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Annex 4: Tax Measures: Supplementary Information, Notices of Ways and Means Motions and Draft Amendments to Various GST/HST Regulations
This annex provides detailed information on each of the tax measures proposed in the Budget.
Table A4.1 lists these measures and provides estimates of their budgetary impact.
The annex also provides Notices of Ways and Means Motions to amend the Income Tax Act, the Excise Tax Act (and related regulations) and the Customs Tariff.
In this annex, references to “Budget Day” are to be read as references to the day on which this Budget is presented.
|Personal Income Tax Measures|
|Medical Expense Tax Credit||–||–||–||–||–||–||–|
|RDSP – Plan Holders2||–||1||2||3||3||2||11|
|RDSP – Proportional Repayment Rule||–||–||–||–||–||–||–|
|RDSP – Maximum and Minimum Withdrawals||–||–||–||–||–||–||–|
|RDSP – Rollover of RESP Investment Income2||–||–||1||–||–||–||1|
|RDSP – Termination of an RDSP following Cessation of Eligibility for the DTC2||–||1||2||4||5||10||22|
|RDSP – Administrative Changes2||–||1||1||1||–||–||3|
|Mineral Exploration Tax Credit for Flow-Through Share Investors||–||130||(30)||–||–||–||100|
|Eligible Dividends – Split-Dividend Designation and Late Designation||–||–||–||–||–||–||–|
|Group Sickness or Accident Insurance Plans||–||(20)||(85)||(95)||(100)||(105)||(405)|
|Retirement Compensation Arrangements||–||–||–||–||–||–||–|
|Employees Profit Sharing Plans||–||(10)||(35)||(40)||(40)||(40)||(165)|
|Salary of the Governor General of Canada||–||–||–||–||–||–||–|
|Life Insurance Policy Exemption Test|
|Business Income Tax Measures|
|Clean Energy Generation Equipment: Accelerated Capital Cost Allowance||–||–||2||3||4||4||13|
|Corporate Mineral Exploration and Development Tax Credit||–||–||(10)||(25)||(25)||(30)||(90)|
|Atlantic Investment Tax Credit – Oil and Gas and Mining Activities||–||–||–||(15)||(35)||(85)||(135)|
|Atlantic Investment Tax Credit – Electricity Generation Equipment||–||–||1||1||1||1||4|
|SR&ED Investment Tax Credit Rate||–||–||–||(190)||(285)||(295)||(770)|
|SR&ED Capital Expenditures||–||–||–||(15)||(40)||(40)||(95)|
|SR&ED Overhead Expenditures||–||–||(10)||(55)||(95)||(100)||(260)|
|SR&ED Contract Payments||–||–||(25)||(55)||(60)||(65)||(205)|
|Tax Avoidance Through the Use of Partnerships||–||–||–||–||–||–||–|
|Transfer Pricing Secondary Adjustments||–||–||–||–||–||–||–|
|Thin Capitalization – Debt-to-Equity Ratio||–||–||(60)||(110)||(75)||(65)||(310)|
|Thin Capitalization – Partnerships||–||–||–||–||–||–||–|
|Thin Capitalization – Disallowed Interest Treated as a Dividend||–||–||(1)||(1)||(1)||(1)||(4)|
|Thin Capitalization – Foreign Affiliate Loans||–||–||–||–||–||–||–|
|Foreign Affiliate Dumping||–||(110)||(225)||(265)||(325)||(385)||(1,310)|
|Base Erosion Rules – Canadian Banks|
|Overseas Employment Tax Credit||–||–||(10)||(35)||(65)||(95)||(205)|
|Sales and Excise Tax Measures|
|GST/HST Health Measures||–||3||3||4||4||4||18|
|GST Rebate for Books to be Given Away for Free by Prescribed Literacy Organizations||–||–||–||–||–||–||–|
|Doubling GST/HST Streamlined Accounting Thresholds||–||–||–||–||–||–||–|
|Tax Relief for Foreign-Based Rental Vehicles Temporarily Imported by Canadian Residents||–||–||–||–||–||–||–|
|Consistent Application of the Green Levy on Fuel-Inefficient Vehicles||–||–||–||–||–||–||–|
|Gifts to Foreign Charitable Organizations||–||–||–||–||–||–||–|
|Charities – Enhancing Transparency and Accountability||–||–||–||–||–||–||–|
|Tax Shelter Administrative Changes||–||–||–||–||–||–||–|
|Aboriginal Tax Policy||–||–||–||–||–||–||–|
|Customs Tariff Measures|
|Trade Measures to Support the Energy Industry||–||30||30||30||30||30||150|
|1 A “–” indicates a nil amount, a small amount (less than $1 million) 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 expenditure.
The Medical Expense Tax Credit recognizes the effect of above-average medical and disability-related expenses on a taxpayer’s ability to pay income tax. The Medical Expense Tax Credit provides federal income tax relief equal to 15 per cent of eligible medical and disability-related expenses in excess of a threshold that is the lesser of 3 per cent of the taxpayer’s net income and an indexed dollar amount ($2,109 in 2012).
The list of expenses eligible for the Medical Expense Tax Credit is regularly reviewed and updated in light of new technologies and other disability-specific or medically-related developments. Budget 2012 proposes to add to the list blood coagulation monitors for use by individuals who require anti-coagulation therapy, including associated disposable peripherals such as pricking devices, lancets and test strips. The cost of these devices will be eligible for the Medical Expense Tax Credit when they are prescribed by a medical practitioner.
This measure will apply to expenses incurred after 2011.
To ensure the ongoing effectiveness of Registered Disability Savings Plans (RDSPs), and in response to stakeholder comments received during the recent review of the RDSP, Budget 2012 proposes a number of changes to the rules governing these plans.
An RDSP may be established for an individual who is eligible for the Disability Tax Credit (DTC). The individual eligible for the DTC is the plan beneficiary. The plan holder is the individual who generally opens the RDSP and makes decisions regarding contributions, investments, and withdrawals. The plan holder can be the beneficiary or, if the plan is opened for a minor child, a parent. The plan holder can also be a legal representative of the beneficiary.
Parents, beneficiaries and others wishing to save on behalf of the beneficiary are allowed to contribute to an RDSP. Contributions to an RDSP are limited to a lifetime maximum of $200,000. Contributions are permitted until the end of the year in which a beneficiary attains 59 years of age.
Annual RDSP contributions attract Canada Disability Saving Grants (CDSGs) at matching rates of 100, 200, or 300 per cent, depending on the beneficiary’s family income and the amount contributed, up to a lifetime maximum of $70,000. An RDSP is eligible to receive CDSGs until the end of the year in which the beneficiary attains 49 years of age. The Government also provides up to $1,000 in Canada Disability Savings Bonds (CDSBs) annually to RDSPs established by low- and modest-income families, up to a lifetime maximum of $20,000. CDSBs are paid into RDSPs until the end of the year in which the beneficiary attains 49 years of age.
Contributions to an RDSP are not deductible and are not included in the beneficiary’s income when withdrawn. Investment income earned in an RDSP grows tax-free. CDSGs, CDSBs and investment income earned in an RDSP are included in the beneficiary’s income for tax purposes when withdrawn from the RDSP. Each withdrawal from an RDSP comprises a taxable portion and a non-taxable portion based on the relative proportion of taxable assets (including CDSGs, CDSBs, and investment income) and non-taxable assets (private contributions) in the plan. RDSP withdrawals must commence by the end of the year in which the beneficiary attains 60 years of age.
Under current rules, when an RDSP is established for a beneficiary who has attained the age of majority, the plan holder must be either the beneficiary or, if the beneficiary lacks the capacity to enter into a contract, the beneficiary’s guardian or other legal representative.
However, a number of adults with disabilities have experienced difficulties in establishing a plan because their capacity to enter into a contract is in doubt. Questions of appropriate legal representation in these cases are a matter of provincial and territorial responsibility. In many provinces and territories, the only way that an RDSP can be opened in these cases is for the individual to be declared legally incompetent and have someone named as their legal guardian – a process that can involve a considerable amount of time and expense on the part of concerned family members, and that may have significant repercussions for the individual.
