1. Canada
Tax
Contacts:
Canadian managing
Canadian tax alert
partner, Tax
Andrew W. Dunn
416-601-6227
2011 federal budget highlights
March 22, 2011
National tax policy
leader
Albert Baker The Minister of Finance, James M. Flaherty, presented his 2011 budget in the House
604-640-3273 of Commons this afternoon. He announced a projected deficit for the 2010-2011 of
St. John’s $40.5 billion which is almost $9 billion less than was projected in budget 2010. The
Brian Brophy Federal debt to GDP ratio is projected to be just over 34%. This ratio is projected to
709-758-5234 grow slightly in 2011-2012 and then decline to 29.7% by 2015-2016, roughly the level
Quebec
before the impact of the recession and the measures contained in the last two
Dominic Vendetti budgets designed to counteract the recession. While excluding provincial debt, the
450-978-3527 projected debt to GDP ratio of 29.7% in 2015-2016 is less than half the projected debt
Denis de la Chevrotière
to GDP ratio of any of the other G7 countries. The deficit is projected to fall to $29.6
819-797-7419 billion in 2011-2012 and continue to decline each year until 2015-2016, when a
surplus is projected.
Montreal
Judith Bellehumeur
514-393-6512 The budget reflects the recovery in the global economy and demonstrates that the
near-term global economic outlook has improved since the October 2010 Update of
Ottawa
Economic and Fiscal Projections. However, only moderate growth is expected in
Jeff Black
613-751-5479 Canada and most of the advanced economies going forward. The Finance Minister
predicts real growth in the economy of 2.9% in calendar year 2011 and 2.7% in 2012.
Toronto
Average growth over the next five years is projected to be just under 2.7%. Growth in
Heather Evans
416-601-6472 the US economy is expected to be stronger over the same term with the average
growth in real GDP over the next five years projected at just less than 3.2%.
Kitchener
Len Lucier
905-315-6730 Unemployment is expected to continue to decline over the next five years from 7.5%
in 2011 to 6.5%. Inflation is projected to remain around 2% over the next five years
Winnipeg
with 2011 projected to be at 2.4%. Similarly, the value of the Canadian dollar is
Jim McDonald
204-944-3540 projected to be just below par compared to the US dollar for the next five years. Short
term and long-term interest rates are projected to increase over the next five years
Saskatoon
with the biggest increases being in 2011 and 2012.
Bookman, Larry
306-343-4409
There are no tax increases contained in the budget, nor any changes to previously
Calgary
promised tax rate reductions. Government expenditures will continue to grow,
Brian Pyra
403-503-1408 although there are expected savings from strategic reviews of government
departments and agencies and continued restraint in government wage increases.
Edmonton
There were no tax rate reductions for individuals announced in the budget but some
Brian Zrobek
780-421-3681 small tax credit enhancements were announced for families. We continue to believe
that the highest personal tax rate is too high and the level at which that rate becomes
Langley
effective is too low and hurts Canada’s global competitiveness for top talent. While
John Bylhouwer
604-539-3624 there were some limited enhancements to support retirement savings such as the
increase to the Guaranteed Income Supplement for low-income seniors, there were
Vancouver
no enhancements to the Registered Retirement Savings Plan (RRSP) and Tax-Free
Etienne Bruson
604-640-3175 Savings Plan (TFSA) regimes which we feel are necessary as more and more

2. Canadians are funding their own retirement.
Related links:
2011 budgets
The Minister did find some savings by eliminating what he calls tax loopholes. These
Weekly Tax Highlights included preventing the deferral of tax by the use of partnerships and eliminating the
– archive ability to avoid capital gains tax when flow-through shares are donated to a charity.
Deloitte Tax Services
No changes are proposed for the Scientific Research and Experimental Development
Update your tax credit system. Many companies performing research and development who are
subscription
not entitled to refundability of the tax credits were hoping that the program would be
expanded to give some relief in this area. This is an opportunity to assist these
companies who are trying to further the country’s innovation agenda and improve
productivity. The Minister may have decided to defer such changes pending
completion of the government’s review of this area. There were also no provisions to
encourage so-called angel investing in startup companies. We had encouraged the
creation of an angel investment tax credit but this was not proposed in the budget.
