2011 Federal Budget
Yesterday's federal budget did not contain many changes for private business owners. The scheduled corporate tax rate reductions will continue and personal tax rates remain unchanged. There were a couple of positive announcements and several new measures to shut down tax loop holes or planning strategies.
Below we have highlighted some of the changes that we think will be of most interest to you. The PwC 2011 Federal Budget web page provides a more in-depth discussion of the budget.
The accelerated 50% Capital cost allowance rate for manufacturing or processing machinery has been extended by two years, covering acquisitions before 2014. After the extension the rate reverts back to 30%.
Small Business Hiring Credit
The budget includes a temporary Hiring Credit of up to $1,000 against a small employer's increase in its 2011 Employment Insurance premiums over those paid in 2010 to encourage additional hiring.
Elimination of partnership deferral
The budget introduces measures that will limit the ability of a corporation to defer the taxation of income earned through a partnership. Basically corporate taxpayers will no longer be able to defer income by having partnerships with year ends different than theirs.
Extension of Tax on Split Income – Capital Gains
The existing "tax on split income" rules (the "kiddie tax") is extended to apply to capital gains realized by or included in the income of a minor, where the gain is attributable to a non-arm's length disposition of shares. These gains will be treated as dividends subject to the kiddie tax and will be ineligible for the lifetime capital gains exemption. As a result, a third party sale of private company shares will generally be required to enable a child under age 18 to use his or her capital gains exemption. Depending on the province of residency, the use of the $750,000 capital gains exemption can save tax in the range of $146,250 in Alberta to $187,500 in Nova Scotia.
New Limitations on Individual Pension Plans
Proposed changes will affect defined benefit Registered Pension Plans (RPPs) established for one main income earner, referred to as individual pension plans (IPPs). Basically the new rules seek to reduce the amount of income a taxpayer may defer by creating an IPP- at the time the IPP is created and by proposing minimum withdrawal requirements from an IPP for a member over 71.
Review of Employee Profit Sharing Plans (EPSP)
No proposed changes yet but a warning from Finance that they will be reviewing the existing rules for EPSPs. Specifically, the Government mentioned their concern with the use of the plans by business owners and their family members.
New Restrictions on Registered Retirement Savings Plans (RRSP)
Anti-avoidance rules applicable to RRSPs and Registered Retirement Income Funds (RRIFs) will be expanded by introducing rules similar to the "advantage," "prohibited investment" and "non-qualified investment" rules applicable to Tax-Free Savings Accounts (TFSAs). The Budget states that these changes are to address concerns regarding the use of RRSP's in tax planning schemes undertaken by a small number of taxpayers, including "RRSP strips", which purport to enable individuals to access their RRSP funds without including the appropriate amount in income.
New Limitations on Donations of Flow Through Shares
Proposed changes will limit the exemption from capital gains tax on donations of publicly-listed flow-through shares to the excess of cumulative capital gains in respect of dispositions of these shares over the original cost of the share.
If you would like to talk about how the budget may impact you or your business, we encourage you to contact your local PwC Private Company Services contact.