Tax-Free Savings Account
Registered Education Savings Plans
Northern Residents Deduction
Medical Expense Tax Credit
Registered Disability Savings Plans
Mineral Exploration Tax Credit
Capital Gains and Donations: Exchangeable Securities
Private Foundations: Excess Corporate Holdings
Dividend Tax Credit
Scientific Research and Experimental Development Program
Manufacturing and Processing: Accelerated CCA
Clean Energy Generation: Accelerated CCA
Aligning CCA Rates with Useful Life
Remittance of Source Deductions
Business Number Initiative
Cross-Border Business and Investment
Donations of Medicines
SIFT Tax: Provincial Component
GST/HST Health Measures
GST/HST Treatment of Long-Term Residential Care Facilities
GST/HST Treatment of Property Leases for Wind and Solar Power Equipment
Excise Duty on Imitation Spirits
Aboriginal Tax Policy
Notice of Ways and Means Motion to Amend the Income Tax Act
Notice of Ways and Means Motion to Amend the Excise Tax Act Relating to the Goods and Services Tax and Harmonized Sales Tax (GST/HST)
Notice of Ways and Means Motion to Amend the Excise Act, 2001, the Excise Act, and the Customs Tariff
Draft Amendments and Explanatory Notes to the Income Tax Regulations
This annex provides detailed information on each of the tax measures proposed in the Budget.
Table A4.1 lists these measures and provides estimates of their budgetary impact.
The annex also provides Notices of Ways and Means Motions to amend the Income Tax Act, the Excise Tax Act, the Excise Act, 2001, the Excise Act and the Customs Tariff. Draft amendments to the Income Tax Regulations are included as well.
Cost of Proposed Tax Measures
(millions of dollars)
|Tax-Free Savings Account||–||5||50||55|
|Registered Education Savings Plans||–||–||–||–|
|Northern Residents Deduction||–||10||10||20|
|Medical Expense Tax Credit||–||5||5||10|
|Registered Disability Savings Plans*||–||–||–||–|
|Mineral Exploration Tax Credit||–||145||-25||120|
|Capital Gains and Donations:|
|Private Foundations: Excess corporate holdings*||–||–||–||–|
|Dividend Tax Credit*||–||–||-25||-25|
|Scientific Research and Experimental|
|Manufacturing and Processing: Accelerated CCA||–||–||155||155|
|Clean Energy Generation: Accelerated CCA||–||–||5||5|
|Aligning CCA Rates with Useful Life||–||–||5||5|
|Remittance of Source Deductions*||–||–||–||–|
|Business Number Initiative*||–||–||–||–|
|Cross-Border Business and Investment||–||–||–||–|
|Donations of Medicines||–||–||–||–|
|SIFT Tax: Provincial component*||–||–||–||–|
|GST/HST Health Measures||–||15||15||30|
|GST/HST Treatment of Long-Term|
|Residential Care Facilities*||15||15||15||45|
|GST/HST Treatment of Property Leases|
|for Wind and Solar Power Equipment||–||–||–||–|
|Excise Duty on Imitation Spirits*||–||–||–||–|
|Aboriginal Tax Policy*||–||–||–||–|
|1 Does not include the additional
funding provided to the Canada Revenue Agency
for administrative improvements.
A "–" indicates a nil amount or a small amount (less than $5 million).
An "*" indicates a measure described only in this annex.
To improve the taxation of savings, Budget 2008 proposes to introduce the Tax-Free Savings Account (TFSA)—a flexible, registered account that will help Canadians with their different savings needs over their lifetime. The design elements of the TFSA are described below.
Any individual (other than a trust) who is resident in Canada and 18 years of age or older will be eligible to establish a TFSA. The individual will be required to provide the issuer of the account with his or her Social Insurance Number when the account is established. An individual will be permitted to hold more than one TFSA.
An individual will be able to make total TFSA contributions up to the contribution room he or she has available.
Starting in 2009, individuals 18 years of age and older will acquire $5,000 of TFSA contribution room each year. The $5,000 limit will be indexed to inflation and the annual additions to contribution room will be rounded to the nearest $500.
Unused contribution room will be carried forward to future years. For example, if an individual contributes $2,000 to a TFSA in 2009, the individual’s contribution room for 2010 will be $8,000 ($5,000 for 2010 plus $3,000 carried forward from 2009). There will be no limit on the number of years that unused contribution room can be carried forward.
Any amounts withdrawn from an individual’s TFSA in a year will be added to the individual’s contribution room for the following year. This will give individuals who access their TFSA savings the ability to re-contribute an equivalent amount in the future.
Excess contributions will be subject to a tax of one per cent per month.
While contributions to a TFSA will not be deductible in computing income for tax purposes, income, losses and gains in respect of investments held within a TFSA, as well as amounts withdrawn, will not be included in computing income for tax purposes or taken into account in determining eligibility for income-tested benefits or credits delivered through the income tax system (for example, the Canada Child Tax Benefit, the Goods and Services Tax Credit and the Age Credit). Nor will such amounts be taken into account in determining other benefits that are based on the individual’s income level, such as Old Age Security benefits, the Guaranteed Income Supplement or Employment Insurance benefits.
A TFSA will generally be permitted to hold the same investments as a Registered Retirement Savings Plan (RRSP). The RRSP qualified investment rules accommodate a broad range of investments including, for example, mutual funds, publicly-traded securities, government and corporate bonds, guaranteed investment certificates and, in certain cases, shares of small business corporations.
To address certain concerns that arise from the special tax treatment of a TFSA, Budget 2008 proposes some limitations on TFSA investments. Specifically, a TFSA will be prohibited from holding investments in any entities with which the account holder does not deal at arm’s length—including for this purpose an entity of which the account holder is a "specified shareholder" as defined in the Income Tax Act or in which the account holder has an analogous interest (generally a 10 per cent or greater interest, together with non-arm’s length persons).
Because the investment income within, and withdrawals from, a TFSA will not be taxable, interest on money borrowed to invest in a TFSA will not be deductible in computing income for tax purposes.
There will be no prohibition in the Income Tax Act on an individual’s ability to use their TFSA assets as collateral for a loan.
If an individual transfers property to the individual’s spouse or common-law partner, the income tax rules generally treat any income earned on that property as income of the individual. An exception to these "attribution rules" will allow individuals to take advantage of the TFSA contribution room available to them using funds provided by their spouse or common-law partner: the rules will not apply to income earned in a TFSA that is derived from such contributions.
Generally, an individual’s TFSA will lose its tax-exempt status upon the death of the individual. (That is, investment income and gains that accrue in the account after the individual’s death will be taxable, while those that accrued before death will remain exempt.) However, an individual will be permitted to name his or her spouse or common-law partner as the successor account holder, in which case the account will maintain its tax-exempt status. Alternatively, the assets of a deceased individual’s TFSA may be transferred to a TFSA of the surviving spouse or common-law partner, regardless of whether the survivor has available contribution room, and without reducing the survivor’s existing room.
On the breakdown of a marriage or a common-law partnership, an amount may be
transferred directly from the TFSA of one party to the relationship to the TFSA
of the other. In this circumstance, the transfer will not
re-instate contribution room of the transferor, and will not be counted against the contribution room of the transferee.
An individual who becomes non-resident will be allowed to maintain his or her TFSA and continue to benefit from the exemption from tax on investment income and withdrawals. However, no contributions will be permitted while the individual is non-resident, and no contribution room will accrue for any year throughout which the individual is non-resident.
Financial institutions currently eligible to issue RRSPs will be permitted to issue TFSAs. This includes Canadian trust companies, life insurance companies, banks and credit unions.
The Canada Revenue Agency (CRA) will determine TFSA contribution room for each eligible individual who files an annual income tax return. Individuals who have not filed returns for prior years (because, for example, there was no tax payable) will be permitted to establish their entitlement to contribution room by filing a return for those years or by other means acceptable to the CRA.
To provide the CRA with adequate means to determine contribution room and monitor compliance, TFSA issuers will be required to file annual information returns. The information required to be reported is expected to include, for example, the value of an account’s assets at the beginning and end of the year and the amount of contributions, withdrawals and transfers made in the year.
This measure will have effect after 2008.
The following section provides additional information on how TFSAs will complement existing individual savings plans.
Features of TFSA and Other Registered Savings Vehicles
The introduction of the TFSA will complement existing registered savings plans such as RRSPs and Registered Education Savings Plans (RESPs).
|Education||Withdrawals of up to $20,000 allowed under the Lifelong Learning Plan (amounts included in income if not repaid)||
Primary purpose of plan
Contributions attract grants of 20% or more up to $7,200
Contributions not deductible; neither investment income nor withdrawals
included in income; withdrawals can be used for any purpose; withdrawals
generate new contribution room
Investment earnings and withdrawals will not affect eligibility for GIS or other federal income-tested benefits and credits
Provides savings vehicle to meet any on-going savings needs
|Home ownership||Withdrawals of up to $20,000 allowed under the Home Buyers’ Plan (amounts included in income if not repaid)||Not intended for these purposess|
|General purpose, pre-retirement||
Intended for retirement, although withdrawals allowed at any time
Withdrawals included in income
Primary purpose of plan
Allows tax-deferral on savings over working years (i.e. contributions deductible, investment income accrues tax-free)
Withdrawals included in income and taken into account for purposes of GIS and other federal income-tested benefits and credits
|General purpose, post-retirement||Accumulated savings must be drawn down after age 71|
The tax assistance provided by a TFSA is, in many ways, a mirror image of that provided through RRSPs.
