2012 Federal Budget
Minister of Finance Jim Flaherty today tabled the 2012 Federal Budget (the “Budget”) entitled “Jobs, Growth and Long-Term Prosperity.”
We are pleased to provide our summary of tax measures contained in the Budget.
There were no changes proposed to corporate income tax rates or to personal income tax rates. The planned corporate tax rate reduction will proceed as previously proposed. However, there are changes that will impact the resulting taxes payable by a corporation or an individual through changes to deductions and credits available, certain special taxes and changes to withholding tax measures. The Budget also contains measures intended to preserve the tax base.
From a fiscal perspective, the Budget forecasts a deficit of $24.9 billion for 2012, $21.1 billion for 2013, $10.2 billion for 2014 and $1.3 billion for 2015. A $3.4 billion surplus is projected for 2016. The projected deficits for 2012 and 2013 are significantly improved over the 2011 Federal Budget. Expenditure reductions contained in the Budget are expected to achieve ongoing savings of $5.2 billion.
Our summary of tax highlights contained in the Budget follows.
IN THIS SECTION:
- Thin Capitalization Rules
- Foreign Affiliate Dumping
- Transfer Pricing Secondary Adjustments
- Base Erosion Rules – Canadian Banks
- Overseas Employment Tax Credit
Current Thin Cap Rules
The thin capitalization rules (the “Thin Cap Rules”) contained in the Income Tax Act (the "Tax Act") limit the deductibility of interest expense of a Canadian resident corporation in circumstances where the amount of debt owing to certain non-residents exceeds a 2-to-1 debt-to-equity ratio. The purpose of the Thin Cap Rules is to protect the Canadian tax base from erosion through excessive interest deductions in respect of debt owing to certain non-residents.
The Thin Cap Rules generally apply to debts owing to a specified non-resident shareholder – that is, a person who, either alone or together with persons with whom the specified non-resident shareholder is not dealing at arm’s length, owns shares of the particular corporation representing more than 25% of the votes or value of the corporation.
Currently, the Thin Cap Rules only apply to Canadian resident corporations.
Proposed Amendments to Thin Cap Rules
The Budget proposes to amend the Thin Cap Rules by:
- reducing the debt-to-equity ratio from 2-to-1 to 1.5-to-1;
- extending the scope of the Thin Cap Rules to debts of partnerships of which a Canadian resident corporation is a member;
- treating disallowed interest expense under the Thin Cap Rules as dividends subject to Part XIII withholding tax; and
- preventing double taxation in certain circumstances where a Canadian resident corporation borrows money from its controlled foreign affiliate.
The proposed changes to the debt-to-equity ratio are consistent with the conclusion reached by the Advisory Panel on Canada’s System of International Taxation (the “Advisory Panel”) to the effect that the permitted 2-to-1 debt-to-equity ratio is high compared to actual industry ratios in the Canadian economy, suggesting it allows inappropriately high levels of foreign related party debt.
The Government is of the view that the conclusion of the Advisory Panel continues to hold and that such a reduction of the ratio is required.
This measure will apply to corporate taxation years that begin after 2012.
Extension of Thin Cap
Rules to Partnerships
The proposal to extend the Thin Cap Rules to partnerships is also consistent with the recommendation of the Advisory Panel that the scope of the Thin Cap Rules be extended to partnerships.
The Budget proposes to extend the Thin Cap Rules to debts owed by partnerships of which a Canadian-resident corporation is a member. In particular, for the purpose of determining the corporation’s debt-to-equity ratio under the Thin Cap Rules, debt obligations of a partnership will be allocated to its members based on their proportionate interest in the partnership.
In circumstances where a corporate partner’s permitted debt-to-equity ratio is exceeded, the partnership’s interest deduction will not be denied but an amount will be included in computing the income of the partner from a business or property, as appropriate. The source of this income inclusion will be determined by reference to the source against which the interest is deductible at the partnership level. This inclusion will equal the amount of the interest on the portion of the allocated partnership debt that exceeds the permitted debt-to-equity ratio.
The Budget includes the following example regarding the extension of the Thin Cap Rules to partnerships:
Canco 1 and Canco 2 are Canadian-resident corporations and are equal partners in a partnership that earns income from a business. Canco 1 is wholly owned by Forco, a non-resident corporation. The Canco 1 shares owned by Forco have paid-up capital of $4,000.
Forco lends $3,000 to the partnership and lends $8,500 directly to Canco 1. Canco 1 has a 50-per-cent interest in the partnership and will therefore be allocated 50 per cent of the partnership loan ($1,500) for thin capitalization purposes.
Canco 1 is considered to have outstanding debts to a specified non-resident shareholder (Forco) of $10,000 ($8,500 debt owed by Canco 1 to Forco, plus $1,500 in debt allocated from the partnership). With a permitted debt-to-equity ratio of 1.5-to-1, Canco 1 has $4,000 of total excess debt ($10,000 – 1.5 x $4,000)/10,000 or 2/5 of $10,000).
This 2/5 ratio is then applied to interest on the debt owed directly to Forco by Canco 1 as well as the debt allocated from the partnership to determine how much interest is denied, or added back to income, respectively.
Accordingly, 2/5 of the interest deduction in respect of the $8,500 direct loan from Forco will be denied and an amount equal to 2/5 of the deductible interest expense in respect of the $1,500 debt allocated from the partnership will be required to be included in computing the income of Canco 1 from the partnership’s business.
This proposed measure will apply in respect of debts of a partnership that are outstanding during corporate taxation years that begin on or after Budget Day.
Treated as a Dividend
The Budget proposes to recharacterize disallowed interest expense (including for this purpose any amount that is required to be included in computing the income of a corporation in respect of an amount deductible by a partnership of which the corporation is a member) as a dividend for purposes of Part XIII withholding taxes.
The calculations required for compliance with the Thin Cap Rules must be made after the end of a corporation’s taxation year. Under this proposal, disallowed interest expense of a corporation for a taxation year will be allocated to specified non-residents in proportion to the corporation’s debt owing in the taxation year to all specified non-residents (taking into account debts owing by partnerships of which the corporation is a member).
The corporation will be allowed to allocate the disallowed interest expense to the latest interest payments made to any particular specified non-resident in the taxation year. Where the disallowed interest expense has not been paid by the end of the taxation year of the corporation, the disallowed interest expense will be deemed to have been paid as a dividend by the corporation at the end of that taxation year.
Part XIII withholding tax will be due at the time that it would have been due if the deemed dividend had been paid at the time the disallowed interest expense was paid or deemed to have been paid. In circumstances where the amount withheld exceeds the withholding tax payable, the non-resident creditor will be able to obtain a refund of the excess.
For purposes of the Canada-US Tax Treaty (the “Treaty”), this will mean that interest which would have been exempt from Canadian withholding taxes under the Tax Treaty will now be subject to Canadian withholding taxes at the rate of 5% or 15%, since it will be treated as a deemed dividend.
This measure will apply to taxation years that end on or after Budget Day. For taxation years that include Budget Day, the measure will apply to an amount of disallowed interest expense that is based on a pro-ration for the number of days in the taxation year that are on or after Budget Day.
Interest on Certain Foreign Affiliate Loans Excluded from Thin Cap Rules Proposed Amendments
Under the existing definition of “outstanding debts to specified non-residents” in subsection 18(5) of the Tax Act, the Thin Cap Rules can, in certain circumstances, apply to loans made to a Canadian-resident corporation from a controlled foreign affiliate of the corporation.
The Canadian tax system also contains rules that protect the tax base by preventing taxpayers from shifting passive income to low-tax jurisdictions. Under these rules, foreign accrual property income (“FAPI”), which includes certain interest income earned by controlled foreign affiliates (“CFA”) of a taxpayer, is taxable in the hands of the Canadian resident taxpayer on an accrual basis.
The combination of these foreign affiliate rules can result in double taxation where, for example, a particular Canadian resident corporation that is owned by a widely held Canadian public company has borrowed money from its CFA. In these circumstances, the particular corporation may be prevented from deducting interest on the loan under the Thin Cap Rules while at the same time the interest is taxable in its hands as FAPI.
In order to prevent such double taxation, the Budget proposes to exclude from the application of the Thin Cap Rules interest expense of a Canadian resident corporation to the extent that the interest is taxable in the hands of the corporation as FAPI of a CFA of the corporation.
This measure will apply to taxation years of Canadian-resident corporations that end on or after Budget Day.
New Anti-Surplus Stripping Rule for Canadian Corporations Controlled by Non- Residents
Proposed foreign affiliate dumping amendments add a new anti-surplus stripping rule to the Tax Act as section 212.3. This provision will apply to a corporation resident in Canada (“CRIC”) which is controlled by a non-resident corporation (“NR Parentco”) where the CRIC engages in certain specified transactions with another non-resident corporation (“NR Subjectco”) that is or becomes a foreign affiliate of the CRIC. Where new section 212.3 applies, the CRIC is deemed to have paid a dividend to NR Parentco. That deemed dividend would, of course, be subject to withholding tax. There is a business purpose exception.
The new rule originates with a recommendation of the Advisory Panel on Canada’s System of International Taxation. A typical example of the mischief which prompted this new rule is a transaction where the CRIC acquires shares of a non-resident corporation in the same corporate group and incurs interest bearing debt to pay the purchase price. This debt results in deductible interest expense which reduces the Canadian tax base and removes corporate surplus from Canada in a way that the Department of Finance considers problematic from a tax policy perspective. Another example is a transaction where the CRIC acquires shares of a non-resident corporation in the same corporate group and pays the purchase price by issuing shares of the CRIC with paid-up capital equal to the purchase price. This paid-up capital allows for a future extraction of corporate surplus from Canada by way of a reduction and distribution of paid-up capital (which is not subject to withholding tax).
The scope of the proposed section 212.3 is not, however, limited to transactions between the CRIC and a non-resident corporation in the same corporate group. An acquisition by a CRIC in an arm’s length transaction of shares or debt of a non-resident corporation that becomes a foreign affiliate of the CRIC can also trigger the adverse application of this new anti-surplus stripping rule.
New section 212.3 will apply, subject to the business purpose exception, where the CRIC:
- acquires shares of NR Subjectco;
- contributes capital to NR Subjectco;
- NR Subjectco becomes indebted to the CRIC, except in the ordinary course of business where the indebtedness is repaid within a commercially reasonable period;
- acquires indebtedness of NR Subjectco from another person, except for an acquisition in the ordinary course of business from a person with whom the CRIC deals at arm’s length;
- acquires an option in respect of, or an interest in, shares or debt of the NR Subjectco; or
- engages in a transaction of similar effect.
