Finance Canada
Budget 2000 - Budget Plan, Annex 7- 3
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General Tax Relief: Business Taxes

Corporate Tax Rate Reduction

Canada must ensure that its business income tax system is internationally competitive. This is important because business income tax rates have a significant impact on the level of business investment, employment, productivity, wages and incomes.

Canada’s tax rates for small businesses and the manufacturing and processing (M&P) sector are already competitive. Also, the resource sector (crude oil, natural gas and mining) benefits from special deductions, such as the resource allowance when it exceeds provincial royalties, accelerated exploration and development expenses and fast write-offs for certain capital assets, all of which serve to reduce its effective tax rate.

However, higher overall corporate tax rates apply to other sectors of the economy. These sectors include the fast-growing service and knowledge-based firms that are likely to influence the pace of Canada’s future economic and social development.

In addition, Canada imposes a capital tax on large corporations that is higher than in most G-7 countries.

Therefore, the Government intends to reduce, within five years, the federal corporate income tax rate from 28 to 21 per cent on business income not currently eligible for special tax treatment.

As an initial step in achieving this tax rate reduction, the budget proposes that, effective January 1, 2001, the federal corporate income tax rate on such income be reduced by 1 percentage point from 28 to 27 per cent. This rate change will be prorated for taxation years that include January 1, 2001.

The tax rate reduction will not apply to income that benefits from preferential corporate tax treatment such as small business and Canadian M&P income, investment income that benefits from refundable tax provisions or income from non-renewable natural resource activities. The reduction will also not apply to mutual fund corporations, mortgage investment corporations, and investment corporations (as defined in the Income Tax Act), which qualify for special tax provisions.

Faster Corporate Tax Rate Reduction for Small Business

Canada provides very favourable tax treatment for small business; this has a direct impact on their cost of doing business. For example, the lower tax rate on the first $200,000 of active business income alone provides the small business sector with more than $2.5 billion of tax assistance annually, allowing the retention of earnings for expansion. However, income earned by small businesses in excess of the $200,000 threshold is currently subject to the general corporate tax rate of 28 per cent or, for M&P income, to the 21-per-cent M&P rate.

Small businesses that are currently taxed at the 28-per-cent tax rate on their active business income in excess of the $200,000 small business limit will benefit from the proposed 1 percentage point reduction in the general tax rate next year and from the further reductions planned for the future. However, in order to provide additional and more immediate support for this sector, the budget proposes to advance the planned 7-percentage-point rate reduction for small business.

Specifically, the corporate tax rate on income between $200,000 and $300,000 earned by a Canadian-controlled private corporation (CCPC) from an active business carried on in Canada will be reduced to 21 per cent from 28 per cent, effective January 1, 2001 (prorated for taxation years that include that date).

Associated corporations will share the additional $100,000 of income eligible for the faster rate reduction in proportion to their share of the $200,000 small business limit. Income eligible for this lower rate will be reduced to the extent that a corporation has M&P income subject to the reduced M&P tax rate or income from resource activities.

Table A7.20 illustrates the impact of this faster access to the reduced 21-per-cent rate for a small business.

Table A7.20

Federal Corporate Tax Rates

Table A7.21 presents the federal corporate tax rates on various types of income, before and after the proposed rate reduction.

Table A7.21

Capital Gains

The budget proposes that the income inclusion rate for capital gains be reduced to two thirds from the current rate of three quarters for capital gains realized after February 27, 2000. This change ensures that capital gains are taxed at about the same rate as dividends received from taxable Canadian corporations.

Computing Taxable Gains/Allowable Losses in Taxation Year 2000 – For Individuals (and Other Taxpayers With Calendar Taxation Years)

Because this measure becomes effective for capital gains realized after February 27, 2000, two different inclusion rates will apply for the 2000 taxation year. Accordingly, individuals (and other taxpayers with calendar taxation years) will be required to separately report capital gains and losses realized in the period January 1 to February 27 inclusive, and capital gains and losses realized after February 27 for that year. For each period, the net capital gain or loss will have to be computed.

An individual’s capital gains inclusion rate for the 2000 taxation year will depend on whether the individual has realized net gains or net losses in one or both periods, or a net gain in one period and a net loss in the other, as outlined below.

