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Archived - Annex 8
Tax Measures:  Supplementary Information

Archived information

Archived information is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.

Overview

Budget 2005 introduces measures that reduce taxes and improve the tax structure. The budget reduces the tax burden of individuals, with most of the benefits going to low- and modest-income Canadians; supports investment and strengthens Canada’s retirement income system by encouraging savings; makes the tax system fairer, notably by improving tax assistance for persons with disabilities; and promotes jobs and sustainable economic growth by making Canada’s tax system more efficient and competitive. Legislation to implement the budget measures will be introduced at the earliest opportunity.

This annex provides detailed information on each of the tax measures proposed in the budget.

Table A8.1 lists these measures and provides estimates of their budgetary impact.

The annex also provides Notices of Ways and Means Motions to amend the Income Tax Act and the Excise Tax Act.

Table A8.1
Cost of Proposed Measures1


 

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010


 

(millions of dollars)

Income tax measures

           

Basic personal amount

70

360

890

2,200

3,550

RPP and RRSP limits

15

70

85

115

145

180

Public safety occupations

10

10

10

10

Foreign property rule

Qualified RRSP investments

Response to the recommendations of the Technical Advisory Committee on Tax Measures for Persons with Disabilities2

25

107

107

112

112

122

Medical expense tax credit

5

5

5

5

5

Tax relief for caregivers

5

15

15

20

20

20

Adoption expense tax credit

5

5

5

5

5

Emergency medical services vehicles

Agricultural cooperatives

10

30

30

30

30

Corporate surtax

5

1,325

1,675

Corporate tax rate

440

920

Capital cost allowance

15

30

40

70

90

Efficient and renewable energy generation equipment

20

45

65

80

85

SR&ED investment tax credit

Sales and excise tax measures

           

Excise tax on jewellery

20

40

60

80

100

GST/HST health care rebate3

10

50

50

55

60

65

Tax administration

           

International tax enforcement4

30

30

30

30

30

Tobacco taxation compliance and enforcement

2

2

2

1

1

Directors’ liability for GST/HST refunds

GST/HST Web registry

Total

55

419

814

1,444

4,613

6,888


1 A "–" indicates a nil or small amount.
2 Includes amounts already set aside in the fiscal framework.
3 Amounts already set aside in the fiscal framework.
4 Additional revenues generated through increased audit and enforcement are expected to offset these amounts.

Income Tax Measures

Basic Personal Amount

The income tax system currently includes personal credits to allow individuals to receive a basic amount of income on a tax-free basis. The basic personal amount eliminates income tax on taxable income of up to $8,012 for 2004.

The budget proposes that, by 2009, the amount of income that any Canadian will be able to receive tax free will grow to at least $10,000, as a result of progressive increases in the basic personal amount. Specifically, the basic personal amount will be increased:

The income tax system also includes personal credits in respect of a spouse or common-law partner or a wholly dependent relative. These credits eliminate tax on up to $6,803 of additional taxable income for 2004. The amounts on which these credits are based will also be increased:

These increases to the amounts will be in addition to increases that take effect due to indexation of the tax system.

The amount upon which the spouse or common-law partner amount (including the equivalent amount that a single individual can claim for a wholly dependent relative) is based, is reduced on a dollar-for-dollar basis by the dependant’s net income over a threshold. This threshold is intended to ensure that small amounts of a dependant’s income will not affect the calculation of these credits. This threshold will be adjusted to reflect the increases described above.

These changes will provide about $7.1 billion in tax relief over the next five years, with most of the benefit going to those with low and modest incomes. In particular, the measure will remove 860,000 low-income taxpayers from the tax rolls—including some 240,000 seniors.

Retirement Savings

The budget proposes measures relating to registered pension plans (RPPs), registered retirement savings plans (RRSPs) and deferred profit sharing plans (DPSPs). The proposed measures will support savings for retirement and improve the fairness of the pension tax rules.

RPP and RRSP Limits

Setting appropriate limits on tax-deferred retirement savings in RPPs, RRSPs and DPSPs is an important means of helping Canadians to better meet their retirement savings needs, allowing employers in Canada to provide competitive compensation packages to attract and retain skilled workers, and encouraging savings to support investment, productivity and economic growth. Accordingly, the budget proposes the following increases in these limits:

Table A8.2
Existing and Proposed Registered Pension Plan/Registered Retirement Savings Plan Limits


 

2005

2006

2007

2008

2009

2010

2011


 

(dollars)

Money purchase RPPs: annual contribution limit

             

Existing

18,000

indexed

         

Proposed

18,000

19,000

20,000

21,000

22,000

indexed

 

Defined benefit RPPs: maximum pension benefit (per year of service)

             

Existing

2,000

indexed

         

Proposed

2,000

2,111

2,222

2,333

2,444

indexed

 

RRSPs: annual contribution limit

             

Existing

16,500

18,000

indexed

       

Proposed

16,500

18,000

19,000

20,000

21,000

22,000

indexed


Note: The RPP limits are based on current-year earnings; the RRSP limits are based on prior-year earnings. Accordingly, the RRSP limits are lagged one year behind the corresponding RPP limits.

Generally, an RPP can reflect increases in the defined benefit limit without reducing the plan member’s RRSP contribution room, provided that the increase does not exceed the increase in the average wage for the relevant years. The increases proposed in this budget, however, are intended to increase the defined benefit limit beyond average wage growth for years 2006–2009. Amendments to the Income Tax Regulations will be made public before 2006 in order to provide guidance with respect to those situations where pension benefits can be improved to reflect increases in the defined benefit limit without reducing the plan member’s RRSP contribution room.

Public Safety Occupations

Special rules governing pension benefits apply to those in public safety occupations. Public safety occupations are defined in the Income Tax Regulations as fire fighters, police officers, corrections officers, commercial airline pilots, and air traffic controllers. These rules allow those in public safety occupations to retire with an unreduced pension five years earlier than other RPP members, recognizing that earlier retirement in these occupations is the norm and is aimed at ensuring public safety. The budget proposes two changes in relation to public safety occupations.

Paramedics

Like fire fighters and police officers, paramedics require particular physical and perceptual capabilities to perform their work and effectively protect the safety of the public. The budget therefore proposes to add paramedics to the list of public safety occupations—effective January 1, 2005—to provide them with the same opportunity to retire earlier with an unreduced pension as is available to those already included in the definition of public safety occupations.

Maximum Pension Accrual Rate

The Income Tax Regulations provide that, under a defined benefit RPP, the maximum annual pension accrual rate applicable to any particular range of earnings cannot exceed 2 per cent. This maximum was increased in the 2003 budget to 2.33 per cent for fire fighters participating in RPPs that provide benefits that are integrated with the Canada or Quebec Pension Plan. This allows greater flexibility for fire fighters’ pension benefits to be enhanced within an integrated plan structure, but subject to the existing overall limits on tax-deferred pension benefits. This means that the maximum annual accrual rate applied to any income range for fire fighters is 2.33 per cent. However, the maximum overall pension limit—2 per cent of best average earnings multiplied by years of pensionable service, which applies to the benefits that an RPP may provide (not taking into account CPP or QPP)—continues to apply.

This budget proposes to extend this measure to the other public safety occupations, thus ensuring that all public safety occupations are treated the same under the pension tax rules. The measure will apply beginning January 1, 2005.

Both the extension of the maximum pension accrual rate and the addition of paramedics to the list of public safety occupations do not in themselves require employers to amend their pension plans. Any change in pension plan provisions resulting from these measures would be a matter for negotiation between employers and employees.

Foreign Property Rule

The Foreign Property Rule (FPR), which was introduced in 1971, limits the amount of foreign property that pension funds and other tax-deferred retirement plans can hold. Foreign property generally consists of shares, units and debt issued by non-resident entities, investments in trusts that hold excess foreign property and investments in certain partnerships. The FPR, which was originally set at 10 per cent of a plan’s assets, was raised to 20 per cent in the 1990s and then to its current level of 30 per cent in 2001. Plan assets in excess of those limits are subject to a one-per-cent per-month penalty tax.

The FPR was introduced to ensure that a substantial proportion of tax-deferred retirement savings flowed to Canadian companies and to support the development of Canada’s capital markets. As these markets have grown and matured since the early 1990s and become more integrated with global capital markets, access to capital for Canadian companies has improved substantially. At the same time, there has been marked improvement in Canada’s fiscal situation, external debt, and balance of payments position over the past decade.

The budget proposes to repeal the FPR effective as of 2005, thus allowing broader international diversification opportunities for retirement investments.

Qualified RRSP Investments

The rules governing Registered Retirement Savings Plans and certain other tax-deferred income plans provide that these plans must invest only in "qualified investments" prescribed by the Income Tax Regulations. The budget proposes to add to the list of qualified investments, investment-grade gold and silver bullion coins and bars, and certificates on such investments. Investment-grade gold must have a purity of at least 99.5 per cent, while investment-grade silver must have a purity of at least 99.9 per cent.