While these provinces and territories develop more appropriate, long term solutions to address RDSP legal representation issues, Budget 2012 proposes to allow, on a temporary basis, certain family members to become the plan holder of the RDSP for an adult individual who might not be able to enter into a contract. This measure will ensure that individuals in all provinces and territories who might not be contractually competent and who do not have a legal representative may still benefit from RDSPs.
Specifically, where, in the opinion of an RDSP issuer, an individual’s ability to enter into a contract is in doubt, the spouse, common-law partner, or parent of the individual will be considered a “qualifying family member” and will be eligible to establish an RDSP for the individual (i.e., be the plan holder of the RDSP). Budget 2012 also proposes to provide that no action will lie against an RDSP issuer who, being of the opinion that a beneficiary’s ability to enter into a contract is in doubt, allows a qualifying family member to establish and become the holder of an RDSP for the beneficiary.
RDSP issuers will be required to notify an individual when a qualifying family member establishes an RDSP for which the individual is the beneficiary.
If, subsequently, the issuer no longer has doubt regarding the individual’s contractual competence, or the individual is determined to be contractually competent by a public agency or tribunal authorized to make such a determination in the relevant jurisdiction, the individual may replace the qualifying family member as plan holder.
If, after an RDSP has been opened by a qualifying family member, a legal representative (i.e., a guardian, tutor, curator or other person who is legally authorized to act on behalf of the individual) is named in respect of an individual, the legal representative will replace the qualifying family member as plan holder.
This measure will not apply in circumstances where an RDSP has already been established for an individual or where an individual already has a legal representative.
This measure will apply from the date of Royal Assent to the enacting legislation until the end of 2016. A qualifying family member who becomes a plan holder under this measure will be able to remain the plan holder after 2016.
Under current rules, any CDSGs and CDSBs paid into an RDSP in the preceding 10 years generally must be repaid to the Government on any of the following events:
- any amount is withdrawn from the RDSP;
- the RDSP is terminated or deregistered; or
- the RDSP beneficiary ceases to be eligible for the DTC or dies.
This is known as the “10-year repayment rule”. To ensure that RDSP funds are available to meet potential obligations under this rule, RDSP issuers must set aside an “assistance holdback amount” equal to the total CDSGs and CDSBs paid into the RDSP in the preceding 10 years less any CDSGs and CDSBs already repaid in respect of that 10-year period. When one of the events described above occurs, the required repayment is equal to the amount of the assistance holdback amount immediately preceding the event.
To provide greater access to RDSP savings for small withdrawals, while still supporting the long-term savings objective of these plans, Budget 2012 proposes to introduce a proportional repayment rule that will apply when a withdrawal is made from an RDSP. This rule will replace the 10-year repayment rule only in respect of RDSP withdrawals. The existing 10-year repayment rule will continue to apply where the RDSP is terminated or deregistered, or the RDSP beneficiary ceases to be eligible for the DTC or dies.
The proportional repayment rule will require that, for each $1 withdrawn from an RDSP, $3 of any CDSGs or CDSBs paid into the plan in the 10 years preceding the withdrawal be repaid, up to a maximum of the assistance holdback amount. Repayments will be attributed to CDSGs or CDSBs that make up the assistance holdback amount based on the order in which they were paid into the RDSP, beginning with the oldest amounts.
This measure will apply to withdrawals made from an RDSP after 2013.
Jeff opens an RDSP in 2009 and contributes $1,500 to his plan annually, attracting the maximum amount of CDSGs ($3,500) each year. In 2014, the assistance holdback amount for his plan equals $21,000.
In 2014, Jeff withdraws $600 from his RDSP. Under the 10-year repayment rule, the entire assistance holdback amount ($21,000) would have to be repaid. Under the proportional repayment rule, $1,800 of the assistance holdback amount will be repaid (approximately 9 per cent of the repayment required under the 10-year repayment rule). The $1,800 repayment will come from CDSGs paid into Jeff's RDSP in 2009 and the plan's assistance holdback amount will be reduced to $19,200.
Budget 2012 proposes changes to the rules governing maximum and minimum withdrawals from RDSPs. These changes will provide greater flexibility in making withdrawals from an RDSP and ensure that RDSP assets are used to support the RDSP beneficiary during their lifetime.
There are two types of withdrawals that may be made from an RDSP: a discretionary disability assistance payment, which may be made at any time, subject to the plan terms and certain restrictions under the tax rules; and a lifetime disability assistance payment (LDAP), which provides an ongoing stream of payments from the RDSP for a beneficiary.
LDAPs may commence at any time. Once started, they must be paid at least annually until either the RDSP is terminated or the beneficiary dies. LDAPs must begin no later than the end of the year in which the beneficiary attains 60 years of age, so that the assets in the plan provide for the long-term financial security of the beneficiary during their lifetime. The maximum LDAP that can be withdrawn from the RDSP each year is determined by a formula (the LDAP formula) that is based on the age of the beneficiary and the fair market value of the assets held in the RDSP.
Specific rules limit the maximum amount that may be withdrawn annually from RDSPs where CDSGs and CDSBs paid into the plan exceed private contributions made to the plan. Such RDSPs are known as primarily government-assisted plans (PGAPs). Total withdrawals from a PGAP in a calendar year may not exceed the amount determined by the LDAP formula for the year. No such maximum withdrawal limits apply to non-PGAPs.
Budget 2012 proposes to increase the maximum annual limit for withdrawals from PGAPs to the greater of the amount determined by the LDAP formula and 10 per cent of the fair market value of plan assets at the beginning of the calendar year. A PGAP beneficiary will continue to be eligible for the existing exemption from the maximum annual limit for withdrawals if a medical doctor certifies 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.
PGAPs are also subject to a minimum annual withdrawal requirement commencing with the calendar year in which the beneficiary attains 60 years of age. For that calendar year and subsequent years, the total withdrawals from a PGAP must be at least equal to the amount determined by the LDAP formula for the year. For other RDSPs, there is no specified minimum withdrawal amount.
Budget 2012 proposes to extend to all RDSPs the minimum annual withdrawal requirement that currently applies only to PGAPs. Accordingly, once an RDSP beneficiary attains 60 years of age, the total withdrawals from the RDSP in a calendar year must be at least equal to the amount determined by the LDAP formula for the year.
These measures will apply after 2013.
To provide greater flexibility for parents who save in a Registered Education Savings Plan (RESP) for a child with a severe disability, Budget 2012 proposes to allow investment income earned in an RESP to be transferred on a tax-free (or “rollover”) basis to an RDSP if the plans share a common beneficiary.
In order to qualify for this measure, the beneficiary must meet the existing age and residency requirements in relation to RDSP contributions. As well, one of the following conditions must be met:
- the beneficiary has a severe and prolonged mental impairment that can reasonably be expected to prevent the beneficiary from pursuing post-secondary education;
- the RESP has been in existence for at least 10 years and each beneficiary is at least 21 years of age and is not pursuing post-secondary education; or
- the RESP has been in existence for more than 35 years.
These are the existing conditions for receiving an accumulated income payment (AIP) from an RESP. An AIP is a lump-sum distribution of investment income earned in an RESP to the RESP subscriber, generally made in circumstances where the RESP beneficiary does not pursue post-secondary education and the RESP is being terminated. The AIP is included in the income of the RESP subscriber for regular income tax purposes and is also subject to an additional 20-per-cent tax. An RESP subscriber may reduce the amount of the AIP subject to tax by contributing a portion of the AIP to a Registered Retirement Savings Plan under specified conditions.
Under this proposal, when RESP investment income is rolled over to an RDSP, contributions in the RESP will be returned to the RESP subscriber on a tax-free basis. The subscriber can contribute these amounts to the RDSP (immediately or over time) if they so choose, potentially attracting CDSGs. In addition, Canada Education Savings Grants and Canada Learning Bonds in the RESP will be required to be repaid to the Government and the RESP terminated by the end of February of the year after the year during which the rollover is made. As in the case of a contribution of an AIP to a Registered Retirement Savings Plan, the rollover amount will not be subject to regular income tax or the additional 20-per-cent tax.