Case 1: A Net Gain/Loss in One Period Only

Where there is a net gain or net loss in one period and none in the other, the individual’s capital gains inclusion rate for the year will be that applicable to the period in which the net gain or net loss is incurred. That is, if the net gain or net loss is incurred in the period January 1 to February 27, the individual’s inclusion rate for the 2000 taxation year will be three quarters; if the net gain or net loss is incurred in the period February 28 to December 31, the individual’s inclusion rate for the 2000 taxation year will be two thirds.

Case 2: A Net Gain in Each Period or Net Loss in Each Period

Where there are net gains in both periods, or net losses in both periods, the individual’s taxable capital gain/allowable capital loss for the year will be determined by reference to the following formula:

3/4 x (A)+ 2/3 x (B)

where

A = Net gain/loss in the period January 1-February 27, 2000;

and

B = Net gain/loss in the period February 28-
      December 31, 2000.

Individuals may need to determine their effective inclusion rate for 2000 for certain purposes, such as loss carryovers. The effective inclusion rate for the year will be the individual’s taxable capital gain or allowable capital loss for the year divided by the net gain or loss for the year.

Case 3: A Net Gain in One Period and a Net Loss in the Other

Where an individual has a net gain in one period and a net loss in the other, the net gain or net loss for 2000 will be computed by netting the two. The individual’s taxable capital gain or allowable loss for the year will be the net gain or net loss for the year multiplied by the inclusion rate, as determined below.

The inclusion rate for 2000 will be three quarters where:

• the amount of net gains for the period January 1-February 27 exceeds net losses for the period February 28-December 31, or
• the amount of net losses for the period January 1-February 27 exceeds net gains for the period February 28-December 31.

The inclusion rate for 2000 will be two thirds where:

• the amount of net gains for the period January 1-February 27 is less than net losses for the period February 28-December 31, or
• the amount of net losses for the period January 1-February 27 is less than net gains for the period February 28-December 31.

Taxpayers With Non-Calendar Taxation Years

For taxpayers whose taxation years do not coincide with the calendar year (such as some corporations), the reduced two-thirds inclusion rate will also apply to capital gains realized after February 27, 2000. Similar to individuals, corporations will be required to report capital gains and losses realized on or before February 27, 2000 separately from those realized after that date.

Loss Carryovers

Net capital losses may be carried back three years or forward indefinitely to offset taxable capital gains of other years. An individual’s net capital loss for a year is set by reference to the capital gains inclusion rate for that year.

Where a net capital loss of a given year is used to reduce a taxable capital gain of another year for which the capital gains inclusion rate is different, the amount of the loss is adjusted to match the inclusion rate in effect for the year in which the loss is being applied. The adjustment factor is determined by dividing the inclusion rate for the year the loss is claimed by the inclusion rate for the year in which the loss arose.

Related Items

To reflect the reduction in the capital gains inclusion rate effective February 28, 2000, the appropriate adjustments will be made to related items, including:

• the deductions for amounts included in income in respect of employee stock options, employer shares from a deferred profit-sharing plan, and shares received by prospectors and grubstakers;
• allowable business investment losses;
• the $500,000 lifetime capital gains exemption for qualified small business shares and qualified farm property; and
• the charitable gifting of listed securities (i.e., one-half the otherwise applicable inclusion rate).

Employee Stock Options

Many corporations use stock options to encourage their employees to take an ownership stake in the corporation, most notably in the fast-growing high-technology industries. These options provide employees with the right to acquire shares in their employer for a predetermined price – the exercise price.

The current tax treatment of employee stock options is as follows:

• A taxable employment benefit equal to the difference between the fair market value of the share at the time the option is exercised and the amount paid by the employee to acquire the share is generally included in income in the year the option is exercised.
• In the case of Canadian-controlled private corporations (CCPCs), the taxable employment benefit is generally not included in income until the year of disposition of the share acquired under the option.
• Where certain conditions are met, a deduction in respect of the employee stock option benefit is provided that essentially results in the benefit being taxed at the same rate as capital gains.

To assist corporations in attracting and retaining high-calibre workers and make our tax treatment of employee stock options more competitive with the United States, the budget proposes to allow employees to defer the income inclusion from exercising employee stock options for publicly listed shares until the disposition of the shares, subject to an annual $100,000 limit (see below). Employees disposing of such shares will be eligible to claim the stock option deduction in the year the benefit is included in income. The new rules will also apply to employee options to acquire units of a mutual fund trust. The proposed rules are generally similar to those for Incentive Stock Options in the United States.