Legal tender bullion coins will qualify if they are produced by the Royal Canadian Mint and all or substantially all of their fair market value is attributable to their precious metal content. Bullion bars will qualify if they are produced by a metal refinery accredited by the London Bullion Market Association, as evidenced by a hallmark identifying the refiner, purity and weight. Certificates will qualify if they are issued by a federally or provincially regulated financial institution and represent a claim on precious metal holdings of the issuing institution. For all such investments—that is, coins, bars and certificates—the investment must be acquired either from the producer of the investment or from a regulated financial institution.

These changes will be effective for investments made on or after February 23, 2005.

Response to the Recommendations of the Technical Advisory Committee on Tax Measures for Persons with Disabilities

The Technical Advisory Committee on Tax Measures for Persons with Disabilities was established in April 2003, with an 18-month mandate to provide advice to the Ministers of Finance and National Revenue on how to address issues related to tax measures for persons with disabilities. It was comprised of members of organizations representing persons with disabilities, medical practitioners, and private sector tax experts. The 2003 and 2004 budgets set aside funding of $85 million per year to improve tax fairness for persons with disabilities based on the recommendations of the Committee.

The 2004 budget acted on an early proposal of the Committee by proposing the creation of the disability supports deduction, at a cost of $15 million per year.

In December 2004, the Committee released its final report, Disability Tax Fairness, in which it made 25 policy and administrative recommendations focusing on three key areas:

Based on the advice of the Committee, the budget proposes a number of income tax changes that will benefit persons with disabilities and those who care for them.

Eligibility for the Disability Tax Credit

The Technical Advisory Committee made several recommendations regarding the eligibility criteria for the disability tax credit (DTC). The budget responds by proposing to:

The Disability Tax Credit (DTC)

Background

Individuals with severe and prolonged mental or physical impairments incur medical or disability-related expenses that are not incurred by others and which reduce their ability to pay tax. The tax system contains a number of measures, such as the disability supports deduction, the medical expense tax credit (METC) and the DTC, to recognize this reduced ability to pay.

The disability supports deduction provides tax relief for the cost of disability supports incurred for the purposes of employment or education (such as sign-language interpretation services and talking textbooks). The METC also provides tax relief for these and other medical or disability-related expenses when they are incurred for reasons not related to employment and education. The METC provides tax relief to individuals who incur above-average medical or disability-related expenses on items such as attendant care, prescription drugs, wheelchairs and hearing aids. For instance, diabetics can claim the cost of insulin, insulin pumps, and devices designed to measure their blood sugar levels, as well as the cost of any needles and syringes used for the purpose of giving an injection.

The Role of the DTC

The DTC, which is available to those with severe and prolonged impairments, complements these tax measures by providing tax relief in recognition of non-discretionary disability-related expenses that are difficult to quantify. For example, individuals with severe mobility impairments may have special transportation needs that result in higher costs. The DTC does not require claimants to itemize the disability-related expenses they incur. Instead, eligible claimants are provided with the equivalent of a general expense claim of $6,596. This reduces their federal tax by up to $1,055 (16 per cent of $6,596) in 2005. Additionally, the DTC supplement for children provides up to $616 in further tax relief for families caring for a child with a severe disability. This credit can be transferred to a supporting spouse or other relative and is fully indexed to inflation. Provinces and territories provide similar credits.

Eligibility for the DTC

The DTC provides tax relief to individuals who, due to the effects of a severe and prolonged mental or physical impairment, are markedly restricted in their ability to perform a basic activity of daily living, or would be markedly restricted were it not for extensive therapy (i.e. averaging at least 14 hours per week) to sustain a vital function. A qualified health practitioner must certify this eligibility. Individuals are markedly restricted if, all or substantially all of the time, even with therapy or the use of appropriate devices and medication, they are blind or unable to perform a basic activity of daily living or require an inordinate amount of time to perform the activity. The basic activities of daily living currently recognized in the Income Tax Act are: walking; feeding or dressing oneself; perceiving, thinking and remembering; speaking; hearing; and eliminating bodily waste.

Conceptualization of Impairment

Currently, the disability tax credit (DTC) eligibility criteria require that a person have a "severe and prolonged mental or physical impairment." In its report, the Technical Advisory Committee expressed concerns with this wording. Based on the Committee’s advice, the budget proposes that the Income Tax Act be amended to replace the present wording of "severe and prolonged mental or physical impairment" with the wording "severe and prolonged impairment in physical or mental functions." As indicated by the Committee, the intent of this measure is to clarify the existing legislation and not to expand eligibility for the DTC.

This measure will apply for the 2005 and subsequent taxation years.

Updating Criteria Regarding Impairments in Mental Functions

The Income Tax Act provides that individuals with severe impairments in mental functions are eligible for the disability tax credit (DTC) if they have a marked restriction in "perceiving, thinking and remembering," which is one of the basic activities of daily living. The disability community, particularly representatives of persons with mental impairments, has raised many concerns about the effectiveness of the term "perceiving, thinking and remembering" as a means of recognizing the impact of impairments in mental functions.

The Technical Advisory Committee noted that the language currently used by the Canada Revenue Agency on Form T2201, Disability Tax Credit Certificate, to explain the meaning of "perceiving, thinking and remembering" provides a clearer description of the effects of impairments in mental functions. Accordingly, the budget proposes to replace the expression "perceiving, thinking and remembering" in the Income Tax Act with the expression "mental functions necessary for everyday life," which is currently used on Form T2201.

In addition, for greater certainty, mental functions necessary for everyday life will be defined as including:

As indicated on the current T2201 form, memory includes the ability to remember the following: simple instructions; basic personal information such as name and address; or material of importance or interest. Problem-solving, goal-setting and judgement refer to the ability to solve problems, set and keep goals, and make appropriate decisions and judgements. Adaptive functioning refers to abilities related to self-care, health and safety, social skills and common, simple transactions. As indicated by the Committee, the intent of this measure is to clarify the existing legislation and not to expand eligibility for the DTC.

This measure will apply for the 2005 and subsequent taxation years.

Cumulative Effects of Multiple Restrictions

Currently, the disability tax credit (DTC) eligibility criteria require that an individual have a marked restriction in at least one basic activity of daily living. In practice, the individual must be unable—or take an inordinate amount of time—to perform the activity, all or substantially all of the time. For example, the individual must be unable to walk, be deaf, or require tube feeding for nutritional sustenance.

Based on the advice of the Technical Advisory Committee, the budget proposes to extend eligibility for the DTC to include individuals with severe and prolonged impairments in mental or physical functions who have significant restrictions in more than one basic activity of daily living as specified in the Income Tax Act if the cumulative effect of their restrictions is equivalent to having a single marked restriction in one basic activity of daily living.

An example of an individual who could become eligible for the DTC under this change is someone with multiple sclerosis who continuously experiences fatigue, depressed mood and balance problems, where each of these restrictions on its own does not markedly restrict a specific basic activity of daily living, but when taken together have an effect equivalent to that of a marked restriction in a single activity. As these individuals incur disability-related costs that are as significant as costs incurred by individuals who are currently eligible for the DTC, it is appropriate to expand eligibility for the credit.

As is currently the case with a marked restriction in a single basic activity of daily living, the multiple restrictions, taken together, must be present all or substantially all of the time. While not a basic activity of daily living, a visual impairment that cannot be mitigated by means of eyeglasses or other visual aids will be considered in conjunction with restrictions in the other basic activities of daily living when determining the cumulative effects of one or more impairments. Time spent on life-sustaining therapy that is less than 14 hours per week cannot be combined with restrictions in other activities. It is estimated that approximately 50,000 individuals will become eligible for the DTC as a result of this measure.

This measure will apply for the 2005 and subsequent taxation years.

Life-Sustaining Therapy

Currently, individuals who require extensive therapy to sustain a vital function qualify for the disability tax credit (DTC) if their therapy meets three conditions:

The purpose of these provisions is to allow individuals to be eligible for the DTC if they must have life-sustaining therapy that requires them to dedicate a significant amount of time away from their normal, everyday activities to receive the therapy. Two examples of individuals who may be eligible under these provisions are individuals who require kidney dialysis and children with cystic fibrosis who require chest physiotherapy on average at least 14 hours per week.

In its report, the Technical Advisory Committee raised concerns as to what activities constitute therapy under these provisions. In particular, the Committee was concerned that certain activities necessary to the administration of insulin were not considered to be therapy for some children with particularly severe cases of Type 1 diabetes. In these cases, the Committee believed that therapy included monitoring blood sugar levels and determining insulin dosages.

In response, the budget proposes amendments to the Income Tax Act to better define the activities that will be considered therapy and will be included as time spent receiving therapy. Specifically:

With these proposed changes, it is expected that children with very severe cases of Type 1 diabetes—who require many insulin injections (which requires knowledge of current blood sugar levels at the time of each injection), as well as several additional blood sugar tests to monitor their condition—will become eligible for the DTC.

