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                                                        2001 FEDERAL BUDGET

 

 

BUDGET HIGHLIGHTS

 

On December 10, 2001, Finance Minister Paul Martin delivered his first full budget in twenty-two months and the first in the aftermath of September 11.  Consequently, most of the new initiatives introduced in the Budget are targeted towards inland security. In total, the Budget introduces a $7.7 billion security package, which includes $6.5 billion for areas such as air security and funding for the military, while another $1.2 billion has been earmarked for border initiatives. In part, the money for these efforts will come from a new security charge on air travelers of either $12 or $24 per ticket purchased, commencing April 2002.

 

While the previously announced tax relief measures introduced in the February 28, 2000 budget and the October 18, 2000 mini-budget were left intact, very few new tax initiatives were incorporated into the current Budget.

 

 

The following sections summarize the major tax initiatives.

 

Corporate Tax Measures

 

Deferral of Corporate Tax Instalments for Small Businesses

 

In order to provide a cash flow benefit to small corporations, many of which are facing serious challenges as the economy has slowed, the Budget proposes to defer payment of their federal corporate income and capital tax instalments for the months of January, February and March 2002 for a period of at least six months, without interest or penalties. Corporations will qualify for this instalment deferral if they are resident in Canada and if they, together with associated corporations, do not have more than $15 million of taxable capital employed in Canada in the previous taxation year. In respect of provinces that have a corporate tax collection agreement with the federal government, eligible corporations will also be able to defer their provincial income tax instalments for the same period.  Since Ontario is a province that does not have a corporate tax collection agreement with the federal government, Ontario income and capital tax instalments will continue to be required.

 

Currently, corporations must make their final payment of taxes owing for a taxation year two or three months after the end of that year (the balance-due day). To ensure that all small corporations effectively benefit from at least a six-month deferral of their January, February and March 2002 instalments, the balance-due day for federal tax purposes will also be extended, in circumstances where it would have otherwise occurred before a deferred instalment payment.  Furthermore, any deferred instalment payment that would otherwise be payable after year-end, but before the balance-due day for the year, will be due only on the balance-due day.

 

The following table sets out the schedule for the deferral of instalments and the deadline for making balance-due day payments:

 

Schedule for Deferred Tax Instalments and Balance-Due Day

 

 

Deductibility of Meals at Construction Work Camps

 

The Budget proposes to expand the ability to fully deduct business meals incurred for employees working at certain “semi-remote” work sites.  This is one of the exceptions from the general rule that business meals and entertainment expenses are only 50% deductible.  Currently, in order to qualify for a full deduction, the meal must be taken at a work site which is at least 30 kilometres from the nearest urban area of at least 40,000 people, and the employee cannot be expected to return home daily. 

 

Commencing in 2002, the cost of business meals provided by an employer to an employee will be fully deductible where the employee is housed at a temporary work camp constructed or installed for the purpose of providing meals and accommodation to employees working at a construction site, provided that the employee cannot be expected to return home daily.  In addition, an input tax credit will be allowed for the full amount of the goods and services tax/harmonized sales tax (GST/HST) paid or payable by the employer for the cost of the fully deductible meals provided at a qualifying construction work camp.

 

Improvements to the Tax Incentives for Renewable Energy and Energy Efficiency

 

To encourage investment in small hydro-electric projects, the Budget proposes to increase the upper limit on the size of small hydro-electric projects that qualify for the beneficial capital cost allowance treatment of Class 43.1, from the current limit of an annual average generating capacity of 15 megawatts (MW) to a maximum annual rated capacity of 50 MW.  The change will apply to property acquired after December 10, 2001. 

 

Furthermore, to encourage energy efficient use of blast furnace gas by steel mills, an additional change to  Class 43.1 is proposed.

 

Venture Capital – Partnerships

 

The Budget proposes two measures to facilitate the use of limited partnerships by tax-exempt and foreign investors in structuring their venture capital investments.

 

Qualified Limited Partnerships

 

Currently, interests in limited partnerships, other than qualified limited partnerships (QLPs), are treated as foreign property for the purposes of the foreign content restrictions applicable to registered retirement savings plans and other deferred income plans.  The Budget proposed to eliminate one of the conditions for eligibility as a QLP. 

 

After 2001, the Budget proposes that a limited partnership may be a QLP even though a limited partner, either alone or as part of a non-arm’s-length group, has more than a 30-per-cent ownership interest in the partnership.  Nevertheless, for the purpose of the foreign property rules, any limited partner or group that holds more than a 30-per-cent interest in a QLP will be treated as owning a proportionate interest of each property owned by the QLP, including any foreign property.  An ownership interest of 30 per cent or less in a QLP will remain exempt from treatment as foreign property.

 

Use of Canadian Investment Managers

 

The Budget proposes that, for 2002 and subsequent taxation years, provided certain conditions are met, a “qualified non-resident” will not be considered to be carrying on business in Canada solely because a Canadian resident provides investment management and administration services to the non-resident, or to a partnership of which the non-resident is a member.

