2009 Federal budget highlights

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Alert, 27 January, 2009
2009 Federal budget highlights
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The minister of Finance, James M. Flaherty, presented the 2009 budget in the House of Commons this afternoon. The following is a summary of the highlights contained in the budget.
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Economic context
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; o1 m. k# n  V- B2 J- ZAfter 11 consecutive years of fiscal surpluses, Canada will face a $1.1 billion deficit in the current fiscal year and a $33.7 billion deficit in the upcoming fiscal year commencing April 1. At some level, the admission of the need for action is an important first step. The question now is whether the current estimates are still overly optimistic.

6 y# ]% Z& g0 e4 G9 bGovernment recognizes revenue on a cash basis. The global slow-down has hit Canadian businesses across all sectors. Business losses not only mean a drop in corporate tax revenue to government, but also losses carried back to generate refunds of prior years’ tax become negative revenue. The Government projects a reduction of revenues from corporate income taxes of $6.3 billion in 2009-10. Similarly, the dramatic 2008 stock market declines will generate capital losses for many individuals to carry back against capital gains of prior years. This factor, coupled with rising unemployment, should have an effect on personal tax revenue as well. The Government projects that in 2009-10 there will be a reduction of revenues from personal income taxes of $5.6 billion.

The declines in corporate and personal tax revenue drive a structural deficit even before the government’s first dollar of additional spending.

Finance Minister Flaherty has announced a series of new programs and tax incentives amounting to approximately $34.8 billion over two years in an effort to kick-start the economy.

4 q1 A  h6 T  H8 N' KThe largest component of these measures is infrastructure spending. On this front, the emphasis is on “shovel-ready” projects intended to speed the effect of the spending. As with much of the proposed tax changes, the focus is clearly on the immediate.

While these measures are a fraction of the stimulus being injected in the United States and the United Kingdom, even measured as a proportion of GDP, they are significant. If nothing else, these proposals are designed to signal to Canadians that the government is taking action in light of the current economic situation. The question is how these proposals will affect Canadian confidence and how quickly.

$ N2 B5 R9 k; G+ oMeasures concerning businesses
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The small business limit is increased to $500,000 as of January 1, 2009.
1 [$ {) T8 S# R: YThe limit of the taxable income phase-out range of the expenditure limit for the enhanced investment tax credit (ITC) rate of 35% on qualified Scientific Research and Experimental Development (SR&ED) expenditures increases accordingly to between $500,000 and $800,000. This change applies where theprevious taxation year ends after 2008.
For manufacturing and processing equipment, a 50% straight-line capital cost allowance (CCA) rate has been extended for equipment acquired in 2010 and 2011. The half-year rule would apply.
2 d; u/ o) O9 m3 D0 zFor eligible new computers and system software used in Canada, acquired after January 27, 2009 and before February 2011, a CCA rate of 100% applies, with no half-year rule.
In response to recent recommendations by the Advisory Panel on Canada's System of International Taxation, section 18.2 of the Income Tax Act, the interest deductibility rules relating to investments in foreign affiliates (dealing with double dip transactions), scheduled to come into force in 2012, will be repealed.
0 [  x  W& X1 t% a4 m' TSimilarly, the Government will review the Advisory Panel’s report and other submissions received on the draft proposals relating to investments in non-resident trusts and foreign investment entities (originally released in 1999) as well as the 2004 draft foreign affiliate proposals, before proceeding with measures in these areas.
! @0 |. i" X2 m- O4 r7 gThe government will review the Panel's report and will enter into public consultations before enacting new measures in response to the Report.
1 _  }3 W+ S# P8 _# V$ A! K4 }In reaction to the Federal Court of Appeal decision inLa Survivance, it is proposed that the deeming rule regarding the timing of an acquisition of control of a corporation not apply for purposes of determining if a corporation is a small business corporation or a Canadian-controlled private corporation. This amendment will apply in respect of acquisitions of control that occur after 2005, except if the taxpayer elects otherwise for acquisitions of control before January 28, 2009.
1 t5 o, R2 O7 R, E6 oMeasures concerning individuals

