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Table of Contents

Overview

Personal Income Tax Measures

Business Income Tax Measures

Sales Tax Measures

Other Measures

Customs Tariff Measures

Tariff Reductions on Machinery and Equipment

Previously Announced Measures

Notices of Ways and Means Motions

Notice of Ways and Means Motion to amend the Income Tax Act

Notice of Ways and Means Motion to amend the Excise Tax Act relating to the Goods and Services Tax and Harmonized Sales Tax (GST/HST)

Notice of Ways and Means Motion to amend the Customs Tariff

 

Tax Measures: Supplementary Information

Overview

This annex provides detailed information on each of the tax measures proposed in the Budget.

Table A5.1 lists these measures and provides estimates of their budgetary impact.

The annex also provides Notices of Ways and Means Motions to amend the Income Tax Act, the Excise Tax Act, and the Customs Tariff.

Table A5.1
Cost of Proposed Tax and Tariff Measures¹

	2008–09	2009–10	2010–11	2011–12	2012–13	2013–14
	Fiscal Costs (millions of dollars)
Personal Income Tax Measures
Personal Amounts and Income    Tax Brackets	470	1,885	1,950	2,055	2,180	2,320
Canada Child Tax Benefit/National    Child Benefit supplement2	–	230	310	320	325	325
Working Income Tax Benefit	145	580	580	585	585	585
Age Credit	80	325	340	360	380	405
Home Renovation Tax Credit	500	2,500	–	–	–	–
Home Buyers’ Plan	–	15	15	15	15	15
First-Time Home Buyers’ Tax Credit	30	175	180	185	185	190
RRSP/RRIF Losses After Death	30	–	–	–	–	–
Mineral Exploration Tax Credit	–	70	-15	–	–	–
Business Income Tax Measures
Small Business Limit	–	45	80	80	90	100
Manufacturing and Processing:    Accelerated CCA	–	–	–	320	530	140
Computers: Accelerated CCA	–	340	355	-125	-160	-105
Sales Tax Measures
Simplification of the GST/HST    for the Direct Selling Industry	–	–	–	–	–	–
Other Measures
International Taxation	–	–	–	–	80	105
Acquisition of Control    of a Corporation—    Time of Acquisition	–	–	–	–	–	–
Canada Revenue Agency    Strategic Review	–	–	–	–	–	–
Aboriginal Tax Policy Measures	–	–	–	–	–	–
Customs Tariff Measures
Tariff Reductions on Machinery    and Equipment	12	76	81	86	91	96
1 A "–" indicates a nil amount or a small amount (less than $5 million). 2 The Canada Child Tax Benefit/National Child Benefit supplement is legislated in the Income Tax Act, but considered an expenditure for government financial reporting purposes.

Personal Income Tax Measures

Personal Amounts and Income Tax Brackets

Budget 2009 proposes significant new personal income tax relief that will provide immediate benefits, particularly for low- to middle-income Canadians.

Budget 2009 proposes to increase the basic personal amount and the two lowest personal income tax brackets by 7.5 per cent above their 2008 levels, effective January 1, 2009. As a result of these measures:

• the basic personal amount, the spousal and common-law partner amount, and the eligible dependant amount will increase for 2009 to $10,320 from $9,600 in 2008,
• the upper limit of the first personal income tax bracket (15-per-cent income tax rate) will increase to $40,726 in 2009 from $37,885 in 2008, and
• the upper limit of the second personal income tax bracket (22-per-cent income tax rate) will increase to $81,452 in 2009 from $75,769 in 2008.

The increased amounts and bracket thresholds will be indexed to account for inflation for 2010 and subsequent years.

Canada Child Tax Benefit/National Child Benefit Supplement

The income levels on which income-testing of the base benefit under the Canada Child Tax Benefit (CCTB) and the National Child Benefit supplement (NCBs) are based, will be increased in line with the increase in the upper limit of the lowest personal income tax bracket. Specifically, for the 2009–10 benefit year, the income level at which the phase-out of the CCTB begins will increase to $40,726, and the income level at which the phase-out of the NCBs begins will increase by $1,894 such that it is completely phased out by $40,726 for the majority of families.

Table A5.2
Total Personal Income Tax Savings for Typical Individuals and Families in 2009

Single Individual1
Total Income	Net Federal Personal Income Tax2	Tax Relief to Date3	Basic Personal Amount	First and Second Brackets	Working Income Tax Benefit4	Total Budget 2009 Relief	Total Tax Relief in 20095
$	$	$	$	$	$	$	$	%
10,000	-287	-510	0	0	-415	-415	-925	–
20,000	1,016	-243	-33	0	0	-33	-276	-27
30,000	2,509	-336	-33	0	0	-33	-369	-15
40,000	4,449	-417	-33	-82	0	-115	-532	-12
60,000	8,796	-414	-33	-133	0	-166	-580	-7
80,000	13,290	-414	-33	-226	0	-259	-673	-5
100,000	18,490	-414	-33	-284	0	-317	-731	-4
150,000	32,202	-414	-33	-284	0	-317	-731	-2
Note: Numbers may not add up to totals due to rounding. 1 Applies to individuals 64 or younger. It is also assumed that the individual does not live in Quebec (where tax relief is affected by the Quebec abatement and its specific Working Income Tax Benefit (WITB) design) or British Columbia or Nunavut (with their specific WITB designs). 2 Net federal personal income tax (PIT) in 2009 in the absence of tax relief introduced since 2006. Negative values indicate that benefits received by the taxpayer from refundable federal tax credits (the WITB or the Goods and Services Tax Credit (GSTC)) are greater than federal personal income tax. All tables for non-seniors assume that all income consists of employment income, that no deductions are taken and that only basic credits are claimed. 3 Takes account, where applicable, of the reduction of the lowest PIT rate, changes to the basic personal amount and related amounts, the introduction of the Canada Employment Credit, the Child Tax Credit and the WITB. Negative values indicate a reduction in net federal PIT. 4 Based on the illustrative example presented in the Budget. 5 A "—" indicates that percentage relief cannot be calculated because net federal PIT in the absence of tax relief introduced since 2006 is less than or equal to zero. Where total tax relief exceeds net federal PIT before changes introduced by the Government, percentage relief is shown as 100 per cent.

