Everybody and their fathers comments on the Federal Budget. So it is with Finance Minister Jim Flaherty latest budget tabled at 4:00 pm in Ottawa. This time, the Ottawa Tax Matters Examiner chooses to focus on measures which are significant in terms of dollars either as they benefit the government, in other words tax increases (even if called otherwise) and benefits to business or individuals, in other words tax reductions.
TAX TREATMENT OF STOCK OPTIONS PLANS
According to table A5.1 called "Cost of Tax and Tariff Measures" included in budget documents and available here, which totals costs and/or increased revenue associated with tax measures for the five-year period ending in 2015, the most important measure, in terms of dollars, and by far, is the modifications proposed to the treatment of stock options plans.
Stock options plans are a means of hiring and retaining highly qualified individuals by giving the employee the right to purchase company shares at a given price although this price is usually a better deal than the fair-market price of the shares at the time the option is exercised. The difference between the price paid by the employee for shares and their fair-market value is considered a taxable employment benefit for the employee. However, employees are entitled, under certain conditions to a "stock option" deduction of 50% of this benefit; the effect being of taxing the stock option benefit at the more advantageous "capital gains" tax rate.
In certain cases the employees do not really purchase the shares, they exercise their option and immediately sell back the shares to the employer ( this is called "cashing out") at fair market prices; under current rules, the employee can still benefit of the stock option deduction and the cashing out payment is also a fully deductible expense for the employer.
The Budget documents propose to limit the right to the stock option deduction to employees who really purchase the company's shares; the "cashing out" option would still allow the employee to claim the stock option deduction only if the employer agrees not to claim the cashing out payment as a deduction. According to table A5.1 this represents a "savings" ( i.e tax increase) of roughly 300$ millions per year totaling 1.6$ billion by 2015! To put this in perspective, the single most important new measure applicable to most Canadians, the equalization of Canada Child Benefits for single parents compared to couples earning an equal revenue will cost a whooping 25$ million ( 5$ million per year.)
The good news about the stock option adjustment is that the current law clearly mostly benefited high-income earners. For example in 2007, income earners above $ 500,000 representing approximately 10% of the 7,092 individuals who claimed the deduction benefited from 75% of total deductions for the stock option deduction, for an average of a $393,000 tax deduction! Accordingly, while clearly a tax increase, the measures appears to close a loophole.
TAX TREATMENT OF "PURELY COSMETIC" MEDICAL OR DENTAL SERVICES
The second most important measure affecting individuals is also a "saving" ( i.e tax increase) involving the Medical Expense Tax Credit which allows a deduction for medical expenses not covered by government health plans. The Budget proposes to disallow expenses for surgical and non surgical incurred for purely cosmetic purposes; this would include procedures purely aimed at enhancing one's appearance such as liposuction, hair replacement procedures, "botox" injections, and teeth whitening.
This restriction to the Medical Expense Benefit will save the government 40 millions a year or 200$ million by 2015. Interestingly there is a similar modification concerning GST and HST. Under the GST/HST all medical or dental procedure performed by medical doctors or dentists are exempt, unless they involve "surgical" procedures made for cosmetic purposes. Botox injections, for example, not being surgical in nature, remained exempt. This is no longer the case. Interestingly while the modified measure only comes into effect on Budget Day it also applies retroactively if GST or HST has been charged in error in the past.
CUSTOMS TARIFF ELIMINATION FOR MANUFACTURING INPUTS
The budget does not only contain hidden tax increases; a welcomed tax break is the elimination of Customs Duties for all manufacturing inputs and/or machinery and equipment. This is the single most costly measure of the budget for businesses and represents a tax reduction of roughly 250 million per year totaling 1,276$ millions by 2015. Under this measure, 1,160 tariff items will be reduced to zero as of March 5 2010 and another 381 items will progressively be reduced to zero by 2015.
To compensate for this tax break in the current environment of austerity measures the Budget also propose to lower the amount of interest paid on tax overpayments by corporations. This measure follows a recommendation of the auditor and will reduce interest expense ( i.e tax increase) by 645$ million by 2015.
If you look at the Budget in terms of dollars earned or spent by the government, the above items are the most significant aspects of the budget. The rest is not significant, wishful thinking and/or bullshit.
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