Effective January 1, 2009, it is proposed that the basic personal amount and the two lowest personal income tax brackets will increase by 7.5% above their 2008 levels. As a result of these measures:
the basic personal amount, the spousal and common-law partner amount, and the eligible dependent amount increase from $9,600 in 2008 to $10,320 in 2009;
$ v* ?* U; i$ V' h. K9 fthe upper limit of the first personal income tax bracket (15% income tax rate) increases from $37,885 in 2008 to $40,726 in 2009;
: M: v# a$ L( c: i/ l: n# nthe upper limit of the second personal income tax bracket (22% income tax rate) increases from $75,769 in 2008 to $81,452 in 2009;
: C, T$ S: W; a" F! Nthe increased amounts and bracket thresholds will be indexed to account for inflation in the 2010 and subsequent tax years.
The income levels on which the Canada Child Tax Benefit (CCTB) and the National Child Benefit Income supplement (NCBs) are based will increase in line with the increase in the upper limit of the lowest personal income tax bracket. For the 2009-2010 benefit year, the income level at which the phase out of the CCTB begins will increase to $40,726, and the income level at which that phase-out of the NCBs begins will increase by $1,894 such that it is completely phased out when the income reaches $40,726.
2 W8 p& |' v$ D" u7 x& V& w0 VIt is proposed that an amount equal to $580 million be added to the Working Income Tax Benefit (WITB) program for the 2009 and subsequent taxation years.
An increase on the amount on which the Age Credit is based is proposed for the 2009 and subsequent years. The amount increases by $1,000 to $6,408 effective January 1, 2009 and will be indexed thereafter. The income level at which the Age Credit is fully phased out increases from $68,365 to $75,032.
A new Home Renovation Tax Credit (HRTC) is being introduced. The HRTC is a 15% non-refundable tax credit for eligible expenditures made in respect of eligible dwellings which would generally be considered to be an individual’s principal residence. Eligible expenditures include labour and building materials for a renovation that is of an enduring nature. The HRTC applies to expenditures, in excess of $1,000 but not more than $10,000, made after January 27, 2009 and before February 1, 2010 pursuant to an agreement entered into after January 27, 2009.
The withdrawal limit under the Home Buyers’ Plan increases to $25,000 from $20,000 in respect of withdrawals made after January 27, 2009.
# d2 q+ s4 Q* S% Y. a8 |  L# KA new First-Time Home Buyers’ Tax Credit is being introduced which is based on an amount of $5,000 for first time home buyers who acquire a qualifying home after January 27, 2009. The non-refundable tax credit is calculated by reference to the lowest personal income tax rate for the year. The credit will also be available for certain acquisitions of a home by or for the benefit of an individual who is eligible for the disability tax credit.
It is proposed to allow, upon final distribution of property from a deceased annuitant’s RRSP or RRIF, the amount of post-death decreases in value of the RRSP or RRIF to be carried back and deducted against the year-of-death RRSP or RRIF income inclusion. This measure will apply in respect of a deceased annuitant’s RRSP or RRIF where the final distribution occurs after 2008.
1 r% _: f1 _2 Q4 B4 ^$ m4 aThe eligibility for the mineral exploration tax credit is extended for one year to flow-through share agreements entered into on or before March 31, 2010.
GST/HST

5 N1 t1 y0 a1 n  V4 @The budget proposes to allow direct sellers using a commission-based model to elect to use a special GST/HST accounting method, provided certain conditions are met. This approach is to be available for fiscal years beginning after 2009.

& [" f- [: \' X. g& M/ mOther measures

- V% @, E/ G' L6 k9 qMandatory electronic filing will be required for:
Income tax returns of corporations that have annual gross revenues in excess of $1 million, for taxation years that end after 2009;
, d- m+ G( |5 U+ @Information returns, where a taxpayer is filing in excess of 50 for information returns required to be filed after 2009.
Designed to help Canadian industry, tariffs on more than 214 items will be eliminated related to machinery and equipment imported from outside North America on or after January 28, 2009.
To help businesses experiencing temporary slowdown to avoid lay-offs, over the next 2 years, work-sharing agreements will be extended by 14 weeks, to a maximum of 52 weeks, and access will be enhanced.
The Government is proposing to provide more funding for green energy projects. The proposals include $125 million for carbon capture and storage projects under the ecoEnergy Technology Initiative of Natural Resources Canada and $1 billion over 5 years for research and the development and demonstration of new clean technologies.
$ |! P! p& N3 @* jIt is proposed that the National Research Council Industrial Research Assistance Program receive an additional $200 million over two years to expand its initiatives for small and medium sized businesses.
The Government will provide $1 billion over five years to the new Southern Ontario Development Agency to support economic and community development, innovation and economic diversification.
The budget proposes to provide $10 million to the Canadian Youth Business Foundation to support young Canadians who are creating new businesses.
The budget proposes to increase to $350,000 ($500,000 if acquiring real property) the maximum eligible loan amount a small business can access the Small Business Financing Program.
" w6 @. |$ y+ g0 x# w& S2 ~The Government will allocate up to $12 billion to purchase term asset-backed securities backed by loans and leases on vehicles and equipment from federally regulated financial institutions and certain provincially regulated financial institutions.
* t* C# a& D" R  CThe authorized capital of the Export Development Corporation (EDC) and the Business Development Corporation will be increased by $1.5 billion each to allow them to expand their programs. In addition, EDC will be permitted to temporarily support financing in the domestic market including accounts receivable insurance.
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3 Q1 F' V6 \; B, l9 Y: t) c3 xNo acceleration of corporate tax rate reductions.
No changes to the tax treatment of carried interest or any other measures targeted at private equity.
! _3 k9 F; _+ `' `) v- W3 o$ KNo significant expansion on SR&ED ITC refund eligibility or broad stimulus for innovation.
- w2 W1 _/ N, f- e  w% QNo reduction in top marginal personal tax rates.
3 f! Q0 S( _8 m8 G' z3 D! c' AFor further details, we refer you to the Finance MInister website, where you can access the official documents without charge.