Employee stock options granted by CCPCs are not affected by the proposed measure.

Eligible Employees

Eligible employees are those who at the time the option is granted:

• deal at arm’s-length with the employer and any related corporation; and
• are not specified shareholders (specified shareholders are generally those who own 10 per cent or more of a company’s shares).

Eligible Options

An eligible option is one under which:

• the share to be acquired is an ordinary common share;
• the share is of a class of shares traded on a prescribed Canadian or foreign stock exchange; and
• the total of all amounts payable to acquire the share, including the exercise price and any amount payable to acquire the option, is not less than the fair market value of the share at the time the option is granted.

The proposal applies to eligible options exercised after February 27, 2000, irrespective of when the option was granted or became vested.

$100,000 Limit

There will be a $100,000 annual limit on the amount of options that an employee can be granted which will be eligible for deferral. The same limit applies in the United States. This limit will apply:

• to the value of the stock options that vest (first become exercisable) in the employee each year (the "value of a stock option" is the fair market value of the underlying share at the time the option is granted); and
• across all stock option plans of the employer corporation and related corporations.

Reporting Arrangements

Deferral of taxation of the employment benefit arising from the exercise of an employee option will depend on the employer having an arrangement in place to ensure that:

• the employer, or an agent of the employer, can monitor compliance with the $100,000 limit; and
• the related employment benefit and the stock option deduction can be reported on an information slip in the year the share is disposed of.

Consultations will be held in the coming months with stakeholders and other interested parties on the design of appropriate reporting arrangements. It is intended that specific proposals based on these consultations will be made public in sufficient time for employers to have reporting arrangements in place by the end of this year.

Deferral Period

The income inclusion for a share acquired under an employee stock option will be deferred until the time the employee disposes of the share or, if earlier, the time the employee dies or becomes a non-resident.

The measure applies to options exercised after February 27, 2000.

Capital Gain Rollover for Investment in Small Business

To improve access to capital for small business corporations, the budget proposes to permit individuals a rollover of capital gains on the disposition of a small business investment where the proceeds of disposition are used to make other small business investments. The cost base of the new investment will be reduced by the capital gain deferred in respect of the initial investment.

Eligible Small Business Investment

An eligible small business investment will have the following characteristics:

• the investment is in ordinary common shares issued from treasury to the investor;
• the corporation is, at the time the shares are issued, an eligible small business corporation – which will generally be defined as a Canadian-controlled private corporation all or substantially all of the assets of which (measured by value) are used in an active business carried on primarily in Canada, or are shares of other related eligible small business corporations;
• the total carrying value of the assets of the corporation and related corporations does not exceed $2.5 million immediately before the investment is made, and does not exceed $10 million immediately after the investment. There will be look-through rules to account for assets held by the corporation through partnerships and trusts; and
• while the investor holds the shares, the issuing corporation is an eligible active business corporation – which will generally be defined as a taxable Canadian corporation all or substantially all of the assets of which (measured by value) are used in an active business carried on primarily in Canada, or are shares of other related eligible active business corporations.

The measure is designed to accommodate rollovers of gains irrespective of the company’s size at the time of sale or the fact that it may have gone public before the sale.

The eligible small business investment must be held for more than six months from the time of acquisition before a gain can be deferred. The replacement eligible investment must be purchased after the beginning of the year of disposition of the original small business investment, and before the earlier of the 120th day following the disposition and the 60th day after the end of the year.

Eligible Investor

The measure will be available to individuals (other than trusts). Further, an individual who acquires shares from a related individual on a rollover basis currently provided under the Income Tax Act (e.g., on death or marriage breakdown) will be considered for the purpose of this measure to have acquired the shares at the time and under the same circumstances that they were acquired by that related individual.

The measure will also be available to individuals in respect of their capital gains on eligible small business investments that are held through a qualifying pooling arrangement. It is contemplated that such an arrangement will be a special-purpose partnership that is treated for the purpose of these rules as a joint venture – effectively allowing the investment vehicle to act as the investment agent for a number of investors, and to pool investments for those investors, while treating each investor as having his or her own share portfolio within the vehicle.

The issues related to the application of the measure to capital gains realized through a qualifying pooling arrangement will be the subject of consultations with stakeholders and other interested parties.