Another area where we expected some more definitive plans was for pooled
registered retirement pension plans or other enhancements to encourage saving. The
budget indicates that the federal government is continuing to work with the provinces
and territories to implement the pooled plans. No other measures were introduced to
encourage savings or to raise the RRSP or TFSA limits.
Measures concerning business
 The budget proposes to extend the temporary incentive for accelerated
capital cost allowance for machinery and equipment primarily for use in
Canada for the manufacturing or processing of goods for sale or lease for an
additional two years. This measure will apply to eligible machinery and
equipment purchased before 2014.
 The budget proposes to expand Class 43.2 (specified clean energy
generation and conservation equipment – declining balance capital cost
allowance (CCA) rate of 50%) to include equipment that is used to generate
electrical energy in a process in which all or substantially all of the energy
input is from waste heat. This measure will apply to eligible assets acquired
on or after March 22, 2011 that have not been used or acquired for use
before that date.
 The budget proposes that the rules governing qualifying environmental
trusts (QETs) be extended to apply to a trust that otherwise meets the
conditions of the Income Tax Act for being a qualifying environmental trust
that is (a) created after 2011 in connection with the reclamation of property
primarily used for the operation of a pipeline; and (b) required to be
maintained by order of a tribunal constituted by a law of Canada or a
province. The budget also proposes to expand the range of eligible
investments that a qualifying environmental trust may hold. Lastly, the
budget proposes to set the rate of tax payable by a QET to the corporate
income tax rate generally applicable for the 2012 and later taxation years.
These changes will apply to the 2012 and subsequent taxation years.
 Currently, the cost of oil sands leases and other oil sands resource property
can be treated as Canadian development expense (CDE) which is
deductible at the rate of 30% per year. In order to better align the deduction
rates for intangible costs in the oil sands sector with rates in the
conventional oil and gas sector, the budget proposes that these costs be
treated as Canadian oil and gas property expense (COGPE) which is
deductible at 10% per year. This measure will be effective for acquisitions

3. made on or after March 22, 2011.
 Currently, development expenses incurred for the purpose of bringing a new
oil sands mine into production in reasonable commercial quantities are
treated as Canadian exploration expense (CEE) which can be deducted in
full in the year incurred. In order to better align the deduction rates for pre-
production development costs in oil sands mines with rates applicable to in
situ oil sands projects and the conventional oil and gas sector, the budget
proposes that these costs be treated as CDE which is deductible at the rate
of 30% per year. This measure will be effective after 2015 for new mines on
which major expenses construction began before March 22, 2011. For other
expenses, the transition from CEE to CDE will be phased in on a gradual
basis, becoming fully phased in by 2016.
 The budget proposes to extend the application of the stop loss rules that
apply to reduce, in certain cases, the amount of a loss otherwise realized by
a corporation on a disposition of shares by the amount of tax free dividends
that have been received or deemed to have been received on those shares
on or before the disposition to include any deemed dividends to be received
on the redemption of shares held by a corporation, except where the
dividends deemed to have been received were from the redemption of
shares of the capital stock of a private corporation that are held by a private
corporation. This measure applies to redemptions that occur on or after
March 22, 2011.
 The budget proposes to limit the deferral opportunities for corporations with
a significant interest in a partnership that has a different fiscal period than
the corporation’s taxation year. In computing the corporation’s income for
the taxation year, it will be required to accrue income from the partnership
for the portion of the partnership’s fiscal period that falls within the
corporation’s taxation year. The additional income for the first year will be
brought into the corporation’s income over a five year period. This measure
will apply to taxation years of a corporation that end after March 22, 2011.
 The government plans to review the existing rules relating to Employee
Profit Sharing Plans to ensure that employers are using these plans for their
intended purpose, rather than, for example, to direct profit participation to
family members. Before proceeding with any changes, the government will
consult with stakeholders.
 The AgriInvest program, which provides an incentive to farmers to set aside
savings through government-matched contributions, is being supplemented
in Quebec by the Agri-Québec program. The budget proposes to provide the
same tax treatment to the Agri-Québec program as the federal program.
 The budget proposes a one-time credit of up to $1,000 against a small firm’s
increase in its 2011 Employment Insurance (EI) premiums over those paid in
2010. This new credit will be available for employers whose EI premiums
were at or below $10,000 in 2010.
Measures concerning individuals
 The budget proposes a new 15% non-refundable Children’s Art Tax Credit
for eligible expenses up to $500. The credit will be available in respect of a
child who is under 16 years of age at the beginning of the year who is
enrolled in an eligible artistic, cultural, recreational or developmental activity.
