February 2005

Federal Budget 2005

Minister of Finance Ralph Goodale presented the first Budget of the current Liberal minority government on February 23, 2005 placing an emphasis on “…an unrelenting dedication to sound financial management—to balanced Budgets or better, year after year.” Balanced or better Budgets are again forecast for 2004- 05 and each of the five succeeding fiscal years.

The tax changes announced in the Budget are relatively minor and most of the benefit of these changes will not be felt for several years. Among the changes proposed are the following.

Corporate Tax Reductions
To foster investment and growth the Budget proposes two corporate tax reduction measures. The corporate surtax of 1.12%, which was introduced in 1987 as a measure to cut the deficit, would be eliminated effective as of 2008. The federal corporate tax rate would be reduced as follows:

Rates	Up to $300,000	Over $300,000
Legistlated
2008	13.12%	22.12%
Proposed
2008	12.00%	20.50%
2009	12.00%	20.00%
2010	12.00%	19.00%

Capital Cost Allowance
The Budget proposes increases to depreciation rates (CCA) for hydrocarbon transmission pipelines and related pumping and compression equipment, combustion turbines generating electricity, electricity transmission and distribution equipment, and cables used for telecommunications infrastructure.

Retirement Savings Limits
To encourage Canadians to save more for retirement the yearly limits on retirement savings are proposed to increase. The RRSP deduction limit would still be based on 18% of earned income for the prior year, but the limits for RRSP's would be increased as follows:

Year	Existing	Proposed
2005	16,500	16,500
2006	18,000	18,000
2007	Indexed	19,000
2008	Indexed	20,000
2009	Indexed	21,000
2010	Indexed	22,000
2011	Indexed	Indexed

Deposit insurance coverage on registered and non-registered accounts is proposed to increase to $100,000.

Foreign Property Rules
Retirement plans are restricted to investing no more than 30% of their assets in foreign property. Foreign assets held in excess of those limits are subject to a penalty of 1% per month. The Budget proposes to repeal the foreign property rule effective as of 2005 to allow for broader international diversification.

Basic Personal Amounts
The amount of income that a Canadian can earn on a tax-free basis is proposed to increase from $8,012 in 2004 to at least $10,000 by 2009. The personal credit allowed in respect of a spouse with a low income or no income at all is proposed to increase to at least $8,500 by 2009. The first of such increases is scheduled for 2006. The tax savings will be modest.

Expansion of the Disability Supports Deduction
Persons with disabilities may receive tax relief for the cost of disability supports (e.g. signlanguage interpretation services, talking textbooks, etc.) incurred for the purposes of employment or education through the disability supports deduction. The effects of this deduction are that no income tax is payable on income (including government assistance) used to pay for these expenses, and that this income is not used in determining the value of income-tested benefits. The 2005 Budget proposes to expand the list of expenses eligible for the disability supports deduction.

Medical Expense Tax Credit - Caregiver
The Budget 2004 enabled those who provide such care to claim up to $5,000 of medical and disability-related expenses. The 2005 Budget will double that amount to $10,000—starting in 2005.

Medical Expense Tax Credit – Eligible Expenses
The Budget proposes three additions to the list of expenses eligible for the METC, including costs relating to phototherapy equipment, oxygen concentrators, and medical marijuana.

Child Disability Benefit
The Budget proposes that the maximum CDB will be increased for the 2005–06 benefit year to $2,000 from $1,681.

Adoption Expense Tax Credit
The Budget proposes to introduce a 16-percent non-refundable credit for eligible (nonreimbursable) adoption expenses for the completed adoption of a child under the age of 18 years.

Refundable Medical Expense Supplement
The refundable medical expense supplement provides assistance for above-average medical and disability-related expenses to low-income working Canadians. The supplement is available to workers with earnings above a threshold that is indexed annually. For 2005, the threshold is $2,857. The supplement is equal to 25 per cent of an individual’s medical expense tax credit (METC) and disability supports deduction claims, up to a maximum of $571. For 2005 and subsequent taxation years, the maximum refundable medical expense supplement has been increased to $750.

Deductibility of Interest and Other Expenses
In October 2003, the Department of Finance released for public consultation a package of legislative proposals regarding the deductibility, for income tax purposes, of interest and other expenses (see the article on the “Reasonable Expectation of Profit” in the February 2005 issue of our TAXTICS newsletter). The Department of Finance announced in the Budget that it intends to release a new proposal for comment. In addition, the Canada Revenue Agency is to release its comments addressing certain administrative questions relating to deductibility.

Taxation of Dividends
In the days leading up to the Budget, it had been widely speculated that the personal rate of income tax on dividends might be reduced to eliminate (or at least reduce) the disparity between the taxation of capital gains and dividends. Currently, capital gains realized by individual residents of Ontario are taxed at an effective maximum rate of 23.20%. Dividends received by the same individuals are taxed at a maximum rate of 31.34%. The Budget itself, however, contains no proposals to reduce the rate of tax on dividends and, in fact, does not address the issue at all.

Income Trusts
In the 2004 Budget, the Government expressed its concerns over the risk to tax revenues posed by business income trusts. No steps were taken at that time but the Government did announce its intention to engage in further consultation. A consultation paper is to be released shortly dealing with business income trusts and certain related issues.

Readers are urged to consult their professional advisors prior to acting on the basis of material in this newsletter. If you have any questions regarding the content of this newsletter, please contact Crawford, Smith & Swallow. Copies of the newsletter in PDF format are available on our website.