Eligible Gains

The deferral will be available in respect of capital gains realized after February 27, 2000, on up to $500,000 of eligible small business investments (by reference to adjusted cost base) in any particular corporation (or related group) made by an eligible investor or by a qualifying pooling arrangement on behalf of the investor.

Investment Limit

A capital gain from the disposition of an eligible investment can be deferred to the extent that the proceeds are reinvested in one or more other eligible small business investments. There are no limits on the total amount of proceeds that can be reinvested, but no amount reinvested in excess of $500,000 in shares of a particular corporation or related group will qualify for additional capital gain deferral.

Calculation of Capital Gain Deferral

The maximum capital gain that can be deferred in respect of an eligible capital gain from the disposition of an eligible small business investment is determined by the following formula:

(A/B) x C

where:

A = the total cost of all replacement eligible small business investments (not exceeding $500,000 in any particular corporation or related group);

B = the proceeds of disposition that relate to the eligible gain; and

C = the eligible gain from the disposition.

This measure will apply to eligible small business investments disposed of after February 27, 2000.

Specific Tax Changes: Personal Income Tax Measures

Foreign Property Rules

The foreign property rule (FPR) in respect of deferred income plans generally limits the amount of foreign property that such a plan can hold. Foreign property generally consists of shares, units and debt issued by non-resident entities. The limit is currently 20 per cent, having been raised from 10 per cent between 1990 and 1994.

The FPR attempts to strike a balance between ensuring that a significant portion of tax-assisted retirement savings is invested in Canada and providing appropriate diversification opportunities for the retirement savings of Canadians.

The budget proposes to raise the FPR limit to 25 per cent for 2000 and 30 per cent after 2000. Increasing the limit has been advocated by committees of the House and Senate and a number of other organizations and groups.

"3 for 1 Bump"

The existing FPR contains a special rule designed to encourage investment by deferred income plans in small businesses operated in Canada. Under the rule, an extra $3 of foreign property "room" is available to a deferred income plan for every $1 invested by the plan in a qualifying small business property. However, the extra foreign property "room" generated cannot result in a plan’s foreign content exceeding a 40 per cent limit.

As a result of the increase in the FPR limit generally, the limit with regard to small business investment will be increased to 45 per cent for 2000 and 50 per cent after 2000.

Extension of FPR Rules to Segregated Funds

Although the FPR currently applies to mutual funds which issue units to deferred income plans, there is currently no legislation providing for its application to segregated funds. Segregated funds are insurance products offered by life insurers which are broadly analogous to mutual funds. As announced by the Minister of Finance by press release on October 27, 1998, proposed rules to extend the FPR to segregated funds were to be effective as of January 2001.

The FPR for segregated funds will contain the same one-year lag as is provided for mutual funds (i.e., an interest in a mutual fund is generally not treated as foreign property during a year, provided the mutual fund satisfied the FPR limit throughout the previous year). In order to provide a better opportunity for insurance companies to institute systems changes to allow foreign property levels to be monitored for segregated funds, the budget proposes that the FPR for segregated funds apply after 2001 (rather than after 2000).

Reduction in Federal Surtax for Non-Residents

Individuals who have income which is considered to have been earned in Canada, but which is not considered to be earned in a province, pay a special federal surtax in addition to their regular federal tax. Individuals with such income include

• deemed residents, such as members of the Armed Forces who reside outside of Canada and therefore have no province of residence;
• Canadian residents with income from a permanent establishment in a foreign country; and
• non-residents who have business or employment income taxable in Canada.

The federal surtax for non-residents, which is currently 52 per cent of basic federal tax, ensures that deemed residents and others with income not earned in a province face a total income tax burden roughly comparable to that of Canadian residents. The surtax, which was introduced in 1972, is calculated to approximate provincial taxes. The surtax percentage has been adjusted on several occasions since 1972 to reflect changes in average provincial tax rates.

In light of recent changes in provincial tax rates, the budget proposes to reduce the federal surtax on income not earned in a province from 52 per cent of basic federal tax to 48 per cent.

This measure will apply for the 2000 and subsequent taxation years.

