Ryan Tax Alert – 2008 Federal Budget

On February 26, 2008, Finance Minister James Flaherty presented Canada’s 2008 Federal Budget. The Conservatives’ minority government has tabled its third consecutive balanced budget that promises “responsible leadership for uncertain times” and vows to maintain strong fiscal management by spending carefully, strengthening our tax advantage, investing in the future, supporting communities and providing leadership both at home and abroad. To meet these objectives, the government has designed a number of proposals, including several commodity tax changes that are worthy of note. It must be pointed out that, as a minority government, the Conservatives will need opposition party support in order to pass the proposed changes in the House of Commons.

GST/HST Measures

Training for Individuals with Autism or Other Disabilities

The budget proposes to expand the exemptions for basic health and education services. Training will qualify for exemption where it is supplied after February 26, 2008 and is specifically designed to aid individuals in coping with the effects of a disorder or disability. Typically, these provisions will apply to specially-designed training supplied by a government, training that is funded by a government program, or where a health care professional who makes exempt supplies identifies the training as an appropriate method of assisting an individual to deal with a disability or disorder.

This exemption is focused on ensuring that children with autism who require assistance to help them cope with the daily impact of this disorder obtain the training without the burden of GST/HST. Previously, some training required by these individuals was exempt while other forms of training were considered to be taxable.

Nursing Services

Effective after February 26, 2008, all nursing services provided to an individual will be exempt from GST/HST, regardless of where these services are provided. This exemption will apply to nursing services administered by a registered nurse, a registered nursing assistant, a licensed or registered practical nurse, or a registered psychiatric nurse, provided the service is made within a nurse-patient relationship.

In addition, an expansion of the exemptions available to diagnostic services is included in the budget. Currently, diagnostic services, including blood tests and X-rays, ordered by nurse practitioners and certain other registered nurses are exempt from GST/HST. This proposal will now extend the exemption to diagnostic services ordered by all registered nurses.

These amendments have been introduced to correct for certain situations where nursing services, such as administering a vaccine, provided in a number of settings are exempt only to be considered taxable when provided in a nurse’s private practice office.

Prescription Drugs

A proposal is being made in the budget to zero-rate all supplies of drugs sold to a final consumer when prescribed by a health professional that has been authorized by provincial or territorial legislation to prescribe them. This change will be effective for supplies made after February 26, 2008, and supplies made on or before February 26, 2008, where GST/HST was not charged or collected.

These changes are considered necessary as increasingly non-medical practitioner health professionals are being authorized to prescribe drugs under provincial or territorial statutes. Under the current rules, only drugs prescribed by a medical practitioner are zero-rated for GST/HST purposes, which has led to a growing number of instances where drugs that are not zero-rated unconditionally become taxable strictly as a result of being prescribed by a non-medical health professional.

Included in the budget is a plan to modify the wording of several of the zero-rating provisions for prescription drugs in an attempt to ensure that zero-rating continues to apply to these drugs in the future. These amendments are being made with a view to providing suppliers and purchasers with some certainty regarding the zero-rated status of drugs that are intended to be zero-rated when issued under a prescription. These measures will apply to supplies of qualifying drugs made after February 26, 2008.

Medical and Assistive Devices

A long list of medical and assistive devices are zero-rated, as are most related parts and services. Typically, there is a requirement that the equipment or devices be "specially designed" for an individual with a disability in order for zero-rating to apply. This is necessary to prevent equipment that may be used for other purposes from qualifying for relief.

Four new categories are being proposed as additions, effective after February 26, 2008, to the list of zero-rated medical and assistive devices, including:

• items specially designed for neuromuscular stimulation or standing therapy devices when supplied on the written order of a medical practitioner for use by an individual with a severe mobility impairment or paralysis;
• chairs, specially designed for use by an individual with a disability, when supplied on the written order of a medical practitioner;
• chest wall oscillation systems for use in airway clearance therapy; and
• specially-trained service animals used to assist an individual with a disability or impairment, if they are supplied to or by an organization that is operated for the purpose of supplying these specially-trained animals.

