It’s all about staying the course.
The government is clearly staying the course with its 2010 budget. The budget does attempt to follow through on commitments made in last year’s plan. The focus remains on gradually reducing the deficit over the next five years so there’s little new spending. The government is also holding the line on income tax. There are neither cuts nor increases.
In short, this year’s budget will have very little impact on most people. But there are a few small changes that could affect some investors either directly or indirectly. Some of the highlights include:
- New tax rules for employee stock options
- New rules for Registered Disability Savings Plans (RDSPs)
- Changes to certain income tax deductions
- New rules for financial institutions that affect their customers.
Of course, the 2010 budget hasn’t passed into law yet. If it does, and you have concerns about how these changes will affect you, consult a financial adviser or tax expert.
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Highlights: Year 2 of Canada’s Economic Action Plan
The 2010 budget follows through on the government’s stimulus plan from last year. Here’s what you can expect if it passes into law:
- The Basic personal amount and amounts relating to non-refundable tax credits will be indexed for inflation in 2010. So will income tax brackets. This means Canadians will be able to earn more income before paying federal and provincial income tax and before moving into a higher tax bracket. ($3.2 billion). Visit the CRA website for more information.
- More money will go into job creation and job protection schemes for such things as extra employment insurance benefits and more training opportunities for unemployed Canadians. ($4 billion).
- More money for infrastructure stimulus aimed at boosting employment ($7.7 billion)
- Money for Canadian research and development with the intent of helping Canadian firms become more competitive in global markets ($1.9 billion).
- Support for industries and communities that will specifically target parts of Canada that have been hit the hardest by the economic downturn ($2.2 billion).
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New tax rules for employee stock options
There were two key changes made to the taxation of employee stock options.
The way it is
Current “Hybrid” or “Phantom” stock option plans
These plans are currently structured so that, at the time the options are exercised, employees can choose to take a cash payment rather than take shares in the company that employs them. The employer is able to claim a deduction for the cash paid, as though it were a bonus. The problem as far as CRA is concerned, is that if structured properly, the employee could also claim tax relief in the form of the stock option deduction and as a result, only pay tax on half of the benefit received.
The new rules aim to eliminate this “double dip” so that the tax break will now be available to either the employer or the employee, but not both. For more information, see Stock Option Cash Outs.
Stock Options in publicly traded companies as it is now
Under current tax rules, employees could exercise their stock options at one date – say, when stock prices were up. But they could defer reporting the income and paying the taxes due until the shares were actually sold. However, in some cases, those shares dropped in value after the options were exercised and were worth less than the tax owing on the stock option benefit. So even if you sell the shares, you will still have to come up with additional cash to pay the tax.
The way it will be once the budget is passed
To address these issues, the 2010 budget proposes new rules. These changes will apply to options exercised after 4 pm on March 4, 2010.
- Employees will no longer be able to defer the tax due when they exercise employee stock options. The benefit will be included in income in the tax year in which they exercise their options.
- Employers must withhold the taxes owing on the stock option benefit from the employee and remit them to CRA on behalf of the employee, at the time the options are exercised. Just like regular tax withholdings on employees’ salaries, this ensures that CRA gets paid first.
- There will be tax relief for taxpayers who, under the old rules, elected to defer the stock option benefit on the acquisition of public company stocks that have since declined significantly in value. This tax relief is available if the shares are disposed of before 2015. This change will ensure that the tax owing on a deferred stock option benefit is not more than the sale price of the shares. For more information, see Tax Deferral Election and Remittance Requirement as well as Special Relief for Tax Deferral Elections.
- Employees must file a special election with their tax return. (A special election is simply a tax form that must be completed in order to receive this special tax treatment). It must be filed on or before their tax return filing deadline for the year in which they disposed of their shares. The election is also available retroactively for employees who disposed of their shares before 2010 and must be made on or before the deadline for filing their 2010 tax return (generally April 30, 2011).
New rules for Registered Disability Savings Plans (RDSPs)
RDSPs were introduced in 2008. They are designed to help parents and others save and provide for a disabled child. Under the 2010 budget, the government will enhance these plans in two ways:
- You will be able to carry forward any contributions you are entitled to from the government for 10 years. Based on your family income, the government offers these funds each year that you contribute. That means if you contribute less in some years and more in others, you can still get the full benefit of the government funding.
- The treatment of funds from a deceased person’s registered retirement plans (RRSP/RRIF) will change. Under the new rules, these funds may be rolled over to the RDSP of a financially dependent infirm child or grandchild. The amount rolled over cannot exceed the available RDSP contribution room. A $200,000 lifetime maximum applies.
Changes to certain income tax deductions
The 2010 budget also means new rules for certain income tax deductions:
- New rules for parents who share custody of a child and receive the child tax benefit, the universal child care benefit and the GST/HST credit. Under current rules, only one parent can receive the benefits each month: the parent with the lowest income. Under the new rules, both parents can split the benefit if the child lives more or less equally with two parents who live apart. The budget also allows single parents to have their universal child care benefits taxed in the hands of their dependent children. The measure will provide $168 in tax relief for single parents with one child under six in 2010.
- Changes to deductions you can make for certain medical expenses. Some cosmetic procedures that are considered not medically necessary will no longer qualify for a tax credit. This includes liposuction, hair transplants, or Botox and teeth whitening.
New rules for financial institutions that affect their customers
The government is proposing to change certain rules that apply to regulated financial institutions. Under the new rules, financial institutions:
- will no longer be able to bill you for products or services unless you've agreed to them
- must standardize the way they calculate and disclose mortgage pre-payment penalties
- must reduce the maximum time they hold funds from a cheque you deposit to your account. The holding period will drop from 7 to 4 days.
As well, the institution would have to allow you to access up to $100 from that cheque within 24 hours.