March 22, 2011

Federal Budget 2011

March 22, 2011
by Jamie Golombek
The 2011 federal budget introduced several specific tax measures aimed at families,
students, charities, registered plans and small businesses. Rather than summarize the entire
350 page budget document, this report will focus on a few key elements that are of most
interest to individuals and small businesses.

FAMILIES

Children’s Arts Tax Credit

The 2011 budget proposes a new tax credit, similar to the Children’s Fitness Tax Credit,
called the Children’s Arts Tax Credit. This will allow parents to claim a 15% non-refundable
tax credit based on an amount of up to $500 in eligible expenses per child paid in a year.

The credit is available for each child, under 16 years of age at the beginning of the year,
and who is enrolled in an eligible program of artistic, cultural, recreational or developmental
activities. Parents of children under 18 years of age at the beginning of the year who
are eligible for the Disability Tax Credit can claim a 15% non-refundable tax credit on an
additional $500 disability supplement amount, provided at least a minimum of $100 has
been paid in eligible expenses.

So, what qualifies?

The program must be either a weekly program lasting a minimum of eight consecutive
weeks or in the case of children’s camps, a program lasting a minimum of five consecutive
days.

Examples of eligible activities include: art, chess, crafts, drama, Girl Guides, languages,
music, painting, photography, pottery, public speaking, Scouts, sculpture, sewing and
tutoring.

Either parent may claim the credit, or share the credit, provided that the total amount
claimed is not more than the maximum amount that would be allowed if only one parent
made the claim.

Family Caregiver Tax Credit

Jamie Golombek
CA, CPA, CFP, CLU, TEP If you care for or provide support to a dependant with a mental or physical infirmity, including
Managing Director spouses, common-law partners and minor children, you will be able to take advantage of
Tax & Estate Planning the newly proposed Family Caregiver Tax Credit.
CIBC Private Wealth
Management This 15% non-refundable credit, which is proposed to begin in 2012, is based on an amount
[email protected]
of $2,000 and can be claimed by caregivers as an enhanced amount under one of the
existing dependency-related credits: the Spousal or Common-law Partner Credit, the Child
Tax Credit, the Eligible Dependant Credit, the Caregiver Credit or the Infirm Dependant
Credit.

http://www.cibc.com
CIBC Federal Budget 2011 - March 22, 2011 CIBC Federal Budget 2011 - March 22, 2011

