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Government Committed to the Better Way: Update to Public Transit Tax Credit

RidetherocketFor years many of us have been taking public transit and have experienced the impact fare hikes have had on its affordability.  The new credit demonstrates that the government is aware of the financial considerations affecting whether an individual decides to commute by car or by transit.  To encourage greater use of public transit and decrease the financial burdens of purchasing monthly passes, the public transit tax credit was introduced in Budget 2006.

However, although this provided much needed relief, individuals who were unable to afford to buy monthly passes could not claim the credit.  Further, some transit authorities only offered electronic fare cards that charge per trip when swiped or pass cards that provide for a minimum amount of rides on a weekly basis (i.e., Go Transit Ten Ride Passes).  Under the Budget 2006 rules, these passes were ineligible for the credit.  Budget 2007 proposes to extend the public transit tax credit to include these types of arrangements.  This will assist both low income individuals who cannot afford monthly passes and those living in areas that offer modified passes.

These changes are effective for the 2007 taxation year.

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Budget 2007 Introduces New $2,000 Child Tax Credit

The Federal Budget Plan was released on March 19, 2007.  The plan contains a number of tax relief measures focused providing assistance to families.  One of the proposed measures is a new tax credit that is intended to provide tax relief to families with children under eighteen.

The new tax credit will be effective January 1, 2007.  Families can claim the credit for each child under age 18. The tax credit is calculated as $2,000 per child and multiplied by the lowest personal income tax rate of 15.5% percent. A family can receive a maximum benefit of $310 per child.

In addition to the new credit, the government plans to increase the basic personal amount exemption from $7,581 to $8,929.  The change will also be effective January 1, 2007. This additional credit will benefit taxpayers with low or no income spouses or single taxpayers who support dependants such as a child or elderly parent.  The amount of the exemption will decrease as the dependant individual’s income increases.  The basic personal amount exemption will continue to rise until it reaches $10,000 in 2009. This change is expected to provide up to $209 in tax relief for these families.

The government hopes that the introduction of the new child tax credit and the increase in the basic personal amount exemption will help preserve tax fairness for all families and, particularly, between different family circumstances.

Taking Steps to Eliminate the Prosperity Gap

The 2007 Budget boasts: “Government of Canada helps parents to save for their children’s post secondary education through registered education savings plans (RESPs) and the Canadian Education Savings Grant (CESG)”.

A number of changes have been proposed for the program under the 2007 Budget.  The Government has recommended eliminating the $4,000 annual contribution limit on RESPs. It has also planned to increase the RESP lifetime contribution limit from $42,000 to $50,000.  The corresponding CESG will increase from $400 to $500 for the maximum annual contribution.  With this change, contributors will be eligible for a $1,000 annual grant as opposed to $800 where there is unused contribution room from a previous year and the maximum grant claim was not made for that year, but is made in a subsequent year.

Under the current rules RESP savings can only be withdrawn, without penalty, by students who are enrolled in a program that requires at least 10 hours of classroom instruction. The proposal extends the circumstances in which a student can access savings under the program.  Budget 2007 plans to allow part-time students access to up to $2,500 of their RESP savings and grants where a student is enrolled for a 13-week semester of study that requires at least 12 hours a month of study.

These changes are effective for the 2007 taxation year.

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Treaty Shopping and GAAR: Dispute Resolution Alternatives

In 2006, the headlines read: “U.K. Decision Challenges Rule Against Treaty Shopping[i]; “Germany to Tighten Anti-Treaty Shopping Rules[ii]; “Belgium Rewrites Anti-avoidance Rules[iii]; “Taxpayer prevails in Canadian Treaty Shopping Case[iv]; “U.K. Struggles to Define Avoidance Schemes[v].  The headlines are ominous, desperate and yet at times reassuring.  But is the story being told a story of a real or perceived crisis?

At the Canadian Tax Foundation Conference in September 2004, the CRA General Anti-avoidance Rule (“GAAR”) Committee reported that as at July 31, 2004, the Committee had reviewed 620 GAAR cases.[vi]  General treaty issues or treaty shopping was not mentioned in a summary of the issues that were addressed.[vii]  However, by June 30, 2005 the CRA reported that a total of 628 cases had been referred to the GAAR Committee and now the specific laundry list of GAAR cases included treaty issues and, specifically, treaty shopping.[viii]  At some point between the 2004 and 2005 report the GAAR Committee either decided that treaty shopping was more of a priority or, as the CRA would likely argue, that adding treaty issues to the list simply clarified their position.[ix]  Regardless of which rationale you subscribe to, it is clear that treaty shopping is a major concern to tax authorities globally.  In response, tax authorities are scrambling to find ways to counteract this behaviour.  Canada provides its courts with the authority to apply domestic provisions such as GAAR to treaties to challenge treaty shopping.  However, this procedure is unpredictable, the rules are not transparent and the decision makers are not completely impartial.  When treaty shopping first became an issue of concern, it may have been that review of disputes by the Canadian courts was the best solution at the time, but transactions and international relations are now more complex.  It’s time to make a change.   

This paper will review the application of the general anti-avoidance rule to Canadian treaties.  In particular, the paper will look at how GAAR is applied to treaty shopping arrangements and review the current approach to resolving disputes about the application of GAAR in these situations.  It will then look at the challenges faced by the courts in applying GAAR in order to make a recommendation about how the dispute resolution process can be improved. 

[i] Nikhil V. Mehta and Kate Habershon, “UK Decision Challenges Rule Against Treaty Shopping” (2006) vol. 44, no. 7 Tax Notes International, 1.

[ii] Nicola Selack and Christian Ehlermann, “Germany to Tighten Anti-Treaty Shopping Rules” (2006) vol. 43, no. 4 Tax Notes International 282.

[iii] Mark Quaghebeur, “Belgium Rewrites Anti-avoidance Rules” vol. 43, no. 6 Tax Notes International 449.

[iv] Ian J. Gamble, “Taxpayer Prevails in Treaty Shopping Case” vol. 43, no. 10 Tax Notes International 803.

[v] Trevor Johnson, UK Struggles to Define Avoidance Schemes” vol. 43, no. 6 Tax Notes International 497.

[vi] This figure tracks GAAR cases since it was introduced into legislation.

[vii] See Canada Revenue Agency, Technical News No. 32, July 15, 2005 at 7.

[viii] Patrick Boyle and Jules Lewy, “2005 Canadian Tax Foundation Annual Conference CRA Roundtable General Anti-Avoidance Rule GAAR Committee,” Tax Topics, no. 1754 (North York, ON: CCH Canadian, October 20, 2005) 1-9 at 5.

[ix] The government has always argued that GAAR applies to treaties, although, there was nothing included in legislation to support this position.  When an amendment was introduced in the Income Tax Convention Interpretation Act (R.S.C. 1985, c. I-4, as amended) the government’s position was that it was introduced as a “clarification” as opposed to a change in law.  This will be discussed in more detail later in the paper.

The above excerpt is taken from my University of Waterloo Masters of Taxation Thesis submitted on April 23, 2007 to Professor Robin MacKnight.  Please submit an email request for the copy of the paper