The following table shows that the net after-tax rates of return on TFSA and RRSP savings are equivalent when effective tax rates are the same at the time of contribution and withdrawal: the value of the tax deduction available for RRSP contributions is equivalent to the value of withdrawing funds from a TFSA on a tax-free basis. The rate of return from saving in either a TFSA or an RRSP is superior to unregistered saving. The following table shows the after tax return of a TFSA, an RRSP and unregistered savings.
|Net Proceeds From Saving in a TFSA Relative to Other Savings Vehicles|
|Tax (40% rate)||400||–||400|
|Investment income (20 years at 5.5%)||1,151||1,918||7072|
|(Net contribution + investment income)||1,751||2,918||1,307|
|Tax (40% rate)||–||1,167||–|
|Net annual after-tax rate of return3 (%)||5.5||5.5||4.0|
1 Forgone consumption (saving) is
$600 in all cases. In the RRSP case, the person contributes $1,000 but
receives a $400 reduction in tax, thereby sacrificing net consumption of
A TFSA will provide a net rate of return equal to the pre-tax rate of return (5.5 per cent in the example). RRSP saving will provide a net rate of return higher than the TFSA when the effective tax rate on the withdrawal is lower than the effective tax rate on the contribution, and a net rate of return lower than the TFSA when the effective tax rate on the withdrawal is higher than at the time of contribution.
Given their complementary nature, whether to save in a TFSA, an RRSP or both will depend on Canadians’ particular savings needs as well as their current and expected future financial situation and income level.
A Registered Education Savings Plan (RESP) is a tax-assisted savings vehicle designed to help families accumulate savings for the post-secondary education of their children. Contributions to an RESP are not deductible for income tax purposes and are not taxed upon withdrawal. Investment income accruing in the plan is generally included in the income of the plan’s beneficiary on withdrawal. For each beneficiary of an RESP, there is a lifetime contribution limit of $50,000, but no annual limit on contributions. The Government of Canada provides additional assistance through the Canada Education Savings Grant and the Canada Learning Bond.
To increase the flexibility of the RESP program, Budget 2008 proposes changes to the applicable RESP time limits.
Currently, contributions to an RESP can be made for 21 years following the year in which the plan is generally entered into. An RESP must be terminated by the end of the year that includes the 25th anniversary of the opening of the plan. These limits are extended by an additional four and five years, respectively, for single-beneficiary RESPs if the beneficiary qualifies for the Disability Tax Credit (DTC). Finally, no contributions may be made to a family plan for a beneficiary who is 21 years of age or older.
To provide additional flexibility to parents who save in RESPs, and to students who later use these savings to help finance their post-secondary education, Budget 2008 proposes to increase each of these limits by an additional 10 years.
Proposed Changes to RESP Time Limits
|Number of contribution years after plan entered into||
|Deadline for plan termination||
|Contribution age limit for family plan||
These changes will apply for the 2008 and subsequent taxation years.
At present, RESP beneficiaries are eligible to receive Educational Assistance Payments (EAPs) from the plan if, at the time of the payment, they are enrolled as a student in a qualifying post-secondary program.
To provide more flexibility for a beneficiary to access RESP savings, Budget 2008 proposes to allow a six-month grace period for receiving EAPs. Under this measure, an RESP beneficiary will be eligible to receive EAPs for up to six months after ceasing to be enrolled in a qualifying program, provided that the payment would have qualified under the rules for EAPs if it had been made immediately before the student’s enrolment ceased.
This measure will apply to RESP beneficiaries who cease to be enrolled in a qualifying program after 2007.
Individuals who live in prescribed areas in northern Canada for at least six consecutive months beginning or ending in a taxation year may claim the northern residents deductions in computing their taxable income for that year. The northern residents deductions provide taxpayers with a basic residency deduction to each member of a household of up to $7.50 per day. Alternatively, one member of a household can claim a maximum of $15 per day if no other member of the household claims this basic amount (including where there is no other member of the household). In addition, the northern residents deductions provide a deduction to offset taxable benefits in respect of up to two employer-paid vacation trips per year and an unlimited number of employer-paid medical trips.
The amount that a taxpayer may deduct depends on whether the taxpayer resides in the Northern Zone (which is generally more isolated) or the Intermediate Zone. Residents of the Northern Zone are eligible for the full deduction, while residents of the Intermediate Zone are eligible for a half deduction.
Budget 2008 proposes to increase the residency deduction by 10 per cent, increasing the maximum deductions referred to above to $8.25 and $16.50, respectively. This amendment will apply to the 2008 and subsequent taxation years.
The Medical Expense Tax Credit (METC) recognizes the effect of above-average specific medical and disability-related expenses on an individual’s ability to pay income tax.
Currently, the METC provides tax relief equal to 15 per cent of eligible medical and disability-related expenses in excess of a threshold. In particular, eligible medical and disability-related expenses incurred by a taxpayer, including those incurred on behalf of a spouse or common-law partner and minor children, may be claimed by the taxpayer to the extent that they exceed the taxpayer’s minimum expense threshold—that is, the lesser of 3 per cent of the taxpayer’s net income and $1,962. Caregivers may also claim expenses they incur on behalf of a dependent relative.
The list of expenses eligible for the METC is regularly reviewed and updated in light of new technologies and other disability-specific or medically related developments. Budget 2008 proposes to add to the list the cost to purchase, operate, and maintain the following devices prescribed by a medical practitioner:
In addition, Budget 2008 proposes to extend eligibility under the METC to recognize eligible expenses for service animals specially trained to assist an individual who is severely affected by autism or epilepsy to cope with the individual’s impairment. Eligible expenses are the cost and the care and maintenance of the service animal, as well as reasonable travel expenses incurred for the individual to attend a school, institution or other place that trains the individual in the handling of such an animal. Currently, the only expenses that are eligible for the METC are those incurred for a service animal that is specially trained to assist an individual who is blind, deaf or has a severe impairment that markedly restricts the use of the individual’s arms or legs.
Budget 2008 also proposes to clarify the METC provisions regarding the eligibility of drugs and medications.
Currently, drugs, medications and other preparations are eligible for the METC when they are both prescribed by a recognized medical practitioner (or a dentist) and recorded by a pharmacist. These two requirements are intended to ensure that only costs for substances not generally available to the public and required for medical reasons receive tax relief. However, recent court decisions have interpreted this measure to include, in some cases, the cost of vitamins, supplements and drugs that could otherwise be purchased without a prescription. Such an interpretation goes beyond the policy intent of the METC.
Budget 2008 therefore proposes to clarify the wording for eligible drugs and medications to ensure that those that may be purchased without a prescription remain ineligible.
The additions to the list of eligible expenses for the METC will be effective for the 2008 and subsequent taxation years. The clarification in respect of eligible drugs and medications will be effective for expenses incurred after February 26, 2008.
Budget 2007 introduced the Registered Disability Savings Plan (RDSP) to help parents and others save to ensure the long-term financial security of a child with a severe disability. Legislation to implement the RDSP has received Royal Assent and regulations under the Canada Disability Savings Act, providing details of the requirements for Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs) to be paid to an RDSP, are being finalized. The Government is working with financial institutions to put the necessary administrative mechanisms in place to allow them to offer RDSPs, with the objective that plans be made available in 2008.
To ensure that RDSPs meet the needs of Canadians with severe disabilities and their families, the RDSP program will be reviewed three years after plans become operational, as recommended in the December 2006 report of the Expert Panel on Financial Security for Children with Severe Disabilities.
For an individual to qualify as a beneficiary under an RDSP, the individual must be eligible for the Disability Tax Credit (DTC). There are two conditions that must be met for an individual to be DTC-eligible:
If an RDSP beneficiary ceases to be DTC-eligible, the RDSP rules require that the proceeds of the plan (less any repayment of CDSGs and CDSBs) be paid out to the beneficiary and the plan collapsed.
An important consideration for a parent establishing an RDSP for a child with a severe disability is assurance that the savings in the plan will serve their intended purpose of ensuring the long-term financial security of their child. In this regard, despite the fact that only a plan holder can collapse a plan, concerns have been raised over the possibility that the beneficiary of a parent-initiated plan who continues to meet the DTC criteria related to the effects of an impairment might be able to force the premature collapse of the plan by rescinding his or her DTC certification. This would enable the beneficiary to gain full access to the RDSP savings (less any required repayments of CDSGs and CDSBs), which could be contrary to the wishes of the parent.