Table A5.2 (cont’d)
Total Personal Income Tax Savings for Typical Individuals and Families in 2009

Single Parent with One Child1,6
Total Income	Net Federal Personal Income Tax2	Tax Relief to Date3	Basic Personal Amount	First Second and Brackets	Working Income Tax Benefit4	Total Budget2009 Relief	Total Tax Relief in 20095		CCTB/ NCBs7
$	$	$	$	$	$	$	$	%	$
10,000	-629	-1,044	0	0	-636	-636	-1,680	–	0
20,000	-606	-338	0	0	-539	-539	-878	–	0
30,000	887	-790	-66	0	0	-66	-856	-97	-231
40,000	2,826	-872	-66	-82	0	-148	-1,020	-36	-112
60,000	7,423	-869	-66	-133	0	-199	-1,067	-14	-38
80,000	11,916	-869	-66	-226	0	-292	-1,161	-10	-38
100,000	17,116	-869	-66	-284	0	-350	-1,219	-7	-38
150,000	30,828	-869	-66	-284	0	-350	-1,219	-4	0
Notes: Numbers may not add up to totals due to rounding. For footnotes 1, 2, 3, 4, and 5, see Single Individual table. 6 Child age 6 or older (i.e., no Universal Child Care Benefit (UCCB)). 7 For July 2009—June 2010 benefit year. Not included in total Budget 2009 relief or total tax relief in 2009.

One-Earner Couple with Two Children^1,8

Total Income	Net Federal Personal Income Tax2	Tax Relief to Date3	Basic Personal Amount	First Second and Brackets	Working Income Tax Benefit4	Total Budget2009 Relief	Total Tax Relief in 20095		CCTB/ NCBs7
$	$	$	$	$	$	$	$	%	$
10,000	-760	-1,044	0	0	-636	-636	-1,680	–	0
20,000	-737	-338	0	0	-539	-539	-878	–	0
30,000	756	-1,104	-66	0	0	-66	-1,170	-100	-436
40,000	2,695	-1,185	-66	-82	0	-148	-1,333	-49	-213
60,000	7,423	-1,182	-66	-133	0	-199	-1,380	-19	-76
80,000	11,916	-1,182	-66	-226	0	-292	-1,474	-12	-76
100,000	17,116	-1,182	-66	-284	0	-350	-1,532	-9	-76
150,000	30,828	-1,182	-66	-284	0	-350	-1,532	-5	0
Note: Numbers may not add up to totals due to rounding. For footnotes 1, 2, 3, 4, and 5, see Single Individual table. For footnote 7, see Single Parent with One Child table. 8 Both children age 6 or older (i.e., no Universal Child Care Benefit (UCCB)).

Table A5.2 (cont’d)
Total Personal Income Tax Savings for Typical Individuals and Families in 2009

Two-Earner Couple with Two Children1,8,9
Total Income	Net Federal Personal Income Tax2	Tax Relief to Date3	Basic Personal Amount	First Second and Brackets	Working Income Tax Benefit4	Total Budget2009 Relief	Total Tax Relief in 20095		CCTB/ NCBs7
$	$	$	$	$	$	$	$	%	$
10,000	-760	-1,044	0	0	-636	-636	-1,680	–	0
20,000	-760	-316	0	0	-539	-539	-855	–	0
30,000	540	-1,018	-66	0	0	-66	-1,084	-100	-436
40,000	2,409	-1,112	-66	0	0	-66	-1,178	-49	-213
60,000	5,779	-1,298	-66	0	0	-66	-1,364	-24	-76
80,000	9,345	-1,395	-66	-133	0	-199	-1,594	-17	-76
100,000	13,249	-1,458	-66	-214	0	-280	-1,738	-13	-76
150,000	24,686	-1,455	-66	-417	0	-483	-1,937	-8	0
Note: Numbers may not add up to totals due to rounding. For footnotes 1, 2, 3, 4, and 5, see Single Individual table. For footnote 7, see Single Parent with One Child table. For footnote 8, see One-Earner Couple with Two Children table. 9 Assumes that one spouse earns 60% of the family’s total income and that the other spouse earns 40%.

Single Senior¹⁰

Total Income	Net Federal Personal Income Tax11	Tax Relief to Date12	Basic Personal Amount	First Second and Brackets	Age Credit	Total Budget 2009 Relief	Total Tax Relief in 20095
$	$	$	$	$	$	$	$	%
10,000	-264	-116	0	0	0	0	-116	–
20,000	1,336	-413	-33	0	-150	-183	-596	-45
30,000	3,215	-519	-33	0	-150	-183	-702	-22
40,000	5,691	-560	-33	-133	-150	-316	-876	-15
60,000	10,455	-475	-33	-133	-150	-316	-790	-8
80,000	17,401	-426	-33	-284	0	-317	-743	-4
100,000	24,821	-426	-33	-284	0	-317	-743	-3
150,000	38,692	-426	-33	-284	0	-317	-743	-2
Note: Numbers may not add up to totals due to rounding. For footnote 5, see Single Individual table. 10 It is assumed that no one is age 64 or younger and that the individual does not live in Quebec. Total income presented in the table consists only of Canada Pension Plan (CPP) benefits, eligible pension income (up to the maximum pension obtainable under the RPP/RRSP limits after a 35-year career) and, where applicable, other income. Old Age Security (OAS) benefits are not included in this definition, but are included in the calculation of tax. 11 For seniors with individual net income (excluding OAS) in excess of $66,335, net federal tax includes the repayment of OAS. It is assumed that no deductions are taken and that only basic credits are claimed. 12 Takes account of the reduction of the lowest PIT rate, changes to the Basic Personal Amount and related amounts, the increase of the Age Credit and pension income credit and, where applicable, the introduction of pension income splitting.