If new section 212.3 applies, then the CRIC is deemed to have paid a dividend to NR Parentco at the time of the relevant transaction.
The amount of the deemed dividend is the fair market value of property transferred by the CRIC in the relevant transaction and/or the fair market value of any obligation incurred or assumed by the CRIC in the relevant transaction.
Where the CRIC has issued shares in the relevant transaction, the CRIC is not deemed to have paid a dividend in respect of the issue of such shares. Instead, the paid- up capital of the shares issued is reduced by the amount the paid-up capital would otherwise have been increased.
The Business Purpose Exception
New subsection 212.3 will not apply if the CRIC’s transaction can reasonably be considered to have been undertaken by the CRIC (instead of by NR Parentco or another non-resident that does not deal at arm’s length with NR Parentco) primarily for bona fide purposes other than to obtain a tax benefit (a reduction, avoidance or deferral of tax or increase of refund).
New subsection 212.3 specifies a number of factors to be considered in deciding if the business purpose exception is available, including whether:
- the business activities of NR Subjectco are more closely connected to the business activities of: (i) the CRIC (or a Canadian resident parent or subsidiary of the CRIC), or (ii) any non-resident corporation with which the CRIC does not deal at arm’s length (other than NR Subjectco and corporations in which NR Subjecto has a direct or indirect equity interest);
- shares in NR Subjectco owned by the CRIC do not participate fully in profits or appreciation of NR Subjectco, e.g., fixed value preferred shares;
- the transaction was undertaken by the CRIC at the direction of a non-resident corporation with which the CRIC does not deal at arm’s length;
- negotiations for the transaction were initiated by senior officers of the CRIC who are resident in and who work principally in Canada;
- if the vendor initiated the transaction, the principal negotiation contact on the other side is an officer of the CRIC who is resident in and who works principally in Canada;
- principal decision making authority for the CRIC in respect of the transaction is exercised by senior officers of the CRIC who are resident in and who work principally in Canada;
- the performance evaluation or compensation of senior officers of the CRIC who are resident in and who work principally in Canada is more closely connected to the operational results of NR Subjectco than the performance evaluation or compensation of senior officers of any non-resident corporation with which the CRIC does not deal at arm’s length (other than NR Subjectco or a corporation controlled by NR Subjecto); and
- senior officers of NR Subjectco report to and are functionally accountable to senior officers of the CRIC who are resident in and who work principally in Canada to a greater extent than to senior officers of any non-resident corporation with which the CRIC does not deal at arm’s length (other than NR Subjectco).
It could be very difficult to determine if the business purpose exception applies before a CRIC undertakes a transaction to which new section 212.3 could apply. It could be equally difficult to satisfy the Canada Revenue Agency (the "CRA") that the business purpose exception applies in the event of a CRA audit or reassessment. The wording of the exception suggests that a taxpayer may have to prove why a non-resident corporation in the corporate group did not undertake the transaction instead of the CRIC. This is tantamount to requiring the taxpayer to prove a negative. Also, a number of the specified factors used in determining if the business purpose exception is available will be very difficult to resolve in practice.
The Government invites stakeholders to submit comments concerning the details of the proposed “business purpose” test, as set out in the Notice of Ways and Means Motion for this measure, before June 1, 2012.
Other Consequential Amendments
The Budget proposes a number of related amendments to other rules. Some of these are noted below.
Contributed surplus of a CRIC that arose in a transaction to which new section 212.3 applies cannot be converted into paid-up capital without triggering a deemed dividend.
Contributed surplus of a CRIC that arose in a transaction to which new section 212.3 applies is not counted as equity for the purposes of the thin capitalization rule.
Where corporate immigration into Canada or emigration out of Canada results in a CRIC controlled by an NR Parentco and the CRIC has a foreign affiliate, paid-up capital reductions and deemed dividends can result.
The new rule applies to transactions undertaken on or after Budget Day subject to grandfathering for certain arms’ length transactions subject to a written agreement entered into before Budget Day if the transaction is completed before 2013.
Where a transaction between a Canadian resident and a non-resident with whom the Canadian resident does not deal at arm’s length is not consistent with a similar arm’s length transaction, Canada’s transfer pricing rules allow the CRA to adjust the transaction prices and other relevant amounts to the arm’s length amounts for Canadian income tax purposes.
For example, if a Canadian resident pays a non-arm’s length non-resident a price of $1,000 for the purchase of goods, other property or services and an arm’s length party in similar circumstances would only have paid $700, then the Canadian resident is deemed to have paid the lower arm’s length price, i.e., $700. The $300 excess over the lower arm’s length price will be disallowed as a deduction where the Canadian resident has deducted the cost of the goods, other property or services in computing its income. Management fees, royalties and interest paid by a Canadian resident to a non-arm’s length non-resident are commonly subject to review and adjustment on this basis. Where the price paid is treated as cost of inventory or capital property, the lower arm’s length price will become the Canadian resident’s cost for tax purposes.
This type of transfer pricing adjustment is called a “primary adjustment”.
Where the Canadian resident subject to a primary transfer pricing adjustment is a corporation, the CRA generally treats the amount of the primary adjustment, i.e., the disallowed portion of the price paid to the non-arm’s length non-resident, as a shareholder benefit under subsection 15(1) of the Tax Act which is deemed to be a dividend subject to withholding tax under paragraph 214(3)(a) of the Tax Act. This treats the portion of the price paid to the non-resident in excess of the arm’s length price as being tantamount to a distribution of corporate surplus. This is referred as a “secondary adjustment.” In the above example, the $300 excess over the arm’s length price would be a deemed dividend subject to withholding tax.
The CRA’s policy with respect to assessing withholding tax for such secondary adjustments is set out in paragraph 211 of CRA Information Circular 87 – 2R on International Transfer Pricing.
The Budget proposes to amend section 247 of the Tax Act to provide specifically for withholding tax assessments for secondary adjustments. The proposed amendments also codify, to some extent, existing CRA administrative policy for relief from the secondary adjustment withholding tax if the non-resident repays or “repatriates” the excess amount to the Canadian corporation.
The proposed amendments are welcome because they provide specific rules for an area that was previously only dealt with under CRA administrative practice. The proposed amendments also specify an exception and a taxpayer favourable adjustment in relation to secondary adjustment withholding tax assessments.
The proposed amendments provide:
Amount: The amount subject to withholding tax is the sum of the Canadian corporation’s income and capital transfer pricing adjustments under section 247, but with the capital adjustments determined on a gross basis. And, this amount is determined as if the Canadian corporation had undertaken no transactions other than those transactions in which the particular non-arm’s length non-resident participated.
Reduction: The amount subject to withholding tax is reduced by transfer pricing adjustments in the Canadian taxpayer’s favour.
Deemed Dividend: The excess amount is treated as a deemed dividend for withholding tax purposes. Therefore, the withholding tax rate under any applicable tax treaty will be the rate for dividends. Nothing is said about when such deemed dividends will qualify for the lower dividend withholding tax rate available under many treaties where the shareholding meets a specified minimum threshold.
Timing: The deemed dividend is deemed to be paid at the end of the taxation year in which the relevant transactions occurred.
CFA Exception: There is an exception for a transaction with a non-resident that is a controlled foreign affiliate (“CFA”) under subsection 17(15) of the Tax Act. A primary transfer pricing adjustment in relation to a transaction with this type of CFA will not give rise to a deemed dividend subject to withholding tax. Excess payments by the Canadian corporation to such a CFA are considered to be equivalent to downstream capital contributions to the foreign affiliate rather than upstream distributions of surplus to foreign shareholders. Therefore, a withholding tax assessment is not appropriate. A subsection 17(15) CFA is generally a CFA controlled by the taxpayer and/or Canadian residents with whom the Canadian corporation does not deal at arm’s length. The non-resident must qualify as this type of CFA throughout the period during which the subject transaction or series of transactions occurred. The broad scope of the term “series of transactions” (see the recent GAAR decision of the Supreme Court of Canada in Copthorne Holdings Ltd.) may come to be a problem for this exception.
Paragraphs 212 and 213 of CRA Information Circular 87 – 2R on International Transfer Pricing and CRA Transfer Pricing Memorandum TPM – 02 set out the CRA’s administrative policy for relief from secondary adjustment withholding tax assessments where the non-resident repays the excess amount to the Canadian resident.
The proposed amendments codify this CRA administrative policy to a limited extent by providing:
Reduction for Repayment: The deemed dividend subject to withholding tax may be reduced where the non-resident has paid the Canadian corporation an amount with the concurrence of the CRA. The reduction would generally be the amount of the repayment, although the proposed amendment is not this specific.
CRA Discretion: The amount of the reduction is the amount that the CRA considers to be appropriate having regard to all the circumstances. This discretion will presumably allow the CRA to continue elements of its current administrative practice, such as denying repatriation relief for abusive transactions, allowing repayment by way of offset of other amounts owing by the Canadian corporation to the non-resident, or creation or adjustment of a shareholder’s loan account, and requiring the taxpayer to accept the primary transfer pricing adjustment and waive objection and appeal rights.
Arrears Interest: The withholding tax that was or could have been assessed prior to reduction for repayment will still be subject to arrears interest for the period from the date of the deemed dividend to the date of repayment. The CRA may agree to reduction of the arrears interest where the CRA considers such a reduction to be appropriate in the circumstances (including whether the other country provides reciprocal treatment).
The proposed amendments on repatriation relief are welcome; however, they fall short on the detailed mechanics. Determining all the tax consequences of a repatriation, in all affected taxation years, can be quite complex in some circumstances. This is particularly the case where repayment is effected by way of adjustments to an existing shareholder loan account and/or where a foreign currency is involved. Also, nothing is proposed to address the inequitable CRA position that withholding tax refunds are not entitled to refund interest.
The changes described above will apply to transactions that occur on or after Budget Day.
The Budget proposes that amendments be made to the “base erosion” rules in the Tax Act regarding the FAPI regime.
In particular, it is proposed that amendments will be developed to: (i) alleviate the tax cost to Canadian banks of using excess liquidity of their foreign affiliates in their Canadian operations; and (ii) ensure that certain securities transactions undertaken in the course of a bank’s business of facilitating trades for arm’s length customers are not inappropriately caught by the base erosion rules.
The Government has indicated that these amendments will be developed in conjunction with industry representatives and will include appropriate safeguards to ensure the Canadian tax base is adequately protected.
Canadian resident employees who qualify for the Overseas Employment Tax Credit (“OETC”) are entitled to a tax credit equal to the federal income tax otherwise payable (calculated using the employee’s average tax rate) on 80% of their qualifying foreign employment income, up to a maximum of $100,000. The OETC is deductible in determining the employee’s tax payable.