The life-sustaining therapy provisions, in and of themselves, do not extend eligibility for the DTC to individuals who receive therapy in a manner that does not significantly affect their everyday activities (for example, by means of a portable or implanted device).

These measures will apply for the 2005 and subsequent taxation years.

List of Qualified Practitioners

Currently, a medical doctor or other health practitioner must certify eligibility for the DTC. While medical doctors can certify all types of impairments, other practitioners may certify impairments only in their respective fields, as summarized in the following box.

Certification of DTC Eligibility

Health practitioner

Type of impairment

Medical doctors

All impairments

Optometrists

Vision

Audiologists

Hearing

Occupational therapists

Walking, feeding or dressing

Psychologists

Perceiving, thinking and remembering

Speech-language pathologists

Speaking

Based on the advice of the Technical Advisory Committee, the budget proposes to allow physiotherapists to certify a marked restriction in walking for the purposes of determining eligibility for the DTC. Certification of eligibility for the DTC as a result of cumulative effects of multiple restrictions must be made by a medical doctor, unless the multiple restrictions pertain only to walking, feeding, or dressing, in which case certification may also be made by an occupational therapist.

These measures will apply to certifications made on or after February 23, 2005.

In addition, the Government will consult further to determine under what circumstances, if any, nurse practitioners should be allowed to certify eligibility for the DTC.

Reducing Barriers to Employment and Education
Expansion of the Disability Supports Deduction

Persons with disabilities may receive tax relief for the cost of disability supports (e.g. sign-language interpretation services, talking textbooks, etc.) incurred for the purposes of employment or education through the disability supports deduction. This deduction was introduced in the 2004 budget following an early recommendation by the Technical Advisory Committee.

The effects of this deduction are that no income tax is payable on income (including government assistance) used to pay for these expenses, and that this income is not used in determining the value of income-tested benefits.

The 2004 budget specified a list of expenses eligible for the disability supports deduction. The Committee noted in its report that the existing deduction could be improved by adding to the list of eligible expenses.

In response, this budget proposes to expand the list of expenses eligible for the disability supports deduction by adding amounts paid for:

These disability supports expenses (except for job coaching services) may be expenses incurred for purposes other than employment or education and, therefore will also be added to the list of expenses eligible for the medical expense tax credit.

These measures will apply for the 2005 and subsequent taxation years.

Increasing the Refundable Medical Expense Supplement

For Canadians with disabilities and others with above-average medical or disability-related expenses, the potential loss of benefits under provincial social assistance programs can be an important barrier to participation in the labour force.

The refundable medical expense supplement helps offset the loss of these benefits. It provides assistance for above-average medical and disability-related expenses to low-income working Canadians. The supplement is available to workers with earnings above a threshold that is indexed annually. For 2005, the threshold is $2,857. The supplement is equal to 25 per cent of an individual’s medical expense tax credit (METC) and disability supports deduction claims, up to a maximum of $571. This means that individuals are entitled to claim the refundable medical expense supplement in respect of medical or disability related expenses in addition to any claim they may be entitled to under the METC and/or the disability supports deduction in respect of those same expenses.

To target assistance to those with low incomes, the supplement is reduced by five percent of net family income above an income threshold that is equal to the sum of the basic personal amount, the spouse or common-law partner amount, and the disability tax credit amount. This threshold is indexed annually. The threshold for 2005 will be $21,663.

The Technical Advisory Committee recommended an increase in the maximum benefit provided by the supplement.

The budget proposes to increase the maximum amount to $750 for the 2005 taxation year—representing an increase of over 30 per cent. The maximum amount will continue to be indexed.

Assistance to Low-Income Canadians with High Medical or Disability-Related Expenses

Laura must incur medical expenses of $3,500 annually for prescription drugs. She recently began working at a job that pays $20,000 annually. Although these expenses were covered by the provincial government when she was in receipt of social assistance, Laura must now pay for them herself.

Under the METC, Laura may receive federal tax relief of $464 (i.e. 16 per cent of her medical expenses in excess of 3 per cent of her net income). In addition to this tax relief, Laura will receive further assistance from the refundable medical expense supplement.

Operation of the Supplement

Existing Rules

Under the current rules, Laura would receive the maximum amount of $571 from the refundable medical expense supplement.

Medical expenses

$3,500

Less: 3% of net income ($20,000 x 3%)

– 600


Net medical expenses

$2,900

Amount of refundable medical expense supplement ($2,900 x 25%, to a maximum of $571)

$571

Proposed Rules

Under the proposed rules, by increasing the maximum amount to $750, Laura would receive $725 from the refundable medical expense supplement, which is the full 25% of her expenses in excess of 3% of her net income.

Medical expenses

$3,500

Less: 3% of net income ($20,000 x 3%)

– 600


Net medical expenses

$2,900

Amount of refundable medical expense supplement ($2,900 x 25%, to a maximum of $750)

$725

This measure will apply for the 2005 and subsequent taxation years.

Changes to Registered Education Savings Plans

A registered education savings plan (RESP) is a tax-assisted savings vehicle designed to help families accumulate savings for the post-secondary education of their children.

Contributions to an RESP are not deductible for income tax purposes and are not taxed upon withdrawal. Investment income accruing in the plan is taxable only on withdrawal. For each beneficiary of an RESP, there is an annual contribution limit of $4,000 and a lifetime contribution limit of $42,000. Contributions to an RESP can only be made for 21 years following the year in which the plan is entered into. An RESP must be terminated by the end of the year that includes the 25th anniversary of the opening of the plan.

The Technical Advisory Committee noted that students with disabilities often have special needs that must be accommodated in order to pursue post-secondary education, in particular with regard to the time required to begin or complete a post-secondary education program. The Committee recommended that the time limits during which an RESP can remain in existence, and during which a subscriber can make contributions, be extended to take into account the needs of students with disabilities.

In response, the budget proposes that, if an RESP beneficiary qualifies for the disability tax credit in the 21st year following the year in which the plan was entered into:

While this change applies only to single beneficiary RESPs, if an individual who qualifies for the disability tax credit is a beneficiary under a family plan, that individual’s share of the family plan can be transferred into a single beneficiary RESP in order to ensure access to these extended limits. These extended limits will apply for the 2005 and subsequent taxation years.

In addition, the list of post-secondary educational institutions—in which enrolment generates entitlement to qualifying withdrawals under the RESP rules—will be reviewed over the coming months.

Children with Disabilities
Increasing the Child Disability Benefit

The 2003 budget introduced the Child Disability Benefit (CDB) as a supplement of the Canada Child Tax Benefit (CCTB) payable in respect of children, in low- and modest-income families, who meet the eligibility criteria for the disability tax credit.

Based on the advice of the Technical Advisory Committee, the budget proposes to increase the maximum annual CDB. This maximum will be increased for the 2005–06 benefit year to $2,000 from $1,681. Under this proposal, a low-income family caring for a child with a severe disability will have seen a fivefold increase in their federal assistance since 1999. The benefit will continue to be indexed.

Growth in Federal Assistance for Children with Disabilities

In 1999, a one-earner family with one child with a severe disability and an income of $30,000 obtained tax relief of about $720 under the disability tax credit (DTC). In 2005, taking into account measures in this budget and indexation, the same family will receive a total of $3,671 in federal assistance for children with disabilities. This includes $2,000 from the Child Disability Benefit and tax relief of $1,671 through the DTC and the DTC supplement for children. For this family, federal assistance for children with disabilities will thus have increased fivefold between 1999 and 2005.

Government of Canada Assistance for Families with children with Disabilities (one-earner family earning $30,000-one child age 7 or over with a severe disability)

The full $2,000 CDB will be provided for each eligible child to families with net income below the amount at which the National Child Benefit (NCB) supplement is fully phased out ($35,595 in July 2005 for families having three or fewer children). Beyond that income level, the CDB will continue to be reduced based on family income at the same rates as the NCB supplement (see table below).

Table A8.3
Parameters of the Child Disability Benefit—July 2005


Number of DTC-eligible Children

Net Family Income Start of Phase-out ($)

Net Family Income Phase-out Threshold ($)

Phase-out Rate (%)


1

35,595

51,988

12.2

2

35,595

53,139

22.8

3

35,595

53,832

32.9


This measure will apply to benefits payable beginning in July 2005.

Improving Administrative Practices

The Canada Revenue Agency (CRA) is responsible for the interpretation and administration of the legislation pertaining to the various tax measures for persons with disabilities.

The Technical Advisory Committee made a series of recommendations with respect to further steps for the CRA to take in two areas: the administration of the disability tax credit (DTC) and other tax measures for persons with disabilities; and communications with the community of persons with disabilities and other stakeholders.

Over the last 18 months, the CRA has taken steps in these areas by consulting with persons with disabilities and qualified health practitioners regarding the DTC certification form (Form T2201), resulting in improvements to the form and other related materials. The CRA also conducted similar consultations with respect to letters issued to individuals regarding their eligibility for the DTC.