To address this concern and provide greater certainty for parents planning to establish an RDSP for their child, Budget 2008 proposes to amend the RDSP rule that provides for a mandatory collapse of the plan if the beneficiary ceases to be DTC-eligible, to provide instead for a mandatory collapse of the plan only where the beneficiary’s condition has factually improved to the extent that the beneficiary no longer qualifies for the DTC. This change will not affect a plan holder’s ability to voluntarily collapse the plan.
The measure will be effective for 2008 and subsequent taxation years.
Flow-through shares allow companies to renounce or flow through tax expenses associated with their Canadian exploration activities to investors, who can deduct the expenses in calculating their own taxable income. This facilitates the raising of equity to fund exploration by enabling companies to sell their shares at a premium. The mineral exploration tax credit is an additional benefit, available to individuals who invest in flow-through shares, equal to 15 per cent of specified mineral exploration expenses incurred in Canada and renounced to them. After expiring at the end of 2005, the temporary credit was re-introduced effective May 2, 2006 and is currently scheduled to expire at the end of March 2008.
Budget 2008 proposes to extend eligibility for the mineral exploration tax credit to flow-through share agreements entered into on or before March 31, 2009. Under the existing look-back rule, funds raised in one calendar year with the benefit of the credit can be spent on eligible exploration up to the end of the following calendar year. Therefore, funds raised with the credit during the first three months of 2009 can support eligible exploration until the end of 2010.
Mineral exploration, as well as new mining and related processing activity that could follow from successful exploration efforts, can be associated with a variety of environmental impacts to soil, water and air. All such activity, however, is subject to applicable federal and provincial environmental regulations, including project-specific environmental assessments where required.
When a taxpayer donates certain publicly traded securities of a Canadian or foreign company to a registered charity or other qualified donee, the full value of the securities is eligible for a charitable donations tax credit (individuals) or deduction (corporations), and any gain on the securities is exempt from capital gains tax.
Budget 2008 proposes to extend the existing capital gains tax exemption for donations of publicly traded securities to capital gains realized on the exchange of unlisted securities that are shares or partnership interests (other than prescribed interests in a partnership) for publicly traded securities, where
Special rules will apply where the exchangeable securities are partnership interests, in order to ensure that only capital gains that reflect economic appreciation of the partnership interests are exempted, and not gains that arise because of various reductions to the adjusted cost base of partnership interests. In general, the taxable capital gain to be recognized on the exchange of a partnership interest under this proposal will be the lesser of the taxable capital gain otherwise determined and one-half of the amount, if any, by which the cost to the donor of the exchanged units exceeds the adjusted cost base to the donor of those interests (determined without reference to distributions of partnership capital).
This measure will apply to donations made on or after February 26, 2008.
Budget 2007 introduced a capital gains exemption for donations of publicly-listed securities to private charitable foundations. To limit potential opportunities for persons connected with a foundation to use their own and the foundation’s shareholdings for their own benefit, Budget 2007 introduced an excess corporate holdings regime for private foundations. All private foundations are subject to the excess corporate holdings regime in respect of both publicly-listed and unlisted shares. The regime places limits on foundations’ share ownership that take into account the holdings of relevant persons, that is, generally those not dealing at arm’s length with the foundation.
A foundation is not subject to the rules in respect of a class of shares if it owns two per cent or less of the class. Where a foundation and relevant persons together own more than 20 per cent of a class, the foundation is required to divest itself of enough shares such that it meets the two per cent limit or it and relevant persons together do not exceed the 20 per cent limit. Transitional rules allow foundations to divest themselves, over a period of from five to 20 years, of excess corporate shares held on March 18, 2007.
No obligation to divest is imposed in respect of shares, known as "entrusted shares", that were donated before March 19, 2007 and that are subject to a condition that they be retained by the foundation. The same provisions apply to any donation made on or after March 19, 2007 and before March 19, 2012 pursuant to the terms of a will signed, or an inter vivos trust settled, before March 19, 2007 that included such a condition and was not amended after that date. However, entrusted shares are taken into account in determining the application of the excess corporate holdings regime to other shares of the same class.
Budget 2008 proposes to exempt from this regime certain holdings of shares that are not listed on a designated stock exchange ("unlisted shares") and that were held on March 18, 2007. Other unlisted shares, and all listed shares, held on March 18, 2007 will continue to be subject to the transitional excess corporate holdings rules. Budget 2008 also introduces technical amendments dealing with entrusted shares and the substitution of shareholdings with new shareholdings, and proposes to extend an existing anti-avoidance rule in respect of the holding of an interest in a corporation via a trust.
Except as indicated below, these amendments will apply to taxation years that begin on or after March 19, 2007.
Unlisted shares can be difficult to sell: they often represent unique assets with no ready market. To provide foundations with relief in respect of unlisted shares held on March 18, 2007, it is proposed that foundations generally not be required to divest these "exempt" shares, as is already the case for entrusted shares. In particular, for the purpose of calculating a private foundation’s divestment obligation at the end of a taxation year, unlisted shares in a corporation held on March 18, 2007 by the foundation will be considered exempt shares unless, at that time,
If a share becomes or ceases to be exempt under these conditions at the end of any taxation year, that change in status will not affect the foundation’s divestment obligation for any previous taxation year. Shares that cease to be exempt will generally be treated as if they had not been exempt as of March 18, 2007, and therefore subject to the existing transitional rules, for taxation years of a foundation that end after the time that the shares cease to be exempt. However, such shares could once again become exempt if, after that time, the shares again meet the conditions for exempt shares.
Under these rules, a controlled corporation will never be required to divest itself of shares. However, as explained above, a controlled corporation’s holdings of non-exempt shares could result in a divestment obligation on a foundation in respect of unlisted shares owned by the foundation. Alternatively, the controlled corporation could opt to divest itself of non-exempt shares in order to eliminate the divestment obligation of the foundation.
As with entrusted shares, all exempt shares will be taken into account in applying the excess corporate holdings regime to other shareholdings. Where a foundation divests itself of exempt shares, its exemption is reduced accordingly: a foundation cannot consider that its original level of shareholdings on March 18, 2007 will allow it to reacquire shares by using the forgone portion of its exemption (subject to the substituted share rules described below). If a foundation holds both exempt and non-exempt shares of the same class, the non-exempt shares will be presumed to be divested first.
A trust may be a relevant person in respect of a private foundation. In such a case, shares in a corporation held by the trust are taken into account in applying the excess corporate holdings regime and its transitional provisions.
In addition, Budget 2008 proposes new rules to attribute to a foundation, in certain circumstances, shares held by a trust on March 18, 2007.
In applying the transitional rules for the excess corporate holdings regime (including the exemption for unlisted shares) a foundation will be deemed to own shares held by a trust on March 18, 2007, in proportion to the value of the foundation’s interest in the trust, where the foundation is the sole trustee of the trust or the following conditions are met:
Where such a trust holds entrusted shares or exempt shares, the excess corporate holdings rules will respect the terms under which the trust holds the actual shares. For example, shares held by the trust that are subject to a condition that they may not be disposed of will not, by themselves, result in a divestment obligation to the foundation.
This measure will apply in respect of private foundations’ divestment obligations for taxation years that begin on or after February 26, 2008.
It is proposed that the concept of "substituted shares" be introduced. Substituted shares will generally be shares acquired by a person in the context of a corporate reorganization, in exchange for other shares. In particular, this would apply to shares acquired in the course of a transaction to which section 51, subparagraph 85.1(1)(a)(i) or section 86 or 87 of the Income Tax Act applies. Substituted shares will be treated the same as the shares for which they were exchanged for the purposes of
The excess corporate holdings rules require a divestment if a foundation holds more than two per cent of the non-exempt outstanding shares of a given class, and the foundation and all relevant persons together hold more than 20 per cent of that class. The divestment obligation is an obligation upon the foundation. However, in certain circumstances where a foundation holds entrusted shares, the existing rules could impose a divestment obligation that a foundation cannot itself meet, implying that a relevant person is required to divest. Budget 2008 proposes an amendment to correct this ambiguity and make clear that entrusted shares need not be divested in these circumstances.
The excess corporate holdings regime includes anti-avoidance rules that address attempts by private foundations to circumvent the regime’s reporting or divestment obligations.
Budget 2008 proposes to extend these anti-avoidance provisions to certain inappropriate uses of trusts. In particular, the provisions will apply to circumstances in which it may reasonably be considered that one of the purposes of the establishment of a trust is to hold or acquire shares or other interests or rights in one or more corporations that would, if they were held by a beneficiary of the trust that is a private foundation or a relevant person, result in a divestment obligation to the foundation. In such a case, the foundation or relevant person will be deemed to hold shares in the corporation that reflect the value of their indirect interest in the corporation.