Table A5.2 (cont’d)
Total Personal Income Tax Savings for Typical Individuals and Families in 2009

One-Pension Senior Couple10
Total Income	Net Federal Personal Income Tax11	Tax Relief to Date12	Basic Personal Amount	First Second and Brackets	Age Credit	Total Budget 2009 Relief	Total Tax Relief in 20095
$	$	$	$	$	$	$	$	%
10,000	-498	0	0	0	0	0	0	–
20,000	-93	-392	0	0	0	0	-392	–
30,000	1,990	-887	-66	0	-300	-366	-1,253	-63
40,000	3,920	-1,315	-66	0	-300	-366	-1,681	-43
60,000	8,800	-3,020	-66	0	-300	-366	-3,386	-38
80,000	14,954	-4,693	-66	-265	-300	-631	-5,324	-36
100,000	22,374	-7,263	-66	-265	-300	-631	-7,894	-35
150,000	36,677	-4,533	-66	-417	-150	-633	-5,166	-14
Note: Numbers may not add up to totals due to rounding. For 5, see Single Individual table. For footnotes 10, 11 and 12, see Single Senior table.

Two-Pension Senior Couple^{10, 13}

Total Income	Net Federal Personal Income Tax11	Tax Relief to Date12	Basic Personal Amount	First Second and Brackets	Age Credit	Total Budget 2009 Relief	Total Tax Relief in 20095
$	$	$	$	$	$	$	$	%
10,000	-498	0	0	0	0	0	0	–
20,000	-253	-232	0	0	0	0	-232	–
30,000	1,830	-727	-66	0	-300	-366	-1,093	-60
40,000	3,432	-827	-66	0	-300	-366	-1,193	-35
60,000	6,819	-1,038	-66	0	-300	-366	-1,404	-21
80,000	11,382	-1,121	-66	-265	-300	-631	-1,752	-15
100,000	16,262	-1,151	-66	-265	-300	-631	-1,782	-11
150,000	31,091	-851	-66	-369	0	-435	-1,287	-4
Note: Numbers may not add up to totals due to rounding. For footnote 5 see Single Individual table. For footnotes 10, 11 and 12, see Single Senior table. 13Assumes that each spouse earns 50% of the family's total income.

Working Income Tax Benefit

Budget 2009 proposes to enhance the tax relief provided by the Working Income Tax Benefit (WITB) by an additional $580 million for the 2009 and subsequent taxation years, which is expected to double the total tax relief provided through the WITB.

The Government of Canada recognizes the efforts that provinces and territories have taken to improve work incentives for low-income individuals and families and has been working with them to ensure that benefits are harmonized and that the WITB builds on these efforts by allowing them to propose province- or territory-specific changes to its design.

Proposed design changes will continue to be guided by the following principles:

• they build on actions taken by the province or territory to improve work incentives for low-income individuals and families;
• they are cost-neutral to the federal government;
• they provide for a minimum benefit for all WITB recipients; and
• they preserve harmonization of the WITB with existing federal programs.

Provinces and territories that wish to propose design changes should indicate their interest in doing so in the spring of 2009 with the objective of concluding agreements by the summer of 2009. The final design parameters of the enhanced WITB for the 2009 taxation year will be announced following these consultations. This will allow for the implementation of the new structures for 2009 tax filing.

Age Credit

Budget 2009 proposes to increase the Age Credit, a federal income tax credit for Canadians 65 years of age and older, for the 2009 and subsequent taxation years.

The Age Credit is calculated by multiplying the lowest personal income tax rate, 15 per cent, by an amount that is indexed to compensate for inflation. The Age Credit is subject to an income test that targets the assistance to those seniors who need it most. The unused portion of an individual’s Age Credit may be transferred to the individual’s spouse or common-law partner.

For 2009, the amount on which the Age Credit is based will be increased by $1,000 to $6,408, effective January 1, 2009, and indexed thereafter. This increase will help eligible low- and middle-income seniors by providing up to $150 of additional federal income tax relief each year.

For 2009, the net income level at which the Age Credit begins to be phased out will remain unchanged at $32,312. The phase-out rate is 15 per cent. With this enhancement of the Age Credit amount, the income level at which the Age Credit is fully phased out will increase by over $6,600 to $75,032 from $68,365.

Home Renovation Tax Credit

To stimulate economic growth and encourage Canadians to invest in improvements to their homes, Budget 2009 proposes to introduce a temporary Home Renovation Tax Credit (HRTC). The HRTC will provide meaningful tax relief to help Canadian homeowners make improvements to their property while promoting broad-based economic activity. The design elements of the HRTC are described below.

Design of the Credit

Individuals will be able to claim a 15-per-cent non-refundable tax credit for eligible expenditures made in respect of eligible dwellings.

The credit will apply to expenditures in excess of $1,000, but not more than $10,000, resulting in a maximum credit of $1,350 ($9,000 x 15%).

Eligibility Period

The credit will apply only to the 2009 taxation year. Expenditures for work performed, or goods acquired, after January 27, 2009 and before February 1, 2010, will be eligible for the credit. The credit will, however, not be available in respect of expenditures for work performed or goods acquired in that period if the expenditure is made pursuant to an agreement entered into before January 28, 2009. Individuals may claim this credit (including in respect of expenditures made in January 2010) in their 2009 income tax returns.

