February 23, 2005 FEDERAL BUDGET COMMENTARY

 

INTRODUCTION

 

Finance Minister Ralph Goodale’s second Budget, presented to Parliament on Wednesday, February 23, was the first to be tabled by a minority government in 25 years. As such it appeared to reflect the government’s aim of pleasing almost everyone while offending as few as possible by combining increased program spending with tax cuts while forecasting balanced budgets over the next five years. In fact, the Budget was unique in that it contemplates a five-year framework rather than the traditional two years.

 

Among other significant proposals, Guaranteed Income Supplement benefits for low-income seniors will be increased by $2.7 billion over five years through increased monthly benefits of $36 a month for singles and $58 a month for couples by January 1, 2007. The government will also implement an earlier pledge to share $5 billion in gasoline tax revenues with cities and communities.

 

Tax changes proposed in the Budget are discussed in the following sections.

 

PERSONAL TAX CHANGES

 

Non-refundable Tax Credits

 

The Budget proposes to increase certain non-refundable tax credits above the annual indexed amounts.

 

The indexed basic personal amount, to which all taxpayers are entitled, is $8,148 for 2005. The Budget proposes that the indexed amount be supplemented by $100 for 2006, $100 for 2007, $400 for 2008 and, for 2009, the greater of $600 and the amount needed to bring this amount to $10,000. Thus, for 2009, the basic personal amount will be a minimum of $10,000.

 

Retirement Savings

 

Limits

 

The Budget proposes that the maximum annual contribution amounts for money purchase registered pension plans and registered retirement savings plans be as follows:

 

           RRSP        RPP

              $              $

 

2005   16,500      18,000

2006   18,000      19,000

2007   19,000      20,000

2008   20,000      21,000

2009   21,000      22,000

2010   22,000      Indexed

2011   Indexed    Indexed

 

Contribution limits are still based on 18% of earned income.

 

 

Plan Investments

 

Currently, the foreign content of deferred income plans, such as registered retirement savings plans, is restricted to a maximum of 30% of the cost of the plan’s assets.  The Budget proposes to repeal the foreign content restriction, effective January 1, 2005.

 

Disability Tax Credit

 

The Budget proposes several changes to the eligibility criteria for the disability tax credit, including:

 

-           Clarification of the legislation with respect to conceptualization of impairments.

 

-           Alignment of legislative criteria for mental impairments with administrative practice.

 

-           Extension of eligibility to individuals with multiple restrictions that, in the aggregate, equate to a marked restriction in a single basic activity of daily living.

 

-           Expansion of the types of health practitioners eligible to certify taxpayers for credit eligibility.

 

These changes are effective January 1, 2005.

 

Disability Supports Deduction

 

The Disability Supports Deduction was introduced in the 2004 Budget. It provides for the deduction of certain supports incurred for purposes of employment or education. The 2005 Budget proposes to expand the list of expenses qualifying for this deduction. Eligible expenses will now include deaf-blind intervening services, job coaching services, reading services for the blind or severely learning disabled, Bliss symbol boards for speech impaired individuals, Braille note-taker devices and page turning devices. These changes are effective January 1, 2005.

 

Refundable Medical Expense Supplement

 

The Budget proposes to increase the maximum refundable medical expense supplement to $750 from the current $571. This measure is effective January 1, 2005.

 

Canada Child Tax Benefit

 

The maximum Child Disability Benefit Supplement to the Canada Child Tax Benefit is increased to $2,000 annually, effective for benefits paid after June, 2005.

 

Medical Expense Credit

 

The list of expenses qualifying for the medical expense credit has been expanded to include: phototherapy equipment for skin disorders, oxygen concentrators, deaf-blind intervening services, reading services for the blind and marijuana under certain restricted circumstances. These changes are effective January 1, 2005.

 

In addition, the Budget proposes to tighten the rules for medical expense eligibility for home renovation expenses in order to limit the credit to expenses that do not increase the value of the home and would not be incurred by unimpaired individuals. These changes are effective for expenses incurred after February 22, 2005.

 

Currently, the maximum amount a caregiver may claim in respect of medical expenses for a dependent relative is $5,000. The Budget proposes to double this limit to $10,000, effective January 1, 2005.

 

Adoption Expense Tax Credit

 

The Budget introduced a non-refundable adoption expense tax credit effective January 1, 2005. The credit will be 16% of eligible expenses to a maximum of $10,000 of expenses. Eligible expenses include: adoption agency fees, court and legal costs, travel expenses and the like. The maximum of $10,000 will be indexed after 2005.

 

CORPORATE TAX CHANGES

 

Corporate Surtax Elimination and Corporate Tax Rate Reduction

 

The Budget proposes to eliminate the corporate surtax in 2008 and reduce the general corporate income tax rate starting in 2008 in accordance with the following chart.

 

                                                            2005/7          2008       2009       2010

 

General income tax rate (%)                  21.0               20.5         20.0         19.0

 

Surtax rate (%)                                     1.12               —           —           —

 

The Federal small business rate of 12% is unchanged.

 

Capital Cost Allowance Rate Modifications

 

The Budget proposes to adjust CCA rates for the following types of assets:

 

                                                                       

                                                                        Current                       Proposed
                                                                        CCA Rate                   CCA Rate

 

Electricity generating

  combustion turbines                                         8%                               15%

Electricity transmission and

  distribution assets                                            4%                               8%

Oil and gas pipelines                                          4%                               8%

Oil and gas pipelines

  compression equipment                                    8% or 20%                   15%

Certain energy generation

  equipment in CCA class 43.1                           30%                             50%

Telecommunications
  infrastructure cables                                        5%                               12%

 

These changes are generally effective for assets acquired on or after February 23, 2005 that have not been used or acquired previously. Changes are also being proposed to the separate CCA class election with respect to some of the above assets.

 

The specified energy property rules limit, to the amount of income from such properties, the CCA deductions that may be taken by passive investors in respect of certain property that is subject to incentive CCA rates. These rules will be extended to some of the above assets.

 

OTHER MEASURES

 

Air Travellers Security Charge

 

This Budget proposes the third consecutive reduction to the charge since it was introduced in 2002:

 

-           For air travel within Canada, the charge will be reduced from $6 to $5 for one-way travel and from $12 to $10 for round-trip travel.

 

These changes are effective for tickets purchased on or after March 1, 2005.

 

Excise Tax on Jewellery

 

The Excise Tax on jewellery, currently 10%, will be phased out through a series of rate reductions as follows:

 

-           Effective February 24, 2005, the rate will be 8% and the rate will reduce by 2% per year each year subsequent until 2009.

 

GST/HST Web Registry

 

The Budget proposes the establishment of a GST/HST Web Registry in order to facilitate identification of GST/HST registrants. This Web site will allow for confirmation of the registrants’ business numbers.

 

GST/HST Directors’ Liability

 

In certain circumstances, directors of a corporation are jointly and severally liable, together with the corporation, to pay any unremitted GST/HST along with the associated penalties and interest. The Budget proposes to extend such liability to net tax refunds, along with the associated penalties and interest, to which the corporation is not entitled. This measure is effective upon Royal Assent.

 

GST/HST Health Care Rebates

 

Eligible charities and non-profit organizations that provide health care services similar to hospitals will qualify for the 83% rebate of GST and the federal portion of HST paid on eligible purchases. This change is effective January 1, 2005.