The amount of RESP investment income rolled over to an RDSP may not exceed, and will reduce, the beneficiary’s available RDSP contribution room. The rollover amount will be considered a private contribution for the purpose of determining whether the RDSP is a PGAP, but will not attract CDSGs. The rollover amount will be included in the taxable portion of RDSP withdrawals.
This measure will apply to rollovers of RESP investment income made after 2013.
An RDSP may be established only for a beneficiary who is eligible for the Disability Tax Credit (DTC). If a beneficiary’s condition factually improves such that the beneficiary does not qualify for the DTC for a taxation year (i.e., the beneficiary is DTC-ineligible throughout a full calendar year), the RDSP must be terminated by the end of the following year. No contributions may be made to, and no CDSGs or CDSBs may be paid into, the RDSP once the beneficiary is DTC-ineligible. In addition, the 10-year repayment rule applies (with the required repayment being equal to the amount of the assistance holdback amount immediately preceding the beneficiary becoming DTC-ineligible) and any assets remaining in the RDSP must be paid to the beneficiary.
A beneficiary who becomes DTC-ineligible might, due to the nature of their condition, be eligible for the DTC for some later year and would be able to establish a new RDSP. Contribution room and repaid CDSGs and CDSBs are not restored in these circumstances.
To reduce the administrative burden on these beneficiaries and ensure greater continuity in their long-term saving, Budget 2012 proposes to extend, in certain circumstances, the period for which an RDSP may remain open when a beneficiary becomes DTC-ineligible.
This measure will apply to RDSPs where the beneficiary has become DTC-ineligible. In addition, a medical practitioner must certify in writing that the nature of the beneficiary’s condition makes it likely that the beneficiary will, because of the condition, be eligible for the DTC in the foreseeable future.
If an RDSP plan holder decides to take advantage of this measure, the plan holder will be required to elect in prescribed form and submit the election, along with the written certification, to the RDSP issuer. The RDSP issuer will then be required to notify Human Resources and Skills Development Canada that the election has been made. The election must be made on or before December 31st of the year following the first full calendar year for which the beneficiary is DTC-ineligible.
Where an election is made, the following rules will apply commencing with the first full calendar year for which the beneficiary is DTC-ineligible:
- No contributions to the RDSP will be permitted, including under the proposed rule for the rollover of RESP investment income. However, a rollover of proceeds from a deceased individual’s Registered Retirement Savings Plan or Registered Retirement Income Fund to the RDSP of a financially dependent infirm child or grandchild will still be permitted.
- No new CDSGs or CDSBs will be paid into the RDSP. If a beneficiary dies after an election has been made, the existing 10-year repayment rule will apply (with the required repayment being equal to the amount of the assistance holdback amount immediately preceding the beneficiary becoming DTC-ineligible, less any repayments made during or after the first full calendar year for which the beneficiary is DTC-ineligible).
- No new entitlements will be generated for the purpose of the carry-forward of CDSGs and CDSBs for years for which the beneficiary is DTC-ineligible.
- Withdrawals from the RDSP will be permitted, and will be subject to the proposed proportional repayment rule and the proposed maximum and minimum withdrawal rules as applicable. For years for which the beneficiary is DTC-ineligible, the assistance holdback amount will be equal to the amount of the assistance holdback amount immediately preceding the beneficiary becoming DTC-ineligible less any repayments made during or after the first full calendar year for which the beneficiary is DTC-ineligible.
Neither the certification required for an election, nor the election itself, will have any bearing on any determination of an individual’s eligibility for the DTC. The sole purpose of the certification and election is to allow an RDSP to remain open for the years under election.
An election will generally be valid until the end of the fourth calendar year following the first full calendar year for which a beneficiary is DTC-ineligible. The RDSP must be terminated by the end of the first year for which there is no longer a valid election.
If a beneficiary becomes eligible for the DTC while an election is valid, the usual RDSP rules will apply commencing with the year for which the beneficiary becomes eligible. For example, contributions will be permitted and new CDSGs and CDSBs may be paid into the RDSP. Should the beneficiary become DTC-ineligible at some later time, a new election could be made.
This measure will apply to elections made after 2013.
RDSPs, that under current rules would have to be terminated before 2014 because the beneficiary has become DTC-ineligible and that have not yet been terminated, will not be required to be terminated until the end of 2014. Plan holders of such RDSPs may take advantage of this measure if they obtain the required medical certification and make an election on or before December 31, 2014.
Under current rules, when an RDSP is established, the issuer of the plan must notify Human Resources and Skills Development Canada within 60 days. When an RDSP is transferred from one RDSP issuer to another, the transfer must be completed within 120 days of the new plan being established. Budget 2012 proposes to replace these deadlines with a requirement that an RDSP issuer act “without delay” in notifying Human Resources and Skills Development Canada or the establishment of transfer of an RDSP. The elimination of these deadlines is intended to give issuers greater flexibility in complying with their obligations.
When an RDSP is transferred to a new issuer, the issuer of the original plan is required to provide a large amount of information to the new issuer. Issuers are also required to file this information on a regular basis with Human Resources and Skills Development Canada. To reduce the administrative burden for issuers, Budget 2012 also proposes that Human Resources and Skills Development Canada, rather than the issuer of the original plan, be responsible for providing this information to the issuer of the new plan when an RDSP transfer occurs.
These measures will apply on Royal Assent to the enacting legislation.
In addition, Budget 2012 proposes that the Canada Disability Savings Regulations be amended to eliminate the 180-day deadline for an RDSP issuer to submit an application for a CDSG or a CDSB.
This measure will apply on and after the day that the regulation amending the Canada Disability Savings Regulations is registered.
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 2012 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, 2013. 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 2013 can support eligible exploration until the end of 2014.
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 and, as a result, could have an impact on the goals of the Federal Sustainable Development Strategy. All such activity, however, is subject to applicable federal and provincial environmental regulations, including project-specific environmental assessments where required.
Corporate income is generally subject to two levels of tax – the corporate level and personal shareholder level when corporate profits are distributed as taxable dividends. In order to relieve against double taxation, the Income Tax Act integrates the corporate and personal income tax systems by crediting individuals through the Dividend Tax Credit (DTC) with their proportionate share of income tax assumed to have been payable at the corporate level on taxable dividends they receive.
The amount of this DTC depends on the type of dividend paid by a corporation to a shareholder. If the dividend is an “eligible dividend”, i.e., a dividend paid out of income that was taxed at the general corporate income tax rate (currently 15 per cent federally), the shareholder qualifies for an enhanced DTC. A taxable dividend that is not an eligible dividend, i.e., a dividend paid out of income that was taxed at a lower rate (in most cases being the small business income tax rate), qualifies for the regular DTC.
The enhanced DTC is available only if, at the time the dividend is paid, the corporation notifies each shareholder in writing that the dividend is designated as an eligible dividend. If a corporation fails to designate a dividend as an eligible dividend, despite the corporation having had sufficient income to make an eligible dividend designation, the corporation cannot file a late eligible dividend designation. In contrast, a corporation that makes an excessive eligible dividend designation may correct the designation by paying a special 20-per-cent tax in respect of the amount of the excessive designation or by filing a valid election under which the shareholders accept that the excess amount that they have received is a separate taxable dividend that qualifies for the regular DTC.
Budget 2012 proposes to simplify the manner in which a corporation resident in Canada pays and designates eligible dividends by allowing the corporation to designate, at the time it pays a taxable dividend, any portion of the dividend to be an eligible dividend. The portion of a taxable dividend that is designated to be an eligible dividend will qualify for the enhanced DTC, and the remaining portion will qualify for the regular DTC. Simplifying the administrative compliance involved in designating a dividend to be an eligible dividend will support the objectives of the Red Tape Reduction Commission.