The government is also taking steps to ensure, by means of a clarifying amendment, that these zero-rating provisions will only apply to medical and assistive devices which are intended to be used by humans.

Exempt Health Services Supplied Through a Corporation

In order to ensure that basic health care services are available to Canadians exempt from GST/HST, the budget proposes, effective after February 26, 2008, to treat health care services provided by health professionals as being exempt whether they are provided directly by a health professional or administered by a corporation.

Treatment of Long-Term Residential Care Facilities

The budget announced that the application of GST/HST to long-term residential care facilities will be clarified to ensure that such facilities remain eligible for the GST New Residential Rental Property Rebate and the GST/HST exemption afforded to residential leases and sales of used residential rental buildings. These measures are considered necessary as a result of recent developments involving long-term residential care facilities that offer a high level of health or personal care services in addition to the long-term occupancy of units as a place of residence. In such cases, a facility may be considered to be supplying more than residential units, which can have unintended GST/HST consequences.

New Residential Rental Property Rebate

To remedy this situation, the government is proposing to modify the GST New Residential Rental Property Rebate provisions by replacing the requirement that residential units in the facility be supplied to individuals under a lease, licence or similar arrangement with the condition that “possession” or “use” of the residential units in the facility be provided to individuals for the purpose of occupancy as a place of residence under a lease, licence or similar arrangement. This change will be effective after February 26, 2008. However, it will also apply to past transactions where tax has been paid on the purchase of the facility or self-assessed under the self-supply rules for facilities constructed or substantially renovated by the owner. In addition, the budget has introduced an election which would allow facilities that meet the new legislative requirements for the rebate and have not self-assessed GST/HST on or before February 26, 2008 to make an adjustment to net tax, subject to certain conditions, in order to claim the rebate.

Long-Term Residential Care Facility Leases

The budget includes a proposed measure to ensure that lease payments made by an operator to an owner of a long-term residential care facility remain exempt. This will be accomplished by having an exemption apply when possession or use of all or substantially all of the residential units of a facility have been provided by the operator to individuals under a lease, licence or similar arrangement entered into for the purpose of occupancy as a place of residence. This measure will take effect after February 26, 2008, but will also apply to transactions on or before that date where the owner treated all lease payments as exempt.

Self-Assessment Rules

Similarly, in order to ensure that owners who constructed or substantially renovated long-term residential care facilities benefit from the GST New Residential Real Property Rebate and that subsequent sales of these facilities remain exempt, the budget has proposed an amendment to the self-assessment rules such that they will apply where either possession or use of a residential unit in a residential facility is given to an individual under a lease, licence or similar arrangement for the purpose of occupancy as a place of residence. Once again, the new measure will be effective after February 26, 2008, but will also apply to transactions on or before that date, provided the owner has self-assessed GST/HST or made an election, as described above, to claim the rebate.

Treatment of Property Leases for Wind and Solar Power Equipment

The budget contains a proposal to expand the GST/HST relief presently available for the supply of a right to explore for, or exploit, a mineral or peat deposit or a forestry, water or fishery resource to include the supply of a right of entry or use to generate, or evaluate the feasibility of generating, electricity from the sun or wind. Under this relief, which will apply to supplies made on or after February 26, 2008 and to the portion of consideration payable on or after that date for supplies made prior to February 26, 2008, an eligible supply of a right is deemed not to be a supply, and the payments made for the right are deemed not to be consideration for GST/HST purposes. Consistent with the existing legislation, this relief will not apply where the supply is made directly to a consumer or a person who is not a registrant and acquires the right in the course of a business of making supplies to consumers.

Tobacco Tax Measures

Excise Duty Rate on Manufactured Tobacco

Excise duty applied to manufactured tobacco is currently at $57.85 per kilogram and can be pro-rated based on the weight of the package. The budget expresses a concern about smaller package sizes attracting sales to youth. To reduce the attractiveness of smaller size tobacco packaging, the excise duty on manufactured tobacco will be changed to $2.8925 per 50 grams, or fraction thereof, effective July 1, 2008.

