2011 Federal Budget

Highlights

Download the budget highlights as a PDF file.

Introduction
 

Federal Minister of Finance Jim Flaherty presented the minority government’s budget on March 22, 2011. The budget does not change corporate or personal tax rates.

The highlights of the federal budget are attached above. In a few hours, we will issue a more detailed Tax Memo that discusses the budget.

Business Tax Changes

Elimination of partnership deferral

The budget introduces measures that will limit the ability of a corporation to defer the taxation of income earned through a partnership. For taxation years of a corporate partner that end after March 22, 2011, the potential tax deferral will be limited by requiring the corporation to accrue partnership income up to the end of the corporation’s taxation year. This accrual will apply where a partnership’s fiscal year differs from the taxation year of a corporate partner and the partner (together with affiliates) exceeds a 10% income or asset entitlement threshold. The rules apply only to income; partnership losses will not be accrued.

Detailed rules apply to the computation of the partnership income accrual (referred to as the “Stub Period Accrual”). Generally, the Stub Period Accrual will be a pro-rated amount of the partner’s income from the partnership for the fiscal period ending in the taxation year. A lower amount can be accrued by the partner, but if the actual pro-rated income exceeds the accrued income, additional “penalty” income can arise. Transitional rules will apply.

Where certain conditions are met, an election may be available to change the fiscal period of a partnership with corporate partners. For multi-tier partnership structures, all partnerships in the structure must adopt a common fiscal period, which will be December 31 unless otherwise elected by all the partnerships.

Stop loss rule on share redemption

The Income Tax Act contains rules that, subject to certain exceptions, reduce the amount of loss realized by a corporation from the disposition of a share by the amount of tax-free dividends received on the share. These rules are extended to apply to any deemed dividend arising on the redemption of shares held by a corporation, unless both the shareholder and the corporation are private companies.

Capital cost allowance

The 50% straight-line accelerated capital cost allowance (CCA) rate for manufacturing and processing equipment acquired primarily for use in Canada will be extended to apply for an additional two years, to eligible machinery and equipment acquired before 2014.

The class of property eligible for a 50% declining balance accelerated CCA rate (specified clean energy generation and conservation equipment acquired before 2020) is expanded to include equipment acquired after March 21, 2011, that generates electricity using waste heat.

Intangible capital expenditures in oil sands projects

Two measures that will bring the taxation of oil sands properties more in line with that of the conventional oil and gas sector:

• the deduction rate per year for the cost of acquiring oil sands leases and other oil sands resource or oil shale property is reduced from 30% to 10% on a declining balance basis; and
• the deduction rate per year for pre-production development expenses is reduced from 100% to 30% on a declining balance basis.

These changes apply generally to acquisitions after March 21, 2011. However, transitional relief is available for pre-production development expenses.

Qualifying environmental trusts (QETs)

Changes to qualifying environmental trusts (QETs) will:

• expand the range of trusts eligible for QET treatment to include trusts established to fund future reclamation cost associated with pipeline abandonment;
• expand the list of eligible investments for a QET; and
• reduce the rate of tax payable by a QET to equal the corporate income tax rate.

These changes generally apply to 2012 and subsequent taxation years for trusts created after 2011.

Personal Tax Changes

Children’s Arts Tax Credit

Commencing in 2011, parents can claim a non-refundable tax credit on up to $500 of fees for enroling in an eligible program of artistic, cultural, recreational or developmental activities, each child who at the beginning of the year is under 16. An additional credit is available for children under 18 at the beginning of the year who qualify for the Disability Tax Credit. The credit can be claimed by either parent or shared between them. The parameters of the credit will be based on those for the Children’s Fitness Tax Credit.

Registered Education Savings Plans (RESP)

Transfers between individual RESPs for siblings will be allowed, without tax penalties or loss of Canada Education Savings Grants, provided the transferee plan was opened when the beneficiary was under 21 years of age. This change is intended to permit the same flexibility regarding the allocation of RESP assets among siblings as exists for RESP family plans.

Registered Retirement Savings Plans (RRSP)

Anti-avoidance rules applicable to RRSPs and Registered Retirement Income Funds (RRIFs) will be expanded by introducing rules similar to the “advantage,” “prohibited investment” and “non-qualified investment” rules applicable to Tax-Free Savings Accounts (TFSAs).

These rules, with certain modifications, will be adopted for RRSPs and RRIFs, for transactions and investments after March 22, 2011, subject to certain transitional rules.

Individual pension plans

Two changes affect defined benefit Registered Pension Plans (RPPs) established for one main income earner, referred to as individual pension plans (IPPs). The first is to require annual minimum withdrawals in amounts
similar to those required for RRIFs, once a plan member turns 72. This change, effective in 2012, is intended to address concerns that members of IPPs may defer greater amounts of income than members of other RPPs or RRSPs.

The second change is to require that the cost of past service under an IPP be funded out of assets already in the plan member’s RRSPs or reduce the member’s accumulated RRSP room before new contributions in respect of past service are permitted. This change is intended to limit unintended tax deferral opportunities where an employee switches from an RRSP to an IPP. This change will apply to IPP contributions made after March 22, 2011, unless the amount has been previously credited to the member under the IPP.

Tax on split income—capital gains

The existing “tax on split income” rules (the “kiddie tax”) is extended to apply to capital gains realized by or included in the income of a minor, where the gain is attributable to a non-arm’s length disposition of shares and any dividends on the shares would have been subject to the kiddie tax. These gains will be treated as dividends subject to the kiddie tax and will be ineligible for the lifetime capital gains exemption. This measure will apply to capital gains realized after March 21, 2011.

Mineral exploration tax credit

The mineral exploration tax credit for flow-through shares is extended by one year to flow-through share agreements entered into before April 1, 2012.

Other Tax Changes

Charities

To ensure that organizations issuing official donation receipts operate in compliance with the law, and to limit unintended or excessive benefits, the regulatory regime for qualified donees will be enhanced, and the Canada Revenue Agency will be given the discretion to consider the criminal history or other past misconduct of individuals with significant influence over an organization when deciding whether to refuse or to revoke the registration of the organization. Other changes will:

• allow the Canada Revenue Agency to issue reassessments to disallow a taxpayer’s claim for a charitable donations tax credit or deduction, if a donated property is returned to a donor after March 21, 2011; 
• defer tax recognition of a charitable donations tax credit or deduction for a donation of a non-qualifying security to a qualified donee;
• clarify that a charitable donations tax credit or deduction is not available to a taxpayer that grants an option, after March 21, 2011, to a qualified donee to acquire a property of the taxpayer until the time that the donee acquires the property from the taxpayer; and
• limit the exemption from capital gains tax on donations of publicly-listed flow-through shares, acquired by a taxpayer pursuant to a flow-through share agreement issued after March 21, 2011, to the excess of cumulative capital gains in respect of dispositions of these shares over the original cost of the shares.