Budget 2012 also proposes to allow the Minister of National Revenue to accept a corporation’s late designation of a taxable dividend to be an eligible dividend. Under the proposal, the Minister will be allowed to accept a late designation of an eligible dividend if the corporation makes the late designation within the three-year period following the day on which the designation was first required to be made. In addition, the Minister must be of the opinion that accepting the late eligible dividend designation would be just and equitable in the circumstances, including to affected shareholders. This measure will therefore improve tax fairness for any corporation that pays a non-eligible taxable dividend to the extent that it is determined that the corporation had, when the dividend was paid, income taxed at the general corporate income tax rate to support an eligible dividend designation, and that the above conditions are met.
These measures will apply to taxable dividends paid on or after Budget Day.
Employment benefits, whether provided in cash or in-kind, are generally included in an employee’s income for tax purposes. Subject to a number of exceptions, if an employer contributes to a group insurance plan in respect of an employee, an amount is included in the employee’s income either when the employer contributions are made to the plan or when benefits are received under the plan.
Currently, wage-loss replacement benefits payable on a periodic basis under a group sickness or accident insurance plan to which an employer has contributed are included in an employee’s income for tax purposes when those benefits are received. However, no amount is included in an employee’s income, either when the employer contributions are made or the benefits are received, to the extent that:
- benefits are not payable on a periodic basis; or
- benefits are payable in respect of a sickness or accident when there is no loss of employment income.
To provide for more neutral and fair tax treatment of beneficiaries under a group sickness or accident insurance plan, Budget 2012 proposes to include the amount of an employer’s contributions to a group sickness or accident insurance plan in an employee’s income for the year in which the contributions are made to the extent that the contributions are not in respect of a wage-loss replacement benefit payable on a periodic basis.
This measure will not affect the tax treatment of private health services plans or other plans described in paragraph 6(1)(a) of the Income Tax Act.
This measure will apply in respect of employer contributions made on or after Budget Day to the extent that the contributions relate to coverage after 2012, except that such contributions made on or after Budget Day and before 2013 will be included in the employee’s income for 2013.
Under the Income Tax Act, a retirement compensation arrangement (RCA) is a type of employer-sponsored, funded retirement savings arrangement. RCAs are normally used to fund the portion of a higher-income employee’s pension benefit that exceeds the maximum pension benefit permitted under the Registered Pension Plan (RPP) contribution limits. The RCA rules were introduced in the 1980s to ensure consistent tax treatment across all employers for pension arrangements above the RPP limits.
RCAs are exempt from regular Part I income tax, and contributions made to an RCA are generally deductible in computing income. A refundable RCA tax (RCA tax) is imposed at a rate of 50 per cent on contributions to an RCA, as well as on income and gains earned or realized by an RCA. The RCA tax is generally refunded as taxable distributions are made from the RCA. However, a special rule assists taxpayers in circumstances where the RCA has suffered investment losses and the ability of the RCA to make distributions is significantly impaired. Under this rule, the RCA may obtain a refund of the RCA tax even if the property held in the RCA has lost some or all of its value.
The Canada Revenue Agency has identified a number of arrangements that seek to take advantage of various features of the RCA rules in order to obtain unintended tax benefits. For example, some arrangements involve the deduction of large contributions that are indirectly returned to the contributors through a series of steps ending with the purported RCA having little or no assets but still being able to claim the refundable tax using the impaired asset exception. Other arrangements use insurance products to allocate costs to the arrangement for benefits that arise outside the arrangement.
The Government is challenging these tax-motivated arrangements, which are not consistent with the policy intent of the RCA rules. Since these challenges are both time-consuming and costly, the Government is acting now to introduce specific legislative measures to prevent the use of similar schemes in future.
Budget 2012 proposes new prohibited investment and advantage rules to directly prevent RCAs from engaging in non-arm’s length transactions. These rules will be based very closely on existing rules for Tax-Free Savings Accounts and Registered Retirement Savings Plans (RRSPs). As well, Budget 2012 proposes a new restriction on RCA tax refunds in circumstances where RCA property has lost value.
Budget 2012 proposes that the new prohibited investment rules apply in respect of RCAs that have a “specified beneficiary”. In general terms, a specified beneficiary of an RCA will be an employee entitled to benefits under the RCA who has a significant interest in their employer. The custodian of an RCA will be liable to pay a 50-per-cent tax on the fair market value of any prohibited investment acquired or held by the RCA. A specified beneficiary of an RCA that participates in the acquisition or holding of a prohibited investment by the RCA will be jointly and severally, or solidarily, liable, to the extent of their participation, for the tax.
This tax will be refundable if the RCA disposes of the prohibited investment by the end of the year following the year in which it was acquired (or such later time as the Minister of National Revenue considers reasonable) unless any of the persons liable for the tax knew or ought to have known that the investment was a prohibited investment. The Minister will also have the power to waive or cancel the tax where the Minister is satisfied that it is just and equitable to do so, having regard to all the circumstances.
This measure will apply in respect of investments acquired, or that become prohibited investments, on or after Budget Day.
Budget 2012 also proposes that the definition of “advantage” be adapted to address the specific forms of tax planning that have been identified in relation to RCAs. For example, if an RCA buys a high-value property and that value is later intentionally eroded or transferred from the RCA without adequate consideration, an “RCA strip” transaction will be considered to have taken place and to constitute an advantage. An “RCA strip” will be a new definition similar to the existing definition of “RRSP strip” in the RRSP rules, with such modifications as the circumstances require to apply to transactions involving RCAs. RCA strips will include situations where an RCA holds a promissory note issued by a non-arm’s length debtor in respect of the RCA and the debtor fails to make commercially reasonable payments of principal and interest on the promissory note.
As is the case under the existing advantage rules, an RCA advantage will be subject to a special tax equal to the fair market value of the advantage. The custodian of the RCA will be liable for the special tax. A specified beneficiary of the RCA that participates in extending the advantage will be jointly and severally, or solidarily, liable, to the extent of their participation, for the special tax.
The Minister of National Revenue will have the power to waive or cancel the special tax where the Minister is satisfied that it is just and equitable to do so, having regard to all the circumstances.
The special tax will generally apply to advantages extended, received or receivable on or after Budget Day, including advantages that relate to RCA property acquired, or transactions occurring, before Budget Day. However, advantages that relate to property acquired, or transactions occurring, before Budget Day will be eligible for special transitional rules on an elective basis, as is the case under the existing advantage rules.
If RCA property acquired, or transactions occurring, before Budget Day cause an advantage to be obtained by a specified beneficiary of the RCA (or a person who does not deal at arm’s length with the specified beneficiary) on or after Budget Day, then the amount of the advantage will not be subject to the special tax provided that the amount is included in computing the income of the specified beneficiary. For example, if on or after Budget Day a specified beneficiary of an RCA proceeds with steps, such as the removal of assets from a debtor corporation, that cause a pre-Budget Day promissory note to lose its value, the amount of the decline in value will be treated as an “RCA strip” and therefore as an advantage subject to the special tax, unless the specified beneficiary includes the amount of the advantage in their income.
If RCA property acquired, or transactions occurring, before Budget Day cause an advantage to be obtained (such as income earned, and capital gains accrued and realized, on a prohibited investment) by the RCA on or after Budget Day, the amount of the advantage will not be subject to the special tax provided that the amount is distributed from the RCA and included in the income of a beneficiary or an employer in respect of the RCA. Such distributions will be treated as regular taxable distributions for the purpose of determining RCA tax.
Budget 2012 proposes that, if RCA property has declined in value, the RCA tax be refunded only in circumstances where the decline in value of the property is not reasonably attributable to prohibited investments or advantages, unless the Minister of National Revenue is satisfied that it is just and equitable to refund the RCA tax, having regard to all the circumstances.
This measure will apply in respect of RCA tax on RCA contributions made on or after Budget Day.