This anti-avoidance provision will apply in respect of private foundations’ divestment obligations for taxation years that begin on or after February 26, 2008.
Income earned by corporations is subject to corporate income tax and, on distribution as dividends to individuals, personal income tax. The result is that dividends received by Canadian taxpayers are taxed at both the corporate and the personal levels. The personal income tax system, through the dividend tax credit (DTC), compensates the individual for corporate income taxes that are presumed to have been paid.
The DTC mechanism calculates a proxy for pre-tax corporate profits and then provides a tax credit to individuals in recognition of corporate level tax. Under this approach an individual is first required to include the grossed-up amount of dividends in income. Using this gross-up the tax system in effect treats the individual as having earned directly the amount that the corporation is assumed to have earned in order to pay the dividend. The DTC then compensates the individual for corporate-level tax on that amount. This serves to integrate the personal and corporate tax systems at the federal level.
Since 2006, "eligible dividends" (generally those received from large corporations) have been subject to a higher gross-up and an enhanced DTC, in recognition that these dividends are generally paid out of income that has been taxed at the general corporate rate, rather than income that has borne a special tax rate such as that for small business corporations.
The 2007 Economic Statement reduced the general corporate income tax rate to 15 per cent by 2012 and stated that consideration would be given to adjusting the enhanced DTC to ensure the appropriate tax treatment of dividend income.
Budget 2008 proposes to adjust the dividend gross-up factor and DTC rate for eligible dividends, to reflect those corporate income tax rate reductions.
Specifically, Budget 2008 proposes to reduce the eligible dividend gross-up from its current level of 45 per cent to 44 per cent effective January 1, 2010, 41 per cent effective January 1, 2011, and 38 per cent effective January 1, 2012. The enhanced DTC rate will also change on the same schedule, moving from 11/18 of the gross-up amount to 10/17, 13/23 and 6/11.
Expressed as a percentage of an eligible dividend amount received, the effective credit will as a result of these changes remain in line with the general corporate income tax rate of 18 per cent in 2010, 16.5 per cent in 2011, and 15 per cent in 2012.
Enhanced DTC Adjustments
The federal income tax incentives for Scientific Research and Experimental Development (SR&ED) provide broad-based support for SR&ED performed in every industrial sector in Canada, and support small businesses in the performance of SR&ED. Under the SR&ED program, eligible current and capital expenditures are fully deductible. In addition, these expenditures are eligible for an investment tax credit (ITC) if they are incurred in Canada. There are two rates of ITCs for SR&ED. The general rate is 20 per cent and there is an enhanced rate of 35 per cent for small Canadian-controlled private corporations (CCPCs).
CCPCs are eligible to claim the enhanced ITC rate of 35 per cent on up to $2 million of qualified SR&ED expenditures annually. Unused ITCs are fully refundable in respect of the first $2 million of current expenses per year. Unused ITCs earned in respect of current expenses exceeding the $2 million limit, and in respect of capital expenditures, qualify for a 40 per cent refund. The $2 million expenditure limit is phased out for CCPCs whose taxable income for the previous taxation year is between $400,000 and $600,000 or whose taxable capital employed in Canada for the previous taxation year is between $10 million and $15 million.
Consultations were undertaken in 2007 on ways to make the SR&ED program more effective for Canadian businesses. In response to the comments provided by stakeholders on areas for improvement, the Government is proposing several improvements to the SR&ED program and its administration. The administrative improvements are discussed in Chapter 3.
Budget 2008 proposes to increase the expenditure limit for the enhanced ITC rate of 35 per cent, and to provide the enhanced SR&ED ITC to medium-sized CCPCs by increasing the phase-out ranges on taxable income and taxable capital.
Budget 2008 proposes to increase the maximum qualified expenditures on which the enhanced 35 per cent rate can be earned to $3 million from $2 million. As a result of the increase in the expenditure limit to $3 million, the maximum amount of fully refundable SR&ED ITCs available for qualifying CCPCs will increase from $700,000 to $1.05 million.
Budget 2008 proposes to increase the upper limit of the phase-out range for prior-year taxable income to $700,000 from $600,000. This change means that the expenditure limit will continue to be reduced by $10 for each $1 by which taxable income for the previous taxation year exceeded $400,000.
Budget 2008 also proposes to increase the upper limit of the phase-out range for prior-year taxable capital to $50 million from $15 million.
Current and Proposed Expenditure Limit and
Taxable Income and Capital Phase-Out Ranges
|Expenditure Limit||$2 million||$3 million|
|Phase-Out Range||$400,000 – $600,000||$400,000 – $700,000|
|Phase-Out Range||$10 million – $15 million||$10 million – $50 million|
Illustrative Examples of Maximum ITCs Earned at the Enhanced
35-Per-Cent Rate Under the Current and Proposed Systems
of Fully Refundable
of Fully Refundable
Proposed Structure: Maximum Fully Refundable
ITCs Earned With $3 million Expenditure Limit
|Taxable Income ($ thousands)|
The proposed increases to the expenditure limit, and the taxable income and taxable capital phase-out limits, will be applicable for taxation years that end on or after February 26, 2008, pro-rated based on the number of days in that taxation year that are after February 25, 2008.
Currently, expenditures incurred on SR&ED carried on outside Canada do not qualify for the SR&ED ITC. Budget 2008 proposes to recognize, for the purpose of the SR&ED ITC, certain salary or wages incurred by a taxpayer in respect of SR&ED carried on outside Canada.
Specifically, the SR&ED ITC will be available to a taxpayer for permissible salary or wages incurred by the taxpayer in respect of Canadian-resident employees carrying on SR&ED activities outside Canada. The activities outside Canada must be directly undertaken by the taxpayer and must be done solely in support of SR&ED carried on by the taxpayer in Canada. Permissible salary or wages incurred by a taxpayer in a taxation year will be limited to 10 per cent of the total salary and wages directly attributable to SR&ED carried on in Canada by the taxpayer during the year.
In addition, permissible salary or wages will not include remuneration based on profits or bonus, or salary or wages subject to an income or profits tax imposed by a foreign country.
The proposal will apply to salary or wages incurred by a taxpayer in respect of SR&ED carried on outside Canada on or after February 26, 2008. For the first taxation year ending on or after February 26, 2008, the 10 per cent limit will be pro-rated based on the number of days that are in that taxation year that are after February 25, 2008.
In general, machinery and equipment used in manufacturing or processing are included in Class 43 of Schedule II to the Income Tax Regulations and are eligible for a 30-per-cent declining-balance capital cost allowance (CCA) rate. Budget 2007 proposed a temporary incentive for eligible machinery and equipment acquired on or after March 19, 2007 and before 2009 that are used in manufacturing or processing. Under regulations proposed to implement this incentive, machinery and equipment eligible for the temporary incentive are included in Class 29 in Schedule II to the Income Tax Regulations and are eligible for a 50-per-cent straight-line CCA rate.
Budget 2008 proposes to extend accelerated CCA treatment for investment in the manufacturing and processing sector for three additional years. This will include a one-year extension of the 50-per-cent straight-line accelerated CCA, followed by a two-year period during which accelerated CCA will be provided on a declining basis.
In particular, businesses will be allowed to apply the current accelerated 50-per-cent straight-line CCA treatment to investment in manufacturing and processing machinery and equipment acquired in 2009 that would otherwise be included in Class 43. Such assets will be included in Class 29.
In addition, Budget 2008 proposes a two-year transition that will apply to eligible assets acquired in calendar years 2010 and 2011. Eligible assets acquired in 2010 will generally be eligible for a 50-per-cent declining-balance rate in the first taxation year ending after the assets are acquired, a 40-per-cent declining-balance rate in the following taxation year and the regular 30-per-cent declining balance rate thereafter. Eligible assets acquired in 2011 will generally be eligible for a 40-per-cent declining-balance rate in the first taxation year ending after the assets are acquired and the regular 30-per-cent declining-balance treatment thereafter.
To implement this transition, eligible assets acquired in 2010 and 2011 will be placed in a separate Class 43 for each year and will be eligible for the regular 30-per-cent declining balance rate. An asset acquired in 2010 will be eligible for an additional allowance of 20 per cent in the first taxation year ending after the asset is acquired and in which the asset is first available for use, and an additional allowance of 10 per cent in the following taxation year. As well, an asset acquired in 2011 will be eligible for an additional allowance of 10 per cent in the first taxation year ending after the asset is acquired and in which the asset is first available for use by the taxpayer.
In general, once the additional allowances no longer apply, the separate classes will be terminated and the assets will be re-integrated into the existing CCA system.
The 30-per-cent declining-balance rate will apply to all Class 43 assets acquired after 2011.
The "half-year rule", which allows half the CCA write-off otherwise available in the year the asset is first available for use by the taxpayer, will apply to the properties that are subject to this measure, including the additional allowance.
