2008 federal budget highlights

2008 federal budget highlights
by Kevin Keith - 5, 2008

On February 26, 2008, the federal government announced some new tax changes that will affect many Canadians. There have also been new changes introduced in the 2008 budget that will help to strengthen the competitiveness of Canadian businesses. The following are some of the changes that may impact those of you who are reading this article.

Good News for Farmers
The federal budget includes funds available for the following:

* $50 million for hog farmers who are interested in leaving the industry or decrease the amount of their breeding stock

* $22 million for livestock producers to relieve them of the rising cost of production and to improve access to the Advance Payments Program

* $20 million for the Biofuels Opportunities for Producers Initiative. This will help farmers who are developing business proposals and feasibility studies for biofuel facilities.

Tax-free Savings Accounts (TFSA)
The budget introduced a new form of savings account allowing an easier and more attractive way for individuals to save. Starting in 2009, Canadian residents over the age of 18 can contribute up to $5,000 annually to a TFSA. Although contributions made to a TFSA are not deductible for tax purposes, withdrawals from a TFSA can be made tax-free. Also, investment income earned within the TFSA on these investments will not be taxed. This new type of savings account will benefit those who are interested in making investments and wish to save for either short-term or the long-term. If you do not use all of your contribution room in a particular year, this contribution room can be carried forward to future years. Also, if you withdraw amounts from a TFSA, you can re-contribute these amounts in future years as the amount withdrawn will be added to your contribution room in the following year. The types of investments made in Registered Retirement Savings Plans (RRSPs) and TFSAs are basically similar however the rules will have different tax benefits and consequences. Tax planning will help to determine the allocation of investments you should be making into RRSPs and TFSAs. The TFSA's will likely become a very popular investment option for many individuals.

Registered Education Savings Plans (RESP)
The budget has extended the number of years for individuals to contribute to their children's RESP program from 21 years to 31 years. For plans of beneficiaries eligible for the disability tax credit, it has been extended from 25 years to 35 years. This allows for families to contribute longer and save more for their children's post-secondary education.

Medical Expense Credit
The list of eligible medical expenses for personal tax purposes has been expanded. However, it has been emphasized in the budget that drugs and medications purchased after February 26, 2008 must have a prescription to be eligible for medical expense tax credits.

Capital Cost Allowance (CCA) (also known as tax depreciation)
The CCA rates have been enhanced in certain asset classes. The CCA rate is the rate at which the tax cost of certain assets, such as equipment and buildings, are expensed over time. The increases in CCA rates results in increased deductions to determine income for tax purposes.

* The CCA rate for qualifying manufacturing and processing equipment has been increased on a temporary basis.

* The eligibility for Clean Energy Generation has been extended. It now includes qualifying round source heat pump systems, additional feedstocks for biogas production equipment, and equipment used to produce heat from waste sources as well as equipment used to produce bio-oil.

* There has been an increase in the CCA rate for carbon dioxide pipelines. The CCA rate for pumping compression equipment on a carbon dioxide pipeline has also been increased.

* There has also been an increase in the CCA rate for new computer purchases.

Scientific Research and Experimental Development (SR&ED)
The tax incentives have been improved for farms and companies dealing with scientific research and experimental development.

* The higher rate of 35% for investment tax credits (ITCs) can be earned for qualifying expenditures for SR&ED up to $3 million, instead of $2 million.

* SR&ED expenditures have been expanded to include certain salaries or wages paid to Canadian residents performing work outside Canada.

* The program's administration has been improved, with the introduction of a new SR&ED claim form and guide as well as an eligibility-assessment tool. CRA will be reviewing its policies and procedures to ensure they are aligned with current business practices and are applied consistently across the country.

Remittance of Source Deductions
Many businesses pay wages and salaries to their shareholders and their employees. These businesses must remit source deductions such as CPP, EI, and federal tax withholdings to CRA regularly. Any late remittances of source deductions are assessed a penalty of 10%. The budget has proposed to charge a reduced penalty for late remittances after February 26, 2008 graduating from 3% if the remittance is one to 3 days late increasing up to 10% if the remittance is more than seven days late. This is a significant relieving provision, as we have seen taxpayers with large fines, for only missing their remittance date by a day or two. Payroll, obviously, is an area where a high level of attention is important.

If you would like more information about any of the topics discussed above or would like to receive tax planning advice regarding these new tax changes, it is recommended that you consult an experienced advisor.

KPMG Lethbridge

Kevin Keith would like to thank Jenny Koba of KPMG for her assistance with writing this article.