Employees Profit Sharing Plans (EPSPs) are trust arrangements that enable employers to share profits with employees, assist employees to save, and better align the economic interests of management and labour. Under an EPSP, an employer may make tax-deductible contributions to a trust and the trustee is required to allocate to beneficiaries each year all employer contributions, profits from trust property, capital gains and losses, and certain amounts in respect of forfeitures. These EPSP allocations, with certain exceptions, are included in computing the income of the beneficiaries for the taxation year in which they are allocated. Once amounts are allocated, payments are made by the trustee to the beneficiaries in accordance with the terms of the plan (for example, immediately, after a minimum vesting period, or on retirement or termination). Because the allocations are taxable, payments out of the trust are generally not subject to tax when received by the beneficiaries.
Recently, EPSPs have been used increasingly as a means for some business owners to direct profits to members of their families in order to reduce or defer the payment of income tax on these profits. Budget 2011 announced that the Government would review EPSPs and undertake consultations to ensure that any changes to the tax rules (to limit the potential for abuse) continue to accommodate appropriate uses of EPSPs. The consultations took place from August to October 2011. Participants in the consultations generally recognized the importance of having reasonable limitations on EPSP contributions, particularly in respect of non-arm’s length employees.
To ensure that EPSPs are used for their intended purposes, Budget 2012 proposes a targeted measure to discourage excessive employer contributions. This proposal introduces a special tax payable by a specified employee on an “excess EPSP amount”. In general terms, an “excess EPSP amount” will be the portion of an employer’s EPSP contribution, allocated by the trustee to a specified employee, that exceeds 20 per cent of the specified employee’s salary received in the year by the specified employee from the employer.
The special tax will be made up of two components. The first component will be equal to the top federal marginal tax rate of 29 per cent. The second component will be equal to the top marginal tax rate of the province of residence of the specified employee and will be shared with provinces and territories participating in a Tax Collection Agreement. A new deduction will be introduced to ensure that an excess EPSP amount is not also subject to regular income tax. A specified employee will, however, not be able to claim any other deductions or credits in respect of an excess EPSP amount.
A mechanism will be introduced to authorize the Minister of National Revenue to waive or cancel the application of these excess EPSP amount rules if the Minister considers that it is just and equitable to do so, having regard to all the circumstances. In such cases, the normal rules will apply.
This measure will apply in respect of EPSP contributions made by an employer on or after Budget Day, other than contributions made before 2013 pursuant to a legally binding obligation arising under a written agreement or arrangement entered into before Budget Day.
Following consultations between the Governor General and the Government, both have agreed that the income tax exemption for the Governor General’s salary should end and that the Governor General’s salary, as adjusted, paid under the Governor General’s Act should be subject to tax in the same manner as the salary of other Canadians.
This treatment is consistent with recent measures in other Commonwealth countries to make the salary of their Governors General subject to income tax (i.e., Australia in 2001 and New Zealand in 2010).
This measure will apply to the 2013 and subsequent taxation years.
Life insurance plays an important role in meeting the financial needs of Canadians by helping to protect against the financial risks of premature death. Life insurance policies may provide both a protection (i.e., insurance) and savings component. The income earned on the savings component of a life insurance policy that is an exempt policy, as determined under the Income Tax Regulations, is not subject to accrual taxation in the hands of the policyholder.
The exemption test that determines whether a life insurance policy is an exempt policy was implemented in the early 1980s and is intended to differentiate protection-oriented life insurance policies from investment-oriented life insurance policies. A life insurance policy is an exempt policy when the savings accumulating in the policy does not exceed the savings in a benchmark policy. The benchmark policy is generally defined as a policy where the death benefit is payable on the earlier of death and the age of 85 years (the endowment time) and premiums are payable 20 years after the issuance of the policy (the pay period). Depending on the type of coverage, the savings in the benchmark policy are calculated using prescribed mortality and interest rates, the rates used in determining the premiums, or the cash surrender value of the actual policy. The savings in an actual policy are measured using an amount that is equal to the greater of the cash surrender value of the policy and the modified net premium reserve in respect of the policy.
As the exemption test was implemented almost 30 years ago, the Government has reviewed the test to ensure that it continues to serve the intended purpose. The review indicates that technical improvements are required to update and simplify the test. Budget 2012 proposes to implement the following changes to the exemption test:
- measuring the savings in an actual policy and the benchmark policy using the Canadian Institute of Actuaries 1986-1992 mortality tables and an interest rate of 3.5 per cent to better reflect mortality rates and investment returns while improving consistency between the measurement of the savings in an actual policy and the measurement of the savings in the benchmark policy;
- increasing the endowment time of the benchmark policy from age 85 years to age 90 years to reflect increased life expectancy;
- measuring the savings in an actual policy using the greater of the cash surrender value of the policy (before the application of surrender charges) and the net premium reserve in respect of the policy to capture all savings in an actual policy while improving consistency between the measurement of the savings in the policy and the measurement of the savings in the benchmark policy; and
- reducing the pay period of the benchmark policy to 8 years from 20 years to better reflect current industry practices and the pay period used in other countries.
Also, Budget 2012 proposes that the Investment Income Tax (IIT) levied on life insurers be recalibrated where appropriate to neutralize impacts of the proposed technical improvements on the IIT base.
Over the coming months, the Government will undertake consultations with key stakeholders on the proposed technical improvements and the recalibration of the IIT base.
Amendments to the tax provisions arising from these consultations will apply to life insurance policies issued after 2013.
Under the capital cost allowance (CCA) regime in the income tax system, Class 43.2 of Schedule II to the Income Tax Regulations provides an accelerated CCA rate (50 per cent per year on a declining balance basis) for investment in specified clean energy generation and conservation equipment. The class incorporates by reference to Class 43.1 a detailed list of eligible equipment that generates or conserves energy by:
- using a renewable energy source (for example, wind, solar, small hydro);
- using fuels from waste (for example, landfill gas, wood waste, manure); or
- making efficient use of fossil fuels (for example, high efficiency cogeneration systems, which simultaneously produce electricity and useful heat).
Providing accelerated CCA in this context is an exception to the general practice of setting CCA rates based on the useful life of assets. Accelerated CCA provides a financial benefit by deferring taxation. This incentive for investment is premised on the environmental benefits of low-emission or no-emission energy generation equipment.
In addition, if the majority of the tangible property in a project is eligible for inclusion in Class 43.2, certain intangible project start-up expenses (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.
Budget 2010 expanded Class 43.2 to broaden the eligible range of applications for which heat recovery equipment and equipment of a district energy system can be used. Equipment that generates electricity using waste heat was added to Class 43.2 in Budget 2011.
Budget 2012 proposes to further expand Class 43.2 with respect to waste-fuelled thermal energy equipment, and equipment of a district energy system that uses thermal energy provided primarily by eligible waste-fuelled thermal energy equipment. Budget 2012 also proposes to expand Class 43.2 to include equipment that uses the residue of plants – generally produced by the agricultural sector – to generate electricity and heat.
These measures will encourage investment in technologies that can contribute to a reduction in emissions of greenhouse gases and air pollutants, in support of Canada’s targets set out in the Federal Sustainable Development Strategy. These measures could also contribute to the diversification of Canada’s energy supply.
Waste-fuelled thermal energy equipment produces heat using wastes (for example, wood waste) and fuels from waste (for example, biogas and bio-oil). Currently, Class 43.2 includes waste-fuelled thermal energy equipment, subject to the requirement that the heat energy generated from the equipment is used in an industrial process or a greenhouse.
Budget 2012 proposes to expand Class 43.2 by removing this requirement. This change will allow waste-fuelled thermal energy equipment to be used in a broad range of applications, including space and water heating. For example, wood waste could be used as an alternative to heating oil for space and water heating in a shopping centre.
This measure will apply to assets acquired on or after Budget Day that have not been used or acquired for use before that date.