The Budget proposes to phase out the OETC over four taxation years, beginning in 2013. During the phase-out period, the factor (currently 80%) applied to an employee’s qualifying foreign employment income in determining the credit will be reduced to:
- 60% for the 2013 taxation year;
- 40% for the 2014 taxation year; and
- 20% for the 2015 taxation year.
The OETC will be eliminated beginning in 2016.
The phase-out will not apply to qualifying foreign employment income related to a project or activity committed to in writing before Budget Day.
IN THIS SECTION:
- Scientific Research and Experimental Development Program
- Tax Avoidance Through Use of Partnerships
- Partnership Waivers
- Clean Energy Generation Equipment – Accelerated Capital Cost Allowance
- Corporate Mineral Exploration and Development Tax Credit
- Atlantic Investment Tax Credit
The Scientific Research and Experimental Development (“SR&ED”) program is a tax incentive program that is meant to encourage the private sector to engage in research and development (“R&D”) in Canada. Allowable SR&ED expenditures are 100% deductible from income, and generate an investment tax credit of 20%, or 35% for certain small to medium Canadian-controlled private corporations (“CCPCs”).
The Budget proposes to make several fairly significant changes to the SR&ED program. The income tax changes mostly involve cuts to the program. In conjunction with the changes to the SR&ED tax deductions and credits, the Government will fund and support R&D initiatives to promote innovation. This includes: (i) doubling the contribution to the Industrial Research Assistance Program; and (ii) redirecting the research of the National Research Council to industry-relevant applied research.
SR&ED Investment Tax Credit Rate Reduction
Qualified SR&ED expenditures incurred in Canada and certain transferred amounts are included in a taxpayer’s SR&ED qualified expenditure pool (“SR&ED Pool”). The balance in the SR&ED Pool at the end of the year is multiplied by 20%, or 35% for qualified CCPC expenditures, to determine the SR&ED investment tax credit. The enhanced 35% rate applies on up to $3 million of qualified SR&ED expenditures incurred by a CCPC in a year. The general 20% rate applies to a CCPC’s SR&ED expenditures that are not eligible for the 35% rate.
The Budget proposes:
- to reduce the general rate from 20% to 15% for tax years that end after 2013, with the reduction in the general rate pro-rated for tax years that include January 1, 2014; and
- no changes to the enhanced 35% rate or the $3 million maximum.
Capital Expenditures Exclusion
Under the existing SR&ED program, current and capital expenditures on qualified R&D are fully deductible. This is in addition to the tax credits noted above. The Budget proposes to exclude capital expenditures from eligibility for SR&ED deductions and investment tax credits. This measure will also apply to payments made in order to use property that would be capital property if it was bought by the taxpayer. This measure will apply to both property acquired after 2013 and the right to use property after 2013.
SR&ED Overhead Expenditures Proxy Reduction
Currently, itemized overhead expenditures that are directly attributable to the conduct of R&D are eligible for the SR&ED tax incentives. Taxpayers can elect to use a proxy method instead of calculating overhead expenditures. The proxy method allows the taxpayer to claim as eligible SR&ED expenditures 65% of the total of the eligible portion of salaries and wages of the taxpayer’s employees directly engaged in the conduct of R&D in Canada.
The Budget proposes to reduce the proxy rate from 65% to 60% for 2013, and 55% for years after 2013. The proxy rate that will apply for taxation years that include days in 2012, 2013, and 2014 will be pro-rated based on the number of days in the taxation year that are in each of those years.
Contract Payments – 80% Proxy and Exclusion of Capital Expenditures
Currently, when a taxpayer hires an arm’s length party to perform R&D, the taxpayer is entitled to claim qualified SR&ED expenditures equal to the entire amount of the contract payment, less the amount of qualified SR&ED expenditures claimed by the arm’s length party in respect of the contract.
The Budget proposes to:
- limit the qualified SR&ED expenditures to 80% of the amount the taxpayer paid on the arm’s length R&D contract, applicable to expenditures incurred in or after 2014; and
- exclude any amount paid in respect of a capital expenditure incurred by an arm’s length provider in fulfillment of the R&D contract, starting in 2014.
In addition, the amount that the arm’s length R&D provider is required to net against its qualifying SR&ED expenditures because of the contract payment will be reduced by the amount received by the provider that is in respect of its capital expenditures.
The Government announced that it will invest $6 million to implement changes to the SR&ED program, including:
- enhancements to the online self-assessment eligibility tool and more effective use of tax alerts in this area; and
- improvements to the notice of objection procedure to allow a second review of the scientific eligibility determination.
The Government also announced that it will conduct a study on contingency-fee based consultants used by businesses to determine eligibility and the amount of SR&ED claims. Future action may be taken on such arrangements.
Denial of Section 88 Bump Where Income Producing Assets Held Through Partnerships
Section 88 of the Tax Act provides that a taxable Canadian corporation (“Parent”) that has acquired control of another taxable Canadian corporation (“Subsidiary”) may increase the cost of certain capital assets acquired by the Parent on a vertical amalgamation with or winding-up of the Subsidiary if certain conditions are met (“Bump Rules”).
The Bump Rules are designed to recognize that the amount paid by the Parent for the shares of the Subsidiary represents the cost to the Parent of the underlying assets of the Subsidiary and that the Parent should be able to take advantage of this amount and “bump” the cost of certain capital assets owned by the Subsidiary acquired on the amalgamation or winding-up to an amount not to exceed the adjusted cost base of the shares of the Subsidiary to the Parent. In most cases, the adjusted cost base of the shares of the Subsidiary to the Parent equals the fair market value of the shares of the Subsidiary at the time such shares were acquired.
Generally, the Bump Rules provide that only capital assets, such as land, shares of a corporation or an interest in a partnership are eligible for the bump. Assets that are not eligible for the bump include eligible capital property, depreciable property, inventory and resource property.
Certain bump transactions were designed to hold a Subsidiary’s income assets (i.e., assets that do not qualify for the bump) in a corporate partnership structure. In these structures, the income generating assets are held indirectly through a partnership rather than directly by the Subsidiary. After the acquisition of control of the Subsidiary, the Parent amalgamates with or winds up the Subsidiary and then bumps up the cost of the partnership interest in circumstances where all of the fair market value of the partnership interest is derived from income producing assets. The Bump Rules are exceptionally complex and contain a number of anti-avoidance provisions.
The Budget proposes to introduce a measure that will generally deny the bump in respect of a partnership interest to the extent that the accrued gain in that partnership interest is reasonably attributable to the amount by which the fair market value of income producing assets exceed their cost amount. This has the effect of looking through the partnership for the purpose of this proposed provision. This proposed measure will apply where the income assets are held directly by the partnership or indirectly through another partnership. The proposed rule will not apply to income assets that are held by a corporation whose shares are held by a partnership.
This proposal will apply to amalgamations that occur, and windings-up that begin, on or after Budget Day. An exception will be provided where a taxable Canadian corporation amalgamates with its subsidiary before 2013, or begins to wind up its subsidiary before 2013. This exception will apply only if, before Budget Day, the corporation had acquired control, or was obligated, as evidenced in writing, to acquire control, of the subsidiary and the corporation had the intention, as evidenced in writing, to amalgamate with or wind up the subsidiary.
A corporation will not be considered to be obligated to acquire control where the corporation may be excused from the obligation if an amendment is made to the Tax Act.
Disposition of Partnership Interests to Non-Residents and Indirect Dispositions of Partnership Interests to Tax-Exempts
Section 100 of the Tax Act deals with the calculation of the capital gain that arises on the disposition of a partnership interest to a tax-exempt person. Generally, the section is designed to ensure that income assets held by a partnership are fully taxable on the disposition of an interest in a partnership by a taxpayer to a tax-exempt person since a tax-exempt person could wind-up a partnership without paying any income tax.
First, the Government indicated that it is concerned with indirect sales of partnership interests by a taxpayer to a tax-exempt person which is not expressly referred to in section 100. Second, the Government is concerned that this rule does not currently apply to a sale of an interest in a partnership to a non-resident even though the income from a disposition of an income asset owned by the partnership may be exempt from Canadian income tax under either Canadian domestic law or one of Canada’s tax treaties.
The Budget proposes to extend the application of section 100 of the Tax Act to the sale of a partnership interest by a taxpayer to a non-resident person, unless the partnership is using all of its assets in a business carried on in Canada through a permanent establishment. This exception is being made because the disposition of such income assets should generally be subject to Canadian taxation and not exempt under a tax treaty.
This proposed measure will also clarify that section 100 applies to dispositions made directly, or indirectly as part of a series of transactions, to a tax-exempt or non-resident person.
This proposed measure will apply to dispositions of interests in partnerships that occur on or after Budget Day. An exception will be provided for an arm’s length disposition made by a taxpayer before 2013 that the taxpayer is obligated to make pursuant to a written agreement entered into by the taxpayer before Budget Day. A taxpayer will not be considered to be obligated to make the disposition where the taxpayer may be excused from the obligation if an amendment is made to the Tax Act.
The Tax Act provides that the CRA may for a fiscal period of a partnership make a determination or redetermination under subsection 152(1.4) of the Tax Act of any income, loss, deduction or other amount in respect of the partnership. The CRA is precluded from determining an amount if more than 3 years have elapsed since the later of the deadline for filing the relevant partnership information return and the day the return is actually filed.
However, if the CRA obtains a waiver from each partner, the time period for making a determination is extended. If one or more of the partners does not provide a waiver, the period cannot be extended and the CRA will have to make a determination using only the information that is available to it at that time.
Under the current rules, the members of a partnership may designate a partner with authority to file an objection on behalf of all of the partners, to a determination under the Tax Act.
The Budget proposes that a single designated partner of a partnership may also be empowered to waive, on behalf of all of the partners, the 3-year time limit for making a determination.
This proposed measure will apply on Royal Assent to the enacting legislation.
Under the capital cost allowance (“CCA”) regime in the income tax system, Class 43.2 of Schedule II to the Income Tax Regulations provides an accelerated CCA rate (50% per year on a declining balance basis) for investment in specified clean energy generation and conservation equipment. The class incorporates by reference to Class 43.1 a detailed list of eligible equipment that generates or conserves energy by:
- using a renewable energy source (e.g., wind, solar, small hydro);
- using fuels from waste (e.g., landfill gas, wood waste, manure); or
- making efficient use of fossil fuels (e.g., high efficiency cogeneration systems, which simultaneously produce electricity and useful heat).
Providing accelerated CCA in this context is an exception to the general practice of setting CCA rates based on the useful life of assets. Accelerated CCA provides a financial benefit by deferring taxation. This incentive for investment is premised on the environmental benefits of low-emission or no-emission energy generation equipment.