Aco, a manufacturing corporation, has a taxation year that coincides with the calendar year. In the examples below, machinery that Aco purchases is available for use in the year of acquisition (and the half-year rule applies for that year).
Asset acquired in 2009:
In 2009, Aco acquires eligible machinery that will qualify for a 50-per-cent straight-line rate in respect of that machinery.
Asset acquired in 2010:
In 2010, Aco acquires eligible machinery that will qualify for (a) a 50-per-cent declining-balance CCA rate (made up of the regular 30-per-cent rate and an additional allowance of 20 per cent) in the first taxation year ending after the asset is acquired (i.e., 2010); (b) a 40-per-cent declining-balance rate (made up of the regular 30-per-cent rate and an additional allowance of 10 per cent) in the following taxation year (i.e., 2011); and (c) a 30-per-cent declining-balance rate in subsequent years.
Asset acquired in 2011:
In 2011, Aco acquires eligible machinery that will qualify for (a) a 40-per-cent declining-balance CCA rate (comprised of the regular 30-per-cent rate and an additional allowance of 10 per cent) in the first taxation year ending after the asset is acquired (i.e., 2011); and (b) a 30-per-cent declining-balance rate in subsequent years.
Under the capital cost allowance (CCA) regime in the income tax system, Class 43.2 of Schedule II to the Income Tax Regulations provides accelerated CCA (50 per cent per year on a declining balance basis) for specified clean energy generation equipment acquired before 2020. The class incorporates by reference a detailed list of eligible equipment that generates energy in the form of electricity or heat, by:
Providing accelerated CCA in this context is an explicit 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.
CCA Class 43.2 was introduced in 2005 and is currently available for assets acquired on or after February 23, 2005 and before 2020. For assets acquired before February 23, 2005, accelerated CCA is provided under Class 43.1 (30 per cent). The eligibility criteria for these classes are generally the same except that cogeneration systems that use fossil fuels must meet a higher efficiency standard in the case of fossil fuel for Class 43.2 than for Class 43.1. Systems that meet only the lower efficiency standard continue to be eligible for Class 43.1.
Class 43.2 covers a variety of stationary clean energy generation equipment that is used to produce electricity or heat, or used to produce certain fuels from waste that are in turn used to produce electricity or heat. Subject to the detailed rules in the regulations, eligible equipment includes:
Fuels from Waste
Where the majority of the tangible property in a project is eligible for Class 43.2, certain intangible project start-up expenses (e.g. engineering and design work, 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 2008 proposes a number of measures to expand eligibility for Class 43.2 to important additional applications.
A typical ground source heat pump (GSHP) system consists of an underground loop through which an energy transfer fluid is circulated in order to collect solar heat from the ground. A heat pump gathers thermal energy from the loop and upgrades it for uses such as space heating or hot water. In the summer, GSHPs can be reversed to provide air cooling.
Currently, GSHP equipment is eligible for Class 43.2 treatment only if it is used to generate heat for use in an industrial process or a greenhouse. The industrial applications of GSHP systems are limited, however, because these systems typically produce low grade heat that is suitable primarily for space heating and hot water.
Budget 2008 proposes to broaden Class 43.2 to include GSHP systems used in applications other than industrial processes or greenhouses, such as space and water heating (but not including swimming pool heating) in industrial, commercial and residential buildings used for an income-earning purpose.
Qualifying GSHP system equipment will include underground piping systems, heat pumps, and ancillary equipment. Back-up energy equipment that supplements a GSHP system and equipment that distributes energy within a building will not be included. Installations will be required to meet relevant Canadian Standards Association (CSA) standards for earth energy systems in order to be eligible for Class 43.2.
By encouraging investment in GSHP systems, in cases where GSHP systems displace use of fossil fuels, this measure will contribute to a reduction in emissions of greenhouse gases and air pollutants. In cases where GSHP systems do not displace fossil fuels because heating needs are predominantly met by electrical heating from a no-emission source, use of GSHP systems can reduce demand for electricity by using it more efficiently.
These changes will apply to eligible assets acquired on or after February 26, 2008.
Class 43.2 includes equipment used to produce biogas through anaerobic digestion of specified organic wastes. A biogas plant consists primarily of a large heated airtight tank in which bacteria act on the organic waste to produce a gas composed mainly of methane. The gas is cleaned and can then be burned, like natural gas, to produce electricity or heat. Biogas facilities contribute to a reduction in greenhouse gas emissions both by capturing and burning methane, a potent greenhouse gas, and by potentially displacing the use of fossil fuels for energy generation. Further processing of the residual waste from biogas production may be undertaken to improve its quality for use as fertilizer.
Using a variety of feedstocks in an anaerobic digester can improve its efficiency by increasing the amount of biogas produced from a given amount of input, making the project more economic and further encouraging the use of fuel from waste. Budget 2007 announced an expansion of the list of feedstocks for eligible biogas production systems from manure to include food waste, plant residue and wood waste. Budget 2008 proposes to further expand this list to include animal matter, which is a good source of biogas, and sludge from a licensed sewage treatment facility, which can help stabilize the biogas production process. To ensure environmental and health standards are met, eligibility will be conditional on such inputs being disposed of in accordance with applicable federal and provincial laws.
These changes will apply to eligible assets acquired on or after February 26, 2008.
In many instances, Class 43.2 allows a taxpayer to sell the output—heat, electricity, or fuel from waste—produced by the eligible equipment. There are, however, several instances where the heat output or fuel produced from waste is required to be used for a specified purpose by a taxpayer:
Budget 2008 proposes to expand the eligibility criteria of Class 43.2 for equipment used to produce heat from waste sources and equipment used to produce bio-oil by removing the requirement that the industrial process, greenhouse, electrical generating facility, or cogeneration facility be operated by the taxpayer. Allowing the taxpayer to sell the bio-oil or heat from waste sources to third parties for the designated uses is consistent with the intent of Class 43.2 in diverting materials that would otherwise be waste into the energy stream. For equipment used to produce bio-oil, eligibility will be expanded to include use of the bio-oil to produce heat for an industrial process or a greenhouse.
Budget 2008 also proposes to remove the requirements that biogas produced by a taxpayer’s eligible anaerobic digester system be used by the taxpayer and that it be used to produce heat for use in an industrial process or a greenhouse or to produce electricity. This will allow biogas to displace natural gas in applications such as commercial and residential space and water heating, thereby reducing fossil fuel use. In addition, biogas will be added as an eligible fuel for waste-fuelled thermal and electrical energy generation systems. This will ensure that equipment using purchased biogas to produce heat for use in an industrial process or a greenhouse, or to produce electricity, will qualify for Class 43.2.
By expanding the range of business models in which technologies eligible for the Class 43.2 incentive can be used, these measures will help to increase the viability of waste-to-energy systems. By promoting investment in these technologies, these measures will contribute to a reduction in greenhouse gas emissions, increased diversification of Canada’s energy supply, and the diversion into energy generation of waste materials.
These changes will apply to eligible assets acquired on or after February 26, 2008.
A portion of the capital cost of depreciable property is deductible as capital cost allowance (CCA) each year, with the CCA rate for each type of property set out in the Income Tax Regulations. Alignment of CCA rates with the useful life of assets ensures that the tax system accurately allocates the cost of capital assets over their useful lives, resulting in a better measurement of income for tax purposes.
The useful life of assets can change over time for several reasons, including technological change. The assessment of CCA rates is therefore an ongoing process. As part of this continuing review, Budget 2008 proposes adjustments to CCA rates for railway locomotives and carbon dioxide pipelines and related pumping and compression equipment on such pipelines.
The Government will continue to assess the appropriateness of CCA rates to ensure that they reflect, as closely as possible, the useful life of assets.
Railway locomotives are currently eligible for a 15-per-cent CCA rate under paragraph (i) of Class 7 of Schedule II to the Income Tax Regulations.
A review of the CCA rate for railway locomotives indicates that a higher CCA rate would better reflect the useful life of these assets. Budget 2008 proposes to increase the CCA rate for railway locomotives acquired on or after February 26, 2008, that have neither been used, nor acquired for use, before February 26, 2008, to 30 per cent from 15 per cent. Expenses of a capital nature that are incurred on or after February 26, 2008 for the refurbishment or reconditioning of a railway locomotive will also be eligible for the 30-per-cent CCA rate.
For income tax purposes, carbon dioxide (CO2) pipelines are generally eligible for a 4-per-cent CCA rate under paragraph (l) of Class 1 of Schedule II to the Income Tax Regulations. Budget 2008 proposes that the CCA rate for CO2 pipelines be increased to 8 per cent, the same rate that applies to oil and gas transmission pipelines, to reflect better the typical useful life of these assets. Included will be control and monitoring devices, valves and other ancillary equipment (other than pumping and compression equipment on the pipeline, discussed below). This change will not apply to buildings or other structures or to gas or oil well equipment.
