Federal Budget 2008 Tax Measure Highlights
PERSONAL INCOME TAX MEASURES
- In 2009, the Tax-Free Savings Account (TFSA) will be introduced. It will allow taxpayers to accumulate funds in order to satisfy their savings needs. Here is a summary of the key features of the TFSA:
- Contributions to a TFSA, which will be limited to $5,000 annually, will not be tax deductible.
- Income, capital gains and losses as well as all amounts withdrawn from a TFSA will not be taxable.
- There will be no limit on the number of years that unused contribution room can be carried forward.
- Amounts withdrawn from an individual’s TFSA will be added to the individual’s contribution room for the following year.
- Excess contributions will be subject to a tax of 1 per cent per month.
- Qualified investments will include investment funds, listed shares, bonds as well as shares of small business corporations with which the account holder deals at arm’s length or in which that individual owns an interest of less than 10 per cent.
- Individuals will be able to use their TFSA assets for collateral for a loan, which they cannot do with investments held in a RRSP.
- Interest on money borrowed to invest in a TFSA will not be deductible.
- Attribution rules will not be applicable to income generated by a TFSA account.
- On the breakdown of a marriage or a common-law partnership, amounts may be transferred directly from the TFSA of one taxpayer to the TFSA of the other, with no tax consequences.
- An individual’s TFSA will lose its tax-exempt status upon the death of the individual, except when the spouse or common-law partner is named as the successor account holder.
- Some changes will be made to Registered Education Savings Plans (RESP) in order to extend certain limits. For example:
- The number of contribution years after the plan is entered into will be extended from 21 to 31 years.
- The deadline for plan termination will be the year that includes the 35th anniversary of the plan rather than the year that includes the 25th anniversary of the plan.
- The contribution age limit for a family plan will be increased so that contributions may be made for a beneficiary who is 30 years of age and under, rather than 20 years old.
- Different limits are applicable when the RESP beneficiary is entitled to the disability tax credit.
- Starting in 2008, the Northern Residents Deduction basic amount will be increased from $7.50 to $8.25 per day. If no other member of the family claims the basic amount, the current amount of $15 will increase to $16.50 per day.
- Minor changes will be made to the Medical Expense Tax Credit in order to add to the list of eligible expenses the cost to purchase, operate, and maintain certain devices prescribed by a medical practitioner.
- Changes will be made to the rules concerning the collapse of registered disability savings plans to provide for the mandatory collapse of a plan only if the beneficiary’s condition has factually improved to the extent that the beneficiary no longer qualifies for the plan.
- Since the Mineral Exploration Tax Credit is scheduled to expire at the end of March 2008, the budget proposes to extend eligibility for the credit to flow-through share agreements entered into on or before March 31, 2009.
- The existing capital gains tax exemption for donations of publicly traded securities will be extended to capital gains realized on the exchange, on or after February 26, 2008, of unlisted securities that are shares or partnership interests for publicly traded securities.
- To provide for a better application of the integration principle, the dividend tax credit and the dividend gross-up will be gradually reduced from 2010 to 2012. As such, the expected 19 per cent tax credit will be reduced to 18 per cent in 2010, 16.5 per cent in 2011 and 15 per cent in 2012. The expected dividend gross-up will go down from its expected rate of 45 per cent to 44 per cent in 2010, 41 per cent in 2011 and 38 per cent in 2012.
BUSINESS INCOME TAX MEASURES
Scientific Research and Experimental Development (SR&ED)
- The yearly maximum qualified expenditures on which the enhanced 35 per cent rate can be earned will increase from $2 million to $3 million.
- The upper limit of the phase-out range for prior-year taxable income will increase from $600,000 to $700,000.
- The upper limit of the phase-out range for prior-year taxable capital will increase from $15 million to $50 million.
- After February 25, 2008, the SR&ED ITC will be available to a taxpayer for salary or wages incurred in respect of SR&ED carried on outside Canada.
Capital cost allowance (CCA)
- The application period of the accelerated 50 per cent straight-line CCA treatment which applies to the acquisition of machinery and equipment used in manufacturing and processing will be extended three years.
- The 50 per cent amortization rate for assets included in class 43.2 will be extended to ground source heat pump systems and biogas production equipment acquired on or after February 25, 2008.
- In order to better reflect the useful life of assets, the CCA rate for railway locomotives will increase from 15 per cent to 30 per cent and the CCA rate for pumping and compression equipment on a CO2 pipeline, and equipment ancillary to it, will increase from 4 per cent to 15 per cent.
- The current 10 per cent fixed penalty for late remittances of source deductions will be replaced by a graduated penalty ranging from 3 per cent to 10 per cent of the amount required to be remitted, depending on the lateness of a remittance. This new mechanism will apply to remittances due on or after February 26, 2008.
- Modifications will be made to streamline the rules that apply to non-residents’ dispositions of taxable Canadian property, in order to lighten the responsibilities related to withholding tax requirements.
SALES AND EXCISE TAX MEASURES
- The application of the GST/HST to a range of health care services, prescription drugs and medical devices will be improved to allow for more exempted and tax-free products and services.
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