In addition, if the majority of the tangible property in a project is eligible for inclusion in Class 43.2, certain intangible project start-up expenses (e.g., engineering and design work and feasibility studies) are treated as Canadian Renewable and Conservation Expenses. These expenses may be deducted in full in the year incurred, carried forward indefinitely for use in future years, or transferred to investors using flow-through shares.
Budget 2010 expanded Class 43.2 to broaden the eligible range of applications for which heat recovery equipment and equipment of a district energy system can be used. Equipment that generates electricity using waste heat was added to Class 43.2 in Budget 2011. The Budget proposes to further expand Class 43.2 to include:
- waste-fuelled thermal energy equipment used for space and water heating applications;
- equipment that is part of a district energy system that distributes thermal energy primarily generated by waste-fuelled thermal energy equipment; and
that uses residue of plants (e.g., straw) to generate electricity and heat.
These measures will encourage investment in technologies that can contribute to a reduction in emissions of greenhouse gases and air pollutants, in support of Canada’s targets set out in the Federal Sustainable Development Strategy. These measures could also contribute to the diversification of Canada’s energy supply.
Waste-Fuelled Thermal Energy Equipment
Waste-fuelled thermal energy equipment produces heat using wastes (e.g., wood waste) and fuels from waste (e.g., biogas and bio-oil). Currently, Class 43.2 includes waste-fuelled thermal energy equipment, subject to the requirement that the heat energy generated from the equipment is used in an industrial process or a greenhouse.
The Budget proposes to expand Class 43.2 by removing this requirement. This change will allow waste-fuelled thermal energy equipment to be used in a broad range of applications, including space and water heating. For example, wood waste could be used as an alternative to heating oil for space and water heating in a shopping centre.
This measure will apply to assets acquired on or after Budget Day that have not been used or acquired for use before that date.
Equipment of a District Energy System
District energy systems transfer thermal energy between a central generation plant and a group or district of buildings by circulating steam, hot water or cold water through a system of underground pipes. Thermal energy distributed by a district energy system can be used for heating, cooling or in an industrial process. Certain equipment that is part of a district energy system is currently included in Class 43.1 or Class 43.2, if the system distributes thermal energy primarily generated by one or more of an eligible cogeneration system, a ground source heat pump, active solar heating equipment and heat recovery equipment.
Building on the proposed expansion of Class 43.2 to include waste-fuelled thermal energy equipment used for a broader range of applications, the Budget also proposes to expand Class 43.2 by adding equipment that is part of a district energy system that distributes thermal energy primarily generated by waste-fuelled thermal energy equipment (that is itself eligible for inclusion in Class 43.2). For example, in a remote community a district energy system that uses heat generated by waste-fuelled thermal energy equipment could provide an alternative to equipment that uses only fossil fuels.
This measure will apply to assets acquired on or after Budget Day that have not been used or acquired for use before that date.
Energy Generation from Residue of Plants
The residue of plants (e.g., straw, corn cobs, leaves and similar organic waste produced by the agricultural sector) can be used in a number of ways, including the production of heat, electricity, bio-fuels and other bio-products. Subject to certain requirements, equipment that uses these residues to produce biogas or bio-oil is currently eligible for inclusion in Class 43.2.
The Budget proposes to add the residue of plants to the list of eligible waste fuels (e.g., biogas, bio-oil, digester gas, landfill gas, municipal waste, pulp and paper waste, and wood waste) that can be used in waste-fuelled thermal energy equipment included in Class 43.2 or a cogeneration system included in Class 43.1 or Class 43.2. For example, a greenhouse could produce heat for its operations using a heating system fuelled by the residue of plants.
This measure will apply to assets acquired on or after Budget Day that have not been used or acquired for use before that date.
If equipment using fuels from waste does not comply with environmental regulations, there could, in some instances, be an increased risk of the release of pollutants. To ensure that taxpayers who benefit from Class 43.1 or 43.2 do so in an environmentally responsible manner, the Budget proposes that equipment using eligible waste fuels not be eligible under Class 43.1 or Class 43.2 if the applicable environmental laws and regulations of Canada or of a province, territory, municipality, or a public or regulatory body are not complied with at the time the equipment first becomes available for use.
A corporate tax credit is available at the rate of 10% for pre-production mining expenditures incurred in respect of certain mineral resources in Canada. Qualifying minerals for purposes of the credit are diamonds, base or precious metals and industrial minerals that become base or precious metals through refining.
The Budget proposes to phase out this corporate tax credit. The credit will apply at a rate of 10% for exploration expenses incurred in 2012, and at a rate of 5% for such expenses incurred in 2013. The credit will not be available for exploration expenses incurred after 2013.
The corporate tax credit will apply at a rate of 10% for pre-production development expenses incurred before 2014, at a rate of 7% for such expenses incurred in 2014, and at a rate of 4% for such expenses incurred in 2015. The credit will not be available for pre-production development expenses incurred after 2015.
Additional transitional relief will be provided in recognition of the long timelines involved in developing mines. The corporate tax credit will apply at a rate of 10% for pre-production development expenses incurred by a taxpayer before 2016 either:
- under a written agreement entered into by the taxpayer before Budget Day; or
- as part of the development of a new mine where
- the construction of the new mine was started by, or on behalf of, the taxpayer before Budget Day, or
- the engineering and design work for the construction of the new mine, as evidenced in writing, was started by, or on behalf of, the taxpayer before Budget Day.
Exploration and pre-production development expenses will continue to qualify as Canadian exploration expenses, and as such will continue to be fully deductible in the year incurred.
The Atlantic Investment Tax Credit (“AITC”) is a 10% credit currently available for qualifying acquisitions of new buildings, machinery and equipment, used primarily in farming, fishing, logging, mining, oil and gas, and manufacturing and processing in the Atlantic provinces, the Gaspé Peninsula and their associated offshore regions.
Oil and Gas and Mining Activities
The Budget proposes to phase out the AITC for oil and gas and mining activities over a four-year period. In particular, this proposal will apply to assets acquired on or after Budget Day for use in any of the following activities:
- operating an oil or gas well;
- extracting petroleum or natural gas from a natural accumulation of petroleum or natural gas;
- extracting minerals from a mineral resource;
- processing ore from a mineral resource to any stage that is not beyond the prime metal stage or its equivalent;
- processing iron ore from a mineral resource to any stage that is not beyond the pellet stage or its equivalent;
- processing tar sands ore from a mineral resource to any stage that is not beyond the crude oil stage or its equivalent;
- producing industrial minerals;
- processing heavy crude oil recovered from a natural reservoir to a stage that is not beyond the crude oil stage or its equivalent;
- Canadian field processing;
- exploring or drilling for petroleum or natural gas; and
- prospecting or exploring for or developing a mineral resource.
The availability of the AITC for assets acquired for use in other activities will not be affected.
The AITC will apply at a rate of 10% for assets acquired before 2014 for use in any of the activities listed above and at a rate of 5% for such assets acquired in 2014 and 2015. The AITC will not be available for such assets acquired after 2015.
Transitional relief will be provided in recognition of the long timelines involved in some oil and gas and mining projects. The AITC will apply at a rate of 10% for assets acquired by a taxpayer before 2017 either:
- under a written agreement entered into by the taxpayer before Budget Day; or
- as part of a project phase where
- the construction of the project phase was started by, or on behalf of, the taxpayer before Budget Day, or
- the engineering and design work for the construction of the project phase, as evidenced in writing, was started by, or on behalf of, the taxpayer before Budget Day.
Electricity Generation Equipment
Equipment is generally eligible for the AITC if the equipment is a qualified property. Electricity generation equipment described in Class 1, 8, 29 or 41, paragraph (c) of Class 43.1 or paragraph (a) of Class 43.2 of Schedule II to the Income Tax Regulations used in the Atlantic region primarily in an eligible activity is a qualified property.
The Budget proposes to improve the neutrality of the AITC by amending the Tax Act so that qualified property will include certain electricity generation equipment and clean energy generation equipment used primarily in an eligible activity (i.e., farming, fishing, logging, and manufacturing and processing).
This change will apply to assets acquired on or after Budget Day that have not been used or acquired for use before that date, other than such assets that are used primarily in oil and gas or mining activities.
IN THIS SECTION:
- Registered Disability Savings Plans
- Retirement Compensation Arrangements
- Employees Profit Sharing Plans
- Group Sickness or Accident Insurance Plans
- Life Insurance Policy Exemption Test
- Eligible Dividends – Split-Dividend Designation and Late Designation
- Mineral Exploration Tax Credit for Flow-Through Share Investors
- Medical Expense Tax Credit
The Budget proposes a number of changes to the rules governing Registered Disability Savings Plans (“RDSPs”). Many of the proposals address issues raised during the consultation process that the Government held in the fall.
The current rules provide that the plan holder of a RDSP established for a beneficiary who has attained the age of majority must be either the beneficiary or, if the beneficiary is incapable of entering into a contract, the guardian, tutor, curator or other person or entity “legally authorized to act” on behalf of the beneficiary.
Family members may not always need, or wish, to obtain a legal guardianship order for a child or other relative, and this requirement can be a stumbling block for families. The process can be expensive and lengthy – and can have other consequences for the individual who has been declared “incapable” as part of the process. The Budget proposes to allow, for the next 4-1/2 years, certain family members to become plan holders of RDSPs for adults who are not capable of entering into a contract. This measure is intended to make RDSPs more accessible to individuals across Canada, who might not otherwise be capable or have a legal representative. The Government is encouraging the provinces to work towards streamlining and simplifying the process of becoming “legally authorized to act” in respect of a RDSP in the intervening period.
Specifically, where, in the opinion of a RDSP issuer, an individual’s ability to enter into a contract is in doubt, the parent, spouse or common-law partner of the individual will be considered a “qualifying family member” and, until the end of 2016, will be eligible to establish a RDSP for the individual and be the plan holder. If a qualifying family member opens a RDSP for a disabled beneficiary prior to the end of 2016, he or she can remain as the plan holder after 2016.
The Budget proposes to provide that no action will lie against a RDSP issuer that allows a qualifying family member to establish and become the holder of a RDSP for the beneficiary where the issuer is in doubt of the beneficiary’s ability to enter into a contract. This measure may provide financial institutions that have permitted family members to open RDSPs for a child or spouse without documentation of the guardianship with some comfort, however, it is our view that issuers should consider what documentation they require with respect to determining capacity or incapacity. Query, however, whether federal income tax legislation can protect a financial institution with respect to what is otherwise a provincial matter.
RDSP issuers will be required to notify an individual when a qualifying family member establishes an RDSP for which the individual is the beneficiary. Presumably, this will facilitate the ability of the beneficiary to replace the qualifying family member as plan holder if the individual is subsequently determined to be capable, whether by the issuer or by “a public agency or tribunal authorized to make such determination” pursuant to provincial legislation governing incapable persons. Moreover, if a guardian, tutor, curator or other person who is legally authorized to act on behalf of the individual is appointed, that person would replace the qualifying family member as the plan holder.
Proportional Repayment Rule
As it stands today, any Canada Disability Saving Grants (“CDSGs”) and Canada Disability Savings Bonds (“CDSBs”) paid into a RDSP in the preceding 10 year period generally must be repaid to the Government on any of the following events (the “10-year repayment rule”):
- an amount is withdrawn from the RDSP;
- the RDSP is terminated or deregistered; or
- the RDSP beneficiary ceases to be eligible for the Disability Tax Credit (“DTC”) or dies.
To ensure funding to meet potential obligations under this rule, RDSP issuers must set aside an “assistance holdback amount” equal to the total CDSGs and CDSBs paid into the RDSP in the preceding 10 years less any CDSGs and CDSBs already repaid in respect of that 10-year period. If one of the triggering events occurs, the required repayment is equal to the amount of the assistance holdback amount immediately preceding the event.
While the purpose of the 10-year rule is to encourage long-term savings and prevent the “recycling” of CDSGs and CDSBs, the rule has been criticized for being overly-complex and harsh. To provide greater access to RDSP savings for small withdrawals, while still supporting the long-term savings objective of these plans, the Budget proposes to introduce a proportional repayment rule that will apply when a withdrawal is made from a RDSP. This rule will replace the 10-year repayment rule only in respect of RDSP withdrawals. The existing 10-year repayment rule will continue to apply where the RDSP is terminated or deregistered, or the RDSP beneficiary ceases to be eligible for the DTC or dies.
The proportional repayment rule will require that for each $1 withdrawn from a RDSP, $3 of any CDSGs or CDSBs paid into the plan in the 10 years preceding the withdrawal be repaid, up to a maximum of the assistance holdback amount. Repayments will be attributed to CDSGs or CDSBs that make up the assistance holdback amount based on the order in which they were paid into the RDSP, beginning with the oldest amounts.
Maximum and Minimum Withdrawals
The Budget proposes greater flexibility with respect to the rules governing maximum and minimum withdrawals from RDSPs to ensure that RDSP assets are used to support the RDSP beneficiary during his or her lifetime.
There are two types of withdrawals that may be made from a RDSP: (i) a “disability assistance payment,” which may be made at any time; and (ii) a lifetime disability assistance payment (“LDAP”), which provides an ongoing stream of payments from the RDSP to the beneficiary (similar to an annuity). The maximum LDAP that can be withdrawn from the RDSP each year is determined by a formula (the LDAP formula) that is based on the age of the beneficiary and the fair market value of the assets held in the RDSP.
Specific rules limit the maximum amount that may be withdrawn annually from RDSPs where CDSGs and CDSBs paid into the plan exceed the non-government, or private, contributions made to the plan. Such RDSPs are known as primarily government-assisted plans (“PGAPs”). Total withdrawals from a PGAP in a calendar year may not exceed the amount determined by the LDAP formula for the year. No such maximum withdrawal limits apply to non-PGAPs.
The Budget proposes to increase the maximum annual limit for withdrawals from PGAPs to the greater of the amount determined by the LDAP formula and 10% of the fair market value of plan assets at the beginning of the calendar year. A PGAP beneficiary will continue to be eligible for an exemption from the maximum annual limit for withdrawals if a medical doctor certifies that the beneficiary has a life expectancy of 5 years or less.
PGAPs are also subject to a minimum annual withdrawal requirement commencing with the calendar year in which the beneficiary attains 60 years of age. For that calendar year and subsequent years, the total withdrawals from a PGAP must be at least equal to the amount determined by the LDAP formula for the year. For other RDSPs, there is currently no specified minimum withdrawal amount.
The Budget proposes to extend to all RDSPs the minimum annual withdrawal requirement that currently applies only to PGAPs. Accordingly, once a RDSP beneficiary attains 60 years of age, the total withdrawals from the RDSP in a calendar year must be at least equal to the amount determined by the LDAP formula for the year. It is unclear why the age of 60 years was chosen, as the RDSP beneficiary will likely continue to be eligible for provincial benefits (e.g., the ODSP in Ontario) until age 65 when Old Age Security commences. While most of the provinces do not penalize a beneficiary of a RDSP when RDSP withdrawals are made, if withdrawals are required while the individual is in receipt of provincial benefits and accumulates the funds (as they are not required while on provincial benefits), it may be that provincial benefits will be affected the following year.
These measures will apply after 2013.
Rollover of RESP Investment Income
The Budget proposes to allow investment income earned in a Registered Education Savings Plan (“RESP”) for a child with a severe disability to be transferred on a tax-free (or “rollover”) basis to a RDSP for a common beneficiary. This measure will allow parents to maintain that income for the benefit of a child who perhaps became disabled after the parents established a RESP for him or her, rather than having the funds transferred into the Registered Retirement Savings Plan (“RRSP”) of the parent/subscriber.
To qualify for the rollover, the beneficiary must meet the current age and residency requirements for RDSP contributions, as well as one of the following conditions:
- the beneficiary has a severe and prolonged mental impairment that can reasonably be expected to prevent the beneficiary from pursuing post-secondary education;
- the RESP has been in existence for at least 10 years and each beneficiary is at least 21 years of age and is not pursuing post-secondary education; or
- the RESP has been in existence for more than 35 years.
These are the existing conditions for receiving an accumulated income payment (“AIP”) from a RESP.
Under this proposal, when RESP investment income is rolled over to an RDSP, contributions in the RESP will be returned to the RESP subscriber on a tax-free basis. The subscriber can contribute these amounts to the RDSP (immediately or over time), potentially attracting CDSGs. However, Canada Education Savings Grants and Canada Learning Bonds in the RESP will have to be repaid to the Government and the RESP terminated by the end of February of the year after the year during which the rollover is made. Similar to contributions of an AIP to a RRSP, the rollover amount will not be subject to regular income tax or the additional 20% tax.
The amount rolled over from a RESP to a RDSP may not exceed, and will reduce, the beneficiary’s available RDSP “contribution” room. The rollover amount will be considered a private contribution for the purpose of determining whether the RDSP is a PGAP, but will not attract CDSGs. The rollover amount will be included in the taxable portion of RDSP withdrawals.
This measure will apply to rollovers of RESP investment income made after 2013.
Termination of a RDSP following Cessation of Eligibility for the DTC
Currently, if a beneficiary becomes ineligible for the DTC for a taxation year, the RDSP must be terminated by the end of the following year and no contributions may be made to, and no CDSGs or CDSBs may be paid into, the RDSP. Further, the 10-year repayment rule applies and any assets remaining in the RDSP must be paid to the beneficiary.
However, a beneficiary who becomes DTC-ineligible might, due to the nature of their condition, be eligible for the DTC in a subsequent year and would be able to establish a new RDSP. Contribution room and repaid CDSGs and CDSBs are not restored in these circumstances.
To reduce the administrative burden on these beneficiaries and ensure greater continuity in their long-term saving, the Budget proposes to extend, in certain circumstances, the period in which a RDSP may remain open when a beneficiary becomes DTC-ineligible. A medical practitioner must certify in writing that the nature of the beneficiary’s condition makes it likely that the beneficiary will, because of the condition, become eligible for the DTC in the foreseeable future.
If a RDSP plan holder decides to take advantage of this measure, the plan holder will be required to elect in a prescribed form and submit the election, along with the written certification, to the RDSP issuer. The RDSP issuer will then be required to notify Human Resources and Skills Development Canada (“HRSDC”) that the election has been made. The election must be made on or before December 31st of the year following the first full calendar year in which the beneficiary is DTC-ineligible.
Where an election is made, the following rules will apply commencing with the first full calendar year in which the beneficiary is DTC-ineligible:
- No contributions to the RDSP will be permitted, including under the proposed rule for the rollover of RESP investment income. However, a rollover of proceeds from a deceased individual’s RRSP or Registered Retirement Income Fund to the RDSP of a financially dependent infirm child or grandchild will still be permitted.
- No new CDSGs or CDSBs will be paid into the RDSP. If a beneficiary dies after an election has been made, the existing 10-year repayment rule will apply.
- No new entitlements will be generated for the purpose of the carryforward of CDSGs and CDSBs for years in which the beneficiary is DTC-ineligible.
- Withdrawals from the RDSP will be permitted, and will be subject to the proposed proportional repayment rule and the proposed maximum and minimum withdrawal rules as applicable. For years in which the beneficiary is DTC-ineligible, the assistance holdback amount will be equal to the amount of the assistance holdback amount immediately preceding the beneficiary becoming DTC-ineligible less any repayments made during or after the first full calendar year in which the beneficiary is DTC-ineligible.
Neither the certification required for an election, nor the election itself, will have any bearing on any determination of an individual’s eligibility for the DTC. The sole purpose of the certification and election is to allow a RDSP to remain open for the years under election.
An election will generally be valid until the end of the 4th calendar year following the first full calendar year in which a beneficiary is DTC-ineligible. The RDSP must be terminated by the end of the first year in which there is no longer a valid election.
If a beneficiary becomes eligible for the DTC while an election is valid, the usual RDSP rules will apply commencing with the year in which the beneficiary becomes eligible. Should the beneficiary become DTC-ineligible at some later time, a new election could be made.
This measure will apply to elections made after 2013. RDSPs that under current rules would have to be terminated before 2014 because the beneficiary has become DTC-ineligible and that have not yet been terminated, will not be required to be terminated until the end of 2014. Plan holders of such RDSPs may take advantage of this measure if they obtain the required medical certification and make an election on or before December 31, 2014.
The Budget proposes to replace the existing deadlines for notifying HRSDC of the establishment of a RDSP (within 60 days by the issuer) and completing a transfer from one RDSP issuer to another (within 120 days) with a “without delay” requirement. The elimination of these deadlines is intended to give issuers greater flexibility in complying with their obligations.
Further, the Budget proposes to shift the responsibility of providing information to the new issuer when a RDSP is transferred from the issuer of the original plan to HRSDC.
These measures will apply on Royal Assent.
In addition, the Budget proposes that the Canada Disability Savings Regulations be amended to eliminate the 180-day deadline for a RDSP issuer to submit an application for a CDSG or a CDSB.
This measure will apply on and after the day that the regulation amending the Canada Disability Savings Regulations is registered.
Retirement Compensation Arrangements (“RCAs”) are special arrangements that are commonly made for the benefit of executives or senior employees to provide funding for their retirement. The RCA itself is a fund that may be established as a trust and managed by a custodian and is exempt from tax liability under Part I of the Tax Act. Contributions made by an employer to a RCA, funded for the benefit of an employee upon his or her retirement, are deductible to the employer in respect of the taxation year in which they are made. However, these contributions are taxed to the RCA at a rate of 50%, pursuant to the regime under Part XI.3 of the Tax Act. Further, any income and gains that are earned or realized by a RCA are also subject to the 50% refundable tax rate. Generally, when distributions are made from a RCA to the employee for whose benefit the arrangement was made (i.e., upon his or her retirement), the RCA receives a refund of the refundable tax paid under Part XI.3 of the Tax Act. Accordingly, for each $2 that are distributed from a RCA to the employee, the RCA receives $1 in refundable tax.
Recently, the CRA has been actively engaged in RCA audits. In many cases, the CRA’s auditing position has been that many RCAs are, in fact, salary deferral arrangements (“SDAs”), as that term is defined under subsection 248(1) of the Tax Act. There is considerable overlap between the definitions of RCAs and SDAs in the Act, such that the only question in most cases is whether it is reasonable to conclude that, by means of a RCA, wages or remuneration that would have been otherwise paid to an employee in one taxation year were otherwise deferred to a future taxation year.
Further to the CRA’s recent reviews of RCAs, the Budget proposes new prohibited investment and advantage rules to directly prevent RCAs from engaging in non-arm’s length transactions. These rules are modeled on similar rules that currently apply to Tax-Free Savings Accounts (“TFSAs”) and Registered Retirement Savings Plans (“RRSPs”). The Budget also proposes a new restriction on RCA tax refunds in circumstances where RCA property has lost value over time, as previously, refundable tax could still have been available in such circumstances.
The Budget proposes adding several definitions to the Act in respect of RCAs. These include the term “specified beneficiary,” defined as an employee that does not deal at arm’s length with the RCA or, more specifically, an employee entitled to benefits under a RCA who has a significant interest in the employer that is making contributions on his or her behalf. In most instances, owners/managers would likely qualify as “specified beneficiaries” under the proposed rules.
In situations where the beneficiary of a RCA is a “specified beneficiary,” the new prohibited investment rules will apply. If the beneficiary of a RCA is a “specified beneficiary,” the RCA’s custodian will be liable to pay a 50% tax on the fair market value of any prohibited investment acquired or held by the RCA. In accordance with similar rules that presently apply to RRSPs, "prohibited investments" include certain debts of and investments in entities in which the RCA beneficiary has an interest in excess of 10% or with which the beneficiary/employee does not deal at arm’s length. Pursuant to the proposed rules in the Budget, if a specified beneficiary participates in the acquisition or holding of a prohibited investment by a RCA, he or she will be jointly and severally, or solidarily, liable (to the extent of his or her participation) for the payment of the 50% tax, meaning that this tax may not only be levied against the RCA custodian.
If the RCA disposes of the prohibited investment by the end of the year that follows the year in which the prohibited investment was first acquired, the 50% tax will be refundable to the RCA. The tax may also be refundable if the RCA disposes of the investment at such later time as the Minister of National Revenue (the “Minister”) considers reasonable, so long as all of the persons liable for the payment of the 50% knew or ought to have known that the investment was a prohibited investment. The Minister will also have the power to waive or cancel the tax in situations where the Minister is satisfied that it is just and equitable to do so, having regard to all the circumstances. This provision mirrors similar provisions in respect of TFSAs and RRSPs. However, it is not evident when and under what circumstances, the Minister will actually exercise his or her discretion to waive or cancel the tax.
The new rules applicable to specified beneficiaries and prohibited investments will apply to investments acquired, or that become prohibited investments, on or after Budget Day.
The Budget also proposes that the Tax Act’s current definition of “advantage” be revised and narrowed in order to better address the forms of aggressive tax planning that the CRA has encountered in its review of some RCAs. The Budget release cites the example of a RCA that buys a high-value property, whose value is intentionally eroded later on or transferred out of the RCA for little-to-no consideration. In these cases, a “RCA strip” transaction will be said to have occurred. The Budget proposes defining a “RCA strip” in the Tax Act in a similar manner to the existing definition of an “RRSP strip.” If a RCA holds a promissory note that was issued by a non-arm’s length debtor in respect of a loan made by the RCA to him or her, a “RCA strip” will be deemed to have occurred if the debtor does not make commercially reasonable payments of principal and interest in respect of the promissory note. It is not clear what repayment terms would be considered “commercially reasonable.”
Advantages received by a taxpayer in respect of a RCA will, similar to the current advantage rules in the Tax Act, be subject to a special tax equal to the fair market value of the advantage. Similar to the proposed rules in respect of the acquisition of a prohibited investment, the custodian of the RCA will be liable for the special tax and, to the extent that a “specified beneficiary” of a RCA participated in extending the advantage, he or she will be liable to the payment of the special tax. Also, similar to the proposed rules in respect of prohibited investments, in certain circumstances, the Minister will have the power to waive or cancel the special tax where he or she is satisfied that it is just and equitable to do so.
Since the new rules in respect of prohibited investments and advantages are effective as of Budget Day, special transitional rules have been provided. For transactions that occurred before Budget Day that resulted in an advantage being obtained by a specified beneficiary of a RCA on or after Budget Day, the amount of the advantage will not be subject to the special tax provided, so long as the amount is included in computing the income of the specified beneficiary. Further, if transactions that occurred before Budget Day will result in a RCA receiving an advantage on or after Budget Day, the amount of the advantage will not be subject to the special tax so long as the amount is distributed from the RCA and included in the income of the RCA beneficiary for the year in which the distribution was made, or in the employer’s income for that year, with the distributions to be provided with the same tax treatment as any regular taxable distributions from RCAs.
RCA Tax Refunds
Finally, if RCA property has declined in value, the Budget proposes that the RCA tax be refunded only if the decline in value of the property held by the RCA cannot be reasonably attributable to prohibited investments or advantages. This is an objective test and it is not clear what will be “reasonable” in certain circumstances. Further, the Budget proposes that the Minister be given discretion to allow the RCA tax to be refunded in situations where RCA property has declined in value where is just and equitable to do so. Once again, the proposed restriction on RCA tax refunds will apply to all contributions made to RCAs on or after Budget Day.
Employees Profit Sharing Plans (“EPSPs”) are arrangements under which an employer is required to make payments computed by reference to profits to a trust for the benefit of employees of an employer or of a non-arm’s length corporation. The beneficiaries of the trust can be all of the employees of the employer or just a designated group of employees. Generally the employer may deduct any amounts contributed to the plan, and amounts received by the trust from the employer or earned from property held by the trust are taxable in the hands of the employees as though such amounts had been earned directly by those employees. Amounts allocated to employees are included in such employees’ income regardless of whether or not they are distributed to the employees, and any such amounts are generally not taxable on their eventual distribution. Although EPSPs do not achieve deferral of income tax (other than perhaps in the first year the EPSP is established), they do present income splitting opportunities with family members and also have the advantage that contributions to EPSPs are not subject to source deductions in the same manner as wages paid directly to employees.
According to the Government, EPSPs have been used increasingly as a means for some business owners to direct profits to members of their families in order to reduce or defer the payment of income tax on these profits. In the 2011 Budget, the Government announced that it would review the existing EPSP regime, but would ensure that any future changes to the rules designed to limit the potential for abuse would continue to accommodate appropriate uses of EPSPs. The Government consulted with stakeholders from August to October 2011, and participants in the consultations generally recognized the Government’s concern in placing reasonable limitations on EPSP contributions to combat perceived abuses of EPSPs in the context of non-arm’s length employees.
To address potential abuse of EPSPs and discourage excessive employer contributions, the Budget proposes a special tax payable by a specified employee on an “excess EPSP amount”. A specified employee is generally an employee who has a significant equity interest (generally at least 10% of any class of shares) in his or her employer or who does not deal at arm’s length with his or her employer. Generally, an “excess EPSP amount” will be the portion of an employer’s EPSP contribution, allocated by the trustee to a specified employee, that exceeds 20% of the specified employee’s salary received in the year by the specified employee from the employer.
The special tax includes a federal component and a provincial component, which will be equivalent to the top federal marginal tax rate of 29% and the top marginal tax rate of the province of residence of the specified employee, respectively. The special tax will be shared with provinces and territories participating in a Tax Collection Agreement, which include all provinces and territories except Québec. The Government will introduce a new deduction to ensure that an excess EPSP amount is not subject to double taxation both under the special tax and as regular income. However, a specified employee will not be able to claim any other deductions or credits in respect of an excess EPSP amount.
The Minister of National Revenue will be able to waive or cancel the special tax if the Minister considers that it is just and equitable to do so, having regard to all the circumstances. In such cases, the normal rules governing EPSPs will apply.
This measure will apply in respect of EPSP contributions made by an employer on or after Budget Day, other than contributions made before 2013 pursuant to a legally binding obligation arising under a written agreement or arrangement entered into before Budget Day.
Currently, wage-loss replacement benefits payable on a periodic basis under a group sickness or accident insurance plan to which an employer has contributed are included in an employee’s income for tax purposes when those benefits are received. However, no amount is included in an employee’s income, either when the employer contributions are made or the benefits are received, to the extent that:
- benefits are not payable on a periodic basis; or
- benefits are payable in respect of a sickness or accident when there is no loss of employment income.
To provide for more neutral and fair tax treatment of beneficiaries under a group sickness or accident insurance plan, the Budget proposes to include the amount of an employer’s contributions to a group sickness or accident insurance plan in an employee’s income for the year in which the contributions are made to the extent that the contributions are not in respect of a wage-loss replacement benefit payable on a periodic basis.
This measure will not affect the tax treatment of private health services plans or other plans described in paragraph 6(1)(a) of the Tax Act.
This measure will apply in respect of employer contributions made on or after Budget Day to the extent that the contributions relate to coverage after 2012, except that such contributions made on or after Budget Day and before 2013 will be included in the employee’s income for 2013.
Holders of permanent life insurance policies are not subject to annual income taxation in respect of the policies’ annual growth or accretion in value, so long as the policy in question is an “exempt” policy, pursuant to the Tax Act and the Income Tax Regulations (the “Regulations”). Upon death, the beneficiaries of an exempt life insurance policy receive death benefits on a tax-free basis, since the insurer, and not the insured, bore the tax burden in respect of the policy over its lifetime.
The Regulations provide a test that is used to determine whether a particular permanent or “cash value” life insurance policy is an exempt policy and therefore not subject to income taxation in a particular taxation year. This exemption test was implemented in the early 1980s and is now almost 30 years old. In the intervening years, while life insurance products have changed and developed (in particular with the widespread use of universal life insurance products), the exempt test has remained static. The test’s purpose was to differentiate between protection-oriented life insurance policies and investment-oriented products. To date, life insurance policies have been measured against a standard benchmark policy in order to determine whether they meet the exemption test in respect of any given taxation year.
Thirty years after its implementation, and submissions to the Department of Finance from industry groups in 1998 and 2009, the Government is reviewing and revisiting the exemption test in order to determine whether it continues to serve its purpose and how it may be improved and modernized to better suit today’s realities. In this regard, the Budget proposes the following revisions to the exemption test:
- Using the Canadian Institute of Actuaries’ 1986-1992 mortality tables in order to measure the savings in an actual policy and the benchmark policy and applying an interest rate of 3.5% (these measures are more consistent with and better reflect today’s mortality rates and standard investment; they are also more consistent in terms of measuring the savings in a particular permanent life insurance policy against the savings in the benchmark policy).
- Increasing the benchmark policy’s endowment time (this is the time when death benefits are payable, on the earlier of death or a specified age) from age 85 years to age 90 years, in order to reflect increased life expectancy in today’s population.
- Using the greater of:
- a life insurance policy’s cash surrender value, prior to the application of any surrender charges (the cash surrender value is the amount that the holder of a life insurance policy may collect in respect of the surrender of a policy of life insurance at any given time); and
- the net premium reserve (which is equal to the present value of future death benefits paid under the policy, less the present value of all future net premiums payable in respect of the policy of life insurance)
to measure the savings in an actual policy. This is expected to capture all savings in an actual policy of life insurance and to improve the measurement of the savings in a given permanent life insurance policy and in the benchmark policy.
- Reducing the benchmark’s policy pay period from a period of 8 to 20 years, to be more consistent with current industry practices, market realities and the practices and methods used in other countries.
The Budget also proposes a recalibration of the Investment Income Tax ("IIT") that is levied on life insurers, where appropriate, in order to neutralize the impacts that the proposed technical changes described above may have on the IIT base.
The revisions to the exemption test and the recalibration of the IIT have not been finalized. The Government will enter into a period of consultations over the next few months with key stakeholders regarding the Budget’s proposed amendments. As such, the Budget’s proposed amendments will apply to life insurance policies that are issued after 2013.
The Budget proposes to simplify the way a resident Canadian corporation pays and designates eligible dividends by allowing the corporation to designate, at the time it pays a taxable dividend, any portion of the dividend to be an eligible dividend. The portion of a taxable dividend that is designated to be an eligible dividend will qualify for the enhanced Dividend Tax Credit, and the remaining portion will qualify for the regular Dividend Tax Credit.
The Budget also proposes to allow the Minister of National Revenue to accept a corporation’s late eligible dividend designation provided the corporation makes the late designation within the three-year period following the day on which the designation was first required to be made. In addition, the Minister must be of the opinion that accepting the late eligible dividend designation would be just and equitable in the circumstances, including to affected shareholders.
These welcome measures will apply to taxable dividends paid on or after Budget Day.
Under flow-through share agreements, corporations that incur legitimate tax expenses in connection with mineral exploration work undertaken in Canada may renounce or “flow” such expenses through to their investors/shareholders. Pursuant to subsection 127(9) of the Tax Act, the investors may then claim a deduction from their income in respect of a given taxation year equal to 15% of specified mineral exploration expenses incurred in Canada in that year and flowed through to them by the corporation pursuant to the flow-through share agreement. Tax credits for flow-through share agreements are advantageous for corporations engaged in mineral exploration work in Canada, as they make the corporations more attractive to investors and consequently permit the corporations to sell their shares at a premium.
The Budget proposes to extend the mineral exploration tax credit available for flow-through share investors for one additional year, pursuant to proposed amendments to subsection 127(9) of the Tax Act. Similar provisions were contained in the Government’s 2011 Budget.
The Tax Act presently contains a “look-back” rule, which enables funds that are raised in one calendar year and that receive the benefit of the mineral exploration tax credit to be spent on eligible exploration up to the end of the following calendar year. Thus, the Budget proposals will permit funds raised with the credit during the first three months of 2013 to support eligible exploration until the end of 2014. Based on the proposed amendments to subsection 127(9), taxpayers will be eligible for the Mineral Exploration Tax Credit in respect of flow-through share agreements entered into on or before March 31, 2013.
Subsection 118.2(1) of the Tax Act provides medical expense tax credits to taxpayers who are faced with high medical or associated expenses in a taxation year as result of, inter alia, illness or disability. Tax relief under subsection 118.2(1) is equivalent to 15% of the medical or disability-related expenses incurred by a taxpayer in a taxation year that are in excess of the threshold of the lesser of 3% of that taxpayer’s annual income in that year and $2,109 (which is the applicable indexed dollar amount in 2012).
Subsection 118.2(2) of the Tax Act provides a lengthy list of medical expenses that will qualify for the tax credit under subsection 118.2(1). The Government regularly revisits this list in order to determine whether there are any new technologies or devices in respect of which a medical expense tax credit should be available under subsection 118.2(1) of the Tax Act.
The Budget proposes to add blood coagulation monitors, for use by individuals who require anti-coagulation therapy, as well as associated disposable peripherals such as pricking devices, lancets and test strips, to the list of eligible medical expenses under subsection 118.2(1). Taxpayers will be entitled to claim a medical expense tax credit with respect to such medical supplies and devices, so long as they are prescribed by a medical practitioner, and so long as the cost in respect of the devices and accessories was incurred after 2011.
IN THIS SECTION:
- GST/HST Health Care Exemptions and Zero-Rating Expanded
- Doubling GST/HST Streamlined Accounting Thresholds
- GST and Excise Tax Relief for Foreign-Based Rental Vehicles Temporarily Imported by Canadian Residents
- Application of the "Gas-Guzzler" Excise Tax or "Green Levy" on Fuel-Inefficient Vehicles
- GST Rebate for Books to be Given Away
- Previously Announced GST/HST Measures
Basic health care services are treated as exempt from the Goods and Services Tax/Harmonized Sales Tax (“GST/HST”). Exempt treatment means that suppliers do not charge GST/HST, but they cannot claim input tax credits to recover the GST/HST paid on inputs in relation to these supplies (so the services have a built in tax cost).
In addition, medical devices, prescription drugs and certain other drugs used to treat life-threatening conditions are zero-rated. Zero-rating means that suppliers do not charge purchasers GST/HST on these medical devices or drugs, but these suppliers are entitled to claim input tax credits to recover the GST/HST paid on inputs in relation to these supplies so that the supplies are truly tax free.
Pharmacists’ Services – Expanded Exempt Services
Provincial governments have recently expanded the health care services that pharmacists are authorized to perform in the course of their professional practice beyond those of dispensing drugs, including:
- ordering and interpreting lab tests;
- administering medications and vaccinations;
- changing drug dosages; and
- prescribing drugs for certain minor ailments.
The Budget proposes to exempt other non-dispensing health care services rendered by individual pharmacists within a pharmacist-patient relationship. This would include those services, such as those listed above, that pharmacists are authorized to provide in the course of their professional practice. This is accomplished by adding new section 7.3 to Part II, Schedule V.
In addition, certain prescribed diagnostic health care services, such as blood tests, are currently exempt when ordered by physicians or registered nurses. The Budget proposes to expand the exemption for prescribed diagnostic health care services that are ordered by pharmacists when the pharmacists are authorized to issue such orders under the laws of a province. This is implemented by adding provincially authorized pharmacists to the types of other health care practitioners who can prescribe under Section 10, Part II of Schedule V.
This measure will apply to supplies made after Budget Day.
Similar to that of Pharmacists, opticians have been authorized under recent changes to provincial laws to, in certain circumstances, conduct vision assessments and produce records of the assessment that authorize the dispensing of corrective eyewear. The Budget proposes to zero-rate corrective eyeglasses or contact lenses supplied under the authority of a prescription or an assessment record produced by an optician who is entitled under the laws of the province in which the person practices to prescribe or to produce the record authorizing dispensing of corrective eyewear. This provision replaces the undefined “eye care professional” term and appears to expand the list of persons authorized to prescribe zero-rated eyewear under Section 9, Part II, Schedule VI.
This measure will apply to supplies made after Budget Day and also to supplies made on or before that day if GST/HST was not charged, collected or remitted in respect of the supply.
Medical and Assistive Devices
Various medical and assistive devices that are specially designed to assist individuals with chronic disease, illness or a physical disability are zero-rated when prescribed by a medical practitioner.
The Budget proposes to add blood coagulation monitoring or metering devices and associated test strips designed for use by individuals requiring blood coagulation monitoring or metering.
The devices currently tax free will also be expanded by zero-rating certain of the listed medical and assistive devices when supplied on the written order of a registered nurse, occupational therapist or physiotherapist as part of their professional practice. Currently, such devices are only zero-rated when supplied on the written order of a medical practitioner.
These measures will apply to supplies made after Budget Day.
The Budget also proposes to add Isosorbide-5-mononitrate, a drug used to treat congestive heart failure, to the list of zero-rated non-prescription drugs in Part I, Schedule VI.
This measure will apply to supplies made after Budget Day and also to supplies made on or before that day if GST/HST was not charged, collected or remitted in respect of the supply.
To simplify and facilitate GST/HST compliance by small businesses and public services bodies (“PSB”), the Budget proposes to double the existing Streamlined Accounting thresholds.
The threshold below which small businesses can elect to use the Quick Method will increase from $200,000 to $400,000 in annual GST/HST-included taxable sales.
The small business and PSB Streamlined Input Tax Credit Method and PSB Rebate Calculation Method threshold will increase from $500,000 to $1,000,000 of annual taxable sales and from $2,000,000 to $4,000,000 of annual taxable purchases, respectively.
This measure will take effect in respect of a GST/HST reporting period of a person beginning after 2012.
GST and Excise Tax Relief for Foreign-Based Rental Vehicles Temporarily Imported by Canadian Residents
Perhaps to the surprise of many Canadians, foreign-based rental vehicles temporarily imported by Canadian residents are generally subject to GST on the full value of the vehicle, the Excise Tax “Gas-Guzzler” or Green Levy on certain “fuel-inefficient” passenger vehicles, and the automobile air conditioner excise tax. Generally, these taxes do not apply to foreign-based rental vehicles temporarily imported by foreign residents visiting Canada.
