2013 Federal Budget Highlights

1. 2013 Federal Budget Highlights Duane Snow, CLU, CFP, ChFC RVP Eastern Canada

2. Minister James M Flaherty presented the 2013/2014 budget on Mar 21, 2012. The budget focuses on jobs training, infrastructure and closing perceived tax loopholes 2013 Federal Budget Highlights

3. Personal Tax (LCGE) • To increase from $750,000 to $800,000 • Indexed to inflation in the future • For all Canadians, even those who have previously claimed LCGE

4. Dividend tax credit • Federal Government integration tool • To ensure income paid as dividends attract same amount of tax as income earned directly • Enhanced DTC and gross up for income from corp taxed a general rate (eligible dividends) • Feds felt ordinary DTC and gross up factors overcompensated individuals running non eligible business • Budget 2013 proposes adjustment to gross up factors

5. Tax Shelters • Normal reassessment periods are extended • This will assist CRA in identifying and auditing taxpayer claims • CRA has 3 years to review after relevant information on the shelter is provided

6. Charitable donations • CRA has spend a lot of time and money in the past fighting donation schemes • Previous rules did not permit CRA to take tax collection action until the case was settled • New rules will permit CRA to collect 50% of the disputed tax, interest and penalties up front

7. Labour Sponsored Venture Capital • Mutual Fund corporation • Currently a 15% tax credit, to a max of $5000 per year • Reduced to 10% in 2015 • Reduced further to 5% in 2016 Then eliminated

8. Leveraged life policies • Life programs were introduced which allowed the client to borrow against life policy for investment purposes • 10% interest was used as a loan rate. Client would claim costs under 20(1)(c) • Interest credited on life policy generally 2% less that loan rate • In some cases, taxpayer would also claim insurance costs as “collateral insurance” deduction • CRA has been concerned about their approach to attack, and litigation costs

9. Leveraged policies Finance has come to CRA’s aid. Response was quite simple and targeted • Deny interest deduction • Deny collateral costs • Deny CDA credit on life proceeds Expected to raise $260M in new tax over next 5 years

10. Leveraged Life Annuity • Client uses cash to buy an annuity (most often corporately) • Client purchases life insurance • Borrow back the initial investment, assigning the two above instruments as collateral. The client would then deduct the interest, deduct collateral insurance costs, enjoy CRA credit and reduce share values

11. Leveraged annuity Finance once again helped CRA with this issue The arrangement is “too rich” for participants and provides more tax benefit than any other “investment” • Life policy is now non exempt (taxable) • No deduction allowed for collateral premium • NO CRA credit for life proceeds

12. Life Policy Exempt Room • Reserves inside an exempt life insurance policy grow tax free • These reserves are inherently a pre payment of future premium costs. Returns within plan limits are invested and grow tax free • The government intends to update and simplify the Exempt test. Policies of a given size will have less room for deposits up front when the Maximum Tax Exempt deposit amounts (MTAR) are reduced • Canadians will pay more, for a longer period, when new rules are implemented (sometime in 2015)

13. Prescribed annuity taxation • Prescribed annuities are purchased by individual Canadian taxpayers with Non Registered investment assets • The low, level lifetime taxation enjoyed on these plans represent that amount of income the individual could earn from the annuity above and beyond their initial deposit amount. • The mortality table currently in use is so old, many of our older annuity clients are already “deceased” or are very close to being • Finance has announced their intention to update mortality tables used to more closely reflect actual potential income

14. Character Conversion Arrangement Derivative based return on forward contracts greater than 180 days will be treated as ordinary income not Capital Gains

15. Graduated rate trusts • Testamentary trusts created by will compute federal income tax using the graduated tax rates applicable to individuals • In the view of finance, this treatment raises questions of tax fairness and neutrality in comparison to beneficiaries receiving equivalent income directly • Finance is also concerned with the tax motivated use of Test. Trusts and the impact on the tax base • Finance intends on releasing a consultation paper to stakeholders with an opportunity to comment

16. Other measure of interest • 15% tax credit for eligible adoption costs • First time super donor credit. Additional 25% charitable donation credit for first time donors up to $1000. • Safety deposit costs no longer deductable

17. Corporate measures of interest • A number of temporary accelerated CCA measure applicable to various equipment and industries • Credit Unions are eligible for the small business deduction. Additional deductions only available to credit unions provide access to preferred income tax rates across the board. Phasing out these tax benefit will raise $200m over next 5 years. • Restricted Farm Loss (RFL) rules will be modified to offer benefit only to those whose primary source of income is farming (SCC ruling favored lawyer who also ran a horse hobby farm)

18. Corporate measures Canada Job Grant Program • $15,000 per person for training • There must be an employer plan specific to training those who are unemployed or underemployed Pension • RPP administrators able to make corrections/adjustments to correct reasonable errors without CRA approval

19. International tax and tax avoidance • Excise tax act will be amended to require reporting to CRA on all international fund transfers over $10,000 • New program will be introduced to reward individuals who provide information related to international non compliance. 15% reward on total (including interest and penalties) major reassessment, currently deemed to be over $100,000

20. Tax avoidance • There is a 3 year automatic extension if the taxpayer has ever failed to report income or neglected to file a T1135. The T1135 will be amended to require much more detailed information from taxpayer on holdings, properties, etc.

21. Thanks for your participation! Questions?