Budget 2008 also proposes to set the CCA rate for pumping and compression equipment, and equipment ancillary to it, on a CO2 pipeline at 15 per cent, consistent with the rate that applies to such equipment on oil and gas pipelines, to reflect better the typical useful life of these assets. This change will not apply to buildings or other structures or to gas or oil well equipment.
The new CCA rates for CO2 pipelines and pumping and compression equipment on CO2 pipelines will apply to property acquired on or after February 26, 2008.
Taxpayers are required to withhold and remit source deductions on certain payments. For example, employers are required to withhold certain amounts from their employees’ wages and salaries (e.g., employee taxes, Canada Pension Plan and Employment Insurance premiums) and to remit those amounts to the Receiver General for Canada on a timely basis. The frequency of remittances depends on a remitter’s average monthly withholding amount (as defined by the Income Tax Regulations). For example, large remitters may be required to remit their payroll withholdings up to four times a month.
Two changes are proposed to the current withholding requirements relating to:
Corresponding changes will also be made to the Employment Insurance Act and the Canada Pension Plan.
Currently, the Income Tax Act provides that, if a remittance is late, the remitter must pay a penalty equal to 10 per cent of the amount required to be remitted, or 20 per cent if the failure to remit is made knowingly or in circumstances that amount to gross negligence. The penalty applies in full even if the remittance is only one day late. In addition, interest is charged on both until the remittance and the related penalty are paid.
In 2003, the Canada Revenue Agency (CRA) created a "pilot project" for payroll remittances that replaces the 10 per cent fixed penalty with a graduated penalty ranging from 3 per cent to 10 per cent of the amount required to be remitted, depending on the lateness of a remittance. The penalty is 3 per cent of the amount required to be remitted if the remittance is one to three days late; 5 per cent if it is four or five days late; 7 per cent if it is six or seven days late; and 10 per cent if it is more than seven days late. The pilot project appears to have worked well and led to fairer and more appropriate results. Between 2003 and 2006, late remittances declined, despite payroll remittances increasing during the period.
The government proposes to enact the graduated penalty regime described above, effective for remittances that are due on or after February 26, 2008.
Large remitters are subject to the existing penalties described above if they fail to remit their withholdings directly to a financial institution. This rule was enacted in 1992 in response to some large remitters’ practice of intentionally remitting their withholdings on time but in a manner that delayed the ability of the CRA to deposit withholdings in the Government’s account.
The enforcement of the mandatory financial institution remittance requirement has resulted in certain unintended effects. In particular, remitters may be penalized for remitting their withholdings directly to the CRA, even if they do so well before the due date—in which case there will ordinarily be no question of delay arising with respect to the deposit in the Government’s account.
In response, the government is proposing that a remittance that is received by the CRA at least one full day before the due date will be considered to be in compliance with the requirement that it be remitted to a financial institution. The graduated penalties regime described above will also apply to late remittances under this rule. These changes apply to remittances due on or after February 26, 2008.
The Canada Revenue Agency (CRA) uses the Business Number (BN) as the main identifier for a specific business or organization and for tracking information relating to that business or organization. The BN is also used to determine eligibility for government programs and promote voluntary compliance with the tax law. The use of the BN ensures reduced compliance costs for businesses through integrated service delivery and greater government efficiency by sharing information and computing resources.
The BN and BN-related information cannot be disclosed to anyone by CRA without express statutory authorization. Currently CRA is able to share a limited amount of BN-related information with certain federal and provincial government departments (BN Partners).
As part of the government’s initiative to reduce the paper burden on small business, Budget 2008 proposes to:
While this measure promises to improve efficiency and reduce paper burden on
businesses, it will involve more information sharing by government. Privacy
considerations regarding this initiative have been carefully considered. The CRA
will be precluded from sharing any personal information naming individuals
except where it relates to a business activity and, in any case, only the
business name and business number may be released to the public. All other
BN-related information will be available only to BN Partners. In addition, CRA sharing of
BN-related information with BN Partners will occur only pursuant to a Memorandum of Understanding with the BN Partner to ensure that security issues have been addressed and that the information is used by the BN Partner only in relation to the intended program or activity.
The legislation to implement this measure will be developed in the coming months, in consultation with the Office of the Privacy Commissioner.
Where a "taxable Canadian property" (TCP)—that is, a property the non-resident’s income or gain from the disposition of which may be taxable in Canada—is disposed of by a non-resident, generally the purchaser must withhold a portion of the amount paid, and remit it to the Government on account of the non-resident vendor’s possible Canadian tax liability. However, the purchaser’s obligation to withhold does not apply if the non-resident vendor obtains a "clearance certificate" from the Canada Revenue Agency (CRA) or the property is "excluded property" (most business inventory, listed shares, mutual fund trust units, etc.). To obtain a clearance certificate, the non-resident vendor needs to remit an amount, post security, or satisfy the CRA that no tax will be owing. These rules are contained in section 116 of the Income Tax Act (the Act).
Most tax treaties allow Canada to tax capital gains only on Canadian real and resource properties and on shares of companies that derive most of their value from such properties. (The otherwise taxable properties the income or gains on which a treaty prevents Canada from taxing are called "treaty-protected properties".)
Currently, section 116 of the Act and its associated rules take no account of the effect of tax treaties. Accordingly, Budget 2008 proposes three changes to streamline and simplify the rules that apply to non-residents’ dispositions of TCP. These changes will make the section 116 process more efficient.
The first change will exempt from the withholding requirements a disposition of property if the property is, at the time of its disposition, a treaty-protected property (as defined in subsection 248(1) of the Act) and, in the case of a disposition between related persons, the purchaser sends to the Minister of National Revenue, on or before the day that is 30 days after the date of the disposition, a notice setting out basic information about the transaction and the vendor. This change does not relieve any person of tax, but relieves the section 116 requirements in a way that matches the protection afforded by the applicable tax treaty, if any.
The second change will expand the scope of an existing "reasonable inquiry" protection for purchasers of TCP from non-resident vendors. This "safe-harbour" provision currently applies only in respect of the vendor’s residence in Canada: if, after reasonable inquiry, the purchaser has no reason to believe that the vendor is non-resident, the purchaser is not liable for failing to withhold under section 116 of the Act. Budget 2008 proposes to expand this safe-harbour provision to ensure that the purchaser of property from a non-resident vendor need not withhold if:
The third change will exempt certain non-residents from filing a Canadian income tax return in respect of dispositions of TCP.
Currently, a non-resident must file a Canadian income tax return for any taxation year in which the non-resident disposes of a TCP, even if the non-resident can claim tax treaty benefits or no Canadian income tax is actually payable. Budget 2008 proposes to exempt non-residents from filing Canadian income tax returns for any taxation year in which the non-resident satisfies all of the following criteria:
(a) "excluded property" for section 116 purposes—which, under the first change described above, will now include certain treaty-protected property, or
(b) a property in respect of the disposition of which the Minister of National Revenue has issued to the non-resident a certificate under section 116 of the Act.
These changes will apply in respect of dispositions that take place after 2008.
Donations by corporations of property held in inventory to Canadian registered charities and other qualified donees are eligible for a charitable donation deduction equal to the fair market value of the property gifted. However, since the fair market value of the property is also included in business income, the net deduction to the corporation is the cost of the property. This result places the corporation in the same after-tax position whether the inventory is sold, donated or otherwise disposed of.
To encourage the donation of excess inventories of medicine, Budget 2007 introduced an incentive for corporations to participate in international programs for the distribution of medicines. This measure allows corporations that make donations from their inventory to claim a special additional deduction equal to the lesser of:
The additional deduction is currently available only when the donee is a registered charity that has received a disbursement under a program of the Canadian International Development Agency (CIDA) and the gift is made in respect of activities of the charity outside of Canada. Budget 2008 proposes to change the definition of an eligible charity for this purpose. An eligible charity will be a registered charity that, in the opinion of the Minister of International Cooperation, meets conditions prescribed by regulation. (In the event that no such Minister has been appointed, the opinion will be required of the Minister responsible for CIDA.) The main purpose of these conditions will be to ensure that eligible charities:
Currently, the additional deduction is available in respect of medicines that meet the requirements of the Food and Drugs Act even if those medicines’ expiry date is imminent. Budget 2008 proposes that eligible gifts must be donated at least six months prior to the expiration date of the medicines.
These changes will apply to eligible donations of medicines made on or after July 1, 2008.
"Specified Investment Flow-Through" trusts and partnerships (SIFTs)—publicly traded income trusts (including business and energy trusts) and partnerships—are subject to a tax (SIFT Tax) on their distributions of what are termed "non-portfolio earnings". (For SIFTs that existed on October 31, 2006, the SIFT Tax will not apply until 2011, as long as their growth does not exceed certain limits.)
The rate of the SIFT Tax is made up of two components. The first is equal to the federal general corporate tax rate, and will be reduced in step with the reduction of that federal corporate tax rate to 15 per cent by 2012. The second component is an additional tax in lieu of provincial tax: its rate is currently 13 per cent, which approximates the average provincial corporate income tax rate. Revenues from the additional rate are to be distributed to provincial governments.
