Foreign Income Verification

The normal “statute of limitations” – the retro period that CRA can reassess and collect taxes for some past omission– is three years. This budget proposes after 2012 to extend that period by three years specifically for the timely and correct filing of the Form 1135 related to foreign holdings and income related thereto.

The extended assessment period will be excused if the foreign income has been properly reported on the income tax return even if the Form 1135 was not filed on time.

Furthermore, the form will be revised and expanded for 2013 and beyond. Presently, the information is reported on the Form 1135 in aggregated totals. Commencing in 2013, this information must be dis-aggregated to show it line-by-line by individual foreign holdings/accounts. Also, for each such item, the income for the year must be identified, as well as the ending amount and highest amount at any point in the year. Needless to say, the administrative and clerical burden of this is non-trivial.

Fortunately, the changes include something positive, which was long overdue.

Form 1135 detailed reporting is excused where the income from foreign assets appears on a Canadian T3 or T5 slip… the logic being that the government knows that the income is being reported. This typically involves foreign stocks held at a Canadian brokerage firm. The Form 1135 still must be submitted but there is a simple check box exemption for these kinds of holdings.

Investors

The dual dividend tax system legislated a few years ago created two kinds of personal tax treatments of dividend income—eligible and ineligible. They differ in how much personal tax they each bear and this can be viewed on our Investor U website.

It is the intent now in our tax system that changes in the personal dividend tax regime be “sympathetic” to changes in corporate tax rates. In this case, as corporate rates have come down, the personal system like-wise must ratchet down.

The 2013 Budget will change the personal tax treatment of ineligible dividends paid from 2014 onwards by lowering the gross-up from 1.25 to 1.18 and lowering the federal tax credit from 13.33% to 11%.

RRSP Limit

The 2013 RRSP limit increases by $850 to $23,820 This requires that your 2012 earned income be at least $132,333.

Manufacturing Equipment

Machinery and equipment acquired for use in a manufacturing environment currently receive a preferential, accelerated depreciation rate via Class 29. This budget provision prolongs that opportunity through the end of 2015.

Tax-free Capital Gains

The Budget adds yet another bump to the life-time tax-free capital gains limit available to farmers, fishers and entrepreneurs. Commencing with the 2014 personal tax year, the limit will increase by $50,000 to $800,000. This extra amount is also available to those who previously have used up their limit. Furthermore, this limit will now join the list of other tax accounts which will automatically receive annual indexing, rather than await future Budget attention.

Auto Limits

The 2013 auto limits increased from 2012. This means that employees can be reimbursed by their employer for business driving at the 54/48 cents/km rates, and employees will be assessed T4 benefits for personal use of company cars at the rate of 27 cents/km.

GST Changes

The 2012 Budget initiated some positive changes for small business and public service bodies. Effective for reporting periods commencing after 2012, the annual taxable (GST/HST-in) sales threshold for eligibility for the Quick Method will double from $200,000 to $400,000.

Similarly, the thresholds for using the Streamlined ITC Method or the Prescribed Method also will be doubled, reaching $1M for (GST/HST-in) sales and $4M for taxable purchases.

Scientific Research Incentives

The 2012 Budget initiated a number of changes to the program for encouraging scientific innovation, which variously kick in through 2013 and 2014. ITCs on contract payments drop from 100% to 80% starting after 2012. No ITCs will be allowed on capital expenditures after 2013. The overhead proxy rate will phase down from 65% to 55% commencing in 2014. The general ITC rate will phase down from 20% to 15% after 2013. The 35% rate will remain intact.

The 2013 Budget is taking aim at the compensation schemes for third-party preparers of SRED claims, many of whom charge on a contingency basis. In the past, there has been an uneven playing field here, as, for instance, accountants in public practice are ethically forbidden to charge on a contingency basis. Some professionals are undertaking SRED work outside a registered “public practice” and therefore are not subject to this restriction. Starting in 2014, SRED filings will need to declare when third parties are involved in the filing, along with details about the billing arrangements.

Payroll Taxes in 2013

Small business and charitable org employers were generally eligible for an EI premium rebate on their 2012 T4 filings. The same program will be in place for the 2013 T4 filing year.

BC Budget 2013

The BC general corporate tax rate will rise from 10% to 11% effective and phased in from April 1, 2013 (see chart below).

A new personal tax bracket for high income taxpayers has been tacked on to the provincial rate scale, beginning in 2014 and ending after 2015. Taxable income above $150,000 will be taxed at 16.8%, not the present 14.7%.

Article published: Sep 2013