tax if in respect of a required withholding under section 105 of the Income Tax Regulations or section 116 of the Income Tax Act where the taxpayer files a return no more than two years after the date of theassessment.

FIEs and Non Resident Trusts: New measures regarding foreign investment entities, proposed to apply for taxation years that end after March 4, 2010 and others on the attribution of trust income from non-resident trusts to resident contributors are proposed to apply to taxation years that end after March 4, 2010, after a public consultation process.

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