Enhanced Tax Assistance for Persons with Disabilities

The Government is committed to promoting the full participation of persons with disabilities in Canadian society. The budget provides additional tax assistance for persons with disabilities by expanding eligibility for and transferability of the disability tax credit, recognizing the contribution of caregivers of children with severe disabilities, and recognizing additional disability-related costs. These measures will be effective for 2000 and subsequent years.

Enhancing the Disability Tax Credit

The disability tax credit (DTC) recognizes the effect of a severe and prolonged disability on an individual’s ability to pay tax. It provides tax relief to over 500,000 claimants at an annual cost of $280 million.

To be eligible for the DTC, an individual must have a severe and prolonged disability that markedly restricts the ability to perform a basic activity of daily living.

The basic activities of daily living include perceiving, thinking and remembering, feeding and dressing oneself, speaking, hearing, eliminating and walking. An individual’s ability to perform these activities is markedly restricted only where, even with the use of appropriate devices, medication and therapy, the individual is blind, or unable to perform the activity.

Consistent with representations made by organizations representing persons with disabilities, the budget proposes extending eligibility for the DTC to individuals who must undergo therapy several times each week totalling at least 14 hours per week in order to sustain their vital functions. In such cases, the severity of the disability is evident in the requirement for extensive therapy that is essential to the individual’s survival. Examples of persons who may be eligible for the DTC under the proposed change include individuals with severe kidney disease requiring dialysis in order to prevent renal failure, and individuals with severe cystic fibrosis requiring clapping therapy in order to breathe. It is estimated that this change will increase the number of persons eligible for the DTC by about 18,000, at a cost of $13 million annually.

The budget also proposes to expand the list of relatives to whom the DTC can be transferred, making it consistent with the medical expense tax credit rules. As a consequence, unused amounts of the DTC may be transferred to individuals supporting a brother, sister, aunt, uncle, niece or nephew, as well as to individuals supporting a spouse, child, grandchild, parent or grandparent.

Assistance for Caregivers of Children with Severe Disabilities

The infirm dependant credit and caregiver credit provide tax assistance for the care of infirm dependent adult relatives and seniors. This budget provides additional tax assistance for families caring for children with severe disabilities through a supplement for children eligible for the DTC. The supplement amount will be $2,941 and will reduce federal taxes payable by up to $500. The $500 supplement credit will be in addition to the $730 federal tax value of the disability tax credit as of January 1, 2000. The $2,941 supplement amount will be reduced by the amount of child care expenses and attendant care expenses claimed, in respect of the child, exceeding $2,000. This reduction will target tax assistance to families providing unpaid care for children with severe disabilities. The supplement is reduced to zero when child care and attendant care expenses reach $4,941. It is estimated that this supplement will benefit about 40,000 children eligible for the DTC at a cost of $20 million annually.

The Child Care Expense Deduction for Persons Eligible for the DTC

A child care expense deduction of up to $7,000 annually is currently available in respect of persons eligible for the DTC. The budget proposes to increase this limit to $10,000.

The Medical Expense Tax Credit and New Homes

The medical expense tax credit (METC) provides tax recognition for above-average medical expenses incurred by individuals. For 2000, the METC reduces the federal tax of a claimant by 17 per cent of qualifying unreimbursed medical expenses in excess of the lesser of $1,637 and 3 per cent of net income.

Currently, an individual who lacks normal physical development or has a severe and prolonged mobility impairment may be eligible for the METC in respect of renovation costs incurred to enable the individual to gain access to or to be mobile or functional within the home. The budget proposes to extend tax assistance to such individuals who incur reasonable expenses relating to the construction of a principal place of residence where the expenses can reasonably be considered to be incremental costs incurred to enable the individual to gain access to or to be mobile or functional within the home.

The Deduction for Attendant Care and Students

The current attendant care provisions allow a deduction in respect of a person with a severe disability for the cost of an attendant required in order for the person to be employed, carry on business or carry on funded research. The budget proposes expanding this deduction to include the cost of an attendant required in order to attend school. The deduction will be subject to a maximum of two thirds of earned income plus, where the taxpayer attends a designated educational institution or a secondary school, two thirds of the lesser of (a) the taxpayer’s income from other sources (up to a maximum of $15,000) and (b) $375 times the number of weeks of attendance at the institution or school.

Personal-Use Property

Currently, the adjusted cost base and proceeds of disposition of personal-use property are deemed to be at least $1,000 for capital gains purposes. This rule is designed to ease the compliance and administrative burden associated with the reporting of dispositions of personal-use property. Personal-use property is generally property that is used primarily for the personal use or enjoyment of an individual and includes jewellery, works of art, furniture and clothing.

