Budget 2009: Tax cuts aimed at middle class

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Tax bracket changes
Business owners
Home-buying and home ownership
Flow through shares
Bankrupt employers
Maternity and parental benefits for the self-employed

See also: “Temporary” deficit to reach $85 billion, by Doug Watt, Advisor.ca.

A newer measure relates to RRSP or RRIF payments after death. Where the fair market value of investments held in a registered plan are generally included as income when clients die, the budget points out that “there is no existing income tax provision to recognize a decrease in the value of RRSP or RRIF investments that occurs after the annuitant’s death and before they are distributed to beneficiaries. Budget 2009 proposes to allow, upon the 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/RRIF income inclusion.”

Notably absent from Finance Minister Jim Flaherty’s announcement today is any hint that the government might eliminate or reduce capital gains taxes. Infrastructure spending is a cornerstone of this budget announcement as well, but the government seems to be keen to go it alone: Although many will likely benefit — including those employed in the building and forestry sectors, supply chain managers, commuters, other travellers and those using outdated university and research facilities (Flaherty says most new funding for infrastructure projects will only be available for only the next two years while the country’s need for stimulus is greatest) — there is no mention that public–private partnerships or other investment opportunities might be part of the equation.

That said, there are a number of new measures that will affect clients and business owners.

Tax bracket changes

Changes to the personal income tax brackets are among the more notable developments announced in Budget 2009. As of January 1, 2009, the two lowest income tax brackets will be raised 7.5% above 2008 limits to $40,726 and $81,452 respectively. The basic personal amount will also be increased to $10,320 in 2009, up from $9,600 in 2008.

This change to the lowest tax bracket could also affect those collecting income–tested benefits like the National Child Benefit Supplement and the Canada Child Tax Benefit — the budget proposes to apply the new upper limit of the 15% tax bracket for income testing both, allowing lower income families to earn more before clawbacks begin — a move that Flaherty says, “will help low and middle income Canadians and it will stimulate consumer spending.”

Additional Support to Low-and Middle-Income Families with Children
Example-Single Parent with Two Children-July 2009 to June 2010
Family Income	Existing Benefits		Additional Benefits		New Total
	NCBs	CCTB	NCBs	CCTB
$20,000	$3,913	$2,680	$0	$0	$6,593
$25,000	$3,181	$2,680	$436	$0	$6,296
$30,000	$2,031	$2,680	$436	$0	$5,146
$35,000	$881	$2,680	$436	$0	$3,996
$40,000	$0	$2,633	$166	$47	$2,846
$45,000	$0	$2,433	$0	$76	$2,509
$50,000	$0	$2,233	$0	$76	$2,309
Note: Totals may not add due to rounding.

Speaking with Advisor.ca before the budget, TD vice-president and deputy chief economist, Craig Alexander said, “as you go up the income scale, the amount you tend to consume out of every dollar you earn diminishes. People who earn a lot of money only spend a fraction of what they earn and they have significant savings. At the low end of the income scale, people who have very modest income spend almost everything that they earn. If you want to boost spending, reduce the impact of how much goes to savings, the people you should target are people with the most modest income.” Also, he says, those at the low end of the income scale have huge effective tax rates because of their reduced access to government programs. “Your effective tax rate is enormous for those individuals. That’s really unfair and it also tends to diminish their willingness to participate in the labour market. So for a number of reasons, both economic and social, I think the government should target tax cuts for low-income Canadians as opposed to mid-income Canadians.”

Business owners

Businesses and small business owners also have a few reasons to be cheery. Small business owners will benefit from an increase in the amount of small business income eligible for the reduced federal tax rate of 11% — changes announced raise the current limit of $400,000 to $500,000 as of January 1. Those planning business investments will also be helped by plans to extend temporary measures that allow companies to write off investments in machinery and equipment.

According to budget documents, the capital cost allowance (CCA) system determines how much of any capital asset costs can be deducted each year for tax purposes. “The government’s approach has generally been to set CCA rates so that the deduction for capital costs is spread over the useful life of the asset,” say the budget’s authors.

Budget 2009 proposes temporary increases in CCA rates for computers and machinery and equipment used in manufacturing or processing, to provide “economic stimulus and assist Canadian businesses during this challenging economic period.”