Eligible Individuals

Eligibility for the HRTC will be family-based. For this purpose, a family will generally be considered to consist of an individual, and where applicable, the individual’s spouse or common-law partner, and their children who were, throughout 2009, under the age of 18 years.

Family members will be subject to a single limit based on their pooled expenditures.

While it is anticipated that in most cases one family member will claim the whole of the credit, any unused portion may be claimed by one or more of the other family members as a credit against that person’s tax otherwise payable.

Two or more families that share ownership of an eligible dwelling will each be eligible for their own credit. Each family’s credit will be determined by their respective eligible expenditures in excess of $1,000, but not more than $10,000.

Eligible Dwellings

Individuals will be able to claim the HRTC on eligible expenditures made at any time after January 27, 2009 and before February 1, 2010 in respect of dwellings that are eligible at any time during that period to be their principal residence or that of one or more of their other family members under the existing tax law.

In general, a housing unit is considered to be eligible to be an individual’s principal residence where it is owned by the individual and ordinarily inhabited by the individual, the individual’s spouse or common-law partner or their children.

In the case of condominiums and co-operative housing corporations, the credit will be available for eligible expenditures incurred to renovate the unit that is eligible to be the individual’s principal residence as well as the individual’s share of the cost of eligible expenditures incurred in respect of common areas.

Individuals who earn business or rental income from part of their principal residence will be allowed to claim the credit for the full amount of expenditures made in respect of the personal-use areas of the residence. For expenditures made in respect of common areas or that benefit the housing unit as a whole (such as re-shingling a roof), the administrative practices ordinarily followed by the Canada Revenue Agency (CRA) to determine how business or rental income and expenditures are allocated as between personal use and income-earning use will apply in establishing the amount qualifying for the credit.

Eligible Expenditures

Expenditures will qualify for the HRTC if they are incurred in relation to a renovation or alteration of an eligible dwelling (including land that forms part of the eligible dwelling) provided that the renovation or alteration is of an enduring nature and is integral to the eligible dwelling. Such expenditures would include the cost of labour and professional services, building materials, fixtures, equipment rentals, and permits.

The following expenditures will not be eligible for the credit:

• The cost of routine repairs and maintenance normally performed on an annual or more frequent basis.
• Expenditures for appliances and audio-visual electronics.
• Financing costs associated with a renovation (e.g. mortgage interest costs).

Alterations or other items, such as furniture or draperies, and other indirect expenditures for items that retain a value independent of the renovation, such as the purchase of construction equipment (e.g. tools) will not be considered integral to the dwelling and therefore will not qualify for the credit.

The HRTC will not be reduced by any other tax credits or grants to which a taxpayer is entitled under other government programs. For instance, in the case of an individual who makes an eligible expenditure that also qualifies for the Medical Expense Tax Credit (METC), the individual will be permitted to claim both the HRTC and the METC in respect of that expenditure.

Expenditures will not be eligible if the related goods or services are provided by a person not dealing at arm’s length with the individual, unless that person is registered for Goods and Services Tax/Harmonized Sales Tax purposes under the Excise Tax Act. Any eligible expenditure claimed for the HRTC must be supported by receipts.

Home Buyers’ Plan

The Home Buyers’ Plan (HBP) allows first-time home buyers to withdraw amounts from a Registered Retirement Savings Plan (RRSP) to purchase or build a home without having to pay tax on the withdrawal. Budget 2009 proposes to increase the HBP withdrawal limit to $25,000 from $20,000.

For HBP purposes, an individual is generally considered to be a first-time home buyer if neither the individual nor the individual’s spouse or common-law partner owned and lived in another home in the calendar year in which the HBP withdrawal is made or in any of the four preceding calendar years. Special rules apply to facilitate the acquisition of a home that is more accessible or better suited for the personal needs and care of an individual who is eligible for the disability tax credit, even if the first-time home-buyer requirement is not met. These rules will also be modified to provide the same $25,000 withdrawal limit.

Withdrawn funds must generally be used to acquire a home before October of the year following the year of withdrawal. Amounts withdrawn under the HBP are repayable in instalments over a period not exceeding 15 years. To the extent that a scheduled repayment for a year is not made, it is added to the participant’s income for the year. A special rule denies an RRSP deduction for contributions withdrawn under the HBP within 90 days of being contributed.

This increase in the HBP withdrawal limit will apply to the 2009 and subsequent calendar years in respect of withdrawals made after January 27, 2009.

First-Time Home Buyers’ Tax Credit

Budget 2009 proposes to introduce a new non-refundable tax credit based on an amount of $5,000 for first-time home buyers who acquire a qualifying home after January 27, 2009 (i.e. the closing is after that date). The credit for a taxation year will be calculated by reference to the lowest personal income tax rate for the year and is claimable for the taxation year in which the home is acquired.

An individual will be considered a first-time home buyer if neither the individual nor the individual’s spouse or common-law partner owned and lived in another home in the calendar year of the home purchase or in any of the four preceding calendar years. A qualifying home is one that is currently eligible for the Home Buyers’ Plan that the individual or individual’s spouse or common-law partner intends to occupy as the principal place of residence not later than one year after its acquisition.

Budget 2009 also proposes that the credit be available for certain acquisitions of a home by or for the benefit of an individual who is eligible for the disability tax credit (DTC). In particular, the credit will be available in respect of a home acquired after January 27, 2009 (i.e. the closing is after that date) by an individual who is eligible for the DTC, or by an individual for the benefit of a related individual who is DTC-eligible, if the home is acquired to enable the DTC-eligible individual to live in a more accessible dwelling or in an environment better suited to the personal needs and care of that person.