District energy systems transfer thermal energy between a central generation plant and a group or district of buildings by circulating steam, hot water or cold water through a system of underground pipes. Thermal energy distributed by a district energy system can be used for heating, cooling or in an industrial process. Certain equipment that is part of a district energy system is currently included in Class 43.1 or Class 43.2, if the system distributes thermal energy primarily generated by one or more of an eligible cogeneration system, a ground source heat pump, active solar heating equipment and heat recovery equipment.
Building on the proposed expansion of Class 43.2 to include waste-fuelled thermal energy equipment used for a broader range of applications, Budget 2012 also proposes to expand Class 43.2 by adding equipment that is part of a district energy system that distributes thermal energy primarily generated by waste-fuelled thermal energy equipment (that is itself eligible for inclusion in Class 43.2). For example, in a remote community a district energy system that uses heat generated by waste-fuelled thermal energy equipment could provide an alternative to equipment that uses only fossil fuels.
This measure will apply to assets acquired on or after Budget Day that have not been used or acquired for use before that date.
The residue of plants (for example, straw, corn cobs, leaves and similar organic waste produced by the agricultural sector) can be used in a number of ways, including the production of heat, electricity, biofuels and other bioproducts. Subject to certain requirements, equipment that uses these residues to produce biogas or bio-oil is currently eligible for inclusion in Class 43.2.
Budget 2012 proposes to add the residue of plants to the list of eligible waste fuels (i.e., biogas, bio-oil, digester gas, landfill gas, municipal waste, pulp and paper waste, and wood waste) that can be used in waste-fuelled thermal energy equipment included in Class 43.2 or a cogeneration system included in Class 43.1 or Class 43.2. For example, a greenhouse could produce heat for its operations using a heating system fuelled by the residue of plants.
This measure will apply to assets acquired on or after Budget Day that have not been used or acquired for use before that date.
If equipment using fuels from waste does not comply with environmental regulations, there could, in some instances, be an increased risk of the release of pollutants. To ensure that taxpayers who benefit from Class 43.1 or 43.2 do so in an environmentally responsible manner, Budget 2012 proposes that equipment using eligible waste fuels not be eligible under Class 43.1 or Class 43.2 if the applicable environmental laws and regulations of Canada or of a province, territory, municipality, or a public or regulatory body are not complied with at the time the equipment first becomes available for use.
A corporate tax credit is available at the rate of 10 per cent for pre-production mining expenditures incurred in respect of certain mineral resources in Canada. The term “pre-production mining expenditure” in subsection 127(9) of the Income Tax Act sets out the expenses that are eligible for the credit:
- exploration expenses described in paragraph (f) of the definition of “Canadian exploration expense” in subsection 66.1(6) of the Income Tax Act; and
- pre-production development expenses described in paragraph (g) of the definition of “Canadian exploration expense”.
Qualifying minerals for purposes of the credit are diamonds, base or precious metals and industrial minerals that become base or precious metals through refining.
Budget 2012 proposes to phase out the corporate tax credit for pre-production mining expenditures. The credit will apply at a rate of 10 per cent for exploration expenses incurred in 2012, and at a rate of 5 per cent for such expenses incurred in 2013. The credit will not be available for exploration expenses incurred after 2013.
The corporate tax credit will apply at a rate of 10 per cent for pre-production development expenses incurred before 2014, at a rate of 7 per cent for such expenses incurred in 2014, and at a rate of 4 per cent for such expenses incurred in 2015. The credit will not be available for pre-production development expenses incurred after 2015.
Additional transitional relief will be provided in recognition of the long timelines involved in developing mines. The corporate tax credit will apply at a rate of 10 per cent for pre-production development expenses incurred by a taxpayer before 2016 either:
- under a written agreement entered into by the taxpayer before Budget Day; or
- as part of the development of a new mine where
- the construction of the new mine was started by, or on behalf of, the taxpayer before Budget Day, or
- the engineering and design work for the construction of the new mine, as evidenced in writing, was started by, or on behalf of, the taxpayer before Budget Day.
Activities such as obtaining permits or regulatory approvals, conducting environmental assessments, community consultations, impact benefit studies and similar activities will not be considered construction or engineering and design work.
Exploration and pre-production development expenses will continue to qualify as Canadian exploration expenses, and as such will continue to be fully deductible in the year incurred.
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 and, as a result, could have an impact on the goals of the Federal Sustainable Development Strategy. All such activity, however, is subject to applicable federal and provincial environmental regulations, including project-specific environmental assessments where required.
The Atlantic Investment Tax Credit (AITC) is a 10-per-cent credit available for qualifying acquisitions of new buildings, machinery and equipment, used primarily in farming, fishing, logging, mining, oil and gas, and manufacturing and processing in the Atlantic provinces, the Gaspé Peninsula and their associated offshore regions.
Budget 2012 proposes to phase out the AITC for oil and gas and mining activities over a four-year period. In particular, this proposal will apply to assets acquired on or after Budget Day for use in any of the following activities:
- operating an oil or gas well;
- extracting petroleum or natural gas from a natural accumulation of petroleum or natural gas;
- extracting minerals from a mineral resource;
- processing ore from a mineral resource to any stage that is not beyond the prime metal stage or its equivalent;
- processing iron ore from a mineral resource to any stage that is not beyond the pellet stage or its equivalent;
- processing tar sands ore from a mineral resource to any stage that is not beyond the crude oil stage or its equivalent;
- producing industrial minerals;
- processing heavy crude oil recovered from a natural reservoir to a stage that is not beyond the crude oil stage or its equivalent;
- Canadian field processing;
- exploring or drilling for petroleum or natural gas; and
- prospecting or exploring for or developing a mineral resource.
The availability of the AITC for assets acquired for use in other activities will not be affected.
The AITC will apply at a rate of 10 per cent for assets acquired before 2014 for use in any of the activities listed above and at a rate of 5 per cent for such assets acquired in 2014 and 2015. The AITC will not be available for such assets acquired after 2015.
Transitional relief will be provided in recognition of the long timelines involved in some oil and gas and mining projects. The AITC will apply at a rate of 10 per cent for assets acquired by a taxpayer before 2017 either:
- under a written agreement entered into by the taxpayer before Budget Day; or
- as part of a project phase where
- the construction of the project phase was started by, or on behalf of, the taxpayer before Budget Day, or
- the engineering and design work for the construction of the project phase, as evidenced in writing, was started by, or on behalf of, the taxpayer before Budget Day.
For this purpose, a phase of a project is a discrete expansion in the extraction, processing or production capacity of the project to attain the planned capacity level that was the demonstrated intention of the taxpayer immediately before Budget Day. Construction undertaken to maintain or restore a capacity level that had been reached before Budget Day is not considered a discrete expansion. Activities such as obtaining permits or regulatory approvals, conducting environmental assessments, community consultations, impact benefit studies and similar activities will not be considered construction or engineering and design work.
Along with other members of the G-20, Canada has committed to rationalize and phase out over the medium-term inefficient fossil fuel subsidies. The Government announced in Budget 2007 and in Budget 2011 the phase-out of tax preferences for oil sands producers, which supports the G-20 commitment and align the tax treatment of oil sands with the conventional oil and gas sector (moreover, the Income Tax Act does not include any tax preferences specific to oil sands producers). The phase out of the AITC for oil and gas and mining sectors builds on these measures and is a further action that the Government is taking in support of the G-20 commitment. The change will also improve the neutrality of the tax system for Canada’s resource sector.
Resource development can be associated with a variety of environmental impacts to soil, water and air and, as a result, could have an impact on the goals of the Federal Sustainable Development Strategy. All such activity, however, is subject to applicable federal and provincial environmental regulations, including project-specific environmental assessments where required.
Equipment is generally eligible for the AITC if the equipment is a qualified property. Electricity generation equipment described in Class 1, 8, 29 or 41, paragraph (c) of Class 43.1 or paragraph (a) of Class 43.2, of Schedule II to the Income Tax Regulations used in the Atlantic region primarily in an eligible activity is a qualified property.