Budget 2008 proposes that for a SIFT’s 2009 and subsequent taxation years the provincial component of the SIFT Tax (and thus the provincial share of the resulting revenue) be based instead on the general provincial corporate income tax rate in each province in which the SIFT has a permanent establishment. This will ensure that the rate of the SIFT Tax is the same as the federal-provincial tax rate for large public corporations with the same activities.
To determine this rate for a particular SIFT, the taxable distributions of the SIFT will be notionally allocated to provinces according to the general corporate taxable income allocation formula. Specifically, the SIFT’s taxable distributions will be allocated to provinces by taking half of the aggregate of:
Applying the relevant provincial tax rates to these notionally allocated amounts will generate a dollar amount that, when expressed as a proportion of the SIFT’s total taxable distributions, will provide an average rate of provincial tax. This average rate will in turn be the provincial component of the SIFT Tax rate of the particular SIFT for the taxation year.
Taxable distributions that are not allocated to any province would instead be subject to a 10 per cent rate constituting the provincial component. The provincial tax rate applied to taxable distributions allocated to the Province of Quebec will be deemed to be nil to take into account the SIFT Tax imposed by that province.
There are two key policies underlying the goods and services tax/harmonized sales tax (GST/HST) treatment of health-related goods and services. First, basic health care services are exempt from the GST/HST. This means that suppliers of exempt health care services do not charge GST/HST to patients, but they cannot claim input tax credits to recover the GST/HST paid on their inputs. Second, prescription drugs and certain medical devices are zero-rated. This means that suppliers do not charge purchasers tax on these drugs and devices and are entitled to claim input tax credits.
Budget 2008 proposes to improve the application of the GST/HST to a range of health care services, prescription drugs and medical devices to reflect the evolving nature of the health sector. A number of clarifying measures are also proposed.
Individuals with a disorder or disability can require training to assist them in coping with their disorder or disability. For instance, children with autism spectrum disorder often receive training based upon methods that apply psychology-based principles of Applied Behavioural Analysis to facilitate new behaviours and teach learning and social skills. In many circumstances, current exemptions for basic health and education services relieve such specially-designed training from the GST/HST. Inconsistent tax treatment can, however, occur because the exemptions apply to some specially-designed training but not to other similar training.
Budget 2008 proposes to expand the exemptions for basic health and education services to include training that is specially designed to assist individuals to cope with the effects of a disorder or disability if:
The exemption will apply to supplies of specially-designed training made after February 26, 2008.
Nursing services provided in institutional and residential settings by registered or licensed nurses are exempt from GST/HST. For instance, a nursing service rendered by a registered nurse to an individual in a health care facility, such as a hospital, or the individual’s home is exempt.
Nursing has evolved since the inception of the GST and nurses are increasingly providing their services outside of institutional and residential settings. This has resulted in certain anomalies. For example, a vaccination performed by a registered nurse in a hospital or medical clinic is exempt, whereas the same service performed in the office of a registered nurse in private practice is subject to GST/HST.
Budget 2008 proposes to exempt from GST/HST nursing services rendered to an individual by a registered nurse, a registered nursing assistant, a licensed or registered practical nurse or a registered psychiatric nurse if the service is provided within a nurse-patient relationship, regardless of where the service is performed.
Budget 2008 also proposes to expand the exemption for diagnostic services that are prescribed by regulation, such as blood tests and X-rays, to include those ordered by registered nurses. Currently, nurse practitioners and certain other registered nurses are authorized to order such services.
The proposed changes will apply to supplies made after February 26, 2008.
The policy underlying the GST/HST treatment of drugs is that all sales of prescription drugs are tax-free when sold to a final consumer. There are two ways in which the supply of a drug may be zero-rated:
Drugs that are not unconditionally zero-rated and that are ordered on the prescription of health professionals who are not medical practitioners are subject to GST/HST.
Increasingly, health professionals who are not medical practitioners, such as nurse practitioners and midwives, are authorized under provincial or territorial legislation to prescribe a range of drugs. As a result, drugs that are not unconditionally zero-rated are treated differently for GST/HST purposes depending on whether they are sold on the prescription of a medical practitioner or another health professional.
Budget 2008 proposes to zero-rate all supplies to final consumers of drugs prescribed by health professionals who are authorized to prescribe them under provincial or territorial legislation. The proposed measure will apply to supplies made after February 26, 2008 and supplies made on or before February 26, 2008 if GST/HST was neither charged nor collected in respect of the supply.
Budget 2008 also proposes to clarify the wording of some of the zero-rating provisions for prescription drugs to ensure that they continue to be zero-rated in the future. The clarifying amendments will provide certainty to vendors and purchasers by avoiding a potential interpretation of the current provisions that would render those drugs taxable. The proposed clarifying amendments will apply to supplies made after February 26, 2008.
The GST/HST legislation lists a number of medical and assistive devices that are zero-rated. In establishing which medical and assistive devices qualify for zero-rating, the emphasis has traditionally been on the nature of the product itself and the relationship it bears to an individual’s condition, whether that condition is a chronic illness or disease or a disability. This approach ensures that only those devices specially designed for use by an individual with a chronic illness or disease or a disability qualify for zero-rating and that where a device has other potential uses it is generally denied GST/HST relief.
Budget 2008 proposes the following additions to the list of zero-rated medical and assistive devices:
Budget 2008 also proposes to amend the GST/HST legislation to clarify that only those medical and assistive devices that are intended for human use are zero-rated.
The proposed changes will apply to supplies made after February 26, 2008.
Consistent with the tax policy objective of exempting basic health care services from GST/HST, most professional services rendered by doctors, dentists and a number of other provincially-regulated health professionals are exempt. Under the GST/HST legislation, however, corporations must charge GST/HST for the services of a health professional in certain circumstances, although the same services would be exempt if supplied directly by the professional.
Budget 2008 proposes that the services of these health professionals be treated as GST/HST exempt regardless of whether their services are supplied directly by the health professional or through a corporation. This change will ensure that the GST/HST exemption for the services of health professionals applies consistently.
The proposed change will apply to supplies made after February 26, 2008.
Long-term residential care facilities are residential facilities at which individuals intend to reside for an indefinite period and may also receive nursing care, personal care or assistance with the activities of daily living. Currently, long-term residential care facilities offering a high level of health or personal care may not qualify for the GST New Residential Rental Property Rebate, nor for the GST/HST exempt treatment that applies to residential leases and sales of used residential rental buildings. This is due to the fact those facilities may not be considered to be supplying "residential units" but may instead be viewed as supplying a mix of health, personal care and accommodation services that include long-term occupancy of those units as a place of residence.
A further issue has arisen as a result of a recent decision of the Federal Court of Appeal, which found that an owner of a long-term residential care facility was not able to self-assess and pay GST on the facility it constructed. As a result, owners in similar situations cannot benefit from the GST/HST exempt treatment for subsequent sales of these facilities, in addition to not being able to claim the GST New Residential Rental Property Rebate.
Budget 2008 proposes to clarify the GST/HST treatment of long-term residential care facilities to ensure that the GST New Residential Rental Property Rebate and GST/HST exempt treatment apply to such facilities on a going forward basis. This change will also apply to certain past transactions where the owner has paid tax on the facility or elects to have the new rules apply as described below.
Generally, the GST New Residential Rental Property Rebate (that came into effect on February 28, 2000) provides an owner of a long-term residential rental facility with a 36 per cent rebate of the GST paid on either the purchase price of newly-constructed or substantially renovated residential rental units, or, where the owner constructed or substantially renovated the facility and self-assessed tax, the units’ fair market value. The Rebate is phased out for residential rental units valued between $350,000 and $450,000. The maximum rebate, which corresponds to a residential unit with a value of $350,000, is $6,300 per unit at a 5 per cent GST rate.
To clarify the application of the GST New Residential Rental Property Rebate to these facilities, Budget 2008 proposes to modify the Rebate provisions to replace the current condition that residential units in the facility be "supplied" to individuals under a lease, licence or similar arrangement with a requirement that the "possession" or "use" of the residential units in the facility be given to individuals for the purpose of their "occupancy" as a place of residence under a lease, licence or similar arrangement. Generally, this measure will be effective after February 26, 2008.
The measure will also apply for past transactions where tax has been paid on the purchase of the facility or on self-assessment where the facility was constructed or substantially renovated by the owner. Further, Budget 2008 proposes an election where GST/HST has not been self-assessed on the facility on or before February 26, 2008 and the relevant legislative requirements for claiming the rebate, as amended, have been met. The election would allow for an adjustment to net tax so as to claim the GST New Residential Rental Property Rebate. The owner will be required to adjust its net tax for self-assessed GST/HST, any unrecovered GST/HST paid on construction costs and the GST New Residential Rental Property Rebate. This election with respect to past transactions will apply only where the owner has not sold the facility on or before February 26, 2008.