For the purpose of this credit, a "DTC–eligible" individual is an individual in respect of whom an amount is deductible under the DTC for the taxation year in which the agreement to acquire the home is entered into, or would be deductible if costs for an attendant or care in a nursing home were not claimed for Medical Expense Tax Credit purposes by or on behalf of that person. Where the home is acquired by or for the benefit of a DTC-eligible individual, the home must be intended to be the principal place of residence of that individual no later than one year after its acquisition.

The credit may be claimed by the individual who acquires the home or by that individual’s spouse or common-law partner. For the purpose of this credit, a home is considered to be acquired by an individual only if the individual’s interest in the home is registered in accordance with the applicable land registration system.

Any unused portion of an individual’s First-Time Home Buyers’ Tax Credit may be claimed by the individual’s spouse or common-law partner. Where more than one individual is entitled to the First-Time Home Buyers’ Tax Credit (for example, where two individuals jointly buy a home), the total amount of the credits claimable for the year by those individuals shall not exceed the maximum amount of the credit that would be claimable for the year by any one of those individuals.

RRSP/RRIF Losses After Death

The fair market value of investments held in a Registered Retirement Savings Plan (RRSP) at the time of an RRSP annuitant’s death is generally included in the income of the deceased for the year of death. A subsequent increase in the value of the RRSP investments is generally included in the income of the beneficiaries of the RRSP upon distribution. Similar rules apply in the case of Registered Retirement Income Funds (RRIFs).

There is, however, 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. The amount that may be carried back will generally be calculated as the difference between the amount in respect of the RRSP or RRIF included in the income of the annuitant as a result of the death of the annuitant and the total of all amounts paid out of the RRSP or RRIF after the death of the annuitant.

This measure will apply in respect of deceased annuitants’ RRSPs or RRIFs where the final distribution from the RRSP or RRIF occurs after 2008.

Mineral Exploration Tax Credit

Flow-through shares allow companies to renounce or 'flow through’ tax expenses associated with their Canadian exploration activities to investors, who can deduct the expenses in calculating their own taxable income. This facilitates the raising of equity to fund exploration by enabling companies to sell their shares at a premium. The mineral exploration tax credit is an additional benefit, available to individuals who invest in flow-through shares, equal to 15 per cent of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. The credit was initially introduced in 2000 and is currently scheduled to expire at the end of March 2009.

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.

Mineral exploration, as well as new mining and related processing activity that could follow from successful exploration efforts, can be associated with a variety of environmental impacts to soil, water and air. All such activity, however, is subject to applicable federal and provincial environmental regulations, including project-specific environmental assessments where required.

Business Income Tax Measures

Small Business Limit

The small business deduction currently reduces the federal corporate income tax rate applied to the first $400,000 of qualifying active business income of a Canadian-controlled private corporation (CCPC) to 11 per cent. The small business deduction is phased out on a straight-line basis for CCPCs having between $10 million and $15 million of taxable capital employed in Canada.

In order to provide additional tax relief to small businesses, Budget 2009 proposes that the annual amount of active business income eligible for the reduced tax rate—generally referred to as the "small business limit"—be increased as of January 1, 2009 to $500,000.

The increase to the small business limit will be pro-rated for corporations with taxation years that do not coincide with the calendar year. In addition, there will continue to be a requirement to allocate the small business limit among associated corporations, and access to the small business deduction will continue to be reduced on a straight-line basis for CCPCs having between $10 million and $15 million of taxable capital employed in Canada.

CCPCs are also eligible to earn investment tax credits at an enhanced rate of 35 per cent on up to $3 million of scientific research and experimental development (SR&ED) expenditures annually. This $3-million expenditure limit is reduced as a CCPC’s taxable income for the previous year increases from $400,000 to $700,000 and taxable capital of the previous year increases from $10 million to $50 million. Tax credits earned at the higher 35-per-cent rate on current expenditures are fully refundable, and 40 per cent of tax credits earned at the higher 35-per-cent rate on capital expenditures is refundable.

Consistent with the proposal to increase the small business limit, the $3-million expenditure limit for SR&ED will begin to be reduced at the proposed small business limit of $500,000 and will be fully eliminated where taxable income in the previous year is $800,000 or more. This change will apply where the previous taxation year ends after 2008. The reduction of the expenditure limit based upon taxable capital will not be changed.

CCPCs that claim the small business deduction are permitted to pay any balance of corporate income tax owing at the end of the third month after the end of their taxation year—one month later than other corporations—provided their taxable income in the previous year is less than the small business limit for that year. In addition, certain CCPCs that claim the small business deduction and have taxable income not exceeding $400,000 are eligible to pay corporate income tax in quarterly instead of monthly instalments.

As a consequence of increasing the small business limit to $500,000, some CCPCs with taxable income above $400,000, but below the proposed new limit, will have an additional month in which to pay any balance of tax owing. As well, CCPCs with taxable income not exceeding $500,000 for their 2009 and subsequent taxation years may be eligible for quarterly instalments of corporate income tax.

Manufacturing and Processing: Accelerated CCA

In general, machinery and equipment used primarily in Canada for manufacturing or processing goods for sale or lease are included in Class 43 of Schedule II to the Income Tax Regulations and are eligible for a 30-per-cent declining-balance capital cost allowance (CCA) rate. Budget 2007 proposed a temporary incentive for eligible machinery and equipment acquired on or after March 19, 2007 and before 2009 that are used primarily in such manufacturing or processing activity. Under regulations proposed to implement this incentive, machinery and equipment eligible for the temporary incentive are included in Class 29 in Schedule II to the Income Tax Regulations and are eligible for a 50-per-cent straight-line CCA rate.