The benefit of the credit is phased out based on the that the tuition fees are paid in respect of a course of at in-kind to a registered charity instead of selling them, REGISTERED PLANS
dependant’s net income. Only one Family Caregiver Tax least 13 consecutive weeks. the capital gain that would have arisen from a sale of
Credit is available for each infirm dependant. The amount the shares is completely tax-free. According to the RESPs – Asset Sharing Among Siblings
is proposed to be indexed to inflation for 2013 and Once this requirement is met, the student can also government, this special exemption from capital gains
subsequent taxation years. qualify for the education and textbook tax credits as well tax on the donation of publicly listed securities allows RESPs can be established as either an individual plan
as be eligible to receive Educational Assistance Payments donors “to avoid this second stage of the normal flow- or a family plan. Often, parents or grandparents
Medical Expense Tax Credit for Other Dependants (EAPs) from a Registered Education Savings Plan (RESP). through share rules.” (“subscribers”) who want to save for a number of their
kids’ post-secondary education will establish family plans
The Medical Expense Tax Credit (METC) allows individuals Many programs at foreign universities, however, are To date, the Canada Revenue Agency has issued several which provide additional flexibility for the subscriber, by
with significant medical expenses to claim a credit in based on semesters that are, in fact, shorter than 13 favourable advance tax rulings on the legitimacy of such allowing the allocation of plan assets among the related
respect of eligible expenses incurred by himself or herself, weeks, meaning that many Canadian students are denied schemes, dating back to 2007, when the elimination of children, subject to certain restrictions.
his or her spouse or common-law partner, or his or her the ability to claim tax credits or receive EAPs. the capital gains tax on the donation of publicly traded
children under 18 years of age. shares to registered charities was introduced. As an example, if one child doesn’t pursue post-secondary
The 2011 budget proposes to change this requirement education, RESP assets can be reallocated among his or
Caregivers can also claim the METC for eligible expenses by reducing the minimum course-duration requirement So, how good was it? her siblings who do go to school. Under current rules,
incurred in respect of a “dependent” relative if the that a Canadian student at a foreign university must all beneficiaries of a family plan must be connected to
caregiver pays medical or disability-related expenses of meet from 13 consecutive weeks to three consecutive Let’s say Jonathan, a top marginal rate Ontario taxpayer, the original subscriber by blood or adoption and each
the dependent relative. weeks. purchases $10,000 of flow-through shares for which he beneficiary must be added to the plan before reaching
gets a 100% tax deduction. This would save him about age 21.
Who is a “dependent” relative? CHARITIES $4,600 at Ontario’s top marginal rate of 46%, costing
him only $5,400 for the shares. His ACB would be ground Aunts or uncles, for example, who want to save for a
A child who is 18 or older, a grandchild, parent, Donation of Flow-Through Shares down to zero from $10,000. number of children through RESPs, but who are not
grandparent, brother, sister, uncle, aunt, niece or considered “connected to the children by blood or
nephew, who is dependent on the taxpayer for support. Among various charity measures in the 2011 budget, Assuming, once the exploration is complete and the adoption” can only do so through separate individual
the change that may have the most significant effect on shares are marketable, the flow-through shares are still plans. To provide these subscribers of separate individual
Under current rules, a caregiver may only claim the individual donors is in the area of flow-through share worth $10,000. Jonathan decides to donate them to plans with the same flexibility to allocate assets among
eligible expenses of a “dependent” relative that exceeds donations. a registered charity and gets a tax receipt for $10,000, siblings as exists for subscribers of family plans, the 2011