Excise Duty Rate on Tobacco Sticks

In the past, the low rate of duty attached to tobacco sticks was due to the fact that some assembly was required by the consumer. Tobacco sticks have evolved to become very similar to cigarettes, on which duties are much higher. Effective February 27, 2008, the government intends to rectify this by increasing the duty to $0.085 per tobacco stick or $17 per carton of 200, which is the same rate applied to cigarettes.

Excise Duty on Tobacco for Duty Free Markets

Currently, both Canadian and foreign-made cigarettes are subject to an excise duty of $17 per carton on cigarettes sold in the domestic market. In 2001, a special excise duty was introduced for all Canadian-made cigarettes for sale in domestic and foreign duty free shops, imports by returning travelers, and imports for sale in Canadian duty free shops, at a rate of $15 per carton.

Canadian cigarette producers are currently able to deliver their normal stamped goods to duty free shops and pay the $15 per carton duty. The budget has proposed to allow foreign tobacco producers to deliver stamped imported goods to duty free markets, and essentially pre-pay the duty normally collected at the border. To help facilitate the payment of the duty by foreign producers, a proposed refund mechanism will be put in place, effective February 27, 2008. However, the amounts will not be refunded to the claimants until the provisions have received Royal Assent.

Controls on Tobacco Manufacturing Equipment

Currently, tobacco producers are required to hold a licence under the Excise Act, 2001, to restrict any non-licensees from manufacturing contraband tobacco products. The budget proposes to limit importation or possession of tobacco manufacturing equipment to licenced tobacco producers.

Licences

It has been proposed to make explicit the Minister’s authority to refuse to issue, or cancel, a licence where the Minister has been denied access to a licensee’s premises.

Excise Duty on Imitation Spirits

There are essentially three principal categories of alcohol products: spirits, wine and beer, each with a different excise duty rate.

The Canadian marketplace has recently been introduced to spirit-flavoured brewed products, where the product, although derived from a brewing process, is put through a secondary process to elevate the alcohol to 20 per cent alcohol by volume (ABV). Currently, these products qualify as beer and are subject to the lower excise duty rate applied to brewed products ($0.3122 per litre), where the ABV is normally 5 per cent.

The budget has proposed to categorize these imitation spirits as a spirit, which has an excise duty rate that is much higher at $11.696 per litre of absolute alcohol. A maximum threshold of 11.9 per cent will be introduced, above which brewed products will be treated as spirits for excise duty purposes.

This change will require producers of imitation spirits exceeding the threshold to obtain a spirit licence and remit the appropriate excise duty. To facilitate the change in licensing requirements, producers and importers of these products may treat their current beer licence as a spirit licence until 30 days after the provision receives Royal Assent.

Previous Measures

The budget also reaffirms the government’s commitment to implementing several previously announced tax measures, including the intensely debated GST/HST changes for financial institutions announced on January 26, 2007.

Other Tax Measures

In this year’s budget, the government confirmed its continued support for direct taxation arrangements in which Indian bands and self-governing Aboriginal groups levy a sales tax within their jurisdictions. The government notes that, to date, it has entered into 30 such arrangements.

Harmonization

As has become customary in recent budgets, the federal government reiterated its willingness to work with the five remaining retail sales tax provinces (British Columbia, Saskatchewan, Manitoba, Ontario and Prince Edward Island) in order to facilitate a transition to provincial value-added sales tax systems that are harmonized with the GST. The government firmly believes that retail sales taxes impair competitiveness by increasing production costs and deterring investment.

In illustrating the benefits of harmonization to the Canadian economy, the budget estimates that Ontario businesses would save more than $5 billion annually if a harmonized provincial value-added tax were adopted. However, it remains to be seen whether or not Ontario, or any other retail sales tax province, is equally willing to embrace harmonization.

Further details on the 2008 Federal Budget are available from the Department of Finance Canada web site at http://www.budget.gc.ca/2008/home-acceuil-eng.htm.

HOME