Geoff McIntyre
2013 Federal Budget
The Honourable Jim Flaherty, Minister of Finance, presented the country’s 2013 Federal Budget on March 21, 2013. As stated by Minister Flaherty: “We will remain focused on what matters to Canadians – jobs and economic growth, and ensuring Canada’s economic advantage today will translate into the long-term prosperity of tomorrow.”
For orchard and winery owners there was three items that were particularly noteworthy in this year’s budget. Here’s a breakdown.
Lifetime Capital Gains Exemption (LCGE)
This year’s budget proposes to increase the LCGE limit to $800,000 (from $750,000) for 2014 and it will be indexed for inflation for taxation years after 2014.
The increase is effective for dispositions of qualified small business corporation shares and qualified farm and qualified fishing property after 2013. The new LCGE limit is applicable to all individuals, including those who had previously used their LCGE.
For farmers who own farm land with significantly unrealized capital gains, this means that each individual can now shelter an additional $50,000 in capital gains. The rules can be a bit complicated, but the LCGE would generally apply to capital gains on land that has been farmed by an individual or a person related to that individual, including shares of a family farm corporation. Shares of a corporation operating a winery may also qualify.
There are ways of benefitting from the LCGE without selling the qualifying property to an arm’s length party. You should consult with a qualified tax advisor about taking advantage of this significant tax planning opportunity.
Accelerated Capital Cost Allowance – Manufacturing & Processing Equipment
A few years ago, the federal government introduced temporary measures to encourage investment in manufacturing and processing by Canadian businesses. Equipment used in wine making or fruit processing and packaging would generally qualify for these measures thereby allowing a business to write off the cost of such equipment much more quickly than under the regular Capital Cost Allowance rates.
The budget proposes to extend the temporary 50% straight-line CCA rate for two additional years to include M&P equipment acquired in 2014 or 2015. Any related assets acquired in 2016 and subsequent years will qualify for the regular 30% declining-balance CCA rate for Class 43 assets.
Even if a business is not currently taxable because of losses, it should place related equipment in Class 29 so that the accelerated claim may be made in future years.
Restricted Farm Losses
Back in the Fall 2012 issue of Orchard & Vine, I wrote about the Supreme Court of Canada decision in Canada v. Craig. In that decision, the Supreme Court dismissed CRA’s appeal and essentially opened the door for the unrestricted claim of farm losses, as long as the taxpayer could demonstrate they were farming on a commercial basis. Previously CRA has argued that farming must be the taxpayer’s chief source of income in order for farm losses to be fully deductible against other income sources. The Court disagreed with CRA, pointing out that the Income Tax Act contemplates that a combination of farming and some other source of income could qualify as a taxpayer’s chief source of income.
Well, as often happens when CRA loses, the government responded by changing the rules. As a result, this year’s budget proposes to amend the restricted farm loss (RFL) rules for purposes of clarifying the chief source of income test. Specifically, a taxpayer’s other sources of income must be subordinate to farming in order for farm losses to be fully deductible against income from those other sources. To soften this blow somewhat, the budget also proposes to increase the RFL limit to $17,500 of deductible farm losses annually ($2,500 plus one half of the next $30,000). These measures will apply to taxation years that end on or after March 21, 2013. It remains to be seen how “sources of income” will be defined.
Other Items to Note
There were no changes to personal income tax rates announced.
The effective top Federal tax rate on non-eligible dividend income will rise from 19.58% to 21.22% for non-eligible dividends paid after 2013.
No new corporate income tax rate changes have been announced in this year’s budget. The current Federal corporate income tax rate is 15.0% for general corporate income and 11.0% for small businesses on active business income up to the small business limit of $500,000.