The Federal Budget of March 2004 introduced a few items of potential interest to both our business and personal clients.
FINES & PENALTIES
A recent Court case opened the door to the deductibility of various kinds of fines and penalties, on the basis that they were a cost of doing business. As often happens when the government loses in Court, they change the statute law! From the Budget date onwards, such costs are not deductible, with the exception of penalty interest imposed under GST and a few less common statutes.
CARRY-FORWARD PERIOD FOR BUSINESS LOSSES
Non-capital losses arising in taxation years ending after March 22, 2004 can be carried forward for ten years. Any losses arising prior to this date fall under the old rules of a seven year carryforward. There is no change to the carryback limit of 3 years.
SMALL BUSINESS DEDUCTION LIMIT
The 2003 budget proposed a phased-in increase to the Small Business Tax Rate Limit from $200,000 to $300,000 by 2006. This was to be achieved by increases of $25,000 in each of the calendar years 2003-6. This year’s budget accelerates the phase-in to $300,000 by one year. The limit still will progress to the $250,000 amount by December 31, 2004; however, the final $50,000 increase will kick in by December 31, 2005, instead of 2006.
CHANGES TO CCA RATES
Several years ago, rapidly depreciating technology equipment was given special CCA treatment by way of creating separate depreciation pools which could trigger terminal losses upon disposition. This was a bit cumbersome, particularly for large companies. So this Budget changes the approach for computer hardware and systems software purchased after March 22, 2004 which now will be eligible for an increased CCA rate of 45%.
After the budget date, no election can be made under the previous rules to put such purchases into separate pools. However, as a transition, the old treatment may be elected for such purchases made before January 1, 2005.
For purchases after March 22, 2004 of data network infrastructure equipment (i.e. equipment supporting advanced telecommunication applications, such as email and Internet) which currently is included in the catchall Class 8 with 20% CCA, a new class will be created with a rate of 30%.
Two new measures were proposed to assist low– and middle-income families with education funding for their children. First, effective January 1, 2004, an annual Canada Learning Bond will be available for each child whose family qualifies for the National Child Benefit supplement. A child may be entitled to $500 at birth and $100 annually up to his or her 15th birthday for transfer into an RESP.
Second, the Canada Education Savings Grant will have an enhanced matching rate. Effective January 1, 2005, the first $500 of annual contributions may trigger either a 30% or 40% matching rate depending on the family income level. All other contributions continue to qualify for the 20% matching rate. Rules have been proposed to prevent subscribers from withdrawing and re-contributing to get the higher rate.
Also, employees pursuing advanced education whilst under salary at their employer presently are ineligible for the monthly education credit. For 2004 and subsequent tax years, such students now can also enjoy the education tax credit, unless they receive partial or full reimbursement of their tuition costs. The education tax credits remain at $400/month for full-time studies and $120/month for part-time studies.
The Budget will curtail the opportunity for individuals to request amendments far back in time. The Fairness Provisions allowed such applications back to 1985. For amendments commencing in 2005, the time limit will be 10 tax years. Thus, applications in 2004 still can apply to 1985, but subsequently the years from 1985-1995 will be lost.
DEDUCTION AVAILABLE FOR DISABLED PERSONS WORKING OR IN SCHOOL
In an effort to reduce the barriers to employment and education for disabled persons, an Advisory Committee was established in 2003 to review and improve the tax fairness for persons with disabilities and those who care for them. For 2004 and subsequent tax years, the Committee proposes that “disability supports” purchased for employment or education will be fully deductible from income as opposed to only being able to claim these as a medical expense tax credit.
There is a lengthy list of eligible “disability supports” expenses, which includes items such as sign-language interpretation services or devices used exclusively by blind individuals. These costs, and attendant care costs, related to work or school will be part of a disability supports deduction, unless they have been reimbursed by a non-taxable payment, such as insurance. Government grants received to pay for disability supports costs must still be included in income, but will now receive an offsetting deduction based on the lesser of the amount of eligible expenses and total earned income (used to be 2/3 earned income).