The Budget proposes changes to the tax treatment of rental vehicles temporarily imported by Canadian residents to enable the temporary importation of these rental vehicles for a period not exceeding 30 days. Specifically, the Budget proposes to:
- relieve GST/HST on foreign-based rental vehicles temporarily imported by Canadian residents who have been outside Canada for at least 48 hours;
- levy GST/HST on a partial basis on foreign-based rental vehicles temporarily imported by Canadian residents who have been outside Canada for less than 48 hours; and
- fully relieve the Green Levy and the automobile air conditioner excise taxes on all foreign-based rental vehicles temporarily imported by Canadian residents.
For a Canadian resident who has been outside Canada for less than 48 hours and who temporarily imports a foreign-based rental vehicle, the GST/HST will be levied on fixed monetary values as follows:
- $200 for cars;
- $300 for pickup trucks, sport utility vehicles and vans; and
- $1,000 for recreational vehicles, such as motor homes.
These values are intended to approximate the average cost of a weekly rental of the same type of vehicle in Canada for each week or part of a week that the vehicle is in Canada.
Consistent with the revised federal vehicle safety rules that permit the temporary importation of foreign-based rental vehicles for a period not exceeding 30 days, this no tax or reduced tax treatment will apply only to foreign based rental vehicles temporarily imported for a period not exceeding 30 days.
This measure is effective for imports on or after June 1, 2012, and will be accomplished by amending section 212.2 and the Non-Taxable Imported Goods (GST/HST) Regulations.
Part III Excise Tax, also known as the “Gas-Guzzler Tax” or “Green Levy”, is imposed on imported or manufactured passenger vehicles that have a weighted average fuel consumption rating of 13 or more litres per 100 kilometres as determined under the EnerGuide Mark. As the Minister of Natural Resources has announced that Canada will change the vehicle fuel consumption testing requirements to better align with those in the United States, the Budget proposes to amend the Excise Tax Act so that the weighted average fuel consumption rating for the purposes of this tax continues to be determined by reference to the current EnerGuide test method. The necessary legislative amendments will apply on Royal Assent to the enacting legislation.
In an effort to promote literacy, the Budget proposes to allow charity and qualifying non-profit literacy organizations prescribed by Regulation to claim a rebate of GST and the federal portion of the HST on printed books that they acquire for the purpose of being given away. This expands the current GST rebate available to public libraries, educational institutions, charities and qualifying non-profit organizations whose primary purpose is the promotion of literacy.
This measure will apply to books acquired or imported after Budget Day.
The Government also confirmed its intention to proceed with the following measures:
- Changes to rules relating to the way financial institutions calculate the provincial component of the HST (as released on January 28, 2011);
- Technical changes relating to the reporting of recaptured input tax credits (as released on October 31, 2011);
- Amendments to the Excise Tax Act to ensure Pooled Registered Pension Plans are subject to the same GST/HST treatment as Registered Pension Plans as released on (December 14, 2011); and
IN THIS SECTION:
- Gifts to Foreign Charitable Organizations
- Charities – Enhancing Transparency and Accountability
- Tax Shelter Administrative Changes
- Aboriginal Tax Policy
For more comments on Charitable Sector Measures, please visit Charities and Not-for-Profit Newsletter March 2012 Budget Special.
The Budget proposes changes to the process by which foreign organizations that have received a grant from the Government will be considered qualified donees under the Tax Act. Under the current rules, foreign charitable organizations become qualified donees as of a given time if they have received a gift from the Government within the 36 month period commencing 24 months prior to that time. This rule is an exception to the general rule that foreign organizations are not qualified donees and therefore cannot issue donation receipts or receive grants from Canadian registered charities.
The Budget proposes to modify the rules making some foreign charitable organizations temporary qualified donees. Foreign charitable organizations that receive a gift from the Government may apply for qualified donee status if they pursue activities:
- related to disaster relief or urgent humanitarian aid; or
- in the national interest of Canada.
The registration of these organizations as qualified donees is now discretionary, and will be granted for a 24-month period that begins on the date chosen by the Minister of National Revenue, which normally would be no later than the date of the gift from the Government.
The Budget proposes new rules relating to the ability of charities and registered Canadian amateur athletics associations (“RCAAAs”) to engage in political activities and the disclosure rules for their political activities. The principal change involves an expansion of the definition of “political activities” to include gifts made to other qualified donees where the purpose of the gift can be reasonably considered as supporting the political activities of the donee. The Tax Act permits a charity or RCAAA to engage in limited political activities that are ancillary and incidental to its charitable purpose, not exceeding 10% of the charity’s total resources. The revised definition of political activities has the potential to substantially expand the resources devoted to such activities.
The Budget also proposes to increase the reporting obligations of registered charities in respect of political activities and in particular with regard to foreign donors that may have supported political activities of a charity. The details of the increased reporting that will be required have yet to be determined.
The Budget also proposes to enable the CRA to suspend for one year the tax-receipting privileges of a charity or RCAAA that exceeds the limitations on political activities. Further, it is proposed that the CRA will be granted the authority to suspend the tax-receipting privileges of a charity or RCAAA that provides inaccurate or incomplete information in its annual information return until the charity provides the required information.
The Budget proposes various new rules and penalties related to tax shelters generally, as well as some changes specific to charitable donation tax shelters. The Tax Act requires that all tax shelters be registered and obtain a tax shelter identification number. The Tax Act imposes a penalty on any person (normally the tax shelter promoter) who sells an interest in, or accepts consideration in respect of, a tax shelter that is not registered with the CRA, or who files false information in an application to register a tax shelter. The penalty is normally calculated as a function of the consideration paid by the participant to the promoter (i.e., the greater of $500 and 25% of such consideration paid). Under the proposed revisions, this penalty will be increased in the context of charitable donation tax shelters to be calculated as a function of the value of the property represented to be available to the participant for donation through participation in the shelter. The proposed penalty will be the greater of the penalty as calculated under the current rules and 25% of the value of the property represented as available for donation.
The Budget also proposes additional promoter penalties where the promoter fails to file an annual information return when demanded by the CRA, or fails to report in the returns all amounts paid by participants to the shelter. The Budget also proposes to make tax shelter identification numbers valid for one year only.
In recognition of Aboriginal peoples being an the increasingly important source of Canada’s labor force, the Budget includes proposals intended to help equip First Nations peoples with the skills and opportunities they need to fully participate in the economy. These proposals primarily involve commitments of funding to programs and initiatives that benefit Aboriginal peoples, including funding to: (i) support First Nations education and to build and renovate schools on reserves; (ii) extend the Atlantic Integrated Commercial Fisheries Initiative and the Pacific Integrated Commercial Fisheries Initiative; and (iii) renew the Urban Aboriginal Strategy. In the Budget the Government also reiterated its willingness to continue to work with interested Aboriginal governments to discuss and implement initiatives that promote the exercise of direct taxation powers, such as sales tax or personal income tax, by Aboriginal governments on reserve and settlement lands.
IN THIS SECTION:
As the Government has committed to make Canada a duty-free zone for industrial manufacturers, the Budget will eliminate a 5% Most-Favoured-Nation rate of duty on certain imported oils used as production inputs in gas and oil refining and electricity production to improve the competitiveness of manufacturers of gasoline, diesel, electricity and jet fuel.
This amendment to the Customs Tariff Schedule will be effective in respect of goods imported on or after March 30, 2012.
The Budget proposes to increase the travellers’ exemption for returning Canadian residents who are out of the country for 24 hours from $50 to $200 for goods other than alcohol and tobacco and for 48 hours from $400 to $800 for all goods included in accompanying baggage. The current 7-day exemption threshold of $750 for goods, whether included in the baggage accompanying the person or shipped later, as long as the goods are declared, will also be increased to $800.
This measure will be effective in respect of travellers returning to Canada on or after June 1, 2012.
In Budget 2011, the Government proposed that it would study initiatives regarding the operation of Canada's trade remedy law system under the Special Import Measures Act. The Budget provides vague references to introducing legislation to consolidate Canada’s trade remedy investigation functions into the Canadian International Trade Tribunal (CITT). The proposal states that this would create efficiencies that would enable the government to sustain an effective trade remedy system and to cut red tape. It is unclear what is meant by this, but what is clear is that the Anti-dumping and Countervail Directorate within the Canada Border Services Agency (CBSA) responsible for investigating and enforcing Canada’s trade remedy laws is going to be amalgamated or fall under the jurisdiction of the CITT rather than CBSA. Notwithstanding the Government’s references that this will make it less cumbersome for Canadian businesses to take unfair trade remedy actions, this development should be closely monitored by Canadian producers who may rely on Canada’s trade remedy law system (that is, those who might bring anti-dumping or countervailing duty cases against unfairly traded imports into Canada). While details are limited, the concern is that the CITT (an economic inquiry, quasi-adjudicative body) is going to be making the decision as to whether to initiate cases or to initiate renewals of cases. This is a move that is contrary to the current bifurcated trade law remedy system whereby the CBSA investigates and is the gatekeeper for trade remedy law actions whereas the CITT is the adjudicative body to determine injury to Canadian producers. It appears that the CITT will have ultimate responsibility for the calculation of duties, dumping and countervailing duties and the injury inquiry, as well as the initiation of investigations. The CBSA will no longer have any role.
The Budget confirms certain tax measures previously announced by the Government. Where appropriate, the measures have been modified to take into account consultations and deliberations since their release. Previously announced measures relating to income tax include the following:
- legislative proposals released on July 16, 2010 relating to income tax technical and bijuralism amendments;
- legislative proposals released on August 27, 2010 relating to various measures including the taxation of non-resident trusts and rules relating to foreign affiliates;
- legislative proposals released on November 5, 2010 relating to income tax technical amendments;
- legislative proposals released on December 16, 2010 relating to real estate investment trusts (“REITs”);
- legislative proposals released on March 16, 2011 addressing case law relating to the deductibility of contingent amounts, withholding tax on interest paid to certain non-residents, and the tax treatment of certain life insurance corporation reserves;
- measures announced on July 20, 2011 relating to specified investment flow-through entities, REITs and publicly traded corporations;
- legislative proposals released on August 19, 2011 relating to foreign affiliates;
- measures announced on November 10, 2011 relating to improving the caseload management of the Tax Court of Canada; and
- automobile expense amounts for 2012 announced on December 29, 2011.
Dalton Albrecht 416.597.4360
Dean J. Barrett 403.298.2427
Alon S. Ossip 905.415.6727
Richard Barbacki 514.905.4224
Miller Thomson LLP International Trade/Customs/Commodity Tax Lawyers
Dalton Albrecht 416.597.4360
We acknowledge and thank the Department of Finance for their helpful commentary on the Budget which has been utilized in the compilation of this summary.
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