 

 

Personal Tax Measures

 

Apprentice Vehicle Mechanics’ Tools Deduction

 

Individuals employed as apprentice vehicle mechanics, who provide their own tools for the on-the-job component of their apprenticeship, may get an income tax deduction for a portion of the cost of new tools acquired after 2001. The amount of the deduction will be the total cost of new tools acquired in a taxation year, less the greater of $1,000 and 5 per cent of the individual’s apprenticeship income for the year. Any part of the eligible deduction that is not claimed in the year in which the tools are acquired, can be carried forward and deducted in subsequent taxation years.   If the tools are later sold for an amount in excess of the acquisition cost less the amount deducted, the excess amount constitutes income in the year of disposition.

 

Adult Basic Education – Tax Deduction for Tuition Assistance

 

Under certain circumstances, individuals may deduct, in computing their taxable income, the amount of eligible tuition assistance received after 1996 for adult basic education that has been included in their income.

 

Education Tax Credit

 

The Budget proposes to extend the education tax credit to students who receive taxable assistance for post-secondary education under certain government programs, including employment insurance. This measure will apply to the 2002 and subsequent taxation years.

 

Farm Property Rollover

 

Effective after December 10, 2001, the Budget proposes to extend the tax-deferred rollover of farm property in Canada to include property used primarily in a woodlot business.

 

Goods and Services Tax Credit

 

Beginning with the GST credit payable for July 2002, the Budget proposes that the credit will be based on an individual’s family circumstances at the end of the preceding quarter, rather than at the end of the preceding calendar year. Change in family circumstances include events such as births, deaths, marriages, reaching the age of 19 years, and becoming or ceasing to be a resident of Canada.

 

 

Other Specific Tax Measures

 

Donations of Certain Publicly Traded Securities to Charities

 

On October 12, 2001, the Government announced that the special tax treatment available for donations of certain publicly traded securities to charities would be made permanent. Where a capital gain results from the making of a gift of certain publicly traded securities to a qualified donee, other than a private foundation, only 25% of the capital gain will be taxable rather than the usual 50%. The types of securities to which this reduced inclusion rate applies are securities listed on a stock exchange, a share or unit of a mutual fund, an interest in a segregated fund and a prescribed debt obligation.  The Government also proposes to make permanent the measure that reduces the tax on employment benefits in respect of donations of eligible securities acquired through stock option plans.

 

Similar special treatment was introduced in February 2000 for the donation of ecologically sensitive land (and related easements, covenants and servitudes) which is capital property of the donor, whereby the income inclusion is also reduced to 25% in respect of capital gains arising from gifts of such property to qualified donees (such as Canada; a province; a municipality; or an approved registered charity, one of the main purposes of which, in the opinion of the Minister of the Environment, is the conservation and protection of Canada’s environmental heritage).  Since the special treatment for ecologically sensitive land was introduced in 2000 as a permanent measure, the Budget does not address these donations.  Gifts of ecologically sensitive land, which is not capital property of the donor, do not qualify for this special treatment.

 

The Air Travellers Security Charge (“ATSC”)

 

The ATSC will apply in respect of emplanements in Canada, other than emplanements on connecting flights.   The application and rate of the charge will depend on where the airline ticket is purchased and the location of the travel (i.e. whether it is domestic, transborder or other international travel).  Transborder travel refers to travel between Canada and the continental USA (i.e. not including Hawaii), or the island of St. Pierre and Miquelon, that does not include any other international travel.  The rate of the charge for transborder travel takes into account that other US security charges may also apply.

 

The ATSC will apply to air travel purchased in Canada on or after April 1, 2002, for air travel occurring on or after that date.  In this case, the ATSC’s are as follows:

 

1)                  For travel wholly within Canada, $12 per emplanement, to a maximum of $24 per ticket.  For example, a return flight from Toronto to Montreal would cost $24, because there were two separate emplanements in Canada.

 

2)                  For transborder travel, $12 per emplanement in Canada, to a maximum of $24 per ticket for two or more emplanements in Canada.  For example, a return flight from Toronto to Miami would cost $12, because there was only one emplanement in Canada.

 

3)                  For travel from Canada to an international destination (including stopovers or connections in the USA), $24.

 

For air travel purchased outside Canada, the ATSC will be payable by the passenger at the time of emplanement at a Canadian airport on a flight leaving Canada, unless the airline or its agent has collected the charge at the time of the ticket purchase and evidence of the payment is submitted by the passenger at the time of emplanement.  The ATSC will apply to purchases made outside Canada, for which payment is made on or after April 1, 2002, for air travel that includes an emplanement in Canada after May 31, 2002.  In this case, the ATSC’s are as follows:

 

1)                  For transborder travel, $12 per emplanement on a flight leaving Canada, to a maximum of $24.

 

2)                  For other international travel, including connections or stopovers in the USA, $24.

 

The ATSC’s listed above include GST or the federal portion of the HST.

 

 

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To discuss the impact of the Budget on your business, please contact your partner at Goldfarb, Shulman, Patel & Co. LLP.