Dividend Tax Credit (DTC)

The DTC compensates the individual shareholder for corporate-level tax in order to integrate the personal and corporate tax systems at the federal level. “Eligible dividends” were introduced in 2006 and are subject to a higher gross-up and an enhanced DTC in order to recognize that these dividends are generally paid out of income taxed at a higher rate.

The 2008 Economic Statement will reduce the general corporate tax rate to 15 per cent by 2012. It stated that adjustments would be considered to the enhanced DTC to ensure the appropriate tax treatment of eligible dividends. The Budget proposes to adjust the dividend gross-up and DTC for eligible dividends to reflect these corporate tax rate reductions. The gross-up of eligible dividends will be reduced from 45 per cent to 44 percent effective January 1, 2010, 41 per cent effective January 1, 2011, and 38 per cent effective January 1, 2012. The enhanced DTC will also change on the same schedule from 11/18 of the gross-up amount to 10/17, 13/23 and 6/11.

The intention is that the net after-tax dividend should remain approximately the same. However, where it is desirable to defer the payment of dividends along with the related personal tax to a subsequent year, the individual recipient will be worse off.

Tax-Free Savings Account (TFSA)

The Budget proposes a TFSA, a registered account that individuals will be able to utilize for their savings. Commencing in 2009, Canadian residents, age 18 or over, will be able to contribute up to $5,000 annually (indexed annually after 2009) to a TFSA. Any portion of this $5,000 annual contribution limit not utilized in one year can be carried forward indefinitely to a future year. Any amounts withdrawn from the TFSA in a year will be added to the individual's limit in the following year. Any excess contributions over the available limit will be subject to a penalty tax of one per cent per month.

Although contributions to the TFSA will not be deductible for income tax purposes, the investment income earned within the TSFA will not be taxable. Withdrawals can be used for any purpose and will not be subject to tax or taken into account in determining eligibility for income-tested benefits or credits such as the age credit or Old Age Security benefits.

Interest on money borrowed to invest in a TFSA will not be tax deductible. However, unlike RRSPs, individuals will be allowed to use their TFSA assets as collateral for a loan.

The income attribution rules will not apply to funds borrowed by a spouse or common-law partner to invest in his/her TFSA.

A TFSA will lose its tax-exempt status upon the death of the individual. Consequently, investment income and gains that accrue after the individual's death will be taxable. However, an individual will be permitted to name his/her spouse or common-law partner as the successor account holder, in which case the account will maintain its tax-exempt status. Alternatively, the assets of the deceased's TFSA may be transferred to a TFSA of the surviving spouse or common-law partner.

An amount may also be transferred on the breakdown of a marriage or common-law partnership directly from the TFSA of one party to the TFSA of the other party. This type of transfer will not reinstate the contribution room of the transferor and will not reduce the contribution room of the transferee.

An individual who becomes a non-resident of Canada will be allowed to maintain his/her TFSA, which will continue to be exempt from tax. However, contributions will not be allowed while the individual is a non-resident and contribution room will not accrue for any year throughout which the individual is a non-resident.

The Canada Revenue Agency (CRA) will determine TFSA contribution room based on tax returns filed. Individuals who have not filed tax returns in prior years will be permitted to establish their entitlement by filing such returns or by other means acceptable to CRA.

Financial institutions eligible to issue RRSPs will be permitted to issue TFSAs. TFSA issuers will be required to file annual information returns to report the value of an account's assets at the beginning and the end of the year, as well as the amount of contributions, withdrawals and transfers made in the year.

A TFSA will generally be permitted to hold the same investments as an RRSP. However, a TFSA will not be allowed to hold investments in any entity with which the individual does not deal at arm's length, including an entity of which the individual is a “specified shareholder” (generally a 10 per cent or greater interest).

Registered Education Savings Plan (RESP)

A RESP must currently be terminated by the end of the year that includes the 25th anniversary of the opening of the plan unless the beneficiary of a single-beneficiary RESP qualifies for the Disability Tax Credit. In addition, contributions may not be made to a family plan for a beneficiary who is 21 years of age or older.

The Budget proposes to increase the time limits by an additional10 years for 2008 and subsequent taxation years.

RESP beneficiaries are eligible to receive Educational Assistance Payments (EAPs) from the plan if they are enrolled in a qualifying program at the time. The Budget proposes to allow RESP beneficiaries to receive EAPs for six months after ceasing to be enrolled in a qualifying program after 2008.

Registered Disability Savings Plans (RDSPs)

The Government is working with financial institutions to put the necessary mechanisms in place to allow them to offer RDSPs in 2008.

If a RDSP beneficiary ceases to be eligible for the Disability Tax Credit, the current RDSP rules require that the proceeds of the plan be paid out to the beneficiary and the plan collapsed. There is a concern that this requirement could, contrary to the wishes of the parent, enable the beneficiary to rescind his/her Disability Tax Credit certification and gain full access to the funds.

Consequently, the Budget proposes to provide instead for a mandatory collapse of the plan only when the beneficiary's condition has factually improved to the extent that the beneficiary no longer qualifies for the Disability Tax Credit.

This proposal will be effective for 2008 and subsequent taxation years.

Medical Expense Tax Credit

The Budget proposes to extend the tax credit to the cost to purchase, operate and maintain the following devices prescribed by a medical practitioner:

• altered auditory feedback devices for treatment of a speech disorder;
• electrotherapy devices for the treatment of a medical condition or severe mobility impairment; standing devices for standing therapy in the treatment of severe mobility impairment, and
• pressure pulse therapy devices for the treatment of a balance disorder.

The above additions to the list of eligible expenses will be effective for 2008 and subsequent taxation years.

The Budget proposes to clarify that, effective for expenses incurred after February 26, 2008, eligible drugs and medications must be purchased with a prescription.

Northern Residents Deduction

Individuals who live in prescribed areas in northern Canada for at least six consecutive months may claim the northern residents deduction. The deductible amount varies depending upon where the individual lives. The Budget proposes to increase this deduction by10 per cent for 2008 and subsequent taxation years.

Mineral Exploration Tax Credit

The mineral exploration tax credit is a benefit, in addition to the deduction of Canadian exploration expenses, equal to 15 per cent of specified mineral expenses incurred in Canada and renounced to the shareholders. The Budget proposes to extend eligibility for this credit to flow-through share agreements entered into by March 31, 2009, which can support eligible exploration until the end of 2010.