As a candidate for the 2013 UFE, you are responsible for technical standards, including taxation laws, that are in effect as of March 31, 2013. Disappointingly, the CICA seems to have stopped updating its “becoming a CA” page. However, if previous years are anything to go on, you can assume the policy will remain the same as it was in 2012:

You are responsible for federal taxation legislation enacted as of March 31, 2012. If, as of that date, there is proposed federal taxation legislation that, if enacted, would change certain provisions for which you are responsible, you may respond in accordance with either the enacted or the proposed provisions.

What does this mean for you with respect to the budget? Since the budget will not be enacted (that is, signed by the governor general) by March 31, 2013, you can choose to use the old tax laws in any of your responses. That said, you are typically expected to know of things that are coming up, and it’s useful to have a refresher as many of the measures in the budget were not new, but recycled from changes in prior years.

Here are some of the big items in Budget 2013 that address topics more commonly addressed on the UFE:

Lifetime Capital Gains Exemption– this will be increased to $800,000 effective January 1, 2014. The LCGE is currently $750,000 – where it has been for a number of years since it was increased from $500,000. This could provide tax planning opportunities for clients engaging in estate planning, as those who have used their full LCGE as of 2013 will be able to use an extra $50,000 in future.

Manufacturing and processing equipment – the 2007 budget introduced an accelerated rate for capital cost allowance on manufacturing and processing machinery and equipment. Instead of including these items in class 43 (30% declining balance), any purchases of such items made between March 18, 2007, and December 31, 2013 were eligible for inclusion in class 29 (50% straight-line). Both of these classes are subject to the half-year rule, so class 29 assets have capital cost allowance of 25%, 50%, and 25% of the purchase price over the first three years, such that they are completely deducted over this time period. Budget 2013 extended this treatment to purchases made throughout 2014 and 2015 – meaning that any manufacturing and processing equipment you might encounter on the UFE will be included in class 29.

New acquisition of control rules –the normal acquisition of control rules lead to a deemed year-end, recognition of pregnant losses, and expiration of all but business losses.  Under the former rules, this only happened when “control” was acquired – generally, this would be the acquisition of a majority of voting shares.  Budget 2013 expands this definition to include the acquisition of shares that represent more than 75% of the fair market value of all shares of the corporation – even if voting control is not obtained. Just one more “special” rule to having your back pocket in case a weird circumstance comes up in a case.

Dividend regime – while there are no changes to eligible dividends, effective in 2014 all non-eligible dividends will be subject to a different gross up and tax credit rate. As has been the case for many years, non-eligible dividends are currently grossed up by 25%, and eligible for a credit of 2/3 of the gross-up amount. That is, if an individual receives a $100 non-eligible dividend, they include in their taxable income $125, and then claim a credit against other taxes of $25 x 2/3 = $4.17.  Keep in mind – the gross-up is of taxable income, and the credit is a reduction of taxes. Candidates frequently stumble on this concept, so work through some practical examples to make sure you understand this fully. Starting in 2014, the gross up will be 18%, and the dividend tax credit will be 13/18 of the gross up – that is, 13% of the actual dividend. So a $100 dividend will be grossed up by $18 to $118, and be eligible for a credit of $13.

Eligible dividends, that is, all dividends paid by public companies as well as dividends paid by CCPCs from accumulated income in excess of the small business deduction, will still be grossed up by 38%, and eligible for a dividend tax credit of 6/11 of the gross up – this has not changed since 2012.

These changes, in effect, are meant to eliminate any benefit that might occur from paying dividends instead of salaries, or vice versa. It would not be surprising to see the salary versus dividends topic become less popular on the UFE in future as the differences are now minimal, and vary significantly from province to province. You would require a lot of information to make an appropriate assessment – the best you could probably do on the UFE would be to identify that an analysis needs to be performed.

Other personal tax measures – there were a few other minor issues added in this year’s budget:

• Adoption expenses eligible for the adoption expense tax credit now include expenses starting from the date the parent makes an application to register with a provincial ministry or adoption agency.
• Budget 2013 introduced a new “first-time donor’s super credit” for individuals who have not made charitable donations since 2007. If a taxpayer makes a donation in 2013 or beyond, they will receive an additional 25% credit on donations up to $1,000. Effectively, this yields a federal credit of 40% on the first $200 of donations, and 54% on donations between $201 and $1,000.
• Finally, starting with 2014, safety deposit box expenses are explicitly no longer deductible as investment expenses. Historically, these were allowed as a safety deposit box was typically required to hold things like stock certificates. With electronic transactions these days, the government is now not allowing deductions for this item.

There were a lot of other tax measures in the budget, but most of these were highly technical and would likely fall outside of “normal circumstances.” Fortunately for you, that means less new material to figure out!

Remember, one of the best ways to learn the concepts is to try to apply them to a specific case. Start writing your practice exams now and send them in for feedback – we can help give you the advice you need.