Budget 2012 proposes to improve the neutrality of the AITC by amending the Income Tax Act and section 4600 of the Income Tax Regulations so that qualified property will include certain electricity generation equipment and clean energy generation equipment used primarily in an eligible activity (i.e., farming, fishing, logging, and manufacturing and processing). In particular, “qualified property” will include the following equipment, if it is used in the Atlantic region primarily in an eligible activity set out in paragraph (c) of the definition of “qualified property” in subsection 127(9) of the Income Tax Act:
- electricity generation equipment described in Class 17 or 48; and
- clean energy generation and conservation equipment described in Class 43.1 or 43.2.
This measure will apply to assets acquired on or after Budget Day that have not been used or acquired for use before that date, except that the measure will not apply to acquisitions of assets that are used primarily in oil and gas or mining activities.
In October 2010, the Government mandated the Expert Review Panel on Research and Development to review all federal support for business research and development with a view to maximizing the effect of federal programs that contribute to innovation and create economic opportunities for business. The expert panel submitted its report to the Government in October 2011. It makes a series of recommendations that call for a simplified and more focused approach to the Government’s support for business research and development, including the Scientific Research and Experimental Development (SR&ED) tax incentive program. To support the key objectives identified by the expert panel, Budget 2012 proposes several changes to the SR&ED tax incentive program to make it simpler, and more cost effective and predictable.
The SR&ED tax incentive program provides broad-based support for SR&ED performed in every industrial sector in Canada, and supports small businesses in the performance of SR&ED. Under the SR&ED program, allowable current and capital expenditures are fully deductible. In addition, qualified SR&ED expenditures incurred in Canada are included in computing a taxpayer’s SR&ED qualified expenditure pool at the end of each taxation year. In general, the amount of this pool at the end of a taxation year is equal to all the qualified expenditures incurred by the taxpayer in the year, plus any amount transferred to the taxpayer in respect of certain non-arm’s length SR&ED contracts less any amount transferred by the taxpayer in respect of such contracts to another person. The balance in the SR&ED qualified expenditure pool at the end of a taxation year is generally eligible for an investment tax credit. There are two investment tax credit rates for SR&ED qualified expenditure pool balances. The general rate is 20 per cent and there is an enhanced rate of 35 per cent for eligible Canadian-controlled private corporations (CCPCs).
CCPCs are eligible to claim the enhanced investment tax credit at the rate of 35 per cent on up to $3 million of qualified SR&ED expenditures annually. For these taxpayers, unused investment tax credits are refundable in respect of the first $3 million of expenditures each year; current expenditures are eligible for a 100-per-cent refund and capital expenditures are eligible for a 40-per-cent refund. All expenditures above the $3 million limit are eligible for an investment tax credit at the rate of 20 per cent and qualify for a 40-per-cent refund. The $3 million expenditure limit is phased out for CCPCs whose taxable income for the previous taxation year is between $500,000 and $800,000 or whose taxable capital employed in Canada for the previous taxation year is between $10 million and $50 million.
Budget 2012 proposes to reduce the general 20-per-cent SR&ED investment tax credit rate applicable to SR&ED qualified expenditure pool balances at the end of a taxation year to 15 per cent. The 15-per-cent investment tax credit rate will apply in respect of taxation years that end after 2013, except that, for a taxation year that includes January 1, 2014, the 5-percentage-point reduction in the investment tax credit rate will be pro-rated based on the number of days in the taxation year that are after 2013. The enhanced 35-per-cent SR&ED investment tax credit rate applicable in respect of eligible CCPCs will remain unchanged on up to $3 million of qualified SR&ED expenditures annually.
As indicated above, allowable current and capital expenditures in respect of SR&ED are fully deductible, and qualifying SR&ED expenditures are eligible for an investment tax credit. Budget 2012 proposes to exclude expenditures of a capital nature (including payments in respect of the use or the right to use property that would, if it were acquired by the taxpayer, be capital property of the taxpayer) from eligibility for SR&ED deductions and investment tax credits. This measure will apply to property acquired on or after January 1, 2014, and to amounts paid or payable in respect of the use of, or the right to use, property during any period that is after 2013.
This measure will also apply to exclude otherwise eligible contract payments made by a taxpayer from benefiting from SR&ED tax incentives to the extent that the payment is in respect of a capital expenditure made in fulfillment of the contract.
Expenditures that have been excluded because of this measure from the SR&ED tax incentives will be accorded the treatment otherwise applicable to such expenditures under the Income Tax Act.
Itemized overhead expenditures directly attributable to the conduct of SR&ED are currently eligible for the SR&ED tax incentives. In lieu of itemizing such overhead expenditures, taxpayers can elect to use a simplified proxy method for the calculation of these expenditures. Under the proxy method, a taxpayer can generally include in the taxpayer’s SR&ED qualified expenditure pool for a taxation year, which is eligible for SR&ED investment tax credits, an amount equal to 65 per cent of the total of the eligible portion of salaries and wages of the taxpayer’s employees directly engaged in the conduct of SR&ED in Canada in the taxation year.
Budget 2012 proposes to reduce the rate at which the prescribed proxy amount is calculated to 60 per cent (from 65 per cent) for 2013 and to 55 per cent after 2013. The proxy rate that will apply for taxation years that include days in 2012, 2013 or 2014 will be pro-rated based on the number of days in the taxation year that are in each of those calendar years.
Where a taxpayer (the payer) contracts to have SR&ED performed by a non-arm’s length person (the performer), the total qualified expenditures on which either the performer or the payer can claim SR&ED investment tax credits are currently restricted to the amount of the qualified SR&ED expenditures incurred by the performer in fulfillment of the contract. These rules ensure that investment tax credits are not earned on the profit element of non-arm’s length SR&ED contracts.
In the case of arm’s length SR&ED contract payments, however, the payer is currently entitled to SR&ED investment tax credits in respect of the entire amount of the contract payment, while the amount of the contract payment is netted against the qualifying SR&ED expenditures of the performer.
Budget 2012 proposes to disallow from the expenditure base for investment tax credits the profit element of arm’s length SR&ED contracts. For simplicity, it is proposed that this be achieved by way of a proxy, under which only 80 per cent of the cost to a payer of arm’s length SR&ED contracts will be eligible for SR&ED investment tax credits.
This measure will apply to expenditures incurred on or after January 1, 2013.
Consistent with the measures described above concerning SR&ED capital expenditures, the amount of an arm’s length contract payment eligible for SR&ED tax incentives for the payer will also exclude any amount paid in respect of a capital expenditure incurred by the performer in fulfillment of the contract. SR&ED contract performers will be required to inform the contract payers of these amounts. Once that measure is in force (beginning in 2014), the exclusion with respect to capital expenditures will reduce the amount of the contract payment before the 80-per-cent eligibility ratio is applied.
In addition, the amount that the performer is required to net against its qualifying SR&ED expenditures because of the contract payment will be reduced by the amount received by the performer that is in respect of capital expenditures by the performer.
Expenditures that have been excluded because of this measure from the SR&ED tax incentives will be accorded the treatment otherwise applicable to such expenditures under the Income Tax Act.
Section 88 of the Income Tax Act contains rules that enable a taxable Canadian corporation (the Parent) that has acquired control of another taxable Canadian corporation (the Subsidiary) to increase the cost of certain capital assets acquired by the Parent on a vertical amalgamation with, or winding-up of, the Subsidiary (the section 88 bump). The section 88 bump recognizes that, in such cases, the amount paid by the Parent for the shares of the Subsidiary represents the cost of the assets of the Subsidiary and allows the Parent, within limits, to add the amount paid for the shares to the cost of certain capital assets acquired on the amalgamation or winding-up.
Capital assets, such as land, shares of a corporation or an interest in a partnership, may be eligible for the section 88 bump. Assets that if sold could produce income (as distinguished from producing only capital gains) are not eligible for the section 88 bump. These income assets include eligible capital property, depreciable property, inventory and resource property.