Making Administrative Improvements

In response to the Committee’s recommendations, the CRA will make a number of improvements to the administration of the disability-related tax measures. For example, to ensure consistency and fairness in the application of these measures, the CRA will improve staff education through enhanced training programs and improved methods, work tools, and procedures.

Enhancing Communications

The CRA will continue to improve communications with the community of persons with disabilities and other stakeholders by, for example:

New CRA Advisory Committee

As recommended by the Technical Advisory Committee, the CRA will establish a new advisory committee, comprised of community and professional representatives, to advise the Minister of National Revenue on the administration of tax measures for persons with disabilities. This new committee will be established in 2005.

Research and Review of Tax Measures
Registered Retirement Savings Plans and Registered Retirement Income Funds

Currently, financially-dependent children with mental or physical infirmities are eligible to receive, on a tax-deferred basis, a deceased parent’s (or in the case of a child that is financially dependent on a grandparent, the deceased grandparent’s) proceeds from a registered retirement savings plan (RRSP) or a registered retirement income fund (RRIF) if the funds are transferred to the child’s RRSP or are used to purchase a life annuity. The Committee recommended that the Government review these rules in order to allow more flexibility in respect of a deceased’s RRSP or RRIF proceeds left to a financially-dependent child or grandchild with a disability and, in particular, that the use of a discretionary trust be permitted in these circumstances. The Government will review the tax rules in this area with a view to providing more flexibility where appropriate.

Disability Tax Credit and Canada Pension Plan Disability Beneficiaries

The Technical Advisory Committee noted the low take-up rate of the disability tax credit (DTC) by recipients of the Canada Pension Plan (CPP) disability benefit. As recommended by the Technical Advisory Committee, the Canada Revenue Agency will work with Social Development Canada to:

Improving Data Collection on Persons with Disabilities

The Technical Advisory Committee noted that there is a lack of detailed statistical information regarding persons with disabilities, and that this has an impact on the effectiveness of current policies in addressing the issues those persons face. To improve the knowledge base in this area, the Committee suggested that, where possible, questions on disability be added to new and existing surveys. The Government has also identified a need for more information on disability-related expenses in its evaluation of the disability tax credit. Accordingly, the budget provides funding of $100,000 per year to Statistics Canada to add questions on disability to the Survey of Household Spending, beginning in 2005–06.

Review of Other Tax Measures

The Technical Advisory Committee recommended that the Department of Finance and the Canada Revenue Agency undertake a review of the medical expense tax credit (METC) and the United States’ Work Opportunity Tax Credit. The Department will take these recommendations of the Committee into consideration.

Medical Expense Tax Credit

The medical expense tax credit (METC) recognizes the effect of above-average specific medical and disability-related expenses on an individual’s ability to pay income tax.

Currently, the METC provides tax relief equal to 16 per cent of eligible medical and disability-related expenses in excess of a threshold. In particular, eligible medical and disability-related expenses incurred by a taxpayer, including those incurred on behalf of a spouse or common-law partner and minor children, may be claimed by the taxpayer to the extent that they exceed the taxpayer’s minimum expense threshold—that is, the lesser of 3 per cent of the taxpayer’s net income and $1,844. Caregivers may also claim expenses they incur on behalf of a dependent relative.

The list of expenses eligible for the credit is regularly reviewed and updated in light of new technologies and other disability-specific or medically related developments. In addition to the items added to the list of expenses eligible for the METC as described under "Expansion of the Disability Supports Deduction," the budget proposes three other additions to the list of expenses eligible for the METC.

First, the budget proposes to add the cost to purchase, operate, and maintain phototherapy equipment prescribed for the treatment of psoriasis or other skin disorders.

Second, while the cost of purchasing an oxygen concentrator is currently an eligible expense under the METC, the budget proposes to extend eligibility under the METC to expenses incurred to operate an oxygen concentrator, including the cost of electricity.

Third, the budget proposes to add drugs purchased under Health Canada’s Special Access Programme, and medical marihuana, to the list of expenses eligible under the METC. Currently, these two types of medication are available only upon the recommendation of a physician but are ineligible for the METC.

To be an eligible expense under the METC, medical marihuana will have to be purchased from either Health Canada or a designated grower, by an individual authorized to use the drug for medical purposes under Health Canada’s Medical Marihuana Access Regulations or an exemption under Section 56 of the Controlled Drug and Substances Act. With the exception of the cost of seeds purchased from Health Canada, expenses incurred by authorized users to grow their own marihuana will not be eligible under the METC.

Health Canada’s Special Access Programme allows access to drugs that have not yet been approved for sale in Canada. Special access can be requested in emergency cases or when conventional therapies have failed, are unsuitable or are unavailable. The cost of drugs purchased under the Special Access Programme will be eligible under the METC. The budget also proposes to extend the same treatment to devices purchased under the Special Access Programme.

These changes will be effective for the 2005 and subsequent taxation years.

The budget also proposes to clarify the METC provisions regarding the eligibility of home renovation expenses.

Currently, reasonable expenses for renovations to a home are recognized under the METC when they are undertaken to enable a person who lacks normal physical development or has a severe and prolonged mobility impairment to gain access to, or to be mobile or functional within, the home. The policy intent is to grant eligibility under the METC to renovation expenses that would be of benefit only to such individuals (e.g. the cost of widening doorways). However, recent court decisions have interpreted these measures to apply more broadly, most notably to include, in some cases, the cost of hardwood floors or installing a hot tub. Such an expansion goes far beyond the policy intent of the METC because it subsidizes renovation expenses that increase the value of the home, and extends tax recognition to expenses with a substantial element of personal consumption and personal choice. To ensure that the METC continues to be provided to those most in need, the budget proposes a two-criteria test for determining whether home renovation expenses qualify under the METC.

The first criterion is that the expense must not typically be expected to increase the value of the home. Secondly, the expenses must be of a type that would not typically be incurred by persons without such an impairment. Only expenses that meet both of these criteria will be eligible to be claimed under the METC.

For example, a person confined to a wheelchair who has a wheelchair ramp installed in his or her home would be able to claim the cost of the ramp since such an expense would (i) not typically increase the value of the home and (ii) not typically be undertaken by individuals without such an impairment.

In light of these clarifications, most medical and disability-related home renovation expenses will remain eligible under the METC, including, for example the cost of installing entrance and exit ramps, widening doorways, lowering shelves, modifying kitchen cabinets and moving electrical outlets.

Similarly, the provisions of the Income Tax Regulations that prescribe devices designed to assist an individual in walking where the individual has a mobility impairment will be amended to ensure that only devices exclusively designed for that purpose will be eligible under the METC.

These changes will be effective for expenses incurred on or after February 23, 2005.

Tax Relief for Caregivers

Taxpayers paying medical or disability-related expenses on behalf of a dependent relative may claim those expenses under the medical expense tax credit (METC). For this purpose, a dependent relative is defined as a child who is 18 years of age or older, or a grandchild, parent, grandparent, brother, sister, uncle, aunt, niece or nephew, who is dependent on the taxpayer for support.

Based on changes introduced in the 2004 budget, taxpayers can claim eligible expenses paid on behalf of the dependent relative that exceed the lesser of 3 per cent of the dependent relative’s net income and $1,844 (i.e. the threshold for the METC that would apply if the dependent relative claimed the expenses). The maximum eligible amount that can be claimed on behalf of such a dependent relative was set at $5,000.

This budget proposes to double this eligible maximum amount to $10,000.

Tax Recognition of Medical and Disability-Related Expenses Paid by Caregivers

Marie provides support to her father, Vincent, who is a senior with severe arthritis. Vincent receives an annual governmental pension of $12,000. Marie pays all of Vincent’s medical expenses (attendant care and prescription drugs), which amount to $8,000 a year.

Existing Rules

Under the existing rules, Marie would be able to claim the portion of Vincent’s medical expenses that exceed 3% of his net income, but only up to a maximum of $5,000. She could claim only $5,000 in expenses, for a federal income tax reduction of $800.


Medical expenses incurred on behalf of Vincent

$8,000

Less: 3% of Vincent’s net income ($12,000 x 3%)

- 360


Net medical expenses

$7,640

Maximum claimable medical expenses [A]

5,000

Federal income tax reduction ([A] x 16%)

$800


Proposed Rules

Under the proposed rules, by increasing the limit from $5,000 to $10,000, Marie would be able to claim $7,640 in expenses, for a federal income tax reduction of $1,222.


Medical expenses incurred on behalf of Vincent

$8,000

Less: 3% of Vincent’s net income ($12,000 x 3%)

- 360

Net medical expenses [B]

$7,640

Federal income tax reduction ([B] x 16%)

$1,222


This measure will apply for the 2005 and subsequent taxation years.

Adoption Expense Tax Credit

There are significant costs attached to the decision to adopt a child, including adoption agency and legal fees. In the case of children who are adopted from outside of Canada, the range of costs often includes travel expenses, accommodation expenses, and document translation fees. The budget proposes to introduce a 16-per-cent non-refundable credit for eligible (non-reimbursable) adoption expenses for the completed adoption of a child under the age of 18 years.

Eligible adoption expenses will include:

The maximum eligible adoption expenses claimable in respect of any particular adoption will be $10,000. This amount will be indexed for taxation years after 2005. The credit may be split between two adoptive parents, but the combined expenses claimed for an adopted child cannot exceed $10,000. To be eligible for the credit, a parent must submit proof of an adoption in the form of a Canadian or foreign adoption order, or otherwise demonstrate that all of the legal requirements of the jurisdiction in which the parent resides have been met in completing the adoption. Parents will be able to claim the credit only for the taxation year in which an adoption is finalized, and will be able to include expenses incurred from the earlier of the time the child’s adoption file is opened with the provincial or territorial ministry responsible for adoption or a licensed adoption agency, and the time, if any, that an application related to an adoption is made to a Canadian court.

This measure will apply for the 2005 and subsequent taxation years.

Emergency Medical Services Vehicles

Employment income is generally defined to include salary, wages and employee benefits such as employer-provided automobiles. Under the Income Tax Act (Act), there are specific provisions to determine the amount of an employee’s taxable benefit for the personal use of employer-provided automobiles.

An employee’s taxable benefit in respect of the personal use of an employer-provided automobile includes a standby charge and an operating expense component. The standby charge is the taxable benefit to the employee of having an employer-provided automobile available for personal use, and is assessed on all vehicles that fit the definition of automobile under the Act. The operating expense component, where applicable, is the taxable benefit to the employee derived from an employer paying the operating costs of an employer-provided automobile.

Automobiles are defined to include any motor vehicle designed to carry individuals on highways and streets and seating a driver and up to eight passengers. However, certain vehicles are excluded from the definition of automobile—including ambulances, taxis, buses and, in certain circumstances, vans or pickup trucks. While such vehicles are not subject to the taxable benefit imputed by the standby charge and operating expense provisions, a reasonable amount in respect of the personal use of such vehicles must be included in computing the income of the employee.

The 2003 budget extended the exclusion from the definition of automobile to clearly marked emergency-response fire and police vehicles. Emergency Medical Services (EMS) vehicles (e.g. vehicles used to carry paramedics and their emergency medical equipment) fall within the current definition of automobile and are therefore subject to the standby charge and operating expense provisions. However, EMS vehicles have a function similar to ambulances and, like fire and police personnel, paramedics are often required to have immediate access to their vehicles in order to respond as quickly as possible to an emergency. The budget proposes to exclude clearly marked EMS vehicles, used for the purpose of providing emergency paramedic services, from the definition of automobile. This change will mean that an employee whose employer provides these vehicles will not have to include the formula-based standby charge and operating expense benefits in calculating income. Rather the employee will be required to include in income a reasonable amount in respect of the personal use of such vehicles determined without reference to those formula-based inclusions.

This measure will apply for the 2005 and subsequent taxation years.

Agricultural Cooperatives

Agricultural cooperative corporations play an important role in rural communities. To aid their capitalization, the budget proposes to allow members of such cooperatives to defer paying tax on patronage dividends paid to them in the form of eligible shares rather than as cash distributions.

Agricultural cooperatives can distribute earnings to their members in the form of patronage dividends, which are paid in proportion to the amount of business the member has undertaken with the cooperative. In computing its income, a cooperative may deduct patronage dividends paid to its members. Accordingly, income paid out in the form of patronage dividends is not subject to tax at the cooperative level.

Patronage dividends received by a member, other than those received in respect of consumer goods and services, are included in the recipient’s income and are taxable in the year they are received. Further, the payor of a patronage dividend is required to withhold an amount from the dividend and remit it to the Canada Revenue Agency on account of the recipients’ tax liability. As a result, when patronage dividends are paid in shares, agricultural cooperatives typically issue a portion of the patronage dividend in cash, in order to fund the member’s tax liability on the patronage dividend. Depending on the amount of the patronage dividend, this cash portion could represent a significant outlay of capital for the agricultural cooperative.

In response, the budget proposes to permit eligible members of eligible agricultural cooperatives to defer the inclusion in income of all or a portion of any patronage dividend received as an eligible share until the disposition (or deemed disposition) of the share. Further, when an eligible agricultural cooperative issues an eligible share as a patronage dividend, there will be no withholding tax obligation in respect of the patronage dividend. Instead, there will be a withholding obligation when the share is redeemed.

Agricultural cooperatives that are eligible for this measure must be resident in Canada and have, as their principal business activity, farming (including for this purpose the production, processing, storing and the wholesale marketing, of the products of their members’ farming activities) or the provision of goods or services required for farming (other than financial services). Further, that principal business must be carried on in Canada. To be eligible for the deferral, a member of an eligible cooperative must generally meet these same criteria.

In order to ensure compliance, facilitate administration and evaluate the impact of this measure, agricultural cooperatives that make patronage dividends in the form of shares eligible for this deferral will be required to report those share issuances with their income tax returns.

The amount of deductible patronage dividends that an agricultural cooperative can issue as eligible shares will be limited. In general, an eligible agricultural cooperative will be allowed to deduct the amount of eligible shares issued in respect of a taxation year as a patronage dividend up to a maximum amount of 85 per cent of its income for that taxation year attributable to business done with members (calculated without reference to the dividend).

In order to be an eligible share, the share must be issued after 2005 and before 2016, and must not, except in the case of death, disability or ceasing to be a member, be redeemable or retractable within five years of its issue. In addition, if the share is pledged as collateral security or the paid-up capital of the share is reduced (other than by way of a redemption) a disposition of the share will be deemed to have occurred.

Corporate Income Tax Reductions

To improve the living standards of Canadians, it is important that Canada’s tax system contribute to a business environment that fosters investment and economic growth. The tax system best encourages productive investment by having low tax rates that are common across all sectors, and an efficient tax structure that is neutral and does not interfere with the efficient allocation of resources.

To foster investment and growth, the budget proposes to eliminate the corporate surtax in 2008 and reduce the general corporate income tax rate by 2 percentage points by 2010.

Corporate Surtax

The corporate surtax applies to all corporations and is calculated at a rate of 4 per cent of federal corporate tax payable after the 10-per-cent abatement for income earned in a province, but before credits such as the small business deduction and the credits for foreign taxes paid. It was originally introduced in 1987 as a deficit reduction measure.

The budget proposes to eliminate the corporate surtax on January 1, 2008, prorated for taxation years that include that date. Its elimination is equivalent to a 1.12 percentage point reduction in corporate income tax rates.

While the elimination of the surtax will benefit all corporations, it will be of particular benefit to small business corporations since the surtax represents a larger proportion of their overall tax payable. Eliminating the surtax will also simplify the tax system.

Corporate Tax Rate Reduction

The budget proposes to reduce the general corporate income tax rate to 19 per cent from 21 per cent by 2010. The general corporate income tax rate will be reduced to 20.5 per cent effective January 1, 2008, to 20 per cent effective January 1, 2009, and to 19 per cent effective January 1, 2010 (all prorated for taxation years that include those dates).

The rate reductions will apply to all types of corporate income, other than: small business income that is already eligible for the low 12-per-cent corporate tax rate; investment income of Canadian-controlled private corporations (CCPCs), which income is eligible for a special refundable tax; the income of credit unions eligible for the corporate tax rate reduction under section 137 of the Income Tax Act; and the income of mutual fund corporations, mortgage investment corporations, and investment corporations (as defined in the Income Tax Act), which income already qualifies for special tax provisions.

The following table presents the federal corporate tax rates on various types of income, before and after the proposed rate reductions.

Table A8.4
Federal Corporate Income Tax Rates


Proposed rates

Legislated rates in  20081

2008

 2009

2010


On first $300,000 of CCPCs’ active business income

13.12

12

12

12

On other business income

22.12

20.5

20

19


1 Rates include the corporate surtax.

Capital Cost Allowance

A portion of the capital cost of depreciable property is deductible as capital cost allowance (CCA) each year, with the CCA rate for each type of property set out in the Income Tax Regulations. CCA rates should, as a general principle, reflect the useful life of an asset and thus provide adequate recognition of capital costs.

The useful life of assets can change over time for several reasons, including technological change. The assessment of CCA rates is therefore an ongoing process. As part of this continuing review, the budget proposes adjustments to CCA rates for hydrocarbon transmission pipelines and related pumping and compression equipment, combustion turbines generating electricity, electricity transmission and distribution equipment, and cables used for telecommunications infrastructure.

The Government will continue to assess the appropriateness of CCA rates to ensure that they reflect, as closely as possible, the useful life of assets.

Transmission Pipelines and Related Equipment

Currently, hydrocarbon transmission pipelines are generally eligible for a 4-per-cent capital cost allowance (CCA) rate under Class 1 of Schedule II to the Income Tax Regulations. Because petroleum pumping equipment and natural gas compression equipment on such pipelines is not specifically included in any of the CCA classes, the sector has generally included such assets in Class 8 (20-per-cent CCA rate), the default class for property not included in any other class. However, court cases have called into question the classification of natural gas compression equipment, on such pipelines, that default into Class 8.

Current CCA Treatment

Class 1 of Schedule II to the Income Tax Regulations includes hydrocarbon transmission pipelines described as "a pipeline, other than gas or oil well equipment, unless, in the case of a pipeline for oil or natural gas, the Minister, in consultation with the Minister of Energy, Mines and Resources [now the Minister of Natural Resources], is or has been satisfied that the main source of supply for the pipeline is or was likely to be exhausted within 15 years after the date on which operation of the pipeline commenced," generally provided it was acquired after 1987. In this latter case, the equipment is typically treated as falling under Class 8 (20-per-cent CCA rate), which includes tangible capital property that is not included in another class.

The budget proposes that the CCA rate for transmission pipelines (as contrasted with distribution lines) for petroleum, natural gas or related hydrocarbons be increased to 8 per cent from 4 per cent to better reflect the typical useful life of these assets. Included will be control and monitoring devices, valves and other ancillary equipment (other than pumping and compression equipment, discussed below). The proposed changes will not affect the existing treatment of gas or oil well equipment and pipelines for which the Minister of National Revenue, in consultation with the Minister of Natural Resources, is satisfied that the main source of supply is likely to be exhausted within 15 years of commencement of operation. Distribution pipelines that distribute gas to the ultimate consumers typically have a longer useful life than transmission pipelines. Accordingly, these properties will continue to be included in Class 1, eligible for a 4-per-cent CCA rate.

The budget also proposes changes to the treatment for pumping and compression equipment, and equipment ancillary to it, related to a transmission pipeline for petroleum, natural gas or related hydrocarbons. The tax treatment of such equipment is to be rationalized by establishing a uniform 15-per-cent CCA rate that better reflects the typical useful life of these assets. However, this change will not apply to gas or oil well equipment (which is already eligible for a 25-per-cent CCA rate) and buildings or other structures.

The useful life of a pipeline can, however, be shortened in cases where production from the associated resource ceases. Accordingly, the budget also proposes that a separate class election be introduced for transmission pipelines and related pumping and compression equipment. The separate class election, which must be made for the taxation year in which a property is acquired, allows taxpayers to place eligible property in a separate class for CCA purposes. Although the separate class election does not change the CCA rate specified for the class, it does provide that any remaining undepreciated balance in the class after the disposition of the property, can, for the year of disposition, be fully deducted as a terminal loss.

The new CCA rates for transmission pipelines will apply to equipment acquired on or after February 23, 2005 that has not been used or acquired for use before that date. The new CCA rates for pumping and compression equipment will apply to all such equipment acquired on or after February 23, 2005.

Combustion Turbines Generating Electricity

As a result of measures announced in the 2000 budget, combustion turbines that generate electricity are eligible for an 8-per-cent CCA rate.

Current CCA Treatment

Proposed amendments to Class 17 of Schedule II to the Income Tax Regulations would include in the class combustion turbines described as "property (other than a building or other structure) acquired after February 27, 2000 that has not been used for any purpose before February 28, 2000 and that is… electrical generating equipment (other than electrical generating equipment described in any of paragraphs (f) to (h) of Class 8)."

Available evidence associated with newer combustion turbines suggests that the current provisions do not reflect the useful life of these assets. The budget therefore proposes that the CCA rate for combustion turbines that generate electricity (including associated burners and compressors) be increased to 15 per cent. The 15-per-cent rate will apply to such property acquired on or after February 23, 2005, that has not been used or acquired for use before February 23, 2005.

Combustion turbines that generate electricity are currently eligible for a separate class election. The separate class election was provided in response to concerns that combustion turbines can have shorter useful lives than other electrical generating equipment.

Because the higher CCA rate proposed in this budget will better reflect the useful life of combustion turbines, it is proposed that the separate class election not be extended to combustion turbines eligible for the higher rate. To accommodate taxpayers who may have already planned purchases based on the availability of the separate class election, it is further proposed that taxpayers may elect to have combustion turbines acquired before 2006 that would otherwise be eligible for the 15-per-cent rate included in Class 17 and therefore eligible for the separate class election. The proposed election must be filed with the income tax return for the taxation year in which the property is acquired.

Electricity Transmission and Distribution Assets

Currently, electricity transmission and distribution assets (e.g., power lines, transformers and substation equipment) are eligible for a 4-per-cent CCA rate.

Current CCA Treatment

Class 1 of Schedule II to the Income Tax Regulations includes electricity transmission and distribution assets described as "the generating or distributing equipment and plant (including structures) of a producer or distributor of electrical energy."

Available evidence associated with transmission and distribution equipment suggests that the current provisions do not reflect the useful life of these assets. The budget therefore proposes that the CCA rate for transmission and distribution equipment and structures (but not including buildings) of a distributor of electrical energy be increased to 8 per cent. This rate will better reflect the estimated useful life of these assets.

The 8-per-cent rate will apply to assets acquired on or after February 23, 2005 that have not been used or acquired for use before February 23, 2005.

Specified Energy Property Rules

In addition to setting the appropriate CCA rate, rules are needed to protect the integrity of the CCA system. These include the specified energy property rules, which limit the amount of CCA deductions that may be used by passive investors in respect of specified energy property—generally property for which an incentive CCA rate is allowed under Class 34 or 43.1—to the amount of income from such property. This prevents CCA deductions from being used by passive investors to shelter other sources of income.

This budget proposes that the specified energy property rules be extended to combustion turbines and electricity transmission and distribution assets that are eligible for the higher CCA rates proposed in this budget.

Cable for Telecommunications Infrastructure

Currently, wire and cable used for telephone, telegraph or data communication, other than fibre-optic cable, is eligible for a 5-per-cent CCA rate. Fibre-optic cable is eligible for a 12-per-cent CCA rate.

Current CCA Treatment

Class 3 (5-per-cent CCA rate) of Schedule II to the Income Tax Regulations includes wire and cable described as "Property not included in any other class that is ... telephone, telegraph or data communication equipment, acquired after May 25, 1976, that is a wire or cable."

A review of the CCA rate for wire and cable used for telephone, telegraph or data communication that is not fibre-optic cable indicates that a higher CCA rate would better reflect the useful life of these assets. The budget proposes that the CCA rate for wire or cable used for telephone, telegraph or data communication not included in any other class be increased to 12 per cent. This rate will better reflect the estimated useful life of these assets.

The 12-per-cent CCA rate will apply to assets acquired on or after February 23, 2005 that have not been used or acquired for use before February 23, 2005.

Efficient and Renewable Energy Generation Equipment

An accelerated capital cost allowance (CCA) rate of 30 per cent is provided under Class 43.1 in Schedule II to the Income Tax Regulations for investments in equipment that, in general, produces heat for an industrial process, or electricity, by using fossil fuel efficiently or renewable energy sources. This accelerated rate is an explicit exception to the practice of setting CCA rates to reflect the useful life of assets.

Where the majority of the tangible property acquired for use in a project is included in Class 43.1, certain start-up expenses (mostly intangible) for the project are treated as Canadian Renewable and Conservation Expenses. These expenses may be deducted in full in the year incurred, carried forward indefinitely for use in future years, or transferred to investors under flow-through share agreements.

Efficient and Renewable Energy Generation

Class 43.1 currently provides an accelerated capital cost allowance (CCA) rate of 30 per cent per year for investments in equipment that produces heat for an industrial process or electricity by using fossil fuel efficiently or by using renewable energy sources.

The two general categories of included equipment are cogeneration and renewable energy technologies.

Cogeneration—also called combined heat and power (CHP)—is the simultaneous generation of electricity and heat from the same fuel to achieve greater energy efficiency. To qualify for Class 43.1 treatment, cogeneration equipment must meet a minimum level of energy efficiency in the use of fossil fuel.

A variety of renewable energy generation assets are also included in Class 43.1, including:

  • Wind turbines.
  • Electrical generating equipment that uses only geothermal energy.
  • Small hydroelectric facilities.
  • Stationary fuel cells.
  • Photovoltaics and "active" solar equipment used to heat a liquid or gas.
  • Equipment powered by certain waste fuels (e.g. wood waste, municipal waste, biogas from a sewage treatment facility).
  • Equipment that recovers biogas from a landfill.
  • Equipment used to convert biomass into bio-oil.

In addition, where the majority of the tangible property in a project is eligible for Class 43.1, certain project start-up expenses (mostly relating to intangibles) are treated as Canadian Renewable and Conservation Expenses (CRCE). These expenses may be deducted in full in the year incurred, carried forward indefinitely for use in future years, or transferred to investors using flow-through shares. Flow-through shares are particularly beneficial to start-up firms that do not have enough taxable income to benefit from tax deductions themselves.

