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As expected from this minority government, this Budget proposes changes that provide a little something for almost everyone. However, with a few notable exceptions, the amendments will be phased in over an extended period of time - implementation of many of the changes will not begin until the 2006 taxation year, or later.  The Budget proposals may be summarized as follows:

Corporate Tax Measures

• The 4% federal corporate surtax will be eliminated for taxation years that end after December 31, 2007, with proration for taxation years that include that date.  The elimination of the surtax will provide a 1.12% reduction in overall corporate taxes.
• The general corporate income tax rate will be reduced by 2% between 2008 and 2010.  However, this reduction does not apply to: (i) corporations that are investment corporations, mortgage investment corporations or mutual fund corporations; (ii) income otherwise subject to the reduced rate applicable to small businesses; and (iii) certain investment income earned by Canadian corporations.
• The combination of the elimination of the 4% corporate surtax and the reduction in the general corporate income tax rate will result in the following rates being applicable:

Type of Income	Legislated 2008	Proposed 2008	Proposed 2009	Proposed 2010
On the first $300,000 of active business income of a CCPC	13.12	12	12	12
On other business income	22.12	20.5	20	19

• The rates of capital cost allowance will be increased for certain industry-specific equipment, as follows: 

Industry	Equipment	Current CCA Rate	Proposed CCA Rate
Oil and Gas	Transmission pipelines for petroleum, natural gas or related hydrocarbons	4%	8%
Oil and Gas	Pumping and compression equipment related to a transmission pipeline	20%	15%
Electrical Generation	Combustion turbines (including burners and compressors)	8%	15%
Electrical Distribution	Transmission and distribution assets	4%	8%
Telecommunications	Wire and cable other than fibre-optic cable	5%	12%
Renewable Energy Generation	High-efficiency cogeneration systems   Renewable energy generation systems	30%   30%	50%   50%

 

Deferred Plans

• The 30% limit on foreign property held by pension funds and deferred income plans will be eliminated for months that end in the 2005 calendar year and for subsequent years.  It is expected that this relief will apply to RRSPs, RRIFs and DPSPs.  This may provide opportunities for structuring certain investment funds such as income trusts.   
• Investment grade gold and silver bullion coins and bars, and certificates in respect of such investments, will be added to the list of qualified investments for RRSPs and certain other deferred income plans, after February 22, 2005. 

Personal Tax Measures

• The basic personal deduction will be gradually increased between 2006 and 2009 to $10,000.  The amount eligible for the spousal, common-law partner and wholly-dependent-relative credits will also be increased.
• The RRSP annual contribution limit will be gradually increased between 2006 and 2010 to $22,000.  The limit for subsequent years will be indexed to average wage growth. 

2005	2006	2007	2008	2009	2010	2011
$16,500	$18,000	$19,000	$20,000	$21,000	$22,000	indexed

• Certain charitable donations made by individuals before January 12, 2005, directed toward the tsunami relief effort, can be claimed in respect of the 2004 taxation year.
• Certain expenses incurred in adopting a child under the age of 18 will be eligible for a 16% non-refundable tax credit.
• Favourable changes to the medical and disability tax credit regimes will be implemented.

Tax Enforcement

• $30 million will be invested to enhance the audit and collection capabilities of the Canada Revenue Agency in respect of cross-border and international transactions.

Goods and Services Tax

• A director of a corporation may be held jointly and severally liable with the corporation to pay any GST/HST net tax refund to which the corporation was not entitled, plus any interest and penalties relating to that amount. 

Legislative Update

• Cross-border share-for-share exchanges

In 2000, the federal government announced it intended to develop rules to permit cross-border share for share exchanges to occur on a tax-deferred basis.  The government proposes to release in the near future a discussion draft of proposed income tax amendments to implement this initiative.

• Interest deductibility

In October, 2003, the federal government introduced draft legislation intended to limit the deductibility of interest on borrowed money used to earn income from a business or property.  The government's intention is to ensure that "income" for this purpose is interpreted as net income or profit rather than gross income and that income exclude capital gains.  The 2003 proposals were greeted with great concern by taxpayers and the investment industry.  Accordingly, the government will release an alternative proposal for comment at an early opportunity.

• Income trusts and Limited Partnerships

In response to a perceived risk to tax revenue posed by investments in income trusts by tax-exempt entities, in 2004 the government proposed measures to limit the level of pension fund investment in business income trusts. As a result of concerns expressed by the investment industry, the government subsequently suspended the implementation of this proposal pending further consultation. The government now proposes to consult stakeholders and release a consultation paper shortly.

The elimination of the limit on foreign property held by pension funds and deferred income plans discussed above also lifts a restriction on investments in limited partnerships.  As limited partnerships, as flow-through vehicles, have many of the same characteristics as income funds, the government's review and consultation process in respect of income funds will also encompass limited partnerships.

• Foreign investment entities, non-resident trusts and other Technical Amendments

The government intends to introduce legislation to implement these measures at a suitable time.

• Taxation agreements with First Nations

The government indicated its willingness to continue to put in place agreements with interested First Nations to permit them to levy sales and/or income taxes.

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.

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