Federal Finance Minister Jim Flaherty tabled the Federal Budget in Parliament today. Unlike previous budgets, there is nothing concrete to report but there are some interesting measures that may impact your pocketbook.

Another Budget, Another Tax Credit

Budget 2013 introduces a new temporary tax credit called the First-time Donor’s Super Credit (FDSC). A first-time donor is an individual (or her spouse or common-law partner) who has not claimed the Charitable Donations Tax Credit (CDTC) or FDSC in any taxation year after 2007. The first-time donor will be allowed to claim a 25 percent tax credit on up to $1,000 of donations once in 2013 or a subsequent tax year before 2018.

Deduction for Safety Deposit Boxes Eliminated

Currently, tax payers are allowed to deduct expense incurred for renting a safety deposit box provided they use it to store and protect papers relating to the portfolio. These days most records are available in electronic form and the importance of paper copies is declining. Therefore, starting in Financial Year 2014, the cost renting safety deposit boxes cannot be deducted as a carrying charge on the income tax return.

Increase in Tax on Non-Eligible Dividends

A non-eligible dividend refers to income received from corporations that are not taxed at the general corporate rate (such as private, small business corporations). If all you receive are mostly dividends from Canadian public companies, this measure will not impact you.

Budget 2013 proposes to reduce the gross-up factor applicable to non-eligible dividends from 25 percent to 18 percent. The Dividend Tax Credit will change from 2/3 of the previous gross-up amount to 13/18 of the new gross-up. The combined effect of this measure will increase the personal tax rate on non-eligible dividends received from corporations. (Note: KPMG reported that the net result of this measure will increase the federal effective tax rate on non-eligible dividends to 21.22 percent from 19.58 percent).

Crackdown on Charitable Donation Tax Shelters

It appears that Budget 2013 is proposing measures that may turn out to be final nail in the coffin of Charitable Donation Tax Shelters. First, the Budget proposes to extend the reassessment period for a participant in a tax shelter by three years to six years. Second, the Budget permits CRA to collect 50 percent of the any tax, interest or penalties resulting from a reassessment of a participant in a tax shelter even if a notice of objection is filed.

Hasta La Vista to Labour-Sponsored Venture Capital Funds

Labour-Sponsored Venture Capital Funds have, in general, turned out to be a poor investment for Canadians. Therefore, it is heartening to see that Budget 2013 is proposing to eliminate the 15 percent Federal Tax Credit for investments of up to $5,000 in Labour-Sponsored Venture Capital Funds gradually by 2017.

There are other interesting measures in the Budget regarding reporting requirements for foreign assets that we will take a look at in future posts. Meanwhile, if you are looking for some bedtime reading, you can find the entire Budget 2013 document here.

This article has 11 comments

  1. Thanks for the summary. I had to puzzle over the tax increase on non-eligible dividends. Superficially, the gross up seems smaller, and the tax credit larger, which seems to mean a tax decrease. However, the tax credit amounts are expressed as a fraction of the increase due to the gross-up. So, the tax credit actually drops from (25%)x(2/3)=16.7% to (18%)x(13/18)=13%. That one would have kept me awake tonight 🙂

  2. I wonder what was the motivation to cut back on LSVCs. Since the tax credit exists in the first place to draw people to an otherwise unattractive investment, some might take this as a sign that they have been doing too well and don’t need the help anymore. I don’t think this is the case though. I looked at a local one recently and found that the managers were earning more than the investors (and my friend who is in the industry complained about advisors pushing it for the large commission they received). If that’s representative of other funds then this move will be good for everyone except the financial services industry.

    • I’m pretty sure the Budget document offered an explanation for cutting the credit for Labour Sponsored Funds. I’ll post it here when the Finance Ministry website is back again.

  3. Good to know about the First Time Donor’s Super Credit. That could definitely come in handy for some people. Every little bit helps to lower tax.

  4. Being the higher income spouse I always claim the tax credits for charitable donations. I wonder if I should have my spouse claim the credit next year to take advantage of the first time donor credit.

    • @Tennis Lover: Nope. A first time donation is defined as a charitable donation when a donation has not been claimed by a tax payer or her spouse or common-law partner in any tax year after 2007. Since you’ve claimed the charitable donation tax credit, any donation made by your spouse will not qualify as a first-time donation. Hope this helps.

  5. Page 145.
    “The Government proposes to implement a bail-in regime for
    systemically important banks. This regime will be designed to ensure that,
    in the unlikely event that a systemically important bank depletes its
    capital, the bank can be recapitalized and returned to viability through the
    very rapid conversion of certain bank liabilities into regulatory capital.”

    This means the Canadian government can pull a Cyprus and seize deposits.

    • One has to wait for legislation and final framework to know exactly what “certain bank liabilities” refers to. It is very unlikely that the bail-in framework will require insured depositors will take a hair cut.

      I take the view that bail-ins are a great idea. Why should tax payers inject capital into banks when unsecured bond holders, preferred share investors get their money back and even equity investors lose some money but not all of it? It is better to require these parties including those with deposits over insurance limits to take haircuts.

    • Currently, depositors with over $100,000 at one bank stand to lose all of that extra cash if the bank goes under. That has been the way it works since CDIC insurance was established 50 years ago. The idea that no deposits can be lost is upholding a promise that was never made and should never be made.

      A bail-in could be a slight improvement on the current model since it sounds like it may involve converting other forms of capital into equity rather than just taking it away. Equity in a failed bank may not be worth much but it just might be more than $0.