Commencing in 2010, tax-free treatment only will be available in a program of study related to a college diploma, or a Bachelor’s, Master’s or PhD degree; to wit a Post-Doc would not qualify. Tax-free treatment for part-time studies will be limited to the amount of tuition and related program costs.
Canadian pensioners who spent some of their lives in the U.S. may have retired to Canada and brought home entitlement to U.S. Social Security Benefits. Prior to 1996, only half of this income was taxed in Canada. From 1996 to 2009, 85% was taxable. Commencing in 2010, the taxable portion will drop back down to 50% but only for people who have been collecting that pension prior to 1996.
Historically, the timing of the assessment of an employment benefit from an exercised stock option has differed between employees of public and private corporations. The former were saddled with bearing the tax on the benefit before the stock had been sold, thus having to come up with the cash from other sources to pay the tax. The private company employee could defer the tax until the stock was actually sold. The Tech Stock run-up in the stock market in 2000 amplified this divergent treatment, and the government of the day responded by giving public company employees a modified deferral opportunity which was more in the spirit of what the private company employees had. The 2010 Budget removes this opportunity effective on Budget Day, returning the law for public company employees to where it was before 2000. Also for them, effective in 2011, tax must be with-held at source on the net stock option benefit at the time of exercise for public company employees. Once again, this creates a potential cash-flow problem for the employee if the stock is not sold.
For employees with deferred options under the “2000 rule” at Budget Day, there is grand-fathering.
For decades, the tax treatment of public company stock options inherently has had a problem for “losers”, i.e. shares which subsequently fell in value between exercise and disposal. The problem was that the net stock option benefit was taxed as employment income while the capital loss may have been useless to the suffering employee if there were no capital gains to offset. Frequent cries for relief have been ignored over the years, until now. The 2010 Budget gives a form of relief for public company employees with deferral elections in place, who face this situation. These folks have until the end of 2014 to dispose of their “losers” and make a special election under these temporary rules.
Under the election:
- The employee pays a special tax in the amount of the sale proceeds
- The deferred employment income inclusion will be nil
- The capital gain or loss will be calculated on a “count-the-cash” basis, i.e. measuring the cash proceeds vis-à-vis the exercise cost (technically [proceeds minus FMV at exercise] divided by 2, minus one half of the employment benefit)
The 2010 Budget extended its tentacles further into this area by also addressing stock appreciation rights (“SARs”). These plans allow an employee to surrender a stock option rather than exercise it, and to receive in cash the difference between the fair market value and the exercise price. The employer is permitted to deduct the cash payout as employment expense, and the employee may deduct one half of the cash received, if qualified, under the Div C stock option deduction.
The 2010 Budget takes offence of the ‘double-dip” enjoyed by the employee and employer and introduces rules that cause one of those parties to lose their half of the benefit extant. Either the employee is denied access to the Div C stock option deduction, or the employer is denied the employment expense. The form of the law change is that, for the employee to enjoy the Div C deduction, the employer must elect that it will not claim the expense. Note that these changes are not directed at SARs where the employee actually exercises the acquisition of the stock.
The Universal Child Care Benefit is a taxable social welfare payment that must be reported by the lower income spouse of a couple. Obviously, a single parent does not have this option. In an unusual move to counter this unfairness, commencing in 2010, a single parent may attribute this income to the child, or any one of the children for whom the UCCB is paid. It remains to be seen whether these children under age 6 will now be filing tax returns!
Where separated parents share joint custody of a child, the system extant permitted them each to have access to the Universal Child Care Benefit, the Child Tax Benefit and any related GST credits. However, CRA required that the parents take turns through the year receiving the entire amount of any particular payment. Commencing in July 2011, the system will change such that each can share each payment throughout the year.
The 2010 Budget provided some insight that “the medical expense tax credit provides tax recognition for ‘above-average’ medical and disability-related expenses”! Furthermore, “… it is not generally intended (where there exists) …. a substantial element of personal consumption and choice”. It would seem that many tax breaks could be eliminated if they were exposed to the same test! In any event, this means that appearance-enhancement costs including, for instance, liposuction, hair replacement and teeth whitening are no longer claimable as of Budget Day 2010.
Commencing in 2010, efiling of tax returns will be mandatory for corporations with gross revenue in excess of $1M, with a few specific exceptions. Significant penalties for non-compliance will commence in 2011 and beyond, starting at $250 and increasing over time to $1,000. The year 2010 appears to be a grace transitional year.