The budget did not propose many large scale changes to the Federal Income Tax laws. The federal personal income tax rates remain unchanged, as do the federal general and small business corporate income tax rates.
However, there were some relatively minor changes to the Federal tax laws. The following tax measures introduced by Finance Minister Jim Flaherty on March 21, 2013 may impact our clients. *
Dividend Tax Credit for Non-Eligible Dividends
The budget proposes to increase the effective tax rate on non-eligible dividends (i.e., dividends paid out of corporate earnings subject to a preferential tax rate, such as the small-business rate). Currently, non-eligible dividends are subject to a gross-up of 25% and a dividend tax credit of 13.33%. The budget proposes to reduce the gross-up to 18% and the dividend tax credit to 11%. This results in an increase in the top marginal federal rate on non-eligible dividends from 19.58% to 21.22%. This change applies to non-eligible dividends paid after 2013. Please note that full impact of this proposed increase in the tax rate on non-eligible dividends will not be known until we see how the individual provinces respond.
Lifetime Capital Gains Exemption
The budget proposes to increase the current $750,000 lifetime capital gains exemption limit to $800,000. The increase is effective for dispositions of qualified small-business corporation shares, qualified farm property and qualified fishing property after 2013. In addition, for taxation years after 2014, the exemption limit will be indexed to inflation.
Deduction for Safety Deposit Boxes
The budget proposes to eliminate the deduction of safety deposit box fees paid to financial institutions.
First-Time Donor’s Super Credit
The budget proposes a new temporary first-time donor’s super credit to supplement the current charitable donation tax credit. A first-time donor will be entitled to a one-time federal credit equal to 40% for money donations of $200 or less, and 54% for donations between $200 and $1,000. An individual is considered a first-time donor if neither the individual nor the individual’s spouse or common-law partner has claimed a charitable donation tax credit (or the new first-time donor’s super credit) after 2007. The maximum donation amount that may be claimed per couple is $1,000. This one-time credit applies to donations made on or after 21 March 2013 and before 2018.
Revised Form T1135
Form T1135 currently requires only general information regarding where specified foreign property is located and what income it generates. To improve the usefulness of Form T1135 to the CRA in determining whether taxpayers are correctly reporting foreign income, the CRA will revise Form T1135. The revised form will require taxpayers to provide more detailed information regarding each specified foreign property, including:
- the name of the specific foreign institution or other entity holding funds outside of Canada;
- the specific country to which the property relates; and
- the foreign income generated from the property.
These new requirements will improve the administration of the tax system and help to ensure that Canadian taxpayers pay an appropriate amount of Canadian tax on income accruing from their foreign holdings. The revised Form T1135 will be required to be used for the 2013 and subsequent taxation years.
Foreign Reporting Requirements
Some taxpayers have indicated that it is difficult to comply with their foreign reporting requirements because they find the instructions on filing Form T1135 to be unclear and Form T1135 cannot be filed electronically. To help taxpayers meet their filing obligations with respect to Form T1135, the CRA will make certain improvements to the Form T1135 filing process. Beginning with the 2013 taxation year:
– The CRA will remind taxpayers, on their Notices of Assessment, of the obligation to file Form T1135 if they have checked the “Yes” box on their income tax returns, indicating that they have specified foreign property in the taxation year with a total cost of more than $100,000; and the filing instructions on Form T1135 will be clarified.
– The CRA is also in the process of developing a system that will allow Form T1135 to be filed electronically. The CRA will announce when electronic filing becomes available.
Please note that the above are proposed changes to the Federal tax laws. However, in almost all instances, they are ultimately passed into law by the members of Parliament.
* Summaries provided by Ernst & Young.