Eligible expenses typically include engineering and design, site clearing, feasibility studies, contract negotiations, and regulatory approvals. In the wind industry, CRCE also includes the capital cost of "test wind turbines," which can constitute up to 20 per cent of the generating capacity in a wind farm.

High-Efficiency and Renewable Energy Generation Equipment

The budget proposes to include certain highly fossil-fuel-efficient and renewable energy generation equipment—which is currently eligible for the 30-per-cent CCA rate under Class 43.1—in a new class eligible for a 50-per-cent CCA rate. The increased rate will apply to such equipment acquired on or after February 23, 2005 and before 2012. As is currently the case with Class 43.1, the specified energy property rules will be extended to apply to this new Class.

High-Efficiency Cogeneration Systems

Cogeneration systems (also called combined heat and power or CHP systems) produce heat and power simultaneously by capturing the waste heat from the electrical generation process and using it for another purpose, such as manufacturing or space heating.

Cogeneration equipment is currently eligible for Class 43.1 treatment if it converts approximately 57 per cent or more of the energy value of the input fossil fuel into electricity and usable heat. In formal terms, this requires a system to use no more than 6000 British Thermal Units (BTUs) of fossil fuel per kilowatt-hour of electricity produced on an annual basis. The energy content of specified waste fuels, such as wood waste, municipal waste, bio-oil and biogas, is not counted for the purposes of this "heat rate" calculation.

The budget proposes that cogeneration equipment that would otherwise be included in Class 43.1 will be included in the new class entitled to a 50-per-cent CCA rate if the equipment is part of a high-efficiency cogeneration system with an annual heat rate from fossil fuel that does not exceed 4750 BTUs per kilowatt-hour of electricity production. This corresponds to a total system efficiency of approximately 72 per cent. To be eligible for the new class, the equipment must be acquired on or after February 23, 2005 and before 2012. Systems eligible for Class 43.1 treatment that exceed the 4750 BTU threshold will still qualify for the current 30-per-cent CCA rate.

Renewable Energy Generation Systems

Class 43.1 also includes a range of renewable energy generation equipment, including wind turbines, small hydroelectric facilities, active solar heating equipment, fixed location photovoltaic equipment and geothermal energy equipment.

The budget proposes that such equipment that would otherwise be included in Class 43.1 will be eligible for the new 50-per-cent CCA rate class. To be eligible for the new Class, the equipment must be acquired on or after February 23, 2005 and before 2012.

Extending Incentives for Investment in Efficient and Renewable Energy Generation

The Government continues to review Class 43.1 on an ongoing basis to ensure inclusion of appropriate energy generation technologies that have the potential to contribute to energy efficiency and the use of alternative energy sources. Frequent additions have been made to the class since its inception in 1994. The budget proposes two further additions to Class 43.1: distribution equipment used in district energy systems that rely on efficient cogeneration; and biogas production equipment.

Distribution Equipment of a District Energy System

District or community energy systems transfer heat between a central generation plant and a group or district of buildings by continuously circulating steam, hot water or cold water through a system of underground pipes. As noted, Class 43.1 currently includes fossil-fuel efficient cogeneration equipment. District energy is an ideal application for cogeneration, since it provides a productive use for low-grade heat created in the process of generating electricity, thereby enabling the system to achieve a high level of energy efficiency.

The budget proposes to extend eligibility for Class 43.1 to specified distribution equipment of a taxpayer that is part of a district energy system used by the taxpayer (or a lessee) primarily to provide district heating or cooling through the use of heat produced by electrical cogeneration equipment that meets the requirements of Class 43.1, including the heat rate requirements. Eligible components of a taxpayer’s system will be pipes, pumps, chillers, meters and control equipment and heat exchangers attached to the main distribution line of the district energy system. Assets forming part of the internal heat and cooling system of the host building will not be eligible.

This change will apply to eligible equipment acquired on or after February 23, 2005. Where the distribution assets are acquired on or after February 23, 2005 and before 2012, and they carry heat produced by cogeneration equipment acquired during that period that qualifies for the new 50-per-cent CCA rate Class, the distribution assets will also qualify for the new Class.

Biogas Production Equipment

Class 43.1 currently includes above-ground equipment used primarily to collect landfill gas and digester gas from a licensed sewage treatment facility. Capture and use of these greenhouse gases contributes to climate change objectives, utilizes energy that would otherwise be wasted, and diversifies Canada’s energy supply mix.

To encourage further capture and use of biogas, the budget proposes to extend eligibility for Class 43.1 to equipment used to produce biogas (which is primarily methane) from the anaerobic digestion of manure. Eligible equipment will be property of a taxpayer that is part of a system that is used by the taxpayer (or a lessee) primarily to produce, store and use biogas primarily for the production by the taxpayer (or the lessee) of heat for use in an industrial process, or electricity, and that is an anaerobic digester reactor, a buffer tank, biogas piping, a biogas storage tank, biogas scrubbing equipment, or generation equipment. Collection equipment, buildings and other structures, and equipment used to process the residue after digestion or to treat recovered liquids, will not be included.

This change will apply to eligible equipment acquired on or after February 23, 2005. Further, such eligible equipment acquired before 2012 will be included in the new 50-per-cent CCA rate Class.

SR&ED Investment Tax Credit

Canada’s income tax system includes incentives for the performance in Canada of scientific research and experimental development (SR&ED). Expenditures on SR&ED performed in Canada may be deducted immediately and may be eligible for an investment tax credit. For these purposes, Canada is considered to include the 12-nautical-mile territorial sea. SR&ED that is undertaken outside that limit is generally not considered to be performed in Canada, even if it is performed in the area that is within 200 nautical miles from the Canadian coastline. This area is commonly referred to as Canada’s Exclusive Economic Zone (EEZ).

The budget proposes to extend the SR&ED incentives to include expenditures incurred in the performance of SR&ED in Canada’s EEZ. As an example of the impact of this measure, expenditures by the fishing sector within the 12 nautical mile territorial sea that are eligible for SR&ED tax incentives will also be eligible for these incentives if they are undertaken in Canada’s EEZ.

This measure will apply to expenditures incurred on or after February 23, 2005.

Sales and Excise Tax Measures

Excise Tax on Jewellery

An excise tax of 10 per cent is imposed under the Excise Tax Act on jewellery manufactured and sold in, or imported into, Canada. The tax is payable by manufacturers on the sale price of domestically-produced jewellery at the time of delivery to the purchaser, and by importers on the duty-paid value of imported jewellery in accordance with the provisions of the Customs Act. Jewellery exported from Canada is exempt from the tax.

In addition to jewellery, whether real or imitation, the tax also applies to clocks and watches (with a value greater than $50) and articles made of semi-precious stones. An exemption from the tax is provided for small manufacturers with annual sales of less than $50,000. As well, the tax is not collected on jewellery with a sale price at the manufacturer’s level, or a duty-paid value, of less than $3.

The budget proposes that the excise tax on jewellery be phased-out through a series of rate reductions over the next four years. The rate will be reduced to 8 percent from 10 percent effective February 24, 2005 and will be reduced by an additional 2 percentage points in each of the next four years, until the rate is zero. The proposed rate reductions and their effective dates are set out in the box below:

Effective Date

Proposed Rate

February 24, 2005

8%

March 1, 2006

6%

March 1, 2007

4%

March 1, 2008

2%

March 1, 2009

0%

The proposed changes affect only the rate; no changes are proposed with respect to the structure or operation of the excise tax on jewellery. The proposed rates apply to deliveries or importations on or after the specified dates, in accordance with the existing provisions of the Excise Tax Act that govern by whom and when the tax is payable.

GST/HST Health Care Rebate

Under the goods and services tax and harmonized sales tax (GST/HST), most supplies made by public sector bodies are exempt. This means that these entities do not charge GST/HST on their exempt supplies, but they cannot recover the GST/HST paid in respect of their purchases related to these supplies by way of input tax credits in the way that businesses making taxable sales can. The public sector body rebate system entitles public sector bodies to claim rebates of the otherwise unrecoverable tax on their inputs. Under this system, hospitals are entitled to a rebate of 83 per cent of the GST and the federal component of the HST that they pay on their purchases used to provide exempt health care supplies, while charities and government-funded non-profit organizations are entitled to a 50-per-cent rebate.

In recent years, the restructuring by provinces and territories of the delivery of health care services has resulted in some services formerly provided by hospitals being performed by other non-profit institutions entitled to claim the lesser 50-per-cent rebate. In recognition that this restructuring might affect the application of the GST/HST rebate for health care, the 2003 budget announced a review of the rebate to assess and improve its application with respect to health care functions moved outside of hospitals.