This credit will be structured in the same manner as the existing Children’s
Fitness Tax Credit. The credit will apply to eligible expenses paid in the 2011
and subsequent taxation years, and will be able to be claimed by either
parent, or shared by both parents.

4.  A Family Caregiver Tax Credit is proposed for a caregiver of a dependent
person who has a mental or physical infirmity. The credit will be integrated
into the existing dependency-related credits and will be based on an amount
of $2,000. The credit will apply beginning in 2012.
 The Medical Expense Tax Credit in respect of a dependent relative (other
than a child who has not reached the age of 18 years before the end of the
taxation year) is proposed to be amended to remove the current $10,000
limit on eligible expenses that can be claimed. This measure will apply to the
2011 and subsequent taxation years.
 The Registered Disability Savings Plan (RDSP) rules are proposed to be
amended to enhance the ability for a beneficiary with a shortened life
expectancy to withdraw amounts from the RDSP without triggering the 10-
year repayment rule in respect of Canada Disability Savings Grants and
Canada Disability Savings Bonds. This measure will apply, subject to a
transitional measure, after 2010 to withdrawals made after Royal Assent.
 The budget proposes to allow for greater flexibility with respect to the
allocation of Registered Education Savings Plan (RESP) assets among
siblings by expanding the ability to transfer between individual RESPs for
siblings, without tax penalties or triggering the repayment of Canada
Education Savings Grants, to individuals who are not connected by blood or
adoption, such as aunts or uncles. This proposal will apply to asset transfers
that occur after 2010.
 The Tuition Tax Credit is proposed to be amended to include certain
occupational, trade or professional examination fees and ancillary fees and
charges as eligible fees for the credit. This amendment will apply to eligible
amounts paid in respect of examinations taken in the 2011 and subsequent
taxation years.
 The Tuition, Education and Textbook Tax Credits, as well as eligibility for
Educational Assistance Payments (EAPs) from an RESP, are proposed to
be amended to accommodate the fact that many programs at foreign
universities are based on semesters that are shorter than 13 weeks. The
minimum course duration for these purposes is proposed to be reduced from
13 weeks to three consecutive weeks. This amendment will apply with
respect to tuition paid for courses taken in the 2011 and subsequent taxation
years and to EAPs made after 2010.
 The RRSP rules are proposed to be amended to address certain perceived
abuses, a number of which involved accessing RRSP funds without a
corresponding income inclusion. Measures similar to those recently
implemented in respect of TFSAs are proposed to be introduced for RRSPs.
Subject to certain exceptions, these measures are proposed to apply to
transactions occurring and investments acquired after March 22, 2011. (For
these purposes investment income earned after March 22, 2011 on
previously acquired investments will be considered a transaction occurring
after March 22, 2011.)
 The budget proposes two amendments in respect of Registered Pension
Plans that are considered Individual Pension Plans (IPPs).
o Similar to the requirements applicable to a Registered Retirement
Income Fund, annual minimum amounts will be required to be
withdrawn from an IPP once a plan member reaches 72 years of
age. This measure is proposed to be applicable to the 2012 and
subsequent taxation years.
o Contributions to an IPP that relate to past years of employment will
be required to be funded first out of RRSP assets or a reduction in
RRSP contribution room before a deductible contribution can be

5. made. This measure is proposed to be generally applicable to past
service contributions made after March 22, 2011.
 The Canada Revenue Agency (CRA) will clarify the application of the
pension tax rules with respect to the tax treatment of lump sum amounts
received by former employees in lieu of their rights to health and dental
coverage from employers who have become insolvent and whose
underfunded pension plans were wound up. These amounts will not be
treated as income for tax purposes in relation to insolvencies arising before
2012.
 The tax on split income, also known as the “kiddie tax”, is proposed to be
amended to extend the application of the 29% tax to certain capital gains.
The provision is proposed to apply to capital gains realized on the
disposition of shares of a corporation to a person who does not deal at arm’s
length with the minor, if taxable dividends on those shares would have been
subject to the “kiddie tax”. If this provision applies, the capital gains will be
treated as dividends and neither the capital gains inclusion rate nor the
lifetime capital gains exemption will apply. This measure is proposed to
apply to capital gains realized on or after March 22, 2011.
