2013 Federal Budget Highlights
Duane Snow, CLU, CFP, ChFC
RVP Eastern Canada
2013 Federal Budget Highlights
Minister James M Flaherty presented the 2013/2014
budget on Mar 21, 2012. The budget focuses on jobs
training, infrastructure and closing perceived tax
loopholes
Personal Tax
(LCGE)
• To increase from $750,000 to $800,000
• Indexed to inflation in the future
• For all Canadians, even those who have previously
claimed LCGE
Dividend tax credit
• Federal Government integration tool
• To ensure income paid as dividends attract same
amount of tax as income earned directly
• Enhanced DTC and gross up for income from corp
taxed a general rate (eligible dividends)
• Feds felt ordinary DTC and gross up factors
overcompensated individuals running non eligible
business
• Budget 2013 proposes adjustment to gross up
factors
Tax Shelters
• Normal reassessment periods are extended
• This will assist CRA in identifying and auditing
taxpayer claims
• CRA has 3 years to review after relevant information
on the shelter is provided
Charitable donations
• CRA has spend a lot of time and money in the past
fighting donation schemes
• Previous rules did not permit CRA to take tax collection
action until the case was settled
• New rules will permit CRA to collect 50% of the disputed
tax, interest and penalties up front
Labour Sponsored Venture Capital
• Mutual Fund corporation
• Currently a 15% tax credit, to a max of $5000 per
year
• Reduced to 10% in 2015
• Reduced further to 5% in 2016
Then eliminated
Leveraged life policies
• Life programs were introduced which allowed the
client to borrow against life policy for investment
purposes
• 10% interest was used as a loan rate. Client would
claim costs under 20(1)(c)
• Interest credited on life policy generally 2% less that
loan rate
• In some cases, taxpayer would also claim insurance
costs as “collateral insurance” deduction
• CRA has been concerned about their approach to
attack, and litigation costs
Leveraged policies
Finance has come to CRA’s aid. Response was quite
simple and targeted
• Deny interest deduction
• Deny collateral costs
• Deny CDA credit on life proceeds
Expected to raise $260M in new tax over next 5 years
Leveraged Life Annuity
• Client uses cash to buy an annuity (most often
corporately)
• Client purchases life insurance
• Borrow back the initial investment, assigning the two
above instruments as collateral.
The client would then deduct the interest, deduct
collateral insurance costs, enjoy CRA credit and
reduce share values
Leveraged annuity
Finance once again helped CRA with this issue
The arrangement is “too rich” for participants and
provides more tax benefit than any other
“investment”
• Life policy is now non exempt (taxable)
• No deduction allowed for collateral premium
• NO CRA credit for life proceeds
Life Policy Exempt Room
• Reserves inside an exempt life insurance policy
grow tax free
• These reserves are inherently a pre payment of
future premium costs. Returns within plan limits are
invested and grow tax free
• The government intends to update and simplify the
Exempt test. Policies of a given size will have less
room for deposits up front when the Maximum Tax
Exempt deposit amounts (MTAR) are reduced
• Canadians will pay more, for a longer period, when
new rules are implemented (sometime in 2015)
Prescribed annuity taxation
• Prescribed annuities are purchased by individual Canadian
taxpayers with Non Registered investment assets
• The low, level lifetime taxation enjoyed on these plans
represent that amount of income the individual could earn
from the annuity above and beyond their initial deposit
amount.
• The mortality table currently in use is so old, many of our
older annuity clients are already “deceased” or are very close
to being
• Finance has announced their intention to update mortality
tables used to more closely reflect actual potential income
Character Conversion Arrangement
Derivative based return on forward contracts greater than
180 days will be treated as ordinary income not Capital
Gains
Graduated rate trusts
• Testamentary trusts created by will compute federal
income tax using the graduated tax rates applicable
to individuals
• In the view of finance, this treatment raises
questions of tax fairness and neutrality in
comparison to beneficiaries receiving equivalent
income directly
• Finance is also concerned with the tax motivated
use of Test. Trusts and the impact on the tax base
• Finance intends on releasing a consultation paper to
stakeholders with an opportunity to comment
Other measure of interest
• 15% tax credit for eligible adoption costs
• First time super donor credit. Additional 25%
charitable donation credit for first time donors up to
$1000.
• Safety deposit costs no longer deductable
Corporate measures of interest
• A number of temporary accelerated CCA measure
applicable to various equipment and industries
• Credit Unions are eligible for the small business
deduction. Additional deductions only available to
credit unions provide access to preferred income tax
rates across the board. Phasing out these tax
benefit will raise $200m over next 5 years.
• Restricted Farm Loss (RFL) rules will be modified to
offer benefit only to those whose primary source of
income is farming (SCC ruling favored lawyer who
also ran a horse hobby farm)
Corporate measures
Canada Job Grant Program
• $15,000 per person for training
• There must be an employer plan specific to training
those who are unemployed or underemployed
Pension
• RPP administrators able to make
corrections/adjustments to correct reasonable
errors without CRA approval
International tax and tax avoidance
• Excise tax act will be amended to require reporting
to CRA on all international fund transfers over
$10,000
• New program will be introduced to reward
individuals who provide information related to
international non compliance. 15% reward on total
(including interest and penalties) major
reassessment, currently deemed to be over
$100,000
Tax avoidance
• There is a 3 year automatic extension if the taxpayer
has ever failed to report income or neglected to file
a T1135. The T1135 will be amended to require
much more detailed information from taxpayer on
holdings, properties, etc.
Thanks for your participation!
Questions?