the lesser of 3% of the dependant’s net income and an worth 46%, for another $4,600 in tax savings. His capital budget proposes to allow transfers between individual
indexed dollar threshold ($2,052 in 2011), to a maximum Over the past number of years, Canadians who wished
gains tax was eliminated since he donated the shares to RESPs for siblings, without any tax penalties and without
of $10,000. to donate significant amounts to charity have been
charity. triggering the repayment of Canada Education Savings
turning to flow-through shares as a means of funding
The 2011 Budget proposes to remove this $10,000 limit Grants (CESGs), provided that the beneficiary of an RESP
their charitable giving at minimal cost. So, in total, for a cost of only $800 ($5,400 cost of the
on eligible expenses that can be claimed under the METC receiving the transfer of assets was under 21 when the
shares less the $4,600 donation tax credit), Jonathan has plan was opened.
in respect of a dependent relative. This is consistent with Flow-through shares are essentially shares issued by
made a donation of $10,000 to charity.
the normal METC rule, which has no maximum amount. oil and gas, mining and renewable energy companies
RDSPs – Shortened Life Expectancy
that renounce or “flow-through” their exploration, In a move that is expected to preserve $185 million
STUDENTS development and project start-up expenses to investors, of forgone tax revenue over the next five years, the Registered Disability Savings Plans (RDSP), which were
who can deduct these expenses personally on their own government is changing the rules and is proposing to introduced in the 2007 budget, allow parents and
Tuition Tax Credit – Examination Fees tax returns. allow the exemption from capital gains tax on donations others the option to contribute up to $200,000 towards
Currently, tuition fees are eligible for a federal non- of flow-through shares only to the extent that a flow- the long-term financial security of a child with a severe
For tax purposes, flow-through shares are treated as
refundable credit of 15% of the amount paid. The 2011 through investor’s capital gain exceeds the amount paid disability. Investment income in an RDSP grows tax-free
having a tax cost or adjusted cost base (ACB) of zero
budget proposes to amend the tuition tax credit to for the shares, ignoring the deemed zero ACB of the and can be supplemented with generous government
when calculating any capital gain or loss from their
recognize exam fees paid to an educational institution, flow-through shares. credits and bonds in the form of the Canada Disability
ultimate disposition.
professional association, provincial ministry or other Savings Grants (CDSGs) and Canada Disability Savings
So, following from the example above, if Jonathan were Bonds (CDSBs).
similar institution to take an exam that is required to As a result, if an investor sells their flow-through shares,
to buy $10,000 of flow-through shares issued today, his
obtain a federally or provincially recognized professional the full amount of the proceeds received becomes a
cost would still be $5,400, allowing for the flow-through RDSP contributions can attract up to $3,500 in annual
status. capital gain. This essentially represents a partial recovery
deduction at 46%. Upon donation, his receipt would still CDSGs, depending upon the beneficiary’s family income
of the tax benefit provided by the government resulting
Education Tax Measures – Study Abroad be worth $4,600 (46% of $10,000), but his capital gains and the amount contributed, up to a lifetime limit of
from the deduction for the original tax cost of the shares,
tax would be $2,300 (50% x 46% X $10,000) increasing $70,000. In addition, CDSBs of up to $1,000 annually
rather than a true economic gain resulting from an
The tuition tax credit is currently available to a Canadian the total cost of his donation from $800 to $3,100. are provided to RDSPs for lower income families, up to a
appreciation in the shares’ value.
student in full-time attendance at a university outside of lifetime limit of $20,000.
Canada in a course leading to a degree only to the extent If an investor decides to donate the flow-through shares
2 3
CIBC Federal Budget 2011 - March 22, 2011 CIBC Federal Budget 2011 - March 22, 2011