In recent years, corporate partnership structures have been used with increasing frequency to attempt to circumvent the denial of the section 88 bump in respect of a Subsidiary’s income assets. Instead of the Subsidiary holding income assets directly, the income assets are held indirectly through a partnership. Upon the acquisition of control of the Subsidiary, the Parent amalgamates with, or winds up, the Subsidiary and then claims an increase (or “bump”) to the cost of the partnership interest, even in circumstances where all of the fair market value of the partnership interest is derived from income assets.
A second concern arises in respect of section 100 of the Income Tax Act, which is meant to ensure that income assets held by a partnership are fully taxable on the sale of the partnership by a taxpayer to a tax-exempt person (since the tax-exempt person could wind up the partnership without paying any income tax). This rule does not currently apply to a sale of a partnership to a non-resident even though the income from a disposition of an income asset owned by the partnership may be exempt from Canadian income tax under either domestic law or one of Canada’s tax treaties. As well, some taxpayers have sought to take advantage of the fact that section 100 does not expressly refer to indirect sales of partnership interests to a tax-exempt person.
The Canada Revenue Agency challenges these partnership structures where appropriate under the existing provisions of the Income Tax Act, including the general anti-avoidance rule. However, specific legislative action is warranted to explicitly prohibit the use of these and similar structures.
Budget 2012 proposes two measures to ensure that partnerships cannot be used to circumvent the intended application of sections 88 and 100. The first measure will generally deny a section 88 bump in respect of a partnership interest to the extent that the accrued gain in respect of the partnership interest is reasonably attributable to the amount by which the fair market value of income assets exceed their cost amount. This measure will apply where the income assets are held directly by the partnership or indirectly through another partnership. For this purpose, assets directly owned by a taxable Canadian corporation, shares of which are held by the partnership, will not be considered to be indirectly held by the partnership.
This measure will apply to amalgamations that occur, and windings-up that begin, on or after Budget Day. An exception will be provided where a taxable Canadian corporation amalgamates with its subsidiary before 2013, or begins to wind up its subsidiary before 2013. This exception will apply only if, before Budget Day, the corporation had acquired control, or was obligated as evidenced in writing to acquire control, of the subsidiary and the corporation had the intention, as evidenced in writing, to amalgamate with, or wind up, the subsidiary. A corporation will not be considered to be obligated to acquire control where the corporation may be excused from the obligation if an amendment is made to the Income Tax Act.
Budget 2012 also proposes to extend the application of section 100 of the Income Tax Act to the sale of a partnership interest to a non-resident person, unless the partnership is carrying on business in Canada through a permanent establishment in which all of the assets of the partnership are used. In such cases, the income assets remain within the Canadian income tax base. This measure will also clarify that section 100 applies to dispositions made directly, or indirectly as part of a series of transactions, to a tax-exempt or non-resident person.
This measure will apply to dispositions, of interests in partnerships, that occur on or after Budget Day. An exception will be provided for an arm’s length disposition made by a taxpayer before 2013 that the taxpayer is obligated to make pursuant to a written agreement entered into by the taxpayer before Budget Day. A taxpayer will not be considered to be obligated to make the disposition where the taxpayer may be excused from the obligation if an amendment is made to the Income Tax Act.
The Income Tax Act provides that the Canada Revenue Agency (CRA) may, for a fiscal period of a partnership, make a determination (which includes a redetermination) under section 152(1.4) of the Income Tax Act of any income, loss, deduction or other amount in respect of the partnership. The CRA is precluded from determining an amount if more than three years have elapsed since the later of the deadline for filing the relevant partnership information return and the day it is actually filed. Where the CRA obtains a waiver from each partner, however, the time period for making a determination is extended. If one or more of the partners does not provide a waiver, and, as a result, the period cannot be extended, a determination will need to be made by the CRA using only the information that is available to it at that time. The provision of a waiver is at the discretion of the taxpayer.
There are circumstances under which it is advantageous to both the CRA and the partners of a partnership to waive the three-year time limit. Obtaining the required waivers from all members of the partnership can, however, be difficult.
Under current rules, the members of a partnership may designate a partner who is authorized to file an objection on behalf of all its partners, to a determination under the Income Tax Act. Budget 2012 proposes that a single designated partner of a partnership may also be empowered to waive, on behalf of all its partners, the three-year time limit for making a determination.
This measure will apply on Royal Assent to the enacting legislation.
The expression “transfer prices” has become known internationally as the tax term that refers to the prices at which goods, services and intangibles are traded across international borders between persons who do not deal with each other at arm’s length. Section 247 of the Income Tax Act contains transfer pricing rules, which apply in respect of transactions or series of transactions between parties who do not deal at arm’s length. Where the terms or conditions of a transaction or series of transactions do not reflect arm’s length terms and conditions, the Canada Revenue Agency (CRA) may adjust for tax purposes amounts related to the transaction or series to reflect arm’s length terms and conditions. This is commonly referred to as a “primary adjustment”.
Once a primary adjustment has been made, a “secondary adjustment” is generally required to account for the benefit conferred on non-residents participating in the transaction or series of transactions. For example, if a Canadian corporation buys goods from its non-resident parent corporation for $100 but parties dealing at arm’s length would have charged $80, the primary adjustment would reduce by $20 the cost of the goods to the Canadian taxpayer. A secondary adjustment should also arise to reflect the $20 benefit that was conferred on the non-resident parent (i.e., the amount by which the non-resident parent was overpaid for the goods).
A number of provisions in the Income Tax Act, such as section 15 and paragraph 214(3)(a), can apply to treat a benefit conferred on a non-resident as a dividend subject to withholding tax under Part XIII of the Act and it is the policy of the CRA to assess these secondary adjustments. There is, however, no specific provision in the transfer pricing rules regarding secondary adjustments. The Transfer Pricing Subcommittee of the Advisory Panel on Canada’s System of International Taxation recommended that legislative changes be made to clarify the treatment of secondary adjustments as constructive dividends.
Budget 2012 proposes to amend section 247 of the Income Tax Act to confirm that secondary adjustments will be treated as dividends for Part XIII tax purposes. A Canadian corporation subject to a primary adjustment will also be deemed to have paid a dividend to each non-arm’s length non-resident participant in the transaction or series of transactions in proportion to the amount of the primary adjustment that relates to the non-resident, regardless of whether the non-resident is a shareholder of the Canadian corporation.
Budget 2012 also proposes, consistent with CRA administrative practice, to clarify that a non-resident is allowed to repatriate to a Canadian corporation that has been subject to a primary adjustment an amount equal to the portion of the primary adjustment that relates to the non-resident. If the repatriation is made by the non-resident with the concurrence of the Minister of National Revenue no deemed dividend will arise in respect of that non-resident. In addition, no deemed dividend will arise if the non-resident is a controlled foreign affiliate (as defined in subsection 17(15) of the Income Tax Act) of the Canadian corporation. In this instance, the benefit conferred on the non-resident is more akin to a capital contribution than a dividend.
This measure will apply to transactions (including transactions that are part of a series of transactions) that occur on or after Budget Day.
The thin capitalization rules limit the deductibility of interest expense of a Canadian-resident corporation in circumstances where the amount of debt owing to certain non-residents exceeds a 2-to-1 debt-to-equity ratio. The thin capitalization rules protect the Canadian tax base from erosion through excessive interest deductions in respect of debt owing to these non-residents. These rules apply to debts owing to a specified shareholder (a person or group owning shares representing more than 25 per cent of the votes or value of the corporation) that is not resident in Canada and any other non-resident who does not deal at arm’s length with a specified shareholder.
The Advisory Panel on Canada’s System of International Taxation (the Advisory Panel) made a number of recommendations relating to the thin capitalization rules, including reducing the debt-to-equity ratio from 2-to-1 to 1.5-to-1 and extending the rules to partnerships, trusts and Canadian branches of non-resident corporations. The Advisory Panel also encouraged the Government to review the treatment of interest expense that is not deductible under Canada’s thin capitalization rules (disallowed interest expense) in order to ensure that non-resident investors are prevented from inappropriately reducing their Canadian withholding tax obligations.
Budget