Budget 2008 also proposes to clarify the GST/HST exempting provisions to ensure that "head lease" payments by an operator to an owner of a long-term residential care facility are exempt. The exemption will apply if "possession" or "use" of all or substantially all of the residential units of the facility has been given by the operator to individuals under a lease, licence or similar arrangement entered into for the purpose of their "occupancy" as a place of residence. This clarifying change is consistent with the change proposed to the GST New Residential Rental Property Rebate.
Generally, this clarifying measure will be effective after February 26, 2008. The measure will also apply to transactions on or before February 26, 2008, where the owner treated all head lease payments on or before that day as exempt.
To address the issues raised by the Federal Court of Appeal’s decision discussed above, Budget 2008 proposes to amend the self-assessment rules to clarify that they apply where either "possession" or "use" of a residential unit in a residential facility is given to an individual under a lease, licence or similar arrangement for the purpose of occupying the unit as a place of residence. This measure will allow owners that constructed or substantially renovated long-term residential care facilities to benefit from the GST New Residential Rental Property Rebate as well as ensure that the subsequent sale of the facility will be exempt under the GST/HST.
This measure will be effective after February 26, 2008 and will also apply for transactions on or before February 26, 2008 where the owner has self-assessed GST/HST or an election to claim the new residential rental property rebate, as discussed above, has been made.
Currently, the supply of a right to explore for or exploit a mineral deposit, a peat deposit, or a forestry, water, or fishery resource is deemed not to be a "supply", and the payments made for that right are deemed not to be "consideration", for GST/HST purposes. As a result, GST/HST is generally not applicable to the payments for the right to explore for or exploit these natural resources. This GST/HST relief does not apply to the supply of such a right if the supply is made directly to a consumer or to a person who is not a GST/HST registrant and who acquires the right in the course of a business of making supplies to consumers.
Budget 2008 proposes that this relief be expanded to include a supply of a right of entry or use to generate, or evaluate the feasibility of generating, electricity from the sun or wind. Consistent with current rules, this expanded GST/HST relief will not apply if the supply is made directly to a consumer or to a person who is not a GST/HST registrant and who acquires the right in the course of a business of making supplies to consumers.
The proposal will apply to supplies made on or after February 26, 2008. It will also apply to supplies made before February 26, 2008 but only in respect of the portion of the consideration for the supply that becomes payable, or is paid without having become payable, on or after February 26, 2008.
Taxing tobacco products at a high and sustainable level is an important element of the Government’s health strategy to discourage smoking among Canadians. To ensure that the tobacco tax system continues to support the Government’s health goals, Budget 2008 proposes a number of changes to enhance tobacco taxation enforcement and compliance, and minor changes to the duty on certain tobacco products.
Manufacturers of tobacco products must hold a licence under the Excise Act, 2001. To make it more difficult for a non-licensee to produce contraband tobacco products, Budget 2008 proposes to limit the possession and importation of tobacco manufacturing equipment to persons holding a license. The limits on possession and importation will not apply to equipment that is designed for use by an individual to make tobacco products for their personal use. These controls will apply as of the date the proposed amendments receive Royal Assent.
The Excise Act, 2001 provides the Minister of National Revenue with the authority to issue, refuse to issue, or cancel licences where it is in the public interest or in circumstances set out in regulations. Amendments are proposed to make explicit the Minister’s authority to refuse to issue, or cancel, a licence where access to the premises of a licensee or registrant is impeded. These amendments will apply as of the date they receive Royal Assent.
Manufactured tobacco (e.g., fine-cut tobacco used in roll-your-own cigarettes) is currently subject to an excise duty of $57.85 per kilogram, and the rate can be calculated pro rata regardless of the package weight. To discourage the multiplicity of package sizes, thereby facilitating the Canada Revenue Agency’s implementation of the new stamping and marking regime, Budget 2008 proposes that manufactured tobacco will be subject to a duty of $2.8925 per 50 grams or fraction thereof effective July 1, 2008. Expressing the rate per unit of 50 grams will also discourage the production of packages of less than 50 grams, thus reducing the availability of small-sized packages to youth. This change will not impact the excise duty payable for packages of 50 grams or multiples of 50 grams.
Tobacco sticks are pre-portioned rolls of tobacco that require further assembly by the consumer, such as being inserted into paper tubes, to produce "roll-your-own" cigarettes. These products are currently subject to a lower rate of duty than cigarettes because of the further assembly required. However, over time, the product has evolved, and now tobacco sticks differ very little from cigarettes. To equalize the tax treatment of tobacco sticks and cigarettes, Budget 2008 proposes that, effective February 27, 2008, the rate of duty on tobacco sticks will be increased to $0.085 per stick ($17 per carton of 200), the same rate that applies to cigarettes.
Canadian- and foreign-made cigarettes sold in the domestic market are subject to an excise duty of $17 per carton and must display a special stamp indicating that duty has been paid. To reduce the availability of low-cost cigarettes and support health goals, in 2001 a special excise duty, currently at the rate of $15 per carton, was imposed on all Canadian-made cigarettes for sale in domestic and foreign duty free shops, imports by returning travellers, and imports for sale in Canadian duty free shops.
The current rules allow Canadian producers to supply their normal stamped products to duty free shops and pay the special $15 per carton duty on that product. This simplifies compliance at the border for returning travellers since the stamp indicates that duty has already been paid.
To help limit access to untaxed tobacco products and to simplify compliance at the border for returning travellers, Budget 2008 proposes that stamped imported tobacco products also be allowed to be delivered to duty free markets. This change will provide foreign producers the same opportunity that Canadian producers have to pre-pay the duty on tobacco products intended for duty free shops if they so choose, thus relieving Canadian duty free shop operators and returning travellers from paying the special $15 per carton duty that would otherwise apply on the importation of such products.
To facilitate the payment of the special excise duty rates on imported stamped tobacco products sold in duty free markets, a new refund mechanism will be introduced. Under this approach, full domestic duties (e.g., $17 per carton of cigarettes) must first be paid on stamped imported tobacco products. Any stamped imports that are subsequently delivered to domestic or foreign duty free shops will then be eligible for a refund of the difference in the domestic and duty free market rate ($2 per carton of cigarettes).
The proposed changes to the stamping requirements and the proposed new refund mechanism will be effective February 27, 2008; however, the refund amounts will not be paid to claimants until after the provisions have received Royal Assent.
For the purpose of applying excise duties, there are three principal categories of alcohol products: spirits, wine and beer, with different rates for each category.
Recently, high-alcohol spirit-flavoured brewed products, also known as imitation spirits, have been introduced to the Canadian marketplace. These products are derived from a brewing process, but utilize flavourings to introduce the desired spirits flavour and a secondary production process to elevate the alcohol content to about 20 per cent alcohol by volume (ABV). In contrast, most consumer beers contain about 5 per cent ABV. The new products compete against traditional spirits products, but qualify and are subject to the lower excise duty rate on beer ($0.3122 per litre) because they are derived from a brewing process.
Budget 2008 proposes to make Canada’s alcohol excise taxation system fairer by treating imitation spirits like its competition, spirits, rather than like beer. Effective February 27, 2008, a maximum allowable alcohol concentration of 11.9 per cent ABV will be established for the excise duty rate on beer to apply to a product derived from a brewing process. Brewed products (including imitation spirits) above this threshold will qualify as spirits and be subject to an excise duty of $11.696 per litre of absolute alcohol. The 11.9 per cent represents the highest alcohol concentration achievable via traditional yeast fermentation processes, and thus the change will not affect most consumer beers.
As a result of this change, producers or importers of imitation spirits with an alcohol content above 11.9 per cent will be required to obtain a licence to produce spirits and report and remit the appropriate excise duty. To assist such producers or importers with the transition to the different licensing regime, their existing licence to produce or import beer will be treated as a licence to produce or import spirits until 30 days after this measure receives Royal Assent, and they will have the same deadline to apply for and receive a spirits licence.
Taxation is an integral part of good governance as it promotes greater accountability and self-sufficiency and provides the revenues for important public services and investments. Therefore, the Government of Canada supports initiatives encouraging the exercise of direct taxation powers by Aboriginal governments.
To date, the Government of Canada has entered into 30 sales tax arrangements whereby Indian Act bands and self-governing Aboriginal groups levy a sales tax within their reserves or their settlement lands. In addition, 13 arrangements respecting personal income taxes are in effect with self-governing Aboriginal groups under which they impose a personal income tax on all residents within their settlement lands. The Government reiterates its willingness to discuss and put into effect direct taxation arrangements with interested Aboriginal governments.
The Government of Canada also supports direct taxation arrangements between interested provinces or territories and Aboriginal governments and enacted legislation to facilitate such arrangements in 2006.
Budget 2008 confirms the Government’s intention to proceed with the following previously announced tax measures, as modified to take into account consultations and deliberations since their release: