This annex provides detailed information on each of the tax measures proposed in the Budget.
Table A3.1 lists these measures and provides estimates of their budgetary impact.
This annex also provides Notices of Ways and Means Motions to amend the Income Tax Act and the regulations thereunder, the Excise Tax Act and the Excise Act, 2001. Draft amendments to the Income Tax Regulations are also included.
|Fiscal Costs (millions of dollars)|
Tax Credit for
|Child Tax Credit
|Tuition Tax Credit –
|Education Tax Measures
– Study Abroad
|RESPs – Asset Sharing
|RDSPs – Shortened
|RRSPs – Anti-Avoidance
|Tax on Split Income –
the Charitable Sector
|Enhance the Regulatory
Regime for Qualified
|Recover Tax Assistance
for Returned Gifts
|Gifts of Non-Qualifying
|Granting of Options to
|Donations of Publicly
|1 A “–” indicates a nil amount or an amount that cannot be determined in respect of a measure that is intended to protect the tax base.
2 The cost of this measure is attributable to program expenditures.
|Fiscal Costs (millions of dollars)|
Accelerated Capital Cost
Expenses in Oil
|Stop-Loss Rules on the
Redemption of a Share
|Partnerships – Deferral
of Corporate Tax
|Other Tax Measures|
|Aboriginal Tax Policy||–||–||–||–||–||–||–|
|Customs Tariff Measures|
|1 A “–” indicates a nil amount or an amount that cannot be determined in respect of a measure that is intended to protect the tax base.
2 The cost of this measure is attributable to program expenditures.
Budget 2011 proposes to introduce a Children’s Arts Tax Credit. This will allow parents to claim a 15-per-cent non-refundable tax credit based on an amount of up to $500 in eligible expenses per child paid in a year. The credit will be available for the enrolment of a child, who is under 16 years of age at the beginning of the year, in an eligible program of artistic, cultural, recreational or developmental activities. For a child who is under 18 years of age at the beginning of the year and is eligible for the Disability Tax Credit, the 15-per-cent non-refundable tax credit may be claimed on an additional $500 disability supplement amount when a minimum of $100 is paid in eligible expenses.
Other than the definition of eligible activities, the parameters of the Children’s Arts Tax Credit will be based on those of the Children’s Fitness Tax Credit.
An eligible expense will be a fee paid in the taxation year to a qualifying entity to the extent that the fee is for the registration or membership of a child in an eligible program of artistic, cultural, recreational or developmental activities. Fees for registration or membership may be paid in respect of expenses for the operation and administration of the program, instruction, renting facilities, equipment used in common, and incidental supplies. Registration or membership fees will not be eligible to the extent that they are paid for the purchase or rental of equipment for exclusive personal use (e.g., musical instruments), travel, meals and accommodation. Expenses eligible for purposes of the child care expenses deduction, or the Children’s Fitness Tax Credit, will also be ineligible.
A qualifying entity will be a person or partnership, other than an individual who is under 18 years of age, that offers one or more eligible programs of artistic, cultural, recreational or developmental activities. A qualifying entity will not include the spouse or common-law partner of a person who is claiming the credit in respect of his or her child.
An eligible activity will be a supervised activity suitable for children that:
An eligible activity will also include similar activities that have been adapted to accommodate the needs and abilities of a child who is eligible for the Disability Tax Credit.
An eligible program must include a significant amount of eligible activities and must be ongoing in nature. In this regard, an eligible program will be either:
Provided that all other requirements are met (i.e., the program is ongoing, supervised, and suitable for children), the full cost of a child’s membership in an organization (including a club, association or similar organization) will be eligible for the credit if more than 50 per cent of the activities offered to children by the organization include a significant amount of eligible activities.
In circumstances where the participant in the program can select from among various activities, the full cost of a child’s registration in such a program offered by a club, association, or similar organization will be eligible for the credit if:
A program that is part of a school curriculum will be ineligible.
Either parent may claim the credit (or share the credit provided that the total amount claimed is not more than the maximum amount that would be allowed if only one parent made the claim) for eligible expenses paid in the year. To avoid duplication of claims, expenses claimed under other credits, such as the Medical Expense Tax Credit, will not qualify.
This measure will apply to eligible expenses paid in the 2011 and subsequent taxation years.
In recognition of the important role played by volunteer firefighters in contributing to the security and safety of Canadians, Budget 2011 proposes a Volunteer Firefighters Tax Credit to allow eligible volunteer firefighters to claim a 15-per-cent non-refundable tax credit based on an amount of $3,000.
An eligible individual will be a volunteer firefighter who performs at least 200 hours of volunteer firefighting services in a taxation year, for one or more fire departments, that consist primarily of responding to and being on call for firefighting and related emergency calls, attending meetings held by the fire department and participating in required training related to the prevention or suppression of fires.
Volunteer service hours performed by a firefighter for a fire department will be ineligible if the firefighter also provides firefighting services, otherwise than as a volunteer, to that fire department.
An individual who claims the credit will be required to obtain written certification from the chief, or a delegated official, of the fire department confirming the number of hours of eligible volunteer firefighting services performed. The details of the certification process will be developed by the Canada Revenue Agency (CRA).
An individual who claims the credit will be ineligible for the existing tax exemption of up to $1,000 for honoraria paid by a government, municipality or public authority in respect of firefighting duties.
Governments, municipalities and public authorities who pay firefighters amounts in respect of their services as volunteers will be required to report those amounts to the CRA as part of their annual reporting of remuneration paid.
This measure will apply to the 2011 and subsequent taxation years.
To provide new support to caregivers of dependants with a mental or physical infirmity, including spouses, common-law partners and minor children, Budget 2011 proposes to introduce a Family Caregiver Tax Credit. This 15-per-cent non-refundable credit will be based on an amount of $2,000 and will apply beginning in 2012.
Caregivers will benefit from the Family Caregiver Tax Credit by claiming an enhanced amount for an infirm dependant under one of the existing dependency-related credits. The effect of the Family Caregiver Tax Credit on the credit amount that can be claimed and the amount of the dependant’s net income at which the amount will be fully phased out in 2012 is set out for each existing credit in Table A3.2.
phased out ($)
|Spousal or Common-law Partner Credit|
|Existing tax support||10,780||10,780|
|Family Caregiver Tax Credit||2,000|
|Total: Enhanced tax support||12,780||12,780|
|Child Tax Credit|
|Existing tax support||2,182||n/a|
|Family Caregiver Tax Credit||2,000|
|Total: Enhanced tax support||4,182||n/a|
|Eligible Dependant Credit|
|Existing tax support||10,780||10,780|
|Family Caregiver Tax Credit||2,000|
|Total: Enhanced tax support||12,780||12,780|
|Existing tax support||4,385||19,360|
|Family Caregiver Tax Credit||2,000|
|Total: Enhanced tax support||6,385||21,360|
|Infirm Dependant Credit|
|Existing tax support||4,385||10,606|
|Family Caregiver Tax Credit||2,000|
|Total: Enhanced tax support||6,385||12,7801|
|Note: Based on projected indexation of 2.4 per cent for the 2012 tax year.
1 Reflects the proposal to increase the threshold at which the Infirm Dependant Credit begins to be phased out.
A dependant who is a minor will be considered to be infirm only if the dependant is likely to be, for a long and continuous period of indefinite duration, dependent on others for significantly more assistance in attending to the dependant’s personal needs and care when compared generally to persons of the same age. This test will apply to dependants who are under 18 years of age at the end of the year and who are claimed for purposes of the Child Tax Credit or the Eligible Dependant Credit.
Budget 2011 also proposes to increase for 2012 the threshold at which the Infirm Dependant Credit begins to be phased out, so that the enhanced amount is fully phased out at the same income level as the 2012 enhanced Spousal or Common-Law Partner Credit.
Consistent with existing measures, only one Family Caregiver Tax Credit will be available in respect of each infirm dependant.
The $2,000 Family Caregiver Tax Credit amount will be indexed to account for inflation for 2013 and subsequent taxation years.
The Medical Expense Tax Credit provides income tax relief for taxpayers with above-average medical and disability expenses in recognition that these individuals have a reduced ability to pay income tax as a result of incurring those expenses. A taxpayer may claim a credit in respect of eligible expenses incurred in respect of himself or herself, his or her spouse or common-law partner, or his or her child who is under 18 years of age.
Caregivers may also claim the Medical Expense Tax Credit in respect of eligible expenses incurred in respect of a “dependent” relative if the caregiver pays medical or disability-related expenses of the dependent relative. For this purpose, a “dependent” relative is defined as a child who is 18 years of age or older, or a grandchild, parent, grandparent, brother, sister, uncle, aunt, niece or nephew, who is dependent on the taxpayer for support.
Currently, a caregiver may only claim the eligible expenses of a “dependent” relative described above that exceed the lesser of 3 per cent of the dependant’s net income and an indexed dollar threshold ($2,052 in 2011), to a maximum of $10,000. In contrast, there is generally no limit on the amount of eligible expenses a taxpayer can claim for himself or herself, a spouse or common-law partner or a child under 18 years of age. To better recognize the impact that extraordinary medical expenses can have on a caregiver’s ability to pay tax, Budget 2011 proposes to remove this $10,000 limit on eligible expenses that can be claimed under the Medical Expense Tax Credit in respect of a dependent relative.
This measure will apply to the 2011 and subsequent taxation years.
The Child Tax Credit (CTC) is a 15-per-cent non-refundable credit based on an indexed amount ($2,131 in 2011) that can be claimed by parents for each child who is under 18 years of age at the end of a taxation year.
Current rules provide that not more than one individual can claim the CTC in respect of the same domestic establishment, which means that when two or more families share a home, only one individual in one family may claim the CTC in respect of his or her children. For example, if two adult sisters live together and each has a child under 18 years of age, under current rules, only one sister can claim the CTC for her child.
To ensure that sharing a home does not prevent otherwise-eligible parents from claiming the CTC in respect of their children, Budget 2011 proposes to repeal the rule that limits the number of CTC claimants to one per domestic establishment.
This measure will apply to the 2011 and subsequent taxation years.
Budget 2011 proposes to amend the Tuition Tax Credit to recognize fees paid to an educational institution, professional association, provincial ministry or other similar institution to take an examination that is required to obtain a professional status recognized by federal or provincial statute, or to be licensed or certified in order to practice a profession or trade in Canada.
Ancillary fees and charges paid in respect of occupational, trade or professional examinations will also be eligible for the credit. Eligible ancillary fees could include the cost of examination materials used during the examination, such as identification cards that must be purchased and worn on examination day and certain prerequisite study materials.
Eligible ancillary fees and charges will not include costs for travel, parking, equipment (such as lab coats, calculators, computers or other items of enduring value), or other costs that are currently ineligible for the Tuition Tax Credit.
Consistent with the general rule that applies for the existing Tuition Tax Credit, the total of tuition and examination fees paid to the institution, association or ministry in respect of a year must exceed $100 to be eligible. An amount will be considered to have been paid in respect of the year in which the examination is taken.
These amendments will not apply to fees in respect of examinations taken in order to begin study in a profession or field, such as a medical college admission test.
This measure will apply to eligible amounts paid in respect of examinations taken in 2011 and subsequent taxation years.
A Tuition Tax Credit is currently available to a Canadian student in full-time attendance at a university outside of Canada in a course leading to a degree to the extent that the tuition fees are paid in respect of a course of at least 13 consecutive weeks. A student who meets these requirements may also claim the Education Tax Credit and the Textbook Tax Credit. Similarly, a Canadian student can currently receive Educational Assistance Payments (EAPs) from a Registered Education Savings Plan for enrolment at an educational institution outside Canada that is a university, college or other educational institution that provides courses at a post-secondary school level and at which the student is enrolled in a course of not less than 13 consecutive weeks.
Many programs at foreign universities are based on semesters shorter than 13 weeks, with the result that many Canadian students are denied tax recognition of education costs that would otherwise be eligible for the credits or are denied access to EAPs.
To improve the tax recognition of education costs and access to EAPs for Canadian post-secondary students who study outside Canada, Budget 2011 proposes to reduce the minimum course-duration requirement that a Canadian student at a foreign university must meet in order to claim the Tuition, Education and Textbook Tax Credits to three consecutive weeks from 13 consecutive weeks. It is also proposed that the 13-consecutive-week requirement for EAP purposes be reduced to three consecutive weeks when the student is enrolled at a university in a full-time course. The three-consecutive-week requirement is consistent with the policy that applies to post-secondary students who study in Canada for the purposes of qualifying for the Education Tax Credit, the Textbook Tax Credit and EAPs. (The Tuition Tax Credit has no minimum duration requirement when the program is taken from an institution in Canada.)
This measure will apply with respect to tuition fees paid for courses taken in the 2011 and subsequent taxation years and to EAPs made after 2010.
Registered Education Savings Plans (RESPs) are tax-assisted savings vehicles designed to help families accumulate savings for a child’s post-secondary education. The Government of Canada supports RESP savings through Canada Education Savings Grants (CESGs) and the Canada Learning Bond. An RESP may take the form of an individual plan or a family plan.
Parents and grandparents (referred to as “subscribers”) who want to save for a number of related children or grandchildren (such as siblings) may open family plans, which are subject to the same contribution limits that apply to other RESPs but provide additional flexibility for the subscriber by allowing the allocation of plan assets among the related children, subject to certain restrictions. For example, family plans allow parents who have named multiple children as beneficiaries to direct plan assets from those among their children who do not pursue post-secondary education to those who do pursue post-secondary education. To ensure that family plans do not provide unintended benefits, all beneficiaries of the plan must be connected to the original subscriber by blood or adoption, and each beneficiary must generally be added to the plan before attaining 21 years of age.
Individuals such as aunts or uncles who want to save for a number of children through RESPs, but who are not considered under the Income Tax Act to be connected to the children by blood or adoption, may do so only through separate individual plans. However, there is less flexibility to share assets among individual plans than within a family plan. In particular, tax penalties and the repayment of CESGs currently may apply to transfers of assets between individual plans unless they occur between plans for the same beneficiary or plans under which the beneficiaries are siblings, generally before the beneficiary under the receiving plan attains 21 years of age. In contrast, in a family plan, a subscriber may allocate plan assets among siblings regardless of their age.
To provide subscribers of separate individual plans with the same flexibility to allocate assets among siblings as exists for subscribers of family plans, Budget 2011 proposes to allow transfers between individual RESPs for siblings, without tax penalties and without triggering the repayment of CESGs, provided that the beneficiary of a plan receiving a transfer of assets had not attained 21 years of age when the plan was opened. Budget 2011 also proposes related amendments to the Canada Education Savings Regulations to give effect to this measure in relation to CESGs.
These measures will apply to asset transfers that occur after 2010.
In recognition of the greater immediate need for Registered Disability Savings Plan (RDSP) beneficiaries with shortened life expectancies to access their savings, Budget 2011 proposes to provide such beneficiaries more flexibility to withdraw their RDSP assets without requiring the repayment of Canada Disability Savings Grants (CDSGs) and Canada Disability Savings Bonds (CDSBs).
The RDSP was introduced in Budget 2007 to better enable parents and others to ensure the long-term financial security of a child with a severe disability. An RDSP is a tax-assisted savings vehicle in which investment income accumulates tax-free. The Government of Canada supports these plans by providing CDSGs and CDSBs. CDSGs, CDSBs and investment income are included in an RDSP beneficiary’s income for tax purposes when paid out of the RDSP.
RDSP contributions attract CDSGs of up to $3,500 annually, depending on the beneficiary’s family income and the amount contributed, up to a lifetime limit of $70,000. In addition, CDSBs of up to $1,000 annually are provided to RDSPs established by low- and modest-income families, based on a beneficiary’s family income, up to a lifetime limit of $20,000. Budget 2010 introduced new rules that allow unused CDSG and CDSB entitlements to be carried forward for up to 10 years. To ensure that government support is used for long-term savings purposes, the “10-year repayment rule” requires that all CDSGs and CDSBs received by an RDSP in the preceding 10 years be held by financial institutions as an “assistance holdback amount”, which must be repaid to the Government in the event of a withdrawal, or termination of the plan.
The RDSP rules currently accommodate the need for beneficiaries with shortened life expectancies to have greater access to their savings in the short term. In particular, although maximum withdrawal limits normally apply to an RDSP if total CDSGs and CDSBs exceed total private contributions, these limits do not apply if the beneficiary has been certified as having a shortened life expectancy, as described below. However, the 10-year repayment rule still applies in this situation, with the result that a withdrawal from the plan may trigger a significant repayment of CDSGs and CDSBs.
Budget 2011 proposes to allow RDSP beneficiaries who have shortened life expectancies to withdraw more of their RDSP savings by permitting annual withdrawals without triggering the 10-year repayment rule, subject to specified limits and certain conditions.
An RDSP beneficiary who is considered to have a shortened life expectancy under current rules will be eligible. These rules require a medical doctor to certify in writing that the beneficiary’s state of health is such that, in the doctor’s opinion, the beneficiary has a life expectancy of five years or less.
If a plan holder decides to take advantage of this measure, the plan holder will be required to elect in prescribed form and submit the election with the medical certification to the RDSP issuer. The RDSP issuer will be required to notify Human Resources and Skills Development Canada of the election.
If a plan holder does not make such an election in respect of an eligible RDSP beneficiary, then the current RDSP rules, including the 10-year repayment rule, will continue to apply to the plan.
Under the current rules, each withdrawal from an RDSP comprises a taxable portion and a non-taxable portion based on the relative proportions of taxable assets (including CDSGs, CDSBs and investment income) and non-taxable assets (private contributions) in the plan.
Under the proposal, withdrawals made at any time following an election will not trigger the repayment of CDSGs and CDSBs provided that the total of the taxable portions of the withdrawals does not exceed $10,000 annually. Accordingly, total annual withdrawals may exceed $10,000 due to non-taxable portions.
As well, under the proposal, once an election has been made, the following rules will apply:
Generally, these rules will apply to the plan on an ongoing basis unless a plan holder reverses the election.
If withdrawals of taxable amounts exceed the annual $10,000 limit, the normal 10-year repayment rule will apply, to the extent that grants and bonds and other assets remain in the plan to satisfy that requirement.
A plan holder will be permitted to reverse an election on a prospective basis at any time. In this case, the regular RDSP rules will generally apply, except that no new CDSGs and CDSBs will be paid into the plan until the year after that in which the election is reversed.
To reverse an election, the plan holder will be required to provide a notice in prescribed form to the RDSP issuer. The issuer will be required to notify Human Resources and Skills Development Canada of the reversal.
Reversing an election will not preclude a plan holder from making a subsequent election if a new medical certification of shortened life expectancy is obtained. However, a subsequent election will be permitted only two or more years after the reversal of the preceding election.
Withdrawals of taxable amounts exceeding the $10,000 annual limit will result in the automatic reversal of an election.
This measure will apply after 2010 to withdrawals made after Royal Assent to the enacting legislation. However, as a transitional rule, beneficiaries making an election under this measure will be permitted to utilize their 2011 withdrawal limit in 2012 provided that the required medical certification was obtained before 2012.
The following table compares the treatment of a typical RDSP for a beneficiary who is certified as having a shortened life expectancy in 2012 under the current and the proposed rules.
The table compares assets and withdrawal amounts in 2012 for an RDSP opened in December 2008. From 2008 to 2012, $1,500 is contributed to the plan, attracting $3,500 in CDSGs in each year. In addition, the plan receives $1,000 in CDSBs annually during these years. By 2012, there is $34,919 in plan assets in the RDSP, including contributions, CDSGs, CDSBs and investment income.
Under the current rules, if a withdrawal of any amount is made from the plan, all CDSGs and CDSBs paid into the plan in the preceding 10 years must be repaid – an amount equal to $22,500. As a result, at most $12,419 may be withdrawn from the plan (the amount of contributions and investment income), which would fully deplete the available RDSP assets.
Under the proposed measure, pursuant to an election, up to $10,000 in taxable amounts may be withdrawn from the RDSP in 2012 without the requirement to repay any CDSGs or CDSBs. The total withdrawal would also include a non-taxable portion (i.e., contributions). Accordingly, as contributions make up 21 per cent of plan assets, the maximum total annual withdrawal would be $12,735, consisting of $10,000 in taxable amounts and $2,735 in non-taxable amounts (which is 21 per cent of the total withdrawal). The remaining $22,184 in RDSP assets could be withdrawn in future years.
|Current Rules||Proposed Rules|
|Calculation of Withdrawal|
|Taxable portion of withdrawal||4,919||10,000|
|Non-taxable portion of withdrawal||7,500||2,735|
|Maximum 2012 withdrawal||12,419||12,7352|
|1 This example assumes a 5.5% annual nominal rate of return.
2 If the beneficiary were certified as having a shortened life expectancy in 2011, any unused portion of the $10,000 taxable withdrawal limit for 2011 could be carried forward to 2012. In this situation, the maximum 2012 withdrawal limit could be as high as $25,471.
Registered Retirement Savings Plans and Registered Retirement Income Funds (both referred to in these proposals as “RRSPs”) form an important part of Canada’s retirement income system. The tax deferral provided on RRSP savings assists and encourages Canadians to save for retirement to achieve their retirement income goals. The RRSP system allows most Canadians to save enough, over a 35-year career, to achieve a retirement income equal to 70 per cent of pre-retirement earnings. In this regard, it is important that the tax rules ensure that RRSPs are used for legitimate savings purposes and do not provide excessive tax advantages unrelated to this basic objective.
Budget 2011 proposes several changes to the RRSP rules to address concerns regarding the use of RRSPs in tax planning schemes undertaken by a small number of taxpayers, including “RRSP strips”. RRSP strips, which may take various forms, are schemes which purport to enable RRSP annuitants to access their RRSP funds without including the appropriate amount in income. The Government has successfully challenged a number of these schemes under existing rules in the Income Tax Act. Nevertheless, these schemes continue to evolve, and to be marketed, often with unexpected and undesirable outcomes for taxpayers. The magnitude of this problem warrants greater assurance through specific legislative action.
Budget 2011 proposes to enhance the existing RRSP anti-avoidance rules by introducing rules similar to the following anti-avoidance rules that currently apply to Tax-Free Savings Accounts (TFSAs):
Budget 2011 proposes to expand the existing RRSP advantage rules by adopting the “advantage” concept from the TFSA rules, with certain modifications.
Under the TFSA rules, an “advantage” may generally be described as a benefit obtained from a transaction that is intended to exploit the tax attributes of a TFSA (for example, shifting returns from a taxable investment to a TFSA investment). TFSA advantages are subject to a tax that is generally equal to their fair market value. The Minister of National Revenue may waive all or a portion of this tax if the Minister considers it just and equitable to do so having regard to all the circumstances (including whether the tax arose as a consequence of reasonable error), and if an amount equal to the liability proposed to be waived has been distributed from the TFSA.
The following portions of the TFSA advantage concept will be included as RRSP advantages:
Additionally, benefits from “RRSP strip transactions” will be specifically included in the RRSP advantage concept. An RRSP strip transaction will generally be defined as any transaction or event (or series of transactions or events) one of the main purposes of which is to enable an RRSP annuitant, or a non-arm’s length person, to use or obtain property held in connection with the RRSP, or property substituted therefor, without including the value of the property in the RRSP annuitant’s income. For this purpose, an exception will accommodate withdrawals under the Home Buyers’ Plan or Lifelong Learning Plan.
As is the case for TFSA advantages, the amount of tax payable in respect of any RRSP advantage will be, in the case of a benefit, the fair market value of the benefit and, in the case of a debt, the amount of the debt. The tax will be payable by the RRSP annuitant, unless the advantage was extended by the issuer (or a person who does not deal at arm’s length with the issuer) in which case the tax will be payable by the issuer. The Minister of National Revenue will have the authority to waive all or part of this tax if the Minister considers it just and equitable to do so, having regard to all the circumstances (including whether the tax arose as a consequence of reasonable error) and if an amount equal to the liability proposed to be waived has been distributed from the RRSP.
Budget 2011 proposes to introduce a “prohibited investment” concept for RRSPs, based closely on the TFSA prohibited investment rules. In the TFSA context, a “prohibited investment” is defined in subsection 207.01(1) of the Income Tax Act and generally includes debt of the TFSA holder and investments in entities in which the TFSA holder or a non-arm’s length person has a “significant interest” (generally 10 per cent or more) or with which the TFSA holder does not deal at arm’s length. This definition will be adopted for RRSP purposes.
A special tax equal to 50 per cent of the fair market value of the investment will apply to an RRSP annuitant on acquisition of a prohibited investment by his or her RRSP (or at the time that an investment becomes prohibited, as the case may be). The tax will generally be refunded, if the investment is disposed of from the RRSP by the end of the year following the year in which the tax applied (or by such later time as the Minister of National Revenue considers reasonable), unless the annuitant knew or ought to have known that the investment was a prohibited investment when it was acquired. The Minister of National Revenue will have the authority to waive or cancel all or part of the tax if the Minister considers it just and equitable to do so, having regard to all the circumstances (including whether the tax arose as a consequence of reasonable error).
Income (including capital gains) derived from prohibited investments will be treated as an “advantage”. Accordingly, any benefit of holding a prohibited investment in an RRSP will be eliminated through the tax on advantages described above.
Budget 2011 also proposes to modify certain tax rules that apply when an RRSP acquires a “non-qualified investment”. These modifications are based on rules that are already in place for TFSAs.
The holding of a non-qualified investment (i.e. an investment that is not a “qualified investment” under the Income Tax Act) by an RRSP results in certain tax consequences. Examples of non-qualified investments include shares in private investment holding companies or foreign private companies, and real estate. Income earned on non-qualified investments of an RRSP is taxable to the RRSP. In addition, when an RRSP acquires a non-qualified investment, the fair market value of the investment is included in the RRSP annuitant’s income. When the property is disposed of by the RRSP, an offsetting deduction (up to the amount of the original income inclusion) is generally available to the RRSP annuitant. Similarly, when a qualified investment held by an RRSP later becomes non-qualified, the RRSP is liable for a tax equal to one per cent per month of the fair market value of the investment for each month that it is held by the RRSP.
Budget 2011 proposes to replace the income inclusion and deduction components of the non-qualified investment rules, as well as the one-per-cent per month tax. Under this proposal, an RRSP annuitant will be subject to a special tax of 50 per cent of the fair market value of a non-qualified investment. The tax liability will apply at the time that a non-qualified investment is acquired by the RRSP or at the time an investment becomes non-qualified, as the case may be. Unless the annuitant knew or ought to have known that the investment was non-qualified, this tax will be refundable to the annuitant if the investment is disposed of from the RRSP by the end of the year following the year in which the tax applied (or by such later time as the Minister of National Revenue considers reasonable). The Minister of National Revenue will have the authority to waive or cancel all or part of the tax if the Minister considers it just and equitable to do so, having regard to all the circumstances (including whether the tax arose as a consequence of reasonable error).
Investment income earned on a non-qualified investment in an RRSP will remain taxable to the RRSP.
As in the TFSA context, an investment that would otherwise be both prohibited and non-qualified will be deemed to be a prohibited investment only (and not a non-qualified investment).
Subject to two exceptions, these new provisions will apply to transactions occurring, and investments acquired, after March 22, 2011. For this purpose, investment income generated after March 22, 2011 on previously acquired investments will be considered to be a “transaction occurring” after March 22, 2011. The exceptions to this effective date are as follows:
Defined benefit Registered Pension Plans (RPPs) are sometimes established for one main income earner, generally an employee of a corporation that he or she controls. Sometimes a spouse or other family member (who is employed by the corporation) is also added as a member of such a plan. Budget 2011 proposes two new tax measures that will apply to these plans (referred to as “individual pension plans” or “IPPs”).
Budget 2011 proposes that:
For this purpose, an IPP will be a defined benefit RPP:
As is the case for designated plans, the Minister of National Revenue will have the power to waive IPP status in appropriate circumstances.
In some cases, taxpayers have established IPPs as a transfer vehicle for the commuted value of their pension under a defined benefit RPP. In these cases, the plan terms of the IPP typically provide a much less generous pension in respect of past service, based on minimal employment earnings with the new employer sponsor (generally a company controlled by the plan member), a lower benefit formula, or both. The result is that much of the value of the IPP becomes pension surplus, which is not subject to any withdrawal requirements under the existing tax rules applicable to RPPs. Consequently, the taxpayer is able to defer more of their retirement savings for a longer period than is generally possible for other RPP members or RRSP savers. To address this inconsistency, Budget 2011 proposes that an IPP be required to pay out to a member, each year after the year in which he or she attains 71 years of age, an amount equal to the greater of:
This requirement will establish reasonable limits on deferrals of tax on IPP savings and generally ensure that such savings are received as income throughout the retirement period of the member, consistent with the basic purpose of RPPs.
It is proposed that the requirement for these RRIF-like withdrawals apply to the 2012 and subsequent taxation years. For those IPP members who reached 72 years of age in 2011 or earlier, the required withdrawals will start in 2012. For those IPP members who attain 72 years of age after 2011, the required withdrawals will start in the year in which they attain 72 years of age.
The contribution and benefit limits that apply to RPPs and RRSPs are designed to allow comparable savings opportunities for Canadians, whether they save in a defined benefit RPP, a defined contribution RPP, an RRSP or a combination of these plans. To achieve this objective, an RPP member’s annual RRSP limit is reduced by the estimated amount of annual saving in the RPP. As well, the contribution limits for RRSPs and defined contribution RPPs allow for a pension that is comparable to that obtainable under the defined benefit RPP limits. For RRSPs and defined contribution RPPs, the annual limit is determined as a fixed percentage of earnings up to a dollar maximum. For defined benefit RPPs, the limits under the tax rules apply to the benefits provided under such plans and permitted contributions are determined actuarially based on the estimated liabilities for the promised pension benefits.
When an employee or the employer makes contributions to an RPP in respect of past service, the tax rules require that the employee either give up accumulated RRSP contribution room for earlier years or, to the extent that the employee has made RRSP contributions in those previous years, to withdraw a portion (calculated by reference to a formula) of RRSP assets (these would usually be transferred to the RPP). For an employee who switches from RRSP savings to RPP savings later in his or her working career, and who is able to have past service recognized under an IPP, the amount required to fund the IPP’s obligation in relation to the past service can be much greater than the amount by which the employee is required to reduce his or her RRSP assets or accumulated RRSP contribution room. This ability to contribute to an IPP in respect of past service can provide a significant tax advantage.
To limit these unintended tax deferral opportunities, March 22, 2011 proposes to require that the cost of past service under the terms of an IPP first be satisfied by transfers from RRSP assets belonging to the IPP member or a reduction in the member’s accumulated RRSP contribution room before new past service contributions are permitted.
This measure will apply to IPP past service contributions made after March 22, 2011, except that it will not apply to IPP past service contributions made in respect of past service that was credited to an IPP member before March 22, 2011 under terms of the IPP submitted for registration on or before March 22, 2011.
The Canadian income tax system applies a progressive marginal rate structure to the taxation of personal income. The Income Tax Act contains a number of rules intended to reduce the ability of a higher-income taxpayer to split taxable income inappropriately with lower-income individuals. One of these rules, referred to as the “tax on split income”, limits income-splitting techniques that seek to shift certain types of income from a higher-income individual to a lower-income minor. The highest marginal tax rate (currently 29 per cent) applies to “split income”, which generally comprises:
The tax on split income did not initially apply to capital gains because the planning techniques that were being used at the time did not rely on capital gains to split income with a minor. However, income-splitting techniques have been developed that use capital gains to avoid the tax on split income. These techniques involve capital gains being realized for the benefit of a minor on a disposition of shares of a corporation to a person who does not deal at arm’s length with the minor.
Budget 2011 proposes a targeted measure to maintain the integrity of the tax on split income regime. The measure will extend the tax on split income to capital gains realized by, or included in the income of, a minor from a disposition of shares of a corporation to a person who does not deal at arm’s length with the minor, if taxable dividends on the shares would have been subject to the tax on split income. Capital gains that are subject to this measure will be treated as dividends and, therefore, will not benefit from capital gains inclusion rates nor qualify for the lifetime capital gains exemption.
This measure will apply to capital gains realized on or after March 22, 2011. In addition, the government will continue to monitor the effectiveness of the tax on split income regime and will take appropriate action if new income-splitting techniques develop.
Agriculture Canada offers, through the AgriInvest program, an incentive to encourage farmers to set aside earnings, through government-matched contributions, in order to provide coverage against small income declines. Under the AgriInvest program, farmers who contribute to an AgriInvest account receive matching government contributions. Furthermore, the government contributions and interest earned in respect of the account are not taxable until withdrawn.
Beginning this year, the province of Quebec will supplement AgriInvest with the new Agri-Québec program, an agricultural income stabilization account program that is very similar to the AgriInvest program.
Budget 2011 proposes amendments to provide the same income tax treatment to investments made under the Agri-Québec program as is currently provided to investments under the AgriInvest program. These amendments will apply for the 2011 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 flow-through share investors.
Budget 2011 proposes to extend eligibility for the mineral exploration tax credit for one year, to flow-through share agreements entered into on or before March 31, 2012. 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, for example, funds raised with the credit during the first three months of 2012 can support eligible exploration until the end of 2013.
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.
The Canada Child Tax Benefit (CCTB) is a non-taxable amount paid monthly to help eligible families with the cost of raising children under 18 years of age. The Goods and Services Tax/Harmonized Sales Tax (GST/HST) Credit is a non-taxable amount paid quarterly; it was introduced to compensate low- and modest-income families for the effects of replacing the Federal Sales Tax with the GST. Entitlement to the CCTB and the GST/HST Credit is based on adjusted family net income.
In order to provide Canadian families with correct benefit amounts, the Canada Revenue Agency requires up-to-date information on family circumstances. Under existing rules, an individual who receives the GST/HST Credit is required to notify the Minister of National Revenue of a change in marital status no later than the end of the month following the month in which the change occurs. However, for CCTB purposes, such notification is not a requirement. This difference can lead to CCTB payments that do not accurately reflect current family circumstances.
To ensure consistency with existing notification requirements for GST/HST Credit purposes, Budget 2011 proposes to require an individual who receives the CCTB to notify the Minister of National Revenue of a marital status change before the end of the month following the month in which the change in status occurs (if the individual has not already done so for GST/HST Credit purposes). If the change in marital status results in a change to CCTB amounts, revised entitlements will be effective in the first month following the month of the change in status.
This measure will apply to marital status changes that occur after June 2011.
The Income Tax Act specifies amounts that can be issued as advance payments once per year to an individual in lieu of monthly payments for the purposes of the CCTB, and in lieu of quarterly payments for the purposes of the GST/HST Credit. Advance payments are made when each monthly CCTB amount is expected to be less than $10 and when each quarterly GST/HST Credit entitlement is expected to be less than $25.
In order to enhance administrative efficiency in the delivery of these benefits and simplify payments to individuals, Budget 2011 proposes to increase the advance payment threshold for the CCTB to $20 per month and for the GST/HST Credit to $50 per quarter.
This measure will apply to benefits paid after June 2011.
The Government has made accommodations under the pension tax rules for members and retirees of underfunded pension plans that are being wound up due to an employer’s insolvency, to ensure the appropriate application of the rules. In this context, the Canada Revenue Agency will clarify the application of the rules regarding the tax treatment of lump-sum amounts received by former employees or retirees in lieu of their right to health and dental coverage from employers who have become insolvent. These amounts will not be treated as income for tax purposes, in relation to insolvencies arising before 2012.
Budget 2011 proposes to amend the Children’s Special Allowances Act and its regulations to provide for the payment of a special allowance to a child protection agency (as listed in section 3 of the Children’s Special Allowances Act) in respect of a child who is a former Crown ward when the child is placed in the custody of a legal guardian, tutor or similar individual and the agency provides financial assistance for the maintenance of that child.
This measure will apply to special allowances payable for months after December 2011.
Employee Profit Sharing Plans (EPSPs) are an important vehicle that enables business owners to align the interests of their employees with those of the business by sharing the profits of their business with their employees.
In recent years, these plans have increasingly been used as a means for some business owners to direct profit participation to members of their families with the intent of reducing or deferring taxes on these profits. Some employers are also using EPSPs to avoid making Canada Pension Plan contributions and to avoid paying Employment Insurance premiums on employee compensation.
To ensure that EPSPs continue to be a useful vehicle for employers that are used for their intended purpose, the Government will review the existing rules for EPSPs to determine whether technical improvements are required in this area.
Before proceeding with any proposals, the Government will undertake consultations to seek the views of stakeholders, and ensure that any amendments to the tax rules applicable to EPSPs continue to accommodate the appropriate use of such plans.
The charitable sector plays an essential role in Canadian society through the valuable services it provides to Canadians, including to the most vulnerable in society. Canadians have shown that they are willing to give generously to charities, but want to have confidence that donations of their hard-earned dollars support legitimate charities and are used for charitable purposes. While the vast majority of charities and other qualified donees use tax-assisted donations in an appropriate manner, the generosity of the existing tax regime makes it a potential target for abuse. Budget 2011 proposes measures to enhance the ability of Canadians to give with confidence to charities, and to help ensure that more resources are available for legitimate charities.
To ensure that organizations given the privilege of issuing official donation receipts operate in compliance with the law, to clarify existing legislation and to limit unintended or excessive benefits, Budget 2011 proposes a number of measures.
The Income Tax Act grants the privilege of issuing official donation receipts to certain types of organizations referred to as “qualified donees”. Registered charities are the most common type of qualified donee.
To safeguard the tax system from abuse and to ensure compliance by those organizations given the privilege of issuing official donation receipts, Budget 2011 proposes to extend to the following qualified donees certain regulatory requirements that apply to registered charities in the interest of fairness and consistency:
In addition, Budget 2011 proposes to extend to RCAAAs additional regulatory requirements that apply to registered charities.
These measures, described in more detail below, will apply on or after the later of January 1, 2012 and Royal Assent to the enacting legislation.
To enhance transparency and accountability and provide greater certainty to donors, Budget 2011 proposes that qualified donees be required to be on a publicly available list maintained by the Canada Revenue Agency.
As is the case for registered charities, these measures will enable members of the public to determine which organizations may issue an official donation receipt and will enable registered charities, which may only make gifts to qualified donees, to determine whether an organization is a qualified donee for grant-making purposes.
The majority of qualified donees are already identified on publicly accessible lists. Accordingly, these proposals will not impose any new requirements on these organizations. For those qualified donees that are not currently on publicly accessible lists, these proposals will require that they be on a list maintained by the CRA in order to be eligible to issue official donation receipts.
Registered charities must abide by rules that relate to the issuance of official donation receipts and are subject to sanctions if they fail to comply. These rules include the requirement to:
Budget 2011 proposes that, if a qualified donee issues a donation receipt other than in accordance with the Income Tax Act and its regulations, then the CRA be authorized to suspend the receipting privileges of the qualified donee or revoke its qualified donee status.
Budget 2011 also proposes that the monetary penalties associated with improper issuance of receipts that apply to registered charities be extended to RCAAAs.
Registered charities and RCAAAs are required to maintain proper books and records to allow the CRA to verify donations and to provide access to these books and records upon request by the CRA. Registered charities and RCAAAs are subject to sanctions if they fail to do so.
To ensure fair and consistent treatment, Budget 2011 proposes that a qualified donee be required to maintain proper books and records and provide access to those books and records to the CRA when requested. If a qualified donee fails to do so, the CRA would be authorized to suspend the receipting privileges of the qualified donee or revoke its qualified donee status.
Budget 2011 also proposes that the monetary penalties associated with failing to file an information return that apply to registered charities be extended to RCAAAs.
In addition to the measures described above, to ensure fair and consistent treatment, Budget 2011 proposes to extend to RCAAAs other key regulatory requirements that apply to registered charities.
Registered charities are required to operate exclusively for charitable purposes. By comparison, RCAAAs currently need have only the promotion of amateur athletics in Canada on a nation-wide basis as their primary purpose and primary function.
Budget 2011 proposes that RCAAAs be required to have the promotion of amateur athletics in Canada on a nation-wide basis as their exclusive purpose and exclusive function rather than their primary purpose and primary function. These changes will not prevent RCAAAs from staging or engaging in international events and competitions, as such activities would normally be consistent with the promotion of amateur athletics in Canada, given the participation of Canadian teams and athletes in such events.
Consistent with the regime for registered charities, certain related activities will be permitted. RCAAAs will be permitted to carry on related business activities, such as selling merchandise related to their sport, and to engage in limited non-partisan political activities.
Under this proposal, RCAAAs will be subject to the same regulatory sanctions as registered charities for breach of these requirements, namely a monetary penalty, the suspension of qualified donee status or the revocation of registration.
Stakeholders are invited to provide feedback on or before August 31, 2011 on the introduction of an “exclusivity of purpose and function” test for RCAAAs.
A registered charity may be subject to a monetary penalty, have its receipting privileges suspended or have its registration revoked if it provides an undue benefit to any person. This includes situations where the charity pays excessive compensation to staff, a professional fundraising company or any individual or company with whom it does business. RCAAAs are not subject to such requirements.
Budget 2011 proposes that, if an RCAAA provides an undue benefit to any person, the CRA be authorized to apply monetary penalties, suspend its receipting privileges or revoke its registration in the same manner as currently applies to registered charities, which will help ensure fair and consistent treatment.
The public is provided access to significant information relating to registered charities such as governing documents, annual information returns, applications for registration and the names of directors. The availability of this information helps registered charities demonstrate that they are established for charitable purposes and are spending their funds appropriately.
To improve the information available to donors, Budget 2011 proposes that the CRA be authorized to make available to the public certain information and documents in respect of RCAAAs, in the same manner as applies to registered charities.
The CRA will consult with stakeholders in developing administrative guidance regarding the application of the proposed measures.
The CRA is responsible for auditing registered charities and registered Canadian amateur athletic associations and reviewing applications for their registration. In some cases, applications may be submitted by individuals who have been involved with other charities or associations that have had their registered status revoked for serious non-compliance, for example, for issuing fraudulent donation receipts. Concerns may also arise if an individual, with significant influence with respect to an organization, has a criminal record involving a breach of public trust, such as fraud or misappropriation. The Income Tax Act does not currently allow consideration of the criminal history or other past misconduct by such individuals as grounds for refusal to register the organization or to revoke its registration. As a result, the CRA may be unable to refuse or revoke the registration of an organization, even when there is a high risk of abuse.
Budget 2011 proposes to give the Minister of National Revenue the discretion to refuse or to revoke the registration of an organization, or to suspend its authority to issue official donation receipts, if a member of the board of directors, a trustee, officer or equivalent official, or any individual who otherwise controls or manages the operation of the organization:
The CRA will consider the particular circumstances of a charity or Canadian amateur athletic association in applying the proposed measures. For example, notwithstanding the involvement of a particular individual in the activities of a charity or association, the CRA will take into account whether appropriate safeguards have been instituted to address any potential concerns.
The proposed measures will not require a charity or Canadian amateur athletic association to obtain background checks. However, after a charity or association has been made aware of concerns on the part of the CRA in respect of an individual, failure to take adequate remedial action could result in the denial of the application for registration, suspension of receipting privileges or revocation of registered status, as the case may be.
The CRA will consult with stakeholders in developing administrative guidance regarding the application of the proposed measures.
These measures will apply on and after the later of January 1, 2012 and Royal Assent to the enacting legislation.
In some circumstances where a qualified donee receives property from a taxpayer and issues an official donation receipt but subsequently returns the property to the taxpayer, the Minister of National Revenue is not able to reassess the taxpayer for the Charitable Donations Tax Credit or Deduction previously claimed. To ensure that tax assistance is not improperly retained, Budget 2011 proposes to permit reassessments to disallow a taxpayer’s claim for a credit or deduction, as the case may be, in any case where property is returned to a donor. In some circumstances, other consequential adjustments will be made for tax purposes.
When property for which the taxpayer received an official donation receipt is returned, the qualified donee must issue to the taxpayer a revised receipt. Budget 2011 proposes that in these circumstances the qualified donee be required to send a copy of the revised receipt to the CRA when the amount of the receipt has changed by more than $50.
This measure will apply in respect of gifts or property returned on or after March 22, 2011.
Various provisions in the Income Tax Act reflect the policy that a Charitable Donations Tax Credit or Deduction generally should not be available to a donor until such time as the use and benefits of the donor’s property have been transferred to a registered charity or other qualified donee. One of these provisions applies in the case of donations of non-qualifying securities of the donor. For this purpose, a non-qualifying security (NQS) of a taxpayer is defined, generally, as a share, debt obligation or other security issued by the taxpayer or by a person not dealing at arm’s length with the taxpayer. Obligations of financial institutions to repay an amount deposited with the institution, as well as shares, debt obligations and other securities listed on a designated stock exchange, are excluded from the definition of NQS.
Budget 2011 proposes that tax recognition of the donation of an NQS of a donor, for the purpose of determining eligibility for a Charitable Donations Tax Credit or Deduction to the donor, will be deferred until such time, within five years of the donation of the NQS, as the qualified donee has disposed of the NQS for consideration that is not, to any person, another NQS.
Budget 2011 also proposes an anti-avoidance rule to ensure that, if as a result of a series of transactions:
the gift of the donor will be subject to the NQS rules until such time (within five years of the donation) as the donee has disposed of the NQS for consideration that is not, to any person, another NQS.
These measures will apply in respect of securities disposed of by donees on or after March 22, 2011.
The Income Tax Act has rules that provide certainty as to the tax consequences arising on the granting of options in a commercial context, but the application of these rules is unclear in respect of an option granted by a person, to a qualified donee, to acquire a property of that person.
Budget 2011 proposes to clarify that the Charitable Donations Tax Credit or Deduction is not available to a taxpayer in respect of the granting of an option to a qualified donee to acquire a property of the taxpayer until such time that the donee acquires property of the taxpayer that is the subject of the option. The taxpayer will be allowed a credit or deduction at the time of acquisition by the donee based on the amount by which the fair market value of the property at that time exceeds the total of amounts, if any, paid by the donee for the option and the property. Consistent with previously proposed measures concerning split receipting, a Charitable Donations Tax Credit or Deduction generally will not be available to the taxpayer if the total amount paid by the qualified donee for the property and the option exceeds 80 per cent of the fair market value of the property at the time of acquisition by the donee.
This measure will apply in respect of options granted on or after March 22, 2011.
Budget 2011 proposes, in general terms, to allow the exemption from capital gains tax on donations of shares of a class in which a taxpayer acquired shares issued pursuant to a flow-through share agreement entered into on or after March 22, 2011 only to the extent that cumulative capital gains in respect of dispositions of shares of that class exceed the original cost of the flow-through shares.
Budget 2006 introduced tax assistance for donations of publicly listed securities by eliminating any capital gains tax on such donations to public charities. Budget 2007 introduced an extension of this measure to donations of publicly listed securities to all registered charities. These measures provide an incentive to donate listed securities which have appreciated in value and carry unrealized capital gains.
Flow-through shares allow corporations in the oil and gas, mining and renewable energy sectors to renounce or “flow-through” tax expenses associated with eligible exploration, development and project start-up expenses to investors, who can deduct these expenses in calculating their own taxable income. Flow-through shares are treated as having a cost of zero for the purpose of calculating any gain or loss on their disposition. As a result, when an investor holding only flow-through shares sells them, the full amount of the proceeds received is recognized as a capital gain for tax purposes. Taxation as a capital gain of the proceeds up to the amount of the original cost represents a partial recovery of the tax benefit provided by the deduction for the original cost of the share, rather than a gain resulting from an appreciation in the share’s value. The exemption from capital gains tax on donations of publicly listed securities allows taxpayers to avoid this second stage of the normal flow-through share rules.
Under current rules, when publicly listed flow-through shares are donated, the donor benefits from:
The net result is that a taxpayer can often acquire and donate flow-through shares at little after-tax cost.
For illustrative purposes, this table sets out a hypothetical flow-through share donation by an Ontario taxpayer in the top income tax bracket. (Results can vary depending on factors including the purchase price of the shares, their value at the time of donation, the province of residence of the donor, the donor’s marginal tax rate, and the availability of federal and provincial flow-through share tax credits.) In this example, all of the benefit due to the capital gains exemption is assumed to accrue to the donor.
This example assumes that the donated flow-through share is eligible for the federal and provincial mineral exploration tax credits (15% and 5% respectively) and that it is issued at a 20% premium to the $100 value at which ordinary shares of the class in which it is issued are trading. It also assumes that after the flow-through deductions have been claimed by the taxpayer, he or she donates the share to charity at its fair market value of $100 (the flow-through share premium generally drops out of the price once the flow-through deductions have been claimed).
|Price paid for flow-through share (20% premium)||$120.00|
|Value of flow-through share deductions (fed/prov)||-$55.70|
|Net value of flow-through share tax credits (fed/prov)||-$12.90|
|Capital gains tax on disposition of shares (fed/prov)||0.00|
|Value of charitable donation credit (fed/prov)||-$46.40||-$115.00|
|Net after-tax cost||$5.00|
|Government tax support as % of donation||95%|
Budget 2011 proposes that if a share, or a right to acquire a share, of a particular class of the capital stock of a corporation (such share or right being referred to below as a “flow-through share”) is issued to a taxpayer under a flow-through share agreement entered into on or after March 22, 2011, the exemption from capital gains tax on donations of publicly listed securities will be available in respect of a subsequent donation by the taxpayer of a share of that class only to the extent that the capital gain on the donation exceeds a threshold amount (the “exemption threshold”) at the time of the donation. The proposed rules will apply as well to a right to acquire a share of that class, and to any other property that is identical to the share or right.
The exemption threshold of a taxpayer in respect of a particular class of shares at any particular time will be equal to the amount by which:
the sum of the original cost (that is, determined without regard to the deemed zero cost of flow-through shares) of all flow-through shares of the particular class issued to the taxpayer on or after March 22, 2011 and before the particular time,
the amount of each capital gain realized by the taxpayer on a disposition, before the particular time and after the first time on or after March 22, 2011 on which flow-through shares of the particular class were issued to the taxpayer, of any shares of the particular class, not exceeding the amount of the exemption threshold immediately before the time of the disposition.
A taxpayer’s exemption threshold in respect of a particular class of shares will be reset at nil at any time that the taxpayer no longer holds any shares of that class. As well, an anti-avoidance rule will apply to the donation of property acquired by a donor in a tax-deferred transaction (a “rollover”).
The proposed rules will apply where a taxpayer acquires shares issued pursuant to a flow-through share agreement entered into on or after March 22, 2011.
The Government also supported Motion 559, sponsored by the Member of Parliament for Kitchener-Waterloo and adopted by the House of Commons on March 2, 2011, which called for the House Standing Committee on Finance to study charitable donation incentives. The Government will ask the Committee to undertake this study in the first session of this Parliament.
Machinery and equipment acquired by a taxpayer, after March 18, 2007 and before 2012, primarily for use in Canada for the manufacturing or processing of goods for sale or lease is currently eligible for a temporary accelerated capital cost allowance (CCA) rate of 50 per cent on a straight line basis (subject to the application of the “half-year rule”) under Class 29 of Schedule II to the Income Tax Regulations.
Budget 2011 proposes to extend this temporary incentive, for two years, to eligible machinery and equipment acquired before 2014.
Machinery and equipment acquired by a taxpayer, after 2013, primarily for use in Canada for the manufacturing or processing of goods for sale or lease will be required to be included in Class 43 of Schedule II to the Income Tax Regulations, for which a 30-per-cent declining balance CCA rate applies.
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 and conservation equipment. The class incorporates by reference a detailed list of eligible equipment that generates or conserves energy 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.
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 two classes are generally the same, except that cogeneration systems that use fossil fuels must meet a higher efficiency standard for Class 43.2 than for Class 43.1. Systems that only meet the lower efficiency standard are eligible for Class 43.1.
Class 43.2 includes a variety of stationary clean energy generation or conservation equipment that is used to produce electricity or thermal energy, or used to produce certain fuels from waste that are in turn used to produce electricity or thermal energy. Subject to detailed rules in the regulations, eligible equipment includes:
Fuels from Waste
If the majority of tangible property in a project is eligible for inclusion in Class 43.2, then certain intangible project start-up expenses (for example, 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.
In Budget 2010, the Government expanded Class 43.2 to include equipment that recovers waste heat in a broader range of applications than was previously eligible. This Budget goes further. One potential use for waste heat is the generation of electricity. In order to encourage productive use of such otherwise wasted energy, Budget 2011 proposes to expand Class 43.2 to include equipment that generates electricity using waste heat.
In traditional thermal electricity generating plants, the power-generating turbines are driven by high-temperature, high-pressure steam created with energy from burning fossil fuel (such as coal or natural gas) or from a nuclear reaction. Waste heat often does not have the same energy characteristics as heat from these sources. There are a variety of processes, however, that can produce electricity from lower temperature sources of heat. The most common process of this kind is the organic Rankine cycle, which uses an organic fluid as the working fluid, instead of water or steam, in order to drive the turbine. The special properties of the fluids used allow electricity to be produced from relatively low-grade heat sources such as waste heat from an industrial process (for example, exhaust gases from a diesel engine or an industrial chimney).
Budget 2011 proposes to amend Class 43.2 to include equipment that is used by the taxpayer, or by a lessee of the taxpayer, to generate electrical energy in a process in which all or substantially all of the energy input is from waste heat. Certain equipment that generates electricity, as the second stage in a combined cycle process, using waste heat from a gas turbine (for example, that either generates electricity or compresses natural gas) can already qualify for inclusion in Class 43.2 (or Class 43.1) without this amendment, subject to energy efficiency thresholds (measured by a “heat rate”). Such equipment will not be included in the new provision, but will rather continue to be subject to the existing energy efficiency thresholds.
Eligible equipment will include electrical generating equipment, control, feedwater and condensate systems, and other ancillary equipment, but not buildings or other structures, heat rejection equipment (such as condensers and cooling water systems), transmission equipment or distribution equipment.
Systems will not be eligible if they use chlorofluorocarbons (CFCs) or hydrochlorofluorocarbons (HCFCs), due to their negative environmental impacts.
This measure will encourage investment in equipment that uses thermal energy, that would otherwise be wasted, in order to generate electricity. This would include, for example, equipment that generates electricity from waste heat produced by diesel engines used to compress natural gas on pipelines or to generate electricity. Investment in such equipment can increase energy efficiency by displacing the consumption of energy from other sources for power generation. To the extent that it displaces use of fossil fuel such as coal or natural gas, the measure could contribute to a reduction in greenhouse gas emissions, in support of Canada’s target, set out in the Federal Sustainable Development Strategy, of reducing greenhouse gas emission levels by 17 per cent by 2020. Displacing fossil fuel consumption could also support the Strategy’s target of reducing emissions of air pollutants.
This measure will apply to eligible assets acquired on or after March 22, 2011 that have not been used or acquired for use before that date.
The Income Tax Act contains special rules for qualifying environmental trusts (QETs). These rules were introduced in recognition of regulatory regimes under which the operator of a mine, quarry or waste disposal site may be required to pre-fund, by means of a trust, the costs of reclaiming or restoring the site.
Under the income tax rules:
Budget 2011 proposes modifications to the existing QET rules.
In May 2009, the National Energy Board (NEB) announced that companies operating pipelines under its jurisdiction will be required to begin setting aside funds during a pipeline’s operating life to fund future reclamation costs associated with the pipeline’s abandonment. This is intended to support the public interest in ensuring that pipeline operators make adequate financial provision for pipelines to be abandoned safely and effectively. In light of these developments, Budget 2011 proposes to expand the range of trusts eligible for QET treatment to include trusts that are required to be established in the context of pipeline abandonment.
One of the existing conditions for a trust to qualify for tax treatment as a QET is that the trust be mandated under the terms of a contract entered into with the Crown in right of Canada or a province or under a law of Canada or a province. Budget 2011 proposes to modify this condition for all QETs to include trusts that are created after 2011 and mandated by order of a tribunal (such as the NEB) constituted by a law of Canada or a province.
These changes could have a modest positive environmental impact by facilitating the efforts of regulators to ensure that funding is set aside for the future reclamation of land used for the operation of pipelines. This could indirectly support the goal in the Federal Sustainable Development Strategy relating to protecting water quality.
These changes will apply to the 2012 and subsequent taxation years for trusts created after 2011.
To qualify for tax treatment as a QET, a trust’s holdings must be limited to eligible investments (such as cash, government bonds, bank deposits and guaranteed investment certificates). Budget 2011 proposes to expand the range of eligible investments for QETs to include debt obligations described in paragraphs (c) and (c.1), and securities described in paragraph (d), of the definition “qualified investment” in section 204 of the Income Tax Act. This will generally include debt of public corporations, investment-grade debt and securities that are listed on a designated stock exchange.
A QET will not be permitted to invest in “prohibited investments”. For this purpose, prohibited investments will generally include an interest in a security (including debt) issued by:
The proposed expansion of eligible investments for a QET is not intended to imply that these investments are suitable investments for any particular QET. The relevant government regulatory authority that mandates the trust is responsible for determining which investments are appropriate given the pre-funding objectives sought by the regulator in the context of the particular industry and site.
These changes will apply to the 2012 and subsequent taxation years for trusts created after 2011. In the case of a trust created before 2012, these changes will apply to the trust for a particular taxation year, and each subsequent taxation year, of the trust that ends after 2011 if the trust and the relevant government regulatory authority jointly so elect.
Budget 2011 proposes to set the rate of tax payable by a QET under Part XII.4 of the Income Tax Act to the corporate income tax rate generally applicable for the 2012 and later taxation years.
As noted above, the attribution of QET income to the operator, and the operator’s related tax credit for tax paid by the QET, together result in income earned in the QET being taxed at the operator’s effective tax rate. Therefore, this change will not generally affect the net tax paid on income earned in a QET, but will better align the initial QET tax liability with the net tax liability in respect of QET income.
This change will apply to the 2012 and subsequent taxation years.
Budget 2011 proposes changes that will better align the deduction rates for intangible costs in the oil sands sector with rates in the conventional oil and gas sector.
Costs are considered to be of a capital nature if they contribute to the earning of income over a number of years. Costs of a capital nature include both the cost of tangible assets such as equipment and the cost of intangible assets or outlays such as the cost of acquiring resource rights or the cost of clearing land or removing overburden prior to excavating a mine.
Budget 2007 announced the phase-out of the accelerated capital cost allowance for tangible assets in oil sands projects, leaving in place the regular 25-per-cent capital cost allowance rate. Budget 2011 builds on these changes by addressing intangible costs.
In the conventional oil and gas sector, the cost of acquiring rights to explore for, drill or extract oil or natural gas, or to acquire an oil or natural gas well or other resource property, is treated for tax purposes as Canadian oil and gas property expense (COGPE). COGPE is deductible at the rate of 10 per cent per year on a declining balance basis. By contrast, the cost of acquiring oil sands leases and other oil sands resource property generally can be treated as Canadian development expense (CDE), which is deductible at the rate of 30 per cent per year on a declining balance basis.
Budget 2011 proposes that the cost of oil sands leases and other oil sands resource property be treated as COGPE and thus be eligible for deduction at 10 per cent per year.
This change will be effective for acquisitions made on or after March 22, 2011. Proceeds from the disposition on or after March 22, 2011 of a taxpayer’s oil sands resource property will be applied to reduce the taxpayer’s cumulative CDE, or cumulative COGPE, consistent with the manner in which the cost of the property was treated by the taxpayer when acquired. These changes will also apply to oil shale property, which is treated in a manner similar to oil sands resource property.
In the conventional oil and gas sector and in situ oil sands projects (which use wells rather than mining techniques), development costs such as the cost of drilling production wells are treated as CDE, which as noted is eligible to be deducted at a rate of 30 per cent per year. By contrast, development expenses incurred for the purpose of bringing a new oil sands mine into production in reasonable commercial quantities are treated as Canadian exploration expense (CEE), which can be deducted in full in the year incurred. This includes such expenses as the cost of clearing land or removing overburden in order to expose the oil sands prior to the start of mining operations. To align the deduction rates for pre-production development costs in oil sands mines with the rates applicable to in situ oil sands projects and the conventional oil and gas sector, Budget 2011 proposes that these expenses be treated as CDE.
In recognition of the long time frames involved in developing oil sands mining projects, the following transitional relief for pre-production development expenses will be provided:
This change will also apply to pre-production development expenses in respect of oil shale mines.
Together, the two measures for oil sands properties and for pre-production development expenses of oil sands mines will improve fairness and neutrality in the taxation of oil sands relative to conventional oil and gas and other sectors of the economy.
The tax treatment of intangible costs is only one of many factors that influence decisions to invest in oil sands projects. These changes will help ensure that investment decisions are based on market factors rather than income tax treatment, subject to applicable regulations. To the extent that these changes remove incentives that may contribute to a higher level of investment than would otherwise have occurred, they could contribute indirectly to goals in the Federal Sustainable Development Strategy relating to reducing emissions of greenhouse gases and minimizing threats to air quality, protecting water quality, and conserving ecosystems and habitat.
The Income Tax Act contains a number of rules generally intended to avoid the potential for dividends to be subject to multiple levels of taxation as they are paid between corporations. Pursuant to these rules, a corporation is generally entitled to a deduction, in computing taxable income for income tax purposes, that offsets the corporation’s income inclusion in respect of dividends received by it from taxable Canadian corporations.
These rules are complemented by certain rules, generally referred to as “stop-loss rules”, which reduce, in certain cases, the amount of a loss otherwise realized by a corporation on a disposition of shares by the amount of tax-free dividends received, or deemed to have been received, on those shares on or before the disposition.
These stop-loss rules are subject to certain exceptions that apply depending on whether the corporate shareholder holds the share as a capital property, an income property or a mark-to-market property. There are slight differences in the mechanics of these exceptions but, in general, they apply if
Some corporations have been entering into tax avoidance arrangements that rely on the existing exceptions to the stop-loss rules to, in effect, claim a double deduction on the redemption of shares. In these cases, a deemed dividend arises on the redemption of shares held by the corporation equal to the difference between the redemption price and the paid-up capital of the shares, for which the corporation claims the dividend deduction. Where the paid-up capital is below the redemption price, the deemed dividend will also result in a loss for tax purposes which may be deducted in computing income by the corporation even though it has not realized a true economic loss.
In order to maintain the integrity of the tax system, Budget 2011 proposes to extend the application of these stop-loss rules to any dividend deemed to be received on the redemption of shares held by a corporation (whether the shares are held directly or indirectly through a partnership or trust), other than dividends deemed to be received on the redemption of shares of the capital stock of a private corporation that are held by a private corporation (other than a financial institution) whether directly or indirectly through a partnership or trust (other than a partnership or trust that is a financial institution).
This measure will apply to redemptions that occur on or after March 22, 2011.
In order to ensure that corporate income is subject to tax on a timely basis, Budget 2011 proposes rules to limit deferral opportunities for corporations with significant interests in partnerships.
Unlike an individual, a corporation or a trust, a partnership is not a taxpayer. The income or loss of a partnership is allocated to its partners, who include the amount in calculating their own taxable income.
Under current tax rules, income earned by a corporation as a member of a partnership is included in the corporation’s income for the corporate taxation year in which the fiscal period of the partnership ends. If a corporation carries on a business through a partnership that has a fiscal period that ends after the end of the corporation’s taxation year, taxation of the partnership earnings can be deferred by up to one year. Although this misalignment may arise simply because two or more corporations with different taxation years carry on business together through a partnership, increasingly corporations are setting up partnerships with misaligned fiscal periods for the primary purpose of deferring taxes.
The deferral of tax, whether intentional or not, when income is earned through a partnership, is inequitable. It also creates an incentive to use business structures that have little purpose other than tax deferral, which is not economically productive.
In 1995, changes were enacted to limit similar tax deferral opportunities that existed for individuals who carry on business through a partnership or sole proprietorship. Precedents for limiting deferral by corporations through the use of partnerships exist in a number of jurisdictions, including the United States, the United Kingdom and Australia.
Budget 2011 proposes to limit the deferral of tax by a corporation that has a significant interest in a partnership having a fiscal period different from the corporation’s taxation year. In computing the corporation’s income for a taxation year, in respect of a fiscal period of the partnership that begins in the taxation year and ends in a subsequent year, the corporation will be required to accrue income from the partnership for the portion of the partnership’s fiscal period that falls within the corporation’s taxation year (the “Stub Period”).
The proposed measures will apply to taxation years of a corporation that end after March 22, 2011. In many cases, these measures could result in the inclusion of significant incremental partnership income for a corporation’s first taxation year that ends after March 22, 2011. To mitigate the potential cash-flow impact, transitional relief will be available that will generally result in no additional taxes being payable for that first corporate taxation year. Instead, the additional income will generally be brought into the corporation’s income over the five taxation years that follow that first taxation year.
This measure will apply to a corporate partner (other than a professional corporation) for a taxation year if:
For greater certainty, this measure will apply to any corporate partner (as described above) of a partnership, even if the partnership has as a member an individual, or a professional corporation, who is subject to the 1995 rules limiting deferral in respect of unincorporated businesses.
A partnership will continue to be allowed to have a fiscal period that differs from that of any of its corporate partners. The potential for deferral will be addressed by requiring the corporate partner to accrue income from the partnership for the Stub Period. Unless the corporate partner designates otherwise, this accrued income will generally be a pro-rated amount of the partner’s income from the partnership for the fiscal period of the partnership ending in the taxation year of the partner. This calculation will be similar to the alternative method of income calculation introduced as part of the 1995 changes that currently apply to an individual who is a member of a partnership that has a fiscal period that does not end on December 31.
Specifically, a corporate partner that is a member of a partnership at the end of the corporate partner’s taxation year will include in computing its income for the year:
the corporate partner’s share of the income or loss of the partnership from the fiscal period that ends in the year;
accrued income, if any, for the Stub Period subject to certain adjustments (“Adjusted Stub Period Accrual”);
the Adjusted Stub Period Accrual, if any, for the corporate partner’s previous taxation year.
In general, the “Stub Period Accrual” in a taxation year of a corporation in respect of a partnership will be determined as follows:
A × B/C
A is the corporate partner’s share of income, if any, from the partnership (other than dividends) for the fiscal periods that end in the taxation year;
B is the number of days in the Stub Period; and
C is the number of days in the partnership’s fiscal periods that end in the taxation year.
Corporations may choose to designate a Stub Period Accrual that is lower than the amount determined under the formulaic approach above. If the designated amount is less than the lesser of the actual pro-rated income of the corporate partner from the partnership for the Stub Period and the amount determined under the formulaic approach, the corporate partner will be subject to the provisions relating to Under-Reported Stub Period Accrual (discussed below).
A corporate partner will be entitled, if it chooses, to reduce the amount of its Stub Period Accrual to a lower amount by the amount of its share of “Designated Resource Expenses” incurred by the partnership in the Stub Period at the maximum rate at which such expenses would otherwise be deductible under the Income Tax Act if the partnership’s fiscal period had ended on the same day as the partner’s taxation year. Designated Resource Expenses will be:
The corporate partner’s share of Designated Resource Expenses will be determined based on the corporate partner’s interest in the partnership for the last fiscal period of the partnership that ends in the corporate partner’s taxation year. If a corporate partner wishes to use these Designated Resource Expenses in computing its accrued income, the corporate partner will be required to obtain from the partnership, before filing the corporate tax return for the year, information in writing evidencing the nature and amount of each such expense and the corporate partner’s share of that expense.
For purposes other than computing accrued Stub Period income from a partnership, the actual allocation of these resource expenses and other amounts affecting resource expense pools will continue to be made at the end of the partnership’s fiscal period.
The net amount of the accrual for the Stub Period, after adjustments, if any, for Designated Resource Expenses, is referred to as the “Adjusted Stub Period Accrual”. In no case can a corporate partner’s Adjusted Stub Period Accrual in respect of a partnership be less than zero. A corporate partner will be required to include Adjusted Stub Period Accrual in its income for the taxation year that includes the Stub Period and will be entitled to deduct the same amount in computing its income for the following taxation year.
A corporate partner that, in a Stub Period, becomes a member of a new or an existing partnership will not have any accrued income, determined under the formulaic approach, from that partnership. In such a case, however, the corporate partner will generally be allowed to designate accrued income from the partnership in the Stub Period.
As outlined above, a corporate partner will be permitted to use either the formulaic approach or the designation approach in computing Stub Period Accrual in respect of each partnership. The designated amount is subject to verification, however, once the partnership’s fiscal period has ended. If the designated amount is less than the lesser of the actual pro-rated income of the corporate partner from the partnership for the Stub Period and the amount determined under the formulaic approach, the corporate partner will be subject to an additional income inclusion in the following taxation year.
For this purpose, the actual pro-rated income of a corporate partner from a partnership for a Stub Period is the partner’s share of the income of the partnership for the fiscal period of the partnership that includes the Stub Period and that ended in the taxation year pro-rated based on the ratio of the number of days in the Stub Period to the number of days in that fiscal period.
In general, the additional income inclusion adjustment will be equal to the amount of the shortfall multiplied by the average prescribed interest rate applicable for underpayments of tax for the period between the end of the corporate partner’s taxation year in which the Adjusted Stub Period Accrual was included and the end of the corporate partner’s taxation year in which the fiscal period of the partnership ended. If the shortfall is larger than 25 per cent of the lesser of the pro-rated actual amount and the amount determined under the formulaic approach, there will be an additional income inclusion adjustment equal to 50 per cent of the additional income inclusion in respect of the amount of the shortfall in excess of the 25-per-cent threshold.
No additional income inclusion will be required in respect of a corporate partner’s income from a partnership in the first taxation year of the corporate partner for which a Stub Period Accrual is calculated if that accrual is eligible for transitional relief. In addition, if the corporate partner is a member of more than one partnership, in calculating the additional income inclusion, a shortfall in Stub Period Accrual in respect of one partnership can be netted against an overstatement in respect of another partnership.
As a result of these measures some partnerships may wish to change their fiscal periods — for example, to align with the taxation year of one or more corporate partners. A one-time election (a “Single-tier Alignment Election”) will be provided that will enable a partnership to change its fiscal period on the following conditions:
If this election results in the end of a fiscal period of a partnership which is the second fiscal period of the partnership that ends in a corporate partner’s first taxation year ending after March 22, 2011, the corporate partner’s share of partnership income or loss for this second fiscal period will be referred to as “Alignment Income”. As discussed below, a corporate partner’s Alignment Income will be eligible for transitional relief.
These measures could result in the inclusion of significant incremental partnership income for a corporation’s first taxation year that ends after March 22, 2011. To mitigate the potential cash-flow impact, transitional relief will be available to recognize the incremental amount gradually over the five taxation years that follow that first taxation year. Income eligible for transitional relief will be subject to certain restrictions.
The amount upon which a transitional reserve may be claimed is referred to as “Qualifying Transitional Income” (QTI). This reserve will be computed on a partnership-by-partnership basis if a corporate partner is a member of two or more partnerships. A corporate partner will generally be eligible for transitional relief in respect of its QTI from a partnership in accordance with the following schedule.
|Allowed reserve deduction for QTI||100%||85%||65%||45%||25%||0%|
|Inclusion rate for QTI||0||15%||20%||20%||20%||25%|
|1 If a corporate partner has more than one taxation year ending in a calendar year, the same reserve percentage will apply to each of those years.
2 If the first taxation year of a corporate partner that ends after March 22, 2011 ends in 2012, the schedule is modified such that the 100% reserve applies in 2012, and subsequent years are adjusted accordingly.
Like other reserves, the amount of a QTI reserve deducted in a taxation year will be included in income in the following taxation year.
The QTI of a corporate partner in respect of a partnership will be the sum of its Adjusted Stub Period Accrual and its Alignment Income in respect of that partnership. If the sum is negative, the QTI is zero.
In determining QTI, the Adjusted Stub Period Accrual and Alignment Income in respect of any fiscal period will be computed as if the partnership, in computing its income for those fiscal periods:
Subject to the adjustment described below, a corporate partner’s QTI will remain constant throughout its reserve period and will form the base on which the corporate partner’s reserve is computed throughout that period. A corporate partner’s Stub Period Accrual for the partner’s first taxation year ending after March 22, 2011 (the “First Reserve Year”) may be adjusted, and consequently its QTI may be adjusted, in the corporate partner’s taxation year in which ended the fiscal period that includes the Stub Period (the “Second Reserve Year”). Specifically, the Stub Period Accrual may be adjusted in the Second Reserve Year up or down to reflect the pro rata portion of the corporate partner’s actual income from the partnership for the fiscal period that included the Stub Period. This will result in an equal change to the Adjusted Stub Period Accrual that was included in QTI (because Designated Resource Expenses will remain unchanged). This adjustment will change the corporate partner’s QTI for the purpose of claiming a reserve in its reserve years after the First Reserve Year. However, this adjustment will not retroactively affect the corporate partner’s QTI or reserve in the First Reserve Year.
As was the case with respect to the 1995 transitional rules, a corporate partner may claim a reserve in a taxation year only to the extent that:
Similarly, no reserve will be available for a corporate partner in a taxation year in respect of QTI that relates to a partnership if:
A corporate partner of a partnership will be eligible for transitional relief only if it has income from the partnership, allocated to it under existing rules, in its first taxation year that ends after March 22, 2011 as well as QTI (consisting of income that is Adjusted Stub Period Accrual or Alignment Income) from the partnership. Specifically, a corporate partner will be eligible for a reserve in a taxation year in respect of QTI relating to a partnership if it was a member of the partnership:
A corporation that results from the amalgamation of two or more predecessor corporations will be considered to be a continuation of each of those predecessor corporations that has QTI.
The tax deferral described in relation to a corporation that is a member of a partnership can be multiplied through the use of a tiered structure where the partnership is itself a member of another partnership with a different fiscal period. Such structures could be several layers deep.
The Stub Period Accrual approach described above for one-tier partnerships is not adaptable to address the tax deferral that arises in multiple-tier structures which may have both corporations and partnerships as members at various levels in the structure. Although the 1995 rules in respect of unincorporated businesses allow partnerships to have an off-calendar fiscal period, they require a fiscal period ending on December 31 for tiered partnerships.
For these reasons, partnerships that are part of a tiered partnership structure will be required to have the same fiscal period. However, that fiscal period need not align with the taxation year of any of its corporate partners. The Stub Period Accrual approach described above will apply to income earned by each corporate partner in a tiered partnership structure if its taxation year does not align with the fiscal period of the partnerships.
Specifically, if a partnership has one or more partnerships as members, all of those partnerships will be required to adopt a common fiscal period. In general, partnerships that are not required under existing rules to have a December 31 fiscal period will be allowed, on a one-time basis, to choose a common fiscal period by filing an election in writing with the Minister of National Revenue (the “Multi-tier Alignment Election”). The elected fiscal period must end before March 22, 2012 and must be no more than 12 months in duration. The election must be filed on behalf of the partnerships on or before the earliest of all filing-due dates for the return of income of any corporate partner of any of the partnerships for the corporate taxation year in which the new fiscal period ends.
If no such election is filed, the common fiscal period of the partnerships will end on December 31, 2011 and subsequent fiscal periods will end on December 31. The Single-tier Alignment election described previously will not be available in the case of multi-tiered structures.
A “Multi-tier Alignment” will be considered to have taken place where the fiscal period of one or more partnerships in a tiered partnership structure has been changed, due to a Multi-tier Alignment Election, or to December 31 as the result of such an election not being filed. In this situation, the first common fiscal period established for the partnerships will be referred to as the “First Aligned Fiscal Period”. In this case, the “Multi-tier Alignment Income” (MTAI) of a corporate partner will be its share, direct or indirect, of any income or loss from each of the partnerships in the multi-tier structure that is included in computing the income of the corporate partner for the First Aligned Fiscal Period that would not have been included by the partner in its income for that taxation year if the alignment had not occurred.
In particular, MTAI will include only incremental income from partnerships, if any, in a multi-tier structure that are at or below the highest level at which the alignment causes a partnership’s fiscal period to end earlier than it otherwise would have.
If a fiscal period of the top partnership in a chain ended in a corporate partner’s taxation year before the time at which, in that taxation year, the First Aligned Fiscal Period ends, all of the partner’s share of the income from the partnerships for the aligned fiscal periods would be MTAI since it would all be incremental income for that taxation year.
For example, assume that the partnership at the top of a multi-tier structure of partnerships has a fiscal period that ends on January 31, and the partnerships do not file a Multi-tier Alignment Election, resulting in an aligned fiscal period of December 31 as of December 31, 2011. The taxation year of a corporate partner with a taxation year-end of December 31, 2011 would include two fiscal periods from the top partnership. The corporate partner’s share of income from the second fiscal period of the top partnership (January 31 to December 31) would all be MTAI.
In comparison, if the end of the First Aligned Fiscal Period is the first fiscal period that ends in the corporate partner’s taxation year, the MTAI will be the corporate partner’s share of the income from the partnerships for the First Aligned Fiscal Period less the income that would have been included by the partner in its income for the taxation year if the alignment had not occurred.
For example, if the top partnership in a two-tier structure of partnerships has a fiscal period that ends on December 31, and a corporate partner of the top partnership has a taxation year-end of December 31, a Multi-tier Alignment to December 31 would not affect the number of fiscal periods reported by the top partnership. The alignment would, however, affect a second-tier partnership that had previously had a fiscal period that ended on January 31, causing it to have two fiscal periods that end in the 2011 taxation year of the corporate partner. In this situation MTAI would be equal to the corporate partner’s share of income of the second-tier partnership for its January 31-to-December 31, 2011 fiscal period.
As in the case of single-tier structures, a corporate partner of a partnership that is in a multi-tier structure could also have a Stub Period Accrual in respect of the partnership, but with modifications to the basic rules described above.
Where there has been a Multi-tier Alignment in respect of a partnership structure, a corporate partner of a partnership in the structure will not have a Stub Period Accrual until the end of the partner’s taxation year in which the First Aligned Fiscal Period ends. There would, however, be no Stub Period Accrual if the First Aligned Fiscal Period ends on the same day as the corporate partner’s taxation year (i.e., because there is no Stub Period). If there is no Multi-tier Alignment because the partnerships in the structure already have a common fiscal period that differs from the taxation year of the corporate partner, the Stub Period Accrual rules will operate in the same manner as in a single-tier partnership structure.
When a Multi-tier Alignment gives rise to a Stub Period in respect of a corporate partner, the partner’s Stub Period Accrual is to be computed based on income from the first fiscal period that ends in the partner’s taxation year pro-rated by the length of the Stub Period divided by the number of days in that fiscal period (similar to the formulaic approach described above in respect of single-tier partnerships). This will be the case whether the first fiscal period is an aligned fiscal period or not. Where the first fiscal period is the First Aligned Fiscal Period, income for this purpose will be net of MTAI, if any, from that partnership.
As in a single-tier structure, a corporate partner will have the ability to designate a lower Stub Period Accrual than is calculated under the formulaic approach, subject to the provisions relating to Under-Reported Stub Period Accrual (discussed previously), and to include Designated Resource Expenses in computing its Adjusted Stub Period Accrual.
As in the case of a single-tier structure, a transitional reserve may be claimed by a corporate partner in respect of its QTI from a multi-tier partnership structure. A corporate partner will compute QTI for each partnership of which it is directly a member and which is part of a multi-tier structure.
QTI is the sum of a corporate partner’s Adjusted Stub Period Accrual, if any, and MTAI, if any, for the corporate partner’s taxation year in which the First Aligned Fiscal Period ends.
A partner will generally be eligible for transitional relief in respect of its QTI from a partnership on the same basis as in the schedule described for a single-tier structure, except in cases where the First Aligned Fiscal Period ends in a 2013 taxation year of the corporate partner (meaning that the first taxation year impacted with QTI is 2013), in which case the reserve will begin at the 85-per-cent level.
In order to qualify for this transitional relief, a corporate partner must have been a direct member of the partnership continuously since before March 22, 2011 until the end of the taxation year in which a reserve is being claimed.
The QTI computational rules and the generally applicable partner eligibility rules for single-tier partnerships, described above, will also apply to a corporate partner in a multi-tier structure.
The operation of the basic rules for single-tier structures, including the transitional reserve, is set out in the following example.
|Income from partnership P (A)||12||15|
|Accrued income adjustment:|
|Add: current year’s Stub Period Accrual (A x approximately 11/12)||11||13.8|
|Deduct: Designated Resource Expenses (CDE x 30%)||(3)||0|
|Deduct: previous year’s Adjusted Stub Period Accrual||n/a||(8)|
|Income before transitional reserve||20||20.8|
|Transitional reserve adjustment|
|Qualifying Transitional Income (QTI) = $8M (B)|
|Deduct: for 2011, 100% of B||(8)||n/a|
|for 2012, 85% of B||n/a||(6.8)|
|Add: previous year’s reserve||n/a||8|
|Income from partnership P under the proposals||12||22|
Taxation is an integral part of good governance as it promotes greater accountability and self-sufficiency and provides revenues for important public services and investments. Therefore, the Government of Canada supports initiatives that encourage the exercise of direct taxation powers by Aboriginal governments.
To date, the Government of Canada has entered into 32 sales tax arrangements under which Indian Act bands and self-governing Aboriginal groups levy a sales tax within their reserves or their settlement lands. In addition, 12 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 2011 announces that the Government is initiating a process to simplify the Customs Tariff in order to facilitate trade and lower the administrative burden for businesses. This follows from tariff measures taken over the last two Budgets and the Government’s commitment to reduce red tape.
This process will identify changes to the Customs Tariff that will be subsequently implemented by a variety of legislative amendments and regulatory modifications. These changes can be grouped as follows:
These and other changes will ensure that the Customs Tariff is modernized in a way that facilitates trade and lowers the customs burden on stakeholders. All changes will be revenue-neutral and where necessary, stakeholder views will be sought on certain proposed changes.
Budget 2011 proposes the introduction of three new tariff items in Chapter 98 of the Schedule to the Customs Tariff to facilitate the processing of low value non-commercial imports arriving by post or by courier. These new tariff items will simplify the Canada Border Service Agency’s (CBSA) tariff classification process of postal and courier imports with values less than $500.
These new tariff items will apply generic Most-Favoured-Nation tariff rates of 0%, 8% or 20% depending on the description of the goods being imported, similar to the treatment that currently exists for goods imported by travellers under heading 98.26 of the Schedule to the Customs Tariff.
To ensure that GST/HST relieving provisions are applied to low value shipments imported by post or courier, the new tariff items will not apply where the goods are relieved from GST/HST. As such, any goods classified under the generic tariff items will be subject to GST/HST.
The introduction of these generic tariff items for non-commercial postal and courier imports is expected to have minimal impact on tariff revenues, no impact on sales tax revenues and will lead to further efficiencies in the CBSA processing of those imports.
Budget 2011 confirms the Government’s intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release:
Budget 2011 also reaffirms the Government’s commitment to move forward as required with technical amendments to improve the operation of the tax system.
1 In these proposals, references to an individual’s “RRSP assets” should be read to include a reference to the individual’s account balances under defined contribution RPPs, where the context requires.
2 In general terms, a designated plan will be a defined benefit RPP if at least 50 per cent of the total pension adjustments of plan members in a year belong to individuals who are connected to the employer (usually through an ownership interest) or who are highly compensated employees.
3 Tax regulations generally require that each RPP member start to receive pension payments before the end of the year in which he or she attains 71 years of age (unless the value of benefits has otherwise been transferred to an RRSP or RRIF).
4 Registered national arts service organizations are deemed to be “registered charities” for specific purposes of the Income Tax Act including the definition of qualified donee.
5 The addition of municipal or public bodies performing a function of government in Canada to the list of qualified donees remains the subject of proposed technical amendments to the Income Tax Act (see July 16, 2010 draft legislation). These amendments will be introduced as a part of these proposals.
6 The Government of Canada, provincial and territorial governments in Canada, and the United Nations and its agencies are also qualified donees. These proposals will not apply to these entities. For the purposes of these measures, the term “qualified donee” will only refer to the above list.
7 Technical amendments to the Income Tax Act are already proposed to authorize the CRA to release the name, registration number and other relevant information with respect to RCAAAs (see July 16, 2010 draft legislation).
8 This will include a listing of municipalities in Canada; municipal and public bodies performing a function of government in Canada; universities outside of Canada the student body of which ordinarily includes students from Canada; and housing corporations in Canada constituted exclusively to provide low-cost housing for the aged.