One of the harshest criticisms of the RDSP system, as it TFSA advantages are subject to a tax equal to their fair As a result, much of the IPPs value is “pension surplus,” service contribution to the IPP which can be much greater
was originally introduced, is what’s become known as the market value, which should act as a deterrent to such which is not subject to any withdrawal requirements than the amount the employee is required to reduce their
“ten-year repayment rule.” Under this punitive rule, all transactions. such that the business owner can defer more of their RRSP assets or accumulated RRSP contribution room.
CDSGs and CDSBs received by an RDSP in the preceding retirement savings, for longer periods of time than
10 years must be repaid to the government in the event RRSP advantages will include: otherwise possible for other RPP members or RRSP Under the new proposed rule, the cost of funding past
of an RDSP withdrawal, or termination of the plan. investors. service under the terms of an IPP must be first satisfied
• RRSP strip transactions; by transfers from RRSP assets, or a reduction in the IPP
The 2011 federal budget proposes to allow RDSP The budget therefore introduces a new rule that will member’s accumulated RRSP contribution room before
beneficiaries who have shortened life expectancies to • Benefits derived from transactions that would not require an IPP to pay out to a member, each year after new past service contributions will be permitted.
withdraw more of their RDSP savings by permitting have occurred in a regular, open market between the year in which he or she turns 71, the greater of the
annual withdrawals without triggering the 10-year arm’s length parties; regular pension amount payable under the IPP terms and Employee Profit Sharing Plans
repayment rule. the minimum amount that would be required to be paid
• Payments to an RRSP for services rendered, such as Finally, a heads up is warranted to business owners who
from the IPP to the member if the member’s share of the
An election will be available to take advantage of this dividends paid by a corporate client of an individual use Employee Profit Sharing Plans (EPSPs). EPSPs allow
IPP assets were held in a RRIF.
new rule. If the election is filed for a beneficiary with a on a special class of shares held by the individual’s business owners to share the profits of their business
shortened life expectancy, withdrawals made at any time RRSP, in lieu of the individual receiving remuneration According to the government, “This requirement will with their employees.
following that election will not trigger the repayment of for services provided to the company; establish reasonable limits on deferrals of tax on IPP
CDSGs and CDSBs provided that the total of the taxable savings and generally ensure that such savings are It’s becoming more popular for business owners of small,
• Investment income tied to the existence of another closely-held companies to direct these plans towards
portions of the withdrawals does not exceed $10,000 received as income throughout the retirement period of
investment. For example, two securities issued “in members of their families with the intent of reducing or
annually. the member, consistent with the basic purpose of RPPs.”
tandem” where one is held inside an RRSP, the other deferring taxes on these profits. Employers are also using
As a reminder, each withdrawal from an RDSP comprises outside, with the intended goal of “streaming” the These rules will begin in 2012. EPSPs to avoid making Canada Pension Plan contributions
a taxable portion and a non-taxable portion based on total investment return disproportionately to one of and to avoid paying Employment Insurance premiums.
the relative proportions of taxable assets (including the securities, and Contributions for Past Service
CDSGs, CDSBs and investment income and growth) and While no changes have been formally announced in
• Swap transactions, in which property is transferred The amount you can contribute to a defined benefit plan, this budget, the government did indicate that it “will
contributions.
between an RRSP and an individual’s non-registered including an IPP, is directly tied to the RRSP contribution review the existing rules for EPSPs to determine whether
As a result, total annual withdrawals can exceed $10,000 account (other than a contribution or withdrawal). limits. As a result, an IPP member’s annual RRSP technical improvements are required in this area.”
due to the non-taxable portions. contribution limit is reduced by the estimated amount of
As with TFSA advantages, the federal budget proposes annual saving in his or her IPP. Before introducing any new rules governing EPSPs,
Once an election has been made, no further contributions to tax any RRSP advantage at 100% of the fair market however, the government will undertake stakeholder
to the plan will be allowed, and no new CDSGs or value of the benefit, which should effectively put an end When a small business owner sets up an IPP, he or she consultations.
CDSBs will be paid into the plan. After the death of the to these types of tax planning schemes. often is given the option to make a contribution in
beneficiary, any CDSGs and CDSBs remaining in the plan respect of past service. To do so, however, the employee Employers with existing EPSPs should watch for further
SMALL BUSINESSES must either give up accumulated RRSP contribution room news in this regard.
that were received by the plan within the preceding 10
years must be repaid. for earlier years or, to the extent that the employee has
Individual Pension Plans (IPPs)
made RRSP contributions in those previous years, to
RRSPs & RRIFs – Anti-Avoidance Rules IPPs are defined benefit Registered Pension Plans (RPPs) withdraw a portion of RRSP assets to fund the IPP.
[email protected]
established for small business owners and their spouse or
Taking a page out of the TFSA playbook, the federal An employee who switches from RRSP savings to IPP
other family member that are employed by the business. Jamie Golombek, CA, CPA, CFP, CLU, TEP is the Managing
government is cracking down on perceived RRSP and savings later in their working career is able to make a past
Director, Tax & Estate Planning with CIBC Private Wealth
RRIF (which for simplicity, we’ll refer to in this section The federal budget proposes two new tax measures that Management in Toronto.
as “RRSP”) schemes and abuses. One such example is will apply specifically to IPPs.
the so-called “RRSP strips”, which purport to enable you
to withdraw money from your RRSP tax-free. While the Minimum Withdrawals
government has successfully challenged a number of
these schemes in Tax Court, they continue to be marketed Some business owners have established IPPs as a transfer
to innocent taxpayers, often resulting in punitive results. vehicle to receive the commuted value of their pension Disclaimer:
under a defined benefit RPP. In these cases, the plan As with all planning strategies, you should seek the advice of a qualified tax advisor.
Under existing TFSA anti-avoidance rules, an “advantage” terms of the IPP are designed to provide a much less This report is published by CIBC with information that is believed to be accurate at the time of publishing. CIBC and its subsidiaries
is a benefit obtained from a transaction that is intended generous pension in respect of past service, based on and affiliates are not liable for any errors or omissions. This report is intended to provide general information and should not
to exploit the tax attributes of a TFSA, such as shifting minimal employment earnings with the new employer be construed as specific legal, lending, or tax advice. Individual circumstances and current events are critical to sound planning;
returns from a taxable investment to a TFSA investment. sponsor or a lower benefit formula. anyone wishing to act on the information in this report should consult with his or her financial advisor and tax specialist.

4 5