PERSONAL INCOME TAX MEASURES 

Tax on Split Income

A “kiddie tax” is levied at the highest federal tax rate on certain income (“split income”) received by minors.

For 2014 and subsequent years, the Budget proposes to expand the definition of split income to include income that is paid or allocated to a minor from a trust or partnership if the income is derived from a business or a rental property and a person related to the minor is actively engaged on a regular basis in the activities of the trust or partnership to earn that business or rental income or the person has, in the case of a partnership, an interest in the partnership.

Adoption Tax Credit

The federal adoption credit is 15% of eligible expenses to a maximum amount. The current maximum is $1,766 (15% of $11,774). The Budget proposes to increase that maximum to $2,250 (15% of $15,000) in 2014. Thereafter, the maximum amount will be indexed annually to inflation.

Search and Rescue Volunteer Tax Credit (SRVTC)

The Budget proposes a new federal SRVTC of $450 (15% of $3,000) for eligible ground, air and marine search and rescue volunteers, commencing in 2014. A volunteer must annually perform 200 hours of service. If an individual claims the SRVTC, he/she may not claim the existing $1,000 Government honorarium as a tax-free amount.

If an individual claims the SRVTC, he/she may not also claim the Volunteer Firefighters Tax Credit or vice versa.

TESTAMENTARY TRUSTS 

The 2013 budget announced the Government’s intention to eliminate the “preferential tax treatment” available to testamentary trusts. The Budget proposes a number of significant changes which will basically transform most testamentary trusts into inter vivos trusts for tax purposes.

A trust is taxed as an individual for income tax purposes. Each testamentary trust is generally able to compute its income tax liability using the graduated personal income tax rates. Multiple trusts could be established in a will to magnify this benefit. Only a “graduated rate estate” will now be entitled to this benefit. All other trusts, whether inter vivos or testamentary, must use only the highest personal income tax rate (29% federally plus the applicable provincial taxes) to calculate its tax liability. Only the following trusts (known as graduated rate estates) will be entitled to use the graduated rates:

 

• An estate that is a testamentary trust but only for the first 36 months after the death of the testator. Consequently, an ongoing estate, such as a spouse trust, would only benefit from the graduated tax rates for its first 36 months. 
• A testamentary trust for the benefit of a disabled individual who would be eligible for the federal Disability Tax Credit. 

 

If a trust is not a graduated rate estate, it will be subject to the following provisions, which previously did not apply to testamentary trusts. More specifically, the testamentary trust (like inter vivos trusts):

 

• Will be required to make quarterly instalments and pay its balance due on March 31 of the following year. 
• Must adopt a calendar year end. If a testamentary trust has a non-calendar year-end, it must change its year-end to December 31 in the year in which it ceases to be a graduated rate estate. For example, a testamentary trust created on September 30, 2014, could choose a September year-end. The trust would be a graduated rate estate until September 30, 2017 and would file its September 30, 2017 return using the graduated rates. Thereafter, it must adopt a December 31 year-end. 
• Will not be entitled to the $40,000 alternative minimum tax exemption. 
• Will be subject to the distribution tax under Part XII.2 of the Income Tax Act. 
• May not make investment tax credits available to its beneficiaries. 
• Will not be able to apply for a refund after the normal reassessment period of three years, rather than the 10-year period available for individuals and graduated rate estates.
• May only file a Notice of Objection within 90 days of the assessment, rather than one year after its filing date of March 31. 

 

These rules will apply after December 31, 2015.

CHARITIES AND NON-PROFIT ORGANIZATIONS

Estate Donations

A donation made by a person’s will is currently treated for income tax purposes as having been made by the individual immediately prior to his/her death. Similar provisions apply where a qualified donee is designated under an RRSP, RRIF, TFSA or a life insurance policy. The applicable donation tax credit may currently be claimed by the individual in the year of death or the prior year. It is not unusual for there to be unused donation credits. The estate cannot claim the unused donation tax credit which arose for donations made by a person’s will.

The Budget proposes, for 2016 and subsequent years, that a donation made by a person’s will instead be treated for income tax purposes as having been made by the person’s estate and will only be considered to be a qualified donation when the property is actually transferred to the qualified donee.

The estate may claim the donation tax credit, either in the year the donation is made or in an earlier year of the estate. Alternatively, the estate may deem the deceased individual to have made the donation in the year of death or the previous year.

This proposal applies to donations made within 36 months following the individual’s death.

Consultation of Non-Profit Organizations (NPOs)

There are concerns that some organizations claiming NPO status are either earning profits which are not incidental to their non-profit purposes or are making income available for the personal benefit of members. Consequently, the Budget indicates that the Government intends to review whether the income tax exemption for NPOs remains properly targeted and whether sufficient transparency and accountability provisions are in place. The Government will release a consultation paper for comment.

Electronic Filing

The Government will provide funding to the CRA to enable charities to apply for registration and file their annual information returns electronically.

BUSINESS INCOME TAX MEASURES

Remittance Thresholds for Employer Source Deductions

The Budget proposes to reduce the compliance burden with respect to the frequency for the remittance of payroll source deductions for some small businesses by increasing the threshold level of average monthly withholdings. The average monthly withholding threshold for remitting two times per month is proposed to increase from $15,000 to $25,000, and from $50,000 to $100,000 for remitting four times per month. This proposal applies to amounts to be remitted after 2014. 

SALES AND EXCISE TAX MEASURES

Tobacco Taxation

The Budget introduces several increases in rates of excise duty on tobacco products in an effort to discourage the use of these products among Canadians as part of its health strategy.

Excise duty rate increases are proposed as follows:

 

• From $0.425 to $0.52575 for each five cigarettes or fraction thereof, 
• From $0.085 to $0.10515 per tobacco stick, 
• From $5.3125 to $6.57188 per 50 grams or fraction thereof for manufactured tobacco, and 
• From $18.50 to $22.88559 per 1,000 cigars, and the additional duty on cigars from the greater of $0.067 per cigar and 67% of the sale price or duty-paid value to the greater of $0.08226 per cigar and 82% of the sale price or duty-paid value. 

 

Duty is imposed on all Canadian-made cigarettes, tobacco sticks and manufactured tobacco for sale in domestic and foreign duty-free shops, as well as on imports of these tobacco products for sale in Canadian duty-free shops or brought into Canada by returning travelers. These “duty-free” rate increases are proposed as follows:

 

• From $0.374875 to $0.52575 for each five cigarettes or fraction thereof, 
• From $0.074975 to $0.10515 per tobacco stick, and 
• From $4.685938 to $6.57188 per 50 grams or fraction thereof for manufactured tobacco. 

 

These rate changes will be effective after Budget Day. Going forward, tobacco taxes will be indexed to the consumer price index automatically every five years.

There will also be an inventory tax imposed on inventories of cigarettes held by manufacturers, importers, wholesalers and retailers at the end of February 11, 2014, at a rate of 2.015 cents. This inventory tax will not apply to taxpayers holding 30,000 or fewer cigarettes at the end of February 11 or to cigarettes held in vending machines. The inventory tax on cigarettes will also apply every five years at the time of each inflationary excise duty adjustment. The first inflationary adjustment will be on December 1, 2019.

Standardizing Sanctions Related to False Statements in Excise Tax Returns

The non-GST/HST portions of the ETA do not currently impose administrative monetary penalties or provide for the possibility of indictment and potential prison sentences. Other federal tax legislation currently provides for these measures. The Budget proposes to add a new administrative monetary penalty and to amend relevant criminal offence provisions to be consistent with the GST/HST portion of the ETA. These measures will apply to any excise tax returns filed after the day of Royal Assent to the enacting legislation.