Banka: Some good, some bad aspects of 2013 federal budget

The major focus of the budget was getting Canadians trained to work in fields that are in high-demand.

The federal budget was revealed on March 21 and there were some positive and not so positive things in the budget.

As much as we don’t like to admit it, the USA is our major trading partner. As such, things that happen in that county and in other countries that we trade with certainly can have an impact on our economy.

The major focus of the budget was getting Canadians trained to work in fields that are in high-demand.  The budget speaks about the creation of a Canada Job Grant, which should be available sometime in 2014.

There are a couple of items that have particular importance to investors and the banking sector.

Beginning on Page 140 of the budget document, the budget addresses the financial sector. The 2013 budget will implement changes to limit the use of portfolio insurance and prohibit the use of any government-backed insured mortgage as collateral in securitization vehicles that are not sponsored by Canada Mortgage and Housing Corporation. What that means is that if you purchase a home with less than 20 per cent down, currently the lending institution will need to insure the high-ratio mortgage.  In future,  the high-ratio mortgage will need to be approved by CMHC.

Budget document pages 144 and 145 attempt to address the possibility that Canada may also experience the failing of its large chartered banks.

The way that the government intends to address this is by increasing the reserves of capital that a bank needs to have on hand to satisfy those who withdraw funds from the bank.

The section also mentions a ‘bail-in’ provision whereby certain bank liabilities could be converted into regulatory capital.

However, there are no details as to what these liabilities might be. In addition, banks are still required to self regulate their risk and have a recovery plan in place.

On the securities front, the budget proposes a common securities regulator who would be responsible for maintaining the integrity and stability of the financial system, preserving fair, efficient and competitive national capital markets, and preventing and responding to systemic risks, such as those posed by over-the-counter derivatives (swaps, options, futures, forwards) using a single set of rules.

There is a change to the taxation of non-eligible dividends paid out after 2013 in that for the 2014 tax year the gross up of the dividends will be reduced to 18 per cent from the current 25 per cent and the dividend tax credit will be reduced to 13/18 of the gross-up from the current 2/3.

This will affect those owner-managed businesses that are currently using a dividend strategy to move income out of their corporations into their shareholders’ hands.

It may now become a better strategy to use salary.

Another measure to improve taxes for small business owners is the increase of the capital gains lifetime exemption to $800,000 from the current $750,000 for qualified property, qualified small business shares and qualified farm and fishing property.  This will become effective for 2014 and the exemption will be indexed to inflation after that.

Those small businesses that use what is termed as ESS (zapper) software to modify sales transactions from their point of sale software will now be facing Canada Revenue Agency monetary penalties which amount to $5,000 for the first offence and $50,000 for any subsequent offences.

The manufacturers of this software will face penalties of $10,000 for the first offence and $100,000 for subsequent offences.

The safety deposit deduction will no longer be available as a tax deduction from 2014 onwards.

The budget will increase the restricted farming loss limit to $17,500 of deductible farm losses annually which is ($2,500 plus 1/2 of the next $30,000) provided that the taxpayer’s chief source of income is from farming.

The 2013 budget is also implementing measures so that CRA can better combat international tax evasion such as international fund transfers.

Beginning in 2015, financial intermediaries will be required to report to the CRA details of any international transfers of more than $10,000.

The financial intermediaries are banks, credit unions, trust and loan companies, money service businesses and casinos. The CRA will also pay a reward to individuals when they provide knowledge to CRA of international tax non-compliance that results in a collection of the taxes due.

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