Certain charitable donation arrangements have been designed to exploit the $1,000 deemed adjusted cost base for personal-use property and to create a scheme under which taxpayers attempt to achieve an after-tax profit from such gifts. For example, arrangements have been designed under which a promoter acquires a number of objects for less than $50 each, invites taxpayers to purchase the objects for $250 each, and arranges for their appraisal at $1,000 each and their donation to a charity.

Based on the $1,000 appraised value, there would be a $750 capital gain per item to the donor but for the $1,000 deemed adjusted cost base for the gift. However, with the deemed adjusted cost base there is no gain for tax purposes. As a result, the cost to governments of the "$1,000 gift" is approximately $500 (i.e., the federal and provincial tax savings associated with a $1,000 charitable donation), which in many cases exceeds the amount that the charity can realize from the donated property. Such an arrangement intends that the "donor" achieve a tax-free profit of $250.

The budget proposes to amend the Income Tax Act so that the $1,000 deemed adjusted cost base and deemed proceeds of disposition for personal-use property will not apply if the property is acquired after February 27, 2000, as part of an arrangement in which the property is donated as a charitable gift.

Charitable Donations: Designations in Favour of Charity

An individual who is an annuitant under a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) or the owner of a life insurance policy may wish to have the proceeds in respect thereof donated to a charity on the individual’s death. There are two common ways of achieving this goal:

• the individual’s will can provide for a cash bequest of the proceeds to the charity; or
• without making any provision in the individual’s will, the individual can designate that the proceeds be paid directly to the charity under the terms of the RRSP, RRIF or insurance policy.

In either case, the individual’s estate is responsible for satisfying the individual’s income tax liabilities on the individual’s death.

Under current income tax rules, donations that are made by way of a donor’s will qualify for the charitable donations tax credit on death. However, donations made as a consequence of a direct designation do not qualify for the credit. In such circumstances, the charitable donations tax credit would not be available to offset income tax arising because of the taxation of an RRSP or RRIF on death. This can lead to liquidity problems for an estate.

In order to provide consistency in the income tax rules in this regard, the budget proposes to extend the charitable donations tax credit to donations of RRSP, RRIF and insurance proceeds that are made as a consequence of direct beneficiary designations. This measure will apply in respect of an individual’s death that occurs after 1998.

Ecologically Sensitive Lands

The protection of Canada’s natural heritage, and especially its species at risk, is a critical objective of the Government. The 1995 budget announced incentives for ecological gifts to the Government of Canada, provincial governments, Canadian municipalities or approved registered charities established for the purpose of protecting Canada’s environmental heritage. To be eligible for the special provisions, a gift must be a property certified as ecologically sensitive by the Minister of the Environment. The preservation of these properties is critical to the Government’s strategy for the protection of species at risk and the promotion of Canada’s system of national and provincial parks and other environmental objectives. This strategy emphasizes providing assistance to encourage Canadians to take voluntary action to protect species and to make responsible stewardship an easy choice.

Donations of ecologically sensitive land from individuals are eligible for the charitable donations tax credit, while those from corporations are eligible for a charitable donation deduction. These provisions apply to transfers of title as well as to covenants, easements and servitudes established under common law, the Civil Code in Quebec, or provincial or territorial legislation allowing for their establishment. Further, ecological gifts are exempt from the rules which would otherwise limit the amount of charitable donations eligible for tax assistance in a year to 75 per cent of net income.

Normally, the value of a donated property is determined to be the price that a purchaser would pay for the property on the open market. As there is no established market for covenants, easements and servitudes, the fair market value of such restrictions on land use is difficult to determine. To provide greater certainty in making these valuations, the 1997 budget introduced a measure to deem the value of these gifts to be not less than the resulting decrease in the value of the land.

The budget proposes a further enhancement of the incentives for the protection of ecologically sensitive lands, including areas containing habitat for species at risk. Specifically, it is proposed that the income inclusion be reduced by one-half in respect of capital gains arising from gifts of ecologically sensitive land and related easements, covenants and servitudes to qualified donees other than private foundations.