Budget 2008 proposed to extend accelerated CCA treatment for investment in the manufacturing and processing sector for three additional years. This included a one-year extension of the 50-per-cent straight-line accelerated CCA rate for eligible assets acquired after March 18, 2007 and before 2010 (instead of before 2009) followed by accelerated CCA treatment on a declining basis for eligible assets acquired in 2010 and 2011.

Budget 2009 proposes that, in lieu of the accelerated CCA on a declining basis for eligible assets acquired in 2010 and 2011, the 50-per-cent straight-line accelerated CCA treatment will apply.

The "half-year rule", which generally allows half the CCA write-off otherwise available in the year the asset is first available for use by the taxpayer, will apply to the properties that are subject to this measure.

Computers: Accelerated CCA

In general, computers acquired after March 18, 2007, are included in Class 50 of Schedule II to the Income Tax Regulations and are eligible for a 55-per-cent declining-balance capital cost allowance (CCA) rate. Budget 2007 increased the CCA rate to 55 per cent from 45 per cent to better reflect the useful life of these assets.

Budget 2009 proposes a temporary 100-per-cent CCA rate for eligible computers and software acquired after January 27, 2009 and before February 2011. This 100-per-cent CCA rate will not be subject to the half-year rule, which generally allows half the CCA write-off otherwise available in the year the asset is first available for use by the taxpayer. As a result of this measure, a business will be able to fully deduct the cost of an eligible computer (including the systems software for that computer) in the first year that CCA deductions are available.

For this purpose eligible computers and systems software acquired by a taxpayer will be computer equipment and software described in Class 50 of Schedule II to the Income Tax Regulations, as described above, that

• is situated in Canada,
• is acquired by the taxpayer
  • for use in a business carried on by the taxpayer in Canada or for the purpose of earning income from property situated in Canada, or
  • for lease by the taxpayer to a lessee for use by the lessee in a business carried on by the lessee in Canada or for the purpose of earning income from property situated in Canada, and
• has not been used, or acquired for use, for any purpose before it is acquired by the taxpayer for use in Canada.

The 100-per-cent CCA rate will also apply to property that is currently included in CCA class 29, that would otherwise be described in Class 50 of Schedule II to the Income Tax Regulations, and that meets the conditions described above.

The computer tax shelter property rules, which prevent CCA deductions from being used by investors to shelter other sources of income, will also apply to computer equipment that is eligible for the 100-per-cent CCA rate.

This temporary measure could result in some limited adverse environmental effects to the extent that computer equipment that is being replaced is not stored, reused, recycled or disposed of in an environmentally-friendly manner. However, there are a number of government and industry programs that encourage re-use and proper disposal of electronic equipment.

Sales Tax Measures

Simplification of the GST/HST for the Direct Selling Industry

The direct selling industry distributes goods to final consumers through a large number of contractors and sales representatives rather than through retail establishments.

The direct selling industry generally employs two business models:

the buy and resell model, where contractors purchase goods from a direct seller and resell the goods to consumers with a mark-up; and

the commission-based model, where a network of sales representatives of a direct selling organization (a "network seller") receives commissions for arranging for the sales of the network seller’s goods to consumers.

To simplify the operation of the Goods and Services Tax/Harmonized Sales Tax (GST/HST) for direct sellers and their contractors, the Excise Tax Act currently offers an Alternate Collection Method (ACM) for direct sellers employing the buy and resell model. The method is not available to those in the direct selling industry employing the commission-based model.

Where a direct seller elects to use the ACM, the contractor pays to the direct seller an amount equal to the GST/HST on the suggested retail price of the direct seller’s goods, and the direct seller is required to remit tax equivalent to that amount to the Government. The contractor is not obligated to remit GST/HST on the contractor’s sales of the direct seller’s goods to consumers since the amount of tax has already been remitted by the direct seller. In addition, under the ACM, sales of direct seller goods by a contractor are ignored in determining whether the contractor qualifies as a small supplier for GST/HST purposes. Also, supplies by a direct seller of sales aids to a contractor, as well as supplies of host gifts made directly or indirectly through a contractor, are not subject to GST/HST.

Budget 2009 proposes to allow network sellers who meet the conditions listed below to use a special GST/HST accounting method to simplify GST/HST compliance. With the approval of the Minister of National Revenue, where those conditions are met and a network seller jointly elects with all of the network seller’s sales representatives to use the proposed method:

• the commissions and bonuses received by these sales representatives from the network seller for arranging for the sale of the network seller’s goods would not be subject to GST/HST;
• the commissions and bonuses received by sales representatives from the network seller for arranging for the sale of the network seller’s goods would be ignored for determining whether sales representatives qualify as small suppliers who are not required to register for GST/HST purposes;
• certain supplies by network sellers of sales aids to these sales representatives and supplies of host gifts to the sales representatives and hosts would not be subject to GST/HST; and
• the sale of the goods by the network seller to the final consumer would continue to be subject to the GST/HST under the normal rules.

A GST/HST registered network seller will generally be eligible to elect to use this special method for a fiscal year if the following conditions are met:

• all or substantially all of the sales of the network seller in the fiscal year are expected to be made through sales representatives or, if the network seller employs both business models referred to above, through a combination of sales representatives and buy and resell contractors;
• all or substantially all of the sales of the network seller in the fiscal year arranged for by sales representatives are expected to be made to final consumers;
• all or substantially all of the sales representatives of the network seller are expected to receive commissions and bonuses from the network seller of no more than $30,000 in the fiscal year; and
• joint elections are made with each new sales representative to continue to qualify for the election.

Where a network seller has elected to use the special GST/HST accounting method, and it is subsequently determined that one or more of the conditions of the election were not met in a fiscal year, the network seller will be required to make an adjustment to the network seller’s GST/HST net tax. An adjustment to the GST/HST net tax of a network seller will also apply where the network seller fails to notify its sales representatives that the election has ceased to have effect.

Budget 2009 proposes that this special GST/HST accounting method be available in respect of fiscal years of a network seller that begin after 2009.

Other Measures

International Taxation

Canada’s system of international taxation plays a critical role in attracting investment and facilitating the growth of Canadian companies. In December 2008, the Government received the final report of the Advisory Panel on Canada’s System of International Taxation (the Panel). The Government is studying the report and will provide a response in due course, on which consultations will be held.

At the same time, certain issues which arose in the context of the Panel’s report merit a more immediate response.

Interest Deductibility

Section 18.2 of the Income Tax Act, scheduled to come into force in 2012, constrains the deductibility of interest in certain situations where a Canadian corporation uses borrowed funds to finance a foreign affiliate and a second deduction for that interest is available in the foreign jurisdiction. 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.

Non-Resident Trusts and Foreign Investment Entities

Outstanding proposals for non-resident trusts and foreign investment entities, first introduced in the 1999 Budget, apply in respect of arrangements under which Canadian residents seek to avoid Canadian tax through the use of foreign intermediaries under circumstances designed to circumvent the application of existing anti-avoidance rules. The Government has received submissions, including the Panel’s recommendations, on these proposals; the Government supports the fundamental policy objective of ensuring that Canadian taxpayers should not be able to avoid paying their fair share of income tax through the use of foreign intermediaries, but will review the existing proposals in light of these submissions before proceeding with measures in this area.

2004 Foreign Affiliate Proposals

The Government will consider the Panel’s recommendations relating to foreign affiliates before proceeding with the remaining foreign affiliate measures announced in February 2004, as modified to take into account consultations and deliberations since their release.

Acquisition of Control of a Corporation—Time of Acquisition

The Income Tax Act provides for various tax consequences, for example, constraints on the ability of a corporation to carry-over unclaimed losses and other amounts, in circumstances where control of a corporation has been acquired. In this regard, control of a corporation is generally deemed to have been acquired at the beginning of the day on which control of the corporation was acquired, instead of at the particular time of that day at which the transaction that caused the acquisition of control occurs. This deeming rule facilitates certain computations, such as the valuation of inventory and other tax pools that are required to be calculated as the result of an acquisition of control.

The application of this deeming rule was interpreted in a 2006 Federal Court of Appeal decision as being limited strictly to the issue of control: in circumstances where control of a corporation was acquired by a purchaser as a result of a transfer of shares of the corporation to the purchaser from a vendor, control of the corporation was considered to have been relinquished by the vendor at the beginning of the day of the transfer, but the ownership of the shares was considered to have been retained by the vendor until the actual time of the transfer. This interpretation can produce anomalies in relation to the vendor’s entitlement to claim certain tax benefits that depend on who has control of the corporation at the time of the transfer.

For example, where a Canadian-resident individual transfers shares of a Canadian-controlled private corporation (CCPC) that is a small business corporation, gains on the disposition normally qualify for the $750,000 Lifetime Capital Gains Exemption (LCGE). However, under this interpretation control of the corporation is considered to have been acquired as at the beginning of the day of the transfer, not at the actual time of the transfer. If the purchaser is, for instance, non-resident, the corporation will no longer be considered to be Canadian-controlled at the actual time of the transfer, and the vendor will not be entitled to claim the LCGE.

Budget 2009 therefore proposes that the deeming rule regarding the timing of an acquisition of control of a corporation be amended to ensure that it does not affect the status of a corporation as a CCPC at the time of the transaction that caused the change of control.

This amendment will apply in respect of acquisitions of control that occur after 2005 except that it will not apply to a taxpayer in respect of such an acquisition of control that occurs before January 28, 2009 if the taxpayer so elects on or before the taxpayer’s filing-due date for the taxpayer’s 2009 taxation year. A taxpayer shall be deemed to have made such an election if it may reasonably be considered that the position taken in the taxpayer’s return of income filed before January 28, 2009 relies upon the reasoning in the court decision.

Canada Revenue Agency Strategic Review: Electronic Filing

As part of the Government’s strategic review of programs and spending, Budget 2008 included the Canada Revenue Agency’s (CRA) commitments to create cost savings through increased efficiencies in the implementation of its programs. The following measures are proposed to attain these goals.

Mandatory Electronic Filing

Taxpayers are currently allowed to file their income tax information with the CRA in electronic format if they meet certain criteria acceptable to the CRA. The CRA will increase efficiencies in the implementation of its programs by requiring such electronic filing in certain circumstances.

First, corporations that have annual gross revenues in excess of $1 million for a taxation year will generally be required to file their income tax returns for the year in electronic format. The CRA may provide exceptions for corporations of a type in respect of which the CRA would not generate efficiencies through electronic filing. These could include, for example, non-resident corporations, insurance corporations, and corporations filing in a functional currency.

This measure will apply in respect of corporate income tax returns for taxation years that end after 2009.

Second, the number of any particular type of income tax information return that can be filed by a taxpayer before the taxpayer is, under an existing income tax provision, required to file those information returns electronically, will be reduced to 50 from 500. This measure will most often apply in practice in respect of T4 information returns for employment income.

This measure will apply in respect of information returns required to be filed after 2009.

Penalties

In addition to the new electronic filing requirements described above, Budget 2009 proposes to introduce a penalty for filing a corporate income tax return in an incorrect format, and to reduce the penalties applicable for late filed or incorrectly filed information returns.

Penalty for Filing a Corporate Income Tax Return in an Incorrect Format

In order to ensure compliance with the new corporate electronic income tax return filing requirement, a new penalty for filing a corporate income tax return in an incorrect format will be introduced. While the requirement to file certain corporate income tax returns in electronic format applies to returns required to be filed after 2009, no penalties will be introduced for failure to do so for returns required to be filed before 2011. The penalty for taxation years that end in 2011 will be set at $250, then increased to $500 for taxation years that end in 2012 and to $1000 for taxation years that end after 2012.

Penalty for Filing Information Returns Late or in an Incorrect Format

There is an existing penalty that has general application to taxpayers who fail to comply with any duties and obligations imposed under the Income Tax Act, including those who fail to file information returns as and when required. This penalty is calculated as the greater of $100 per failure and $25 times the number of days, not exceeding 100, during which the failure continues. This penalty can be excessive in cases where a large number of similar returns are required to be filed, but are filed late. Under the current rules, for example, an employer who filed 500 T4 information returns one day late would be liable to a penalty of $50,000.

This penalty will be reduced, so that taxpayers who fail to file electronically under the electronic information return requirements, or who file information returns late, are not unduly penalized. The penalties will be calculated based on the number of any particular type of information return that is filed in the incorrect format or that is filed late.

For information returns that are filed in the incorrect format, the penalty is proposed to be set at the following amounts:

• $250—where the taxpayer is required to file more than 50 but less than 251 returns;
• $500—where the taxpayer is required to file more than 250 but less than 501 returns;
• $1,500—where the taxpayer is required to file more than 500 but less than 2,501 returns; and
• $2,500—where the taxpayer is required to file more than 2,500 returns.

For information returns that are filed late, the penalty is proposed to be set at the greater of $100 and the following amounts:

• $10 per day—where the taxpayer is required to file less than 51 returns;
• $15 per day—where the taxpayer is required to file more than 50 but less than 501 returns;
• $25 per day—where the taxpayer is required to file more than 500 but less than 2,501 returns;
• $50 per day—where the taxpayer is required to file more than 2,500 but less than 10,001 returns; and
• $75 per day—where the taxpayer is required to file more than 10,000 returns.

The penalty for late-filed information returns will be limited to 100 days, meaning that it will be capped at between $1,000 and $7,500 (depending on the number of returns that are required to be filed).

These penalties will apply to information returns required to be filed after 2009.

Arrivals Duty-Free

The sale of duty- and tax-free goods to international passengers on arrival at Canadian airports (Arrivals Duty-Free) has been suggested as a way of enhancing the competitiveness of Canada’s major airports and promoting purchases in Canada rather than abroad. The Government will undertake consultations with stakeholders and provinces on the desirability and feasibility of implementing an Arrivals Duty-Free program at Canada’s international airports.

Aboriginal Tax Policy

Taxation is an integral part of good governance as it promotes greater accountability and self-sufficiency and provides revenues for important public services and investments. Therefore, the Government of Canada supports initiatives that encourage the exercise of direct taxation powers by Aboriginal governments.

To date, the Government of Canada has entered into 31 sales tax arrangements under which Indian Act bands and self-governing Aboriginal groups levy a sales tax within their reserves or their settlement lands. In addition, 12 arrangements respecting personal income taxes are in effect with self-governing Aboriginal groups under which they impose a personal income tax on all residents within their settlement lands. The Government reiterates its willingness to discuss and put into effect direct taxation arrangements with interested Aboriginal governments.

The Government of Canada also supports direct taxation arrangements between interested provinces or territories and Aboriginal governments and enacted legislation to facilitate such arrangements in 2006.

Customs Tariff Measures

Tariff Reductions on Machinery and Equipment

Budget 2009 proposes to permanently eliminate tariffs on a range of machinery and equipment. The Department of Finance consulted extensively with stakeholders in preparing this measure, including through the publication of a notice in the Canada Gazette on August 30, 2008.

This measure will assist Canadian industry by lowering the costs of acquiring machinery and equipment when imported from outside North America. Tariffs on such goods vary from 2.5 per cent to 11 per cent and represent a non-recoverable tax on new investments that companies make in order to enhance their competitiveness.

The reductions apply to 214 tariff items as currently listed in the Schedule to the Customs Tariff. For these items, the Most-Favoured-Nation (MFN) rates of duty are reduced to "Free". In certain instances, these MFN reductions are leading to consequential reductions to the rates of duty under other tariff treatments, namely the General Preferential Tariff, the Australia Tariff and the New Zealand Tariff.

This measure also offers an opportunity to simplify the existing structure of the Customs Tariff with respect to the affected tariff items. Budget 2009 proposes that a number of tariff items be revoked and replaced by more general tariff items. In a few instances, additional tariff items are being created to take into consideration comments received from stakeholders.

The tariff reductions, to be given effect by amendments to the Customs Tariff, are effective in respect of goods imported into Canada on or after January 28, 2009.

Previously Announced Measures

Budget 2009 confirms the Government’s intention to proceed with the following previously-announced tax measures, as modified to take into account consultations and deliberations since their release:

• Measures included in the Notice of Ways and Means Motion tabled by the Government in Parliament on November 28, 2008, including the reduced 2008 minimum withdrawal amounts in respect of Registered Retirement Income Funds and variable benefits under a Registered Pension Plan;
• Draft amendments released on November 10, 2008 relating to Functional Currency Tax Reporting;
• Extension of the 2008 deadline for Registered Disability Savings Plan contributions, announced on December 23, 2008;
• Modifications to the provisions relating to amateur athletic trusts, announced on December 29, 2008;
• Improvements to the application of the GST/HST to the financial services sector announced on January 26, 2007; and
• Modifications to the Customs Tariff to implement the results of GATT Article XXVIII negotiations regarding milk protein concentrates, announced on June 12, 2008.

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