Further to extensive consultations with provincial and territorial health and finance authorities, the budget proposes to extend, effective January 1, 2005, the application of the 83-per-cent rebate to eligible charities and non-profit organizations that provide health care services similar to those traditionally performed in hospitals. Under this proposal:

The proposed measure, which accommodates the significant variations in health care delivery models across the country, will expand the 83-per-cent rebate to eligible facilities and entities that belong to the following categories:

Eligible entities that incur substantially all of their GST/HST during a rebate claim period on goods and services for use in respect of the medical or surgical treatment of individuals and/or the supply of ancillary support services will qualify for the 83-per-cent rebate in respect of the GST and the federal component of the HST that they incur during that period.

Entities that do not meet the "all or substantially all" threshold described above will be eligible to receive the 83-per-cent rebate to the extent that the GST/HST they pay relates to purchases used in fulfilling their medical mission. Thus, a community health and social service centre that is responsible for the provision of both health and social services to the public but does not meet the "all or substantially all" test will qualify for the 83-per-cent rebate to the extent that the GST/HST it incurs during a claim period relates to goods and services for use in the provision of health care services.

As a result of the proposal to expand the application of the 83-per-cent rebate, new remittance rates for eligible facilities and entities will be required under the Streamlined Accounting (GST/HST) Regulations, which provide small businesses and public service bodies optional simplified methods of calculating their GST/HST remittances. The new remittance rates will be the same as the current remittance rates for hospital authorities. The new rates will ensure that the appropriate amount of tax is remitted. It is proposed that these new remittance rates apply to reporting periods that end after 2004. However, they will not apply to a reporting period that includes January 1, 2005 in respect of a supply for which consideration was paid or became payable before that date.

Each HST province determines the rate of rebate for the provincial component of the HST with respect to entities in the HST provinces affected by this proposal.

Tax Administration

International Tax Enforcement

Those who try to evade tax are subject to a wide range of compliance and collection measures, as well as interest and penalty charges. In extreme cases, fines and imprisonment can be imposed under the criminal law. The Canada Revenue Agency (CRA) applies these rules in keeping with the Government’s commitment to the great majority of Canadians who pay their income taxes fully and on time.

Governments around the world cooperate in the fight against international tax evasion. For example, Canada has treaties with over 80 other countries providing for the exchange of tax-related information. In some cases, Canada and its treaty partners assist in each other’s tax collections. This global cooperation is intensifying, but international tax evasion and aggressive international tax planning continue.

The budget proposes to invest $30 million annually in enhanced CRA audit and collection activities in this area. These resources will be used to increase audit and compliance capacity with respect to cross-border and international transactions, using a risk-based approach. Additional revenues generated through increased audit and enforcement are expected to offset this cost.

Tobacco Taxation Compliance and Enforcement

Taxing tobacco products at a high and sustainable level is an important element of the Government’s health strategy to discourage smoking among Canadians. Enhancements to tobacco tax compliance and enforcement programs will ensure that the tobacco tax system continues to support the Government’s health goals.

Through Canada Revenue Agency internal reallocations and this budget’s provision of $8 million of new funding over the next 5 years, compliance and enforcement enhancements will be implemented at three different stages of the production and distribution process:

Directors’ Liability for GST/HST Refunds

Under existing provisions in the Excise Tax Act, a director of a corporation can, subject to certain limitations, be held liable for the corporation’s unremitted net goods and services tax and harmonized sales tax (GST/HST) amounts if the director has not exercised due diligence in ensuring that the remittances are made.

The budget proposes to provide that a director of a corporation may be held liable not only for unremitted net GST/HST amounts, but also for GST/HST net tax refund amounts to which the corporation is not entitled.

As is currently the case with respect to liability for unremitted net GST/HST amounts, a director’s liability with respect to GST/HST net tax refunds would arise only where the director has not exercised due diligence, the amounts are otherwise unrecoverable, and either the corporation’s liability has been proved during liquidation or bankruptcy proceedings, or an execution for the corporation’s liability in furtherance of a certificate filed with the federal court has been returned unsatisfied.

The extension of directors’ liability to GST/HST net tax refunds will apply in respect of net tax refund amounts paid on or after Royal Assent.

GST/HST Web Registry

As part of their obligations under the goods and services tax and the harmonized sales tax (GST/HST), registrants are required to ensure that input tax credits are claimed only where GST/HST has been paid to suppliers who are registered for GST/HST purposes. Currently, the sole means available to verify the validity of a supplier’s registration is to contact the Canada Revenue Agency (CRA). A publicly accessible Web-based GST/HST registry is therefore proposed to facilitate the verification of a supplier’s GST/HST registration. This will help streamline the process and ensure that a supplier’s registration information is readily available. The registry will be designed so that only a supplier’s GST/HST registration status may be verified.

It is intended that this Registry be operational within 12 months of this measure receiving Royal Assent.

Update—Taxation Issues

Deductibility of Interest and Other Expenses

In October 2003, the Department of Finance released for public consultation a package of legislative proposals regarding the deductibility, for income tax purposes, of interest and other expenses. The proposals responded to certain court decisions that departed significantly from what had been the accepted understanding of the law in this area.

In computing income from a business or property, a taxpayer can deduct many kinds of expenses, provided they were incurred in order to earn the income. A familiar example is interest on borrowed money, which is deductible only if the borrowed money is used for the purpose of earning income from a business or property.

In this context, "income" had been understood to be a net amount comparable to profit, and to exclude capital gains. The court decisions, however, took a different view: income was read as the equivalent of gross revenue, and the distinction between income and capital gains was blurred.

The 2003 proposals were intended to restore the law on these points to its more familiar and more appropriate state.

An extended period of public consultation on the proposals ended in August 2004. Many commentators expressed concerns with the proposals’ structure: in particular, that the proposals’ codification of an objective "reasonable expectation of profit" test might inadvertently limit the deductibility of a wide variety of ordinary commercial expenses. The Department of Finance has sought to respond by developing a more modest legislative initiative that would respond to those concerns while still achieving the Government’s objectives. The Department will, at an early opportunity, release that alternative proposal for comment. This will be combined with a Canada Revenue Agency publication that addresses, in the context of the alternative proposal, certain administrative questions relating to deductibility.

Cross-Border Share-for-Share Exchanges

The 2000 Economic Statement and Budget Update and subsequent budgets indicated the Government’s intention to develop rules that would provide an explicit rollover for cross-border share-for-share exchanges while ensuring that the Canadian tax base was protected. A discussion draft of proposed income tax amendments to implement this initiative will be released in the near future.

Other Outstanding Legislative Proposals

There are a number of legislative proposals that remain outstanding. These include:

The Government intends to introduce legislation to implement these proposals at a suitable time, consistent with other legislative priorities.

Income Trusts

In the 2004 budget, the Government identified a risk to tax revenue posed by business income trusts, which have grown considerably in recent years. As flow-through entities, business income trusts shift the point of taxation from the corporation to the investor. Where the investor is taxable, the revenue loss to Government is small. However, where the investor is tax-exempt, the net fiscal impact may be significant.

The 2004 budget noted that expected provincial legislation to limit the liability of investors in income trusts could stimulate additional investment in business income trusts, including by tax-exempt entities, thereby contributing to further erosion of tax revenues. Accordingly, to protect tax revenues while still allowing the business income trust market to develop in an orderly manner, the 2004 budget proposed to limit the level of pension fund investment in business income trusts.

After the tabling of the 2004 budget, however, a number of stakeholders expressed concern about the impact of the proposals. In response, the Government decided to suspend the implementation of these measures and to engage in further consultation.

The decision in the budget to eliminate the foreign property rule also lifts a restriction that applied, under this rule, to investments in limited partnerships. Limited partnerships have many of the same characteristics, from a tax policy perspective, as business income trusts and other flow-through entities, and correspondingly pose many of the same policy issues.

The Government will consult stakeholders on tax issues related to business income trusts and other flow-through entities. A consultation paper will be released by the Department of Finance shortly after the budget. The consultation will be open and transparent and will involve third parties to ensure a range of views is engaged on a broad spectrum of options.

The Government will continue to monitor developments in the markets for business income trusts and other flow-through entities during the consultation process. Future initiatives, if any, will be taken following these consultations and in full consideration of the costs and benefits related to business income trusts and other flow-through entities.

Taxation Agreements with First Nations

In successive budgets since 1997, the Government has expressed its willingness to put into effect taxation arrangements with interested First Nations. To date, the Government has entered into taxation arrangements allowing ten First Nations to levy a tax on sales within their reserves of fuel, tobacco products and alcoholic beverages, and for the nine self-governing Yukon First Nations to levy a personal income tax within their lands and, in 2004, to levy a First Nations goods and services tax within their lands. The Government once again confirms its willingness to discuss and put into effect direct taxation arrangements with interested First Nations.

The Government of Canada is also prepared to facilitate the entering into of taxation arrangements between provinces/territories and interested First Nations. In 2004, the Government of Canada introduced legislation to provide authority to interested Indian Act bands situated in Quebec to levy direct sales taxes harmonized with any of the sales taxes levied by the Government of Quebec. The Government of Canada remains willing to facilitate such taxation arrangements with any other provincial or territorial government.

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