Because of the amount of tax assistance offered and the difficulty of valuing such donations, it is proposed that the value of all ecological gifts be determined by a special process to be established by the Minister of the Environment. The value determined by the Minister of the Environment may be appealed to the Tax Court of Canada after an irrevocable gift has been made. This valuation process, together with the certification of the ecological importance of the property, will help to ensure that such donations are effectively and efficiently directed toward the protection of Canada’s natural heritage.

These measures will be effective for ecological gifts made after February 27, 2000.

The measures with respect to ecologically sensitive land are examples of how the tax system can be used to support the Government’s overall environmental policy. Other examples include accelerated depreciation for energy conservation equipment and tax relief for ethanol and methanol used in gasoline-blended fuels.

Offsetting of Interest on Personal Tax Overpayments and Underpayments

An individual who has made an overpayment of income tax may be entitled to receive refund interest from the government on the overpayment. Refund interest is included in income for tax purposes, in the same manner as interest from other sources.

If, on the other hand, an individual has failed to pay an amount of income tax when due, the individual is required to pay arrears interest to the government. Arrears interest is not deductible in computing a taxpayer’s income for tax purposes.

The taxation of refund interest and non-deductibility of arrears interest can produce inappropriate results in situations where an individual who owes interest on unpaid tax from one taxation year is concurrently owed interest on a tax overpayment from a different taxation year. In this circumstance, the cost of the non-deductible interest payable by the individual exceeds the after-tax value of the taxable interest receivable by the individual. In many instances, this difference results from the non-deductibility of interest paid and the inclusion in income of interest received.

This budget proposes a relieving mechanism for these individuals. Refund interest accruing over a period will be taxable only to the extent that it exceeds any arrears interest that accrued over the same period to which the refund interest relates. As under current practice, the individual’s notice of assessment will indicate the full amount of refund interest. In addition, the Canada Customs and Revenue Agency will issue an information slip indicating the amount, if any, of the refund interest that must be included in the individual’s income for tax purposes.

This measure will apply to individuals other than trusts in respect of arrears and refund interest amounts that accrue concurrently after 1999, regardless of the taxation year to which the amounts relate.

Charitable Donations of Shares Acquired with Employee Stock Options

The 1997 budget halved the inclusion rate on capital gains arising from charitable donations made before 2002 of listed securities, such as shares, bonds, bills, warrants and futures.

An individual who acquires a share under an employee stock option plan is required to include in income an employment benefit equal to the fair market value of the share, less any amounts paid to acquire the share. If certain conditions are satisfied, the individual is allowed to deduct part of the employment benefit in order to effectively tax the benefit at capital gains rates.

However, where the employee exercises the option in order to donate the share to a charity, there is no provision to reduce the tax burden on the employment benefit to parallel the reduced capital gains inclusion rate for donations of publicly-traded securities. The budget therefore proposes to introduce such a provision in order to provide parallel treatment between the two forms of gift-giving. In such circumstances, the individual will be allowed to deduct an additional third of the employment benefit. Taking into account the changes proposed in this budget to increase the existing stock option deduction from a quarter to a third, only a third of the employment benefit will be subject to tax.

If the value of the share at the time it is donated is less than when the option was exercised, the additional deduction will be reduced to provide the appropriate amount of tax assistance.

To be eligible for this measure, the share must be donated in the year and within 30 days of the option being exercised. Also, the share will have to meet the existing criteria for the reduced capital gains inclusion rate for donations of publicly-traded securities. The restrictions on eligible charities will also be the same. In addition, the conditions for the existing stock option deduction will have to be satisfied – principally, that the share be an ordinary common share and that amounts payable to acquire the share be no less than the fair market value of the share at the time the option is granted.

The measure will also apply to the donation of units of a mutual fund trust acquired under an employee option plan.

The measure will apply to securities acquired after February 27, 2000, and donated before 2002.

Partial Exemption for Scholarships, Fellowships and Bursaries

The first $500 of scholarship, fellowship or bursary income received in a year has been excluded from income for tax purposes since 1972.

In order to provide additional assistance to students, the budget proposes to increase the annual exemption to $3,000, beginning with the 2000 taxation year. The $2,500 increase in the exemption will apply only to amounts received by a student where that student enrols in a program which entitles the student to claim the education tax credit. Generally, this includes programs at a post-secondary level and programs at educational institutions certified by the Minister of Human Resources Development that furnish or improve skills in an occupation.

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