 Eligibility for the Mineral Exploration Tax Credit is extended for one year to
flow-through share agreements entered into on or before March 31, 2012.
 A new 15% non-refundable Volunteer Firefighters Tax Credit is introduced.
This credit is based on an amount of $3,000 and is proposed to be available
to individuals who perform at least 200 hours of volunteer firefighting in a
taxation year. Volunteer service hours will not qualify if the firefighter also
performs non-volunteer services to a particular fire department. An individual
who claims this credit will not be eligible for the current $1,000 tax
exemption for honoraria paid in respect of firefighting. This credit will apply
to the 2011 and subsequent taxation years.
 Eligibility for the 15% non-refundable Child Tax Credit (based on an indexed
amount - $2,131 in 2011) is proposed to be modified to eliminate the
restriction that only one credit may be claimed per domestic establishment.
This will ensure that where two or more families share a home, each eligible
parent will still be entitled to claim the credit. This measure will apply to the
2011 and subsequent taxation years.
 In order to prevent taxpayers from acquiring and donating flow-through
shares at little or no after tax cost, the budget proposes to allow the
exemption from capital gains tax on donations of flow-through shares only to
the extent that cumulative capital gains in respect of dispositions of shares
of that class exceed the original cost of the flow-through shares. This
measure applies for shares issued pursuant to a flow-through share
agreement entered into on or after March 22, 2011.
 The budget proposes to clarify that the Charitable Donations Tax Credit or
Deduction is not available to a taxpayer in respect of the granting of an
option to a qualified donee to acquire a property of the taxpayer until such
time that the donee acquires the property that is the subject of the option.
The taxpayer will be allowed a credit or deduction at that time based on the
amount by which the fair market value of the property exceeds the total
amount, if any, paid by the donee for the option and the property. This
measure will apply in respect of options granted on or after March 22, 2011.
 The budget proposes that the tax recognition of the donation of a non-
qualifying security of a donor, for the purposes of determining eligibility for
the Charitable Donations Tax Credit or Deduction, will be deferred until such
time, within five years of the donation, that the qualified donee has disposed
of the non-qualifying security for consideration that is not another non-

6. qualifying security. This measure will apply in respect of securities disposed
of by donees on or after March 22, 2011.
 The government intends to renew two EI pilot projects for one year. The
Working While on Claim pilot project, available across Canada, will allow EI
claimants to earn additional money while receiving income support. It will be
renewed until August 2012. The Best 14 Weeks pilot project, which allows
claimants in 25 regions of higher unemployment to have their EI benefits
calculated based on the highest 14 weeks of earnings over the year
preceding a claim, will be renewed until June 2012.
Customs tariff measures
 The budget announces that the Government is initiating a process to simplify
the Customs Tariff in order to facilitate trade and lower the administrative
burden for businesses. The changes include a reduction of customs
processing burden for businesses, modification of the structure of the
Customs Tariff, and technical modernization of the Customs Tariff.
 The budget proposes the introduction of three new tariff items to facilitate
the processing of low value non-commercial imports arriving by post or by
courier. These new items will apply generic Most-Favoured-Nation tariff
rates of 0%, 8% or 20%, depending on the description of the goods.
Other measures
 The budget proposes a number of measures relating to charities, including:
the requirement that qualified donees be included on a publicly available list
maintained by the CRA; the potential suspension of receipting privileges,
revocation of qualified donee status or monetary penalties associated with
improper issuance of receipts; the extension of monetary penalties
associated with the failure to file information returns to registered Canadian
amateur athletic associations (RCAAAs); the extension to RCAAAs of other
key regulatory requirements that apply to registered charities; and the ability
of the Minister of National Revenue to refuse or revoke the registration of an
organization if certain offenses are committed by certain members of the
organization.
 The budget proposes that when property in respect of which a taxpayer
received a donation receipt is returned to the donor, the qualified donee
must issue a revised donation receipt and must forward a copy to the CRA if
the amount of the receipt has changed by more than $50. This measure will
apply in respect of gifts or property returned on or after March 22, 2011.
 The government has committed $400 million in 2011-12 for the ecoENERGY
Retrofit – Homes program to help homeowners make their homes more
energy efficient and reduce high energy costs. Further details will be
announced in the near future.
For further details, we refer you to the Department of Finance website, where you
can access the official budget documents without charge.
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