The 2010 budget brought no big surprises for Canada’s wealthy, but then it brought no real disappointments either.
A cash-strapped government struggling to balance a record $56 billion deficit, gave up very little in the way of tax cuts or incentives. But as John Nicola, partner and financial advisor at Nicola Wealth Management, points out, “This budget was meant more or less as a PR exercise in convincing Canadians their government is running the ship better than any other G7 nation.”
And they succeeded to a large extent, Nicola says. “The debt to GDP ratios are better, the deficit ratios are better, overall unemployment rates are not as bad, just about by every measure Canada came out looking better than anyone else. It’s obvious some better decisions were made on Bay Street than on Wall Street.”
Given the yawning deficit, Nicola adds the fact they didn’t compromise on reduction of tax rates is a big deal. They could have waffled, but didn’t. “It makes Canada very formidable as a competitive place to run a business.”
Bruce Cumming, president of Cumming and Cumming Wealth Management, however, wants a little more. “I wish Jim Flaherty would take them down to zero,” he said.
Some Canadian companies will face tougher competition as a result of the tariff cuts, but the government projects the measure will create 12,000 new jobs.
Budget 2010 further proposes improvements to the investment environment by reducing barriers for businesses and enhancing competition. It includes eliminating all remaining tariffs on productivity-improving machinery and equipment and goods imported for further manufacturing. When fully implemented, this will provide $300 million in annual duty savings to Canadian business.
The government also claims this will greatly reduce paperwork for manufacturers in Canada. Nicola remains skeptical. “There’s always a lot of talk about reducing paperwork, it would be interesting to see what the government will actually do about that. Our regulatory requirements have gone up steadily. There’s no reduction in our compliance outcomes. Asking them to reduce paperwork is like putting the fox in the hen house.”
Closing the loops
The budget also proposes closing unfair tax loops. But the impact on the wealthy, Nicola says will be very marginal. “Those are not things our clients have ever had to deal with. I don’t see them having any significant impact on them.”
Extension of work sharing he says might be much more of a plus from the manufacturing perspective. “A lot of employers don’t want to have to lay off people.”
The big news coming out of this budget for Cumming is the plan to revamp the Registered Disability Savings Plan (RDSP).
The new rule will allow the rollover of a deceased individual’s Registered Retirement Savings Plan (RRSP) to a surviving spouse (or to a financially dependent child or grandchild). The measure will come into effect for deaths on, or after, March 4, 2010 (for deaths after 2007 and before 2011 special transitional rules will permit an equivalent result). The Department of Finance estimates this revision will save Canadians $20 million in taxes over five years.
Cumming says this will change advisor-client discussions about wills. “If the family has a disabled child we’re going to be talking about Henson Trusts and the new RDSP. It’s a slam-dunk to create the RDSP because of all the government grants you get. And now this will allow a top-up and change the discussion I have with my clients about whether they’d like to leave money via a Henson trust or fund a grandchild via RDSP. The issue of RDSP versus Henson Trust is going to be an ongoing one.”
Commenting on the promise of a national regulator, Cumming says, “Flaherty is like a dog with a bone about the national securities regulator. But it will positively impact advisors and by inference the HNW clients.”
Lorn Kutner, tax partner in private company services group, Deloitte, wasn’t expecting fundamental changes. “Clearly they have a deficit to deal with, that restricts the goodies.”
He’s skeptical of the government’s plans of a public consultation period for tax avoidance transactions. This regime currently exists south of the border and in the U.K. (and very recently in Quebec) where a transaction is considered an avoidance transaction as defined in Income Tax Act if two of the three hallmarks are met, and there is an obligation to report the transaction to CRA.
The hallmarks include:
1. Promoter or tax advisor is entitled to fees contingent on attaining the tax benefit;
2. Promoter or tax advisor requires confidential protection; and
3. Tax payer obtains contractual protection
If you don’t report to the CRA, and you are caught, you can be denied the tax benefit. Kutner says if this becomes a law it could impact the wealthy, they’re the ones who enter transactions aimed at minimizing or mitigating tax liability. So even if 90% of the population doesn’t really care about it, the 10% who are impacted will be watching. Kutner is, however, happy about new rules that eliminate tax reporting under section 116 of the Income Tax Act for investments such as those by non-resident venture capital funds in a typical Canadian high-technology firm.
“It was a very cumbersome and time-consuming process and non-resident private equity firms have traditionally shied away significantly from investing in Canadian private companies because of this.”
He’s also pleased with the government’s decision to consider the possibility of a formal system of loss transfers or consolidated reporting. “If you’re an entrepreneur with two to three companies with profit in one and losses in another, unless you have reason to move income around you’re not really taking advantage of the losses in one company or the profits in the other.”
Taxing options
Kutner also calls out new rules governing the tax treatment of employee stock options to prevent certain tax-planning practices known as a “double deduction.” These practices allow stock-based employment benefits to escape taxation both at the corporate and personal level.
When an employee acquires shares of his or her employer under a stock option agreement, the difference between the fair market value of the security at the time of the option being exercised and the amount paid by the employee to acquire the shares is treated as a taxable employment benefit, in which the employee is entitled to a deduction equal to 50% of the benefit.
Under the new rules, the stock option deduction would be available to the employee only in situations where the employee exercises his or her option to acquire the shares.
The employer may allow an employee to cash out stock option rights and still get a stock option deduction, but only if the employer makes an election to forgo the deduction of the cash payment. If the employer does not make the election to forgo the deduction in a cash-out scenario, the stock option deduction would not be available to the employee.
The government has also eliminated the tax deferral election effective immediately such that an employee can no longer defer paying tax on the stock option benefit until the year of sale.
In addition, to ensure it collects its taxes when such options are exercised, the government will now insist on collecting the required income tax withholding when the options are exercised. Employers will be required to withhold tax at source for the period in which the employee exercised the option.
In a related announcement, the government is also cracking down on employee stock option plans that permit employees to dispose of their stock option rights for a cash payment from their employer.
Currently, the employer can deduct the cost of such cash payments while employees are entitled to the 50% stock option benefit deduction.
Under new proposals, for employees to be able to get this 50% deduction, their employer will have to file an election promising to forgo its deduction for the cash payment. If they don’t, employees will be fully taxable on the value of such cash-out payments.
Mike George, director of wealth and estate planning, Richardson GMP Limited, is excited at newer options available for charitable giving. “A significant number of our clients are looking at making a long-term gift to charities, this allows more flexibility in how they want to fund a gift over time,” he says.
Ottawa is proposing to get rid of the disbursement quota, introduced in the 1970s and intended to ensure a significant portion of a charity’s resources be devoted to charitable purposes. Specifically, the amount a charity spends each year on charitable activities must be at least the sum of 80% of the previous year’s donations (the charitable expenditure rule) and 3.5% of all assets (the capital accumulation rule).
This year’s budget proposes to eliminate the charitable expenditure rule and to modify the capital accumulation rule. Estate planners will be looking at this part of the budget very carefully, particularly for high net worth clients who may be making large donations and looking at ways to make those donations more effective.
(03/04/10)
