Highlights

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Federal Minister of Finance Jim Flaherty presented the minority government’s third budget on February 26, 2008. The budget does not change personal or corporate tax rates. The highlights of the budget are outlined below.

In a few hours, PricewaterhouseCoopers will issue a more detailed Tax Memo that discusses the federal budget. Please contact your PricewaterhouseCoopers tax adviser for more information on how the budget changes affect you or your business.

Business Tax Changes

Scientific research and experimental development

For taxation years ending after February 25, 2008, the annual expenditure limit up to which Canadian-controlled private corporations can claim the 35% investment tax credit (ITC) will increase to $3 million (from $2 million) and this limit will be eliminated when:

• taxable income is $700,000 (up from $600,000); or
• taxable capital is $50 million (up from $15 million).

Furthermore, certain salary and wages incurred in respect of scientific research and experimental development (SR&ED) carried on outside Canada will qualify for the SR&ED ITC.

Capital cost allowance

The 50% straight-line accelerated capital cost allowance (CCA) rate will be extended to manufacturing and processing (M&P) equipment acquired before 2010. Eligible M&P assets acquired in 2010 and 2011 will qualify for accelerated CCA on a declining balance basis. In addition, eligibility for Class 43.2, which provides accelerated CCA (50% declining balance basis) for specified clean energy generation equipment acquired before 2020, is expanded for certain assets acquired after February 25, 2008.

The CCA rate for CO2 pipelines is increased from 4% to 8% for property acquired on or after February 26, 2008, while the CCA rate for pumping and compression equipment and equipment ancillary to it, on a CO2 pipeline, is set at 15%.

Dispositions of taxable Canadian property

Changes that streamline rules for dispositions of taxable Canadian property by non-residents after 2008:

• exempt from withholdings certain dispositions of treaty-protected property;
• expand the circumstances in which purchasers are exempt from withholding requirements, based on a “reasonable inquiry” that the vendor is resident in a treaty country and the gain is treaty-exempt; and
• eliminate the need for non-residents to file a Canadian income tax return in certain cases when no tax is payable.

Tax on specified investment flow-throughs (SIFTs): provincial components

Commencing 2009 taxation years of specified investment flow-through (SIFT) trusts and partnerships, the provincial component (other than in Quebec) of the SIFT tax will be based on the general provincial corporate income tax rate in each province in which the SIFT has a permanent establishment, instead of a rate of 13%.

Business Number initiative

As part of the government’s initiative to reduce the paper burden on small business, a number of measures expand the scope and function of the Business Number (BN).

Remittance of source deductions

A graduated penalty regime will apply to remittances due after February 25, 2008.

Personal Tax Changes

Tax-Free Savings Account

Starting in 2009, individuals age 18 or older will be eligible to contribute up to $5,000 annually (indexed to inflation) to a Tax-Free Savings Account (TFSA). Contributions will not be deductible. Withdrawals, as well as capital gains and other investment income earned in a TFSA, will not be taxed.

Donations of exchangeable securities

For donations made after February 25, 2008, the budget extends the capital gains tax exemption for donations of publicly traded securities to capital gains realized on the exchange of certain unlisted securities that are shares or partnership interests for publicly traded securities that are donated to a registered charity within 30 days of the exchange.

Excess business holdings for private foundations

Building upon budget measures released in 2007, the budget proposes to exempt certain holdings of shares that are not listed on a designated stock exchange and were held on March 18, 2007, from the excess corporate holdings regime that applies to private foundations. It also introduces technical amendments that refine the regime and extends an anti-avoidance rule in respect of the holding of an interest in a corporation via a trust.

Dividend tax credit

To reflect previously announced reductions to the general (and manufacturing and processing) income tax rate to 15% by 2012, there will be corresponding decreases in the gross-up for eligible dividends and the enhanced dividend tax credit in the years 2010, 2011 and 2012.

Registered Education Savings Plans

Commencing 2008, enhancements to Registered Education Savings Plans (RESPs) extend the number of contribution years after the RESP is created, the deadline for plan termination and the contribution age limit for family plans.

Mineral exploration tax credit

Eligibility for the 15% mineral exploration tax credit is extended to flow-through share agreements entered into before April 1, 2009.

Commodity Tax Changes

Health measures

A number of measures are intended to improve the application of the GST/HST to health care services, including prescription drugs, medical devices and the treatment of long-term residential care facilities.