The measures include a move to create a temporary 100% capital cost allowance rate for computer hardware and systems software acquired after January 27, 2009 and before February 1, 2011. For manufacturers, the budget proposes to extend measures announced in the 2007 and 2008 budgets that gave business in manufacturing and processing sectors a 50% straight-line accelerated rate for eligible assets acquired during a certain period of time. Budget 2009 proposes to extend the rate to investment in machinery and equipment made in 2010 and 2011 as well.

“Canadian business must be free to reinvest. In our last two budgets our government temporarily accelerated the capital cost allowance treatment of investments in machinery and equipment,” Flaherty says. “We will extend the 50% straight-line accelerated capital cost allowance rate by two years.”

Other proposed initiatives that affect business owners include:

• Reduced Employment Insurance premium rates to $1.73 per $100 of insurable earnings, their lowest level since 1982.
• A repeal of section 18.2 of the Income Tax Act. This section is scheduled to come into force in 2012 and will affect businesses by constraining the deductibility of interest in certain situations in which a Canadian corporation uses borrowed funds to finance a foreign affiliate. “Early action is being taken in relation to the panel’s recommendation concerning section 18.2 because of the conclusions of the panel on the potential effects of the provision on foreign investment by Canadian multinational firms, particularly in the context of the current global financial environment. Accordingly, it is proposed that section 18.2 be repealed.”
• Increasing access to credit for small business through proposed amendments to the Canada Small Business Financing Program and the Business Development Bank of Canada.

Home-buying and home ownership

First-time home-buyers who are eyeing the market, and those interested in making renovations in the next year or two, are also on the government’s thoughts this year. To encourage home ownership and home construction, the finance minister proposes to increase the amount first-time homebuyers can withdraw from their RRSPs to purchase or build a home — from $20,000 to $25,000. It also proposes to establish a first-time homebuyer’s tax credit which could amount to $750 worth of savings on closing costs.

The second “limited-time offer” being offered up in this budget is a temporary home renovation tax credit. Until January 31, 2010, this proposed measure will provide tax relief for home renovation costs. Once calculated on a client’s 2009 tax return, the savings could work out to $1,350 for each family.

Flaherty says the home renovation credit is available for any project. “Everything from a new furnace to energy-efficient windows to a new deck” at the house or cottage is eligible. The credit can also be claimed in addition to support from existing government energy retrofit programs and the medical expense tax credit.

Other measures

Finally, additional measures announced today include but are not limited to, a new extension to mineral exploration tax credits, the establishment of a new Clean Energy Fund to support research, development and demonstration projects, possibly in areas of interest to green investors, protection for workers when employers go bankrupt and changes to employment insurance provisions.

Flow through shares could get an extra boost by way of a one-year extension in the existing 15% mineral exploration tax credit (the shares allow companies to renounce or “flow through” any tax expenses associated with Canadian exploration activities to investors, who deduct the expenses when calculating their own taxable income). The mineral credit, first introduced in 2000, is currently scheduled to expire at the end of March 2009.

“In light of global financial conditions and the important role of the mining sector in Canada, Budget 2009 proposes to extend eligibility for the mineral exploration tax credit for one year, to flow-through share agreements entered into on or before March 31, 2010. Under the existing ‘look-back’ rule, funds raised in one calendar year with the benefit of the credit can be spent on eligible exploration up to the end of the following calendar year. Therefore, funds raised with the credit during the first three months of 2010 can support eligible exploration until the end of 2011.”

Bankrupt employers can cause significant financial strain for many when their underfunded pension plans are left behind as well. To address this possibility, plans announced will extend the Wage Earner Protection Program to cover severance and termination pay. The program currently provides guaranteed and timely payment of wages and vacation pay owed to eligible workers if employers fail to pay after declaring bankruptcy. Currently this assistance is worth $3,254 per person.

Maternity and parental benefits for the self-employed are also likely to be examined in the future as a result of this budget announcement. According to documents, the Minister of Human Resources and Skills Development will be asked to establish an expert panel that will consult Canadians on how to best provide self-employed Canadians with access to EI maternity and parental benefits. “These benefits could help self-employed parents to better balance work and family responsibilities and give them the opportunity to spend more time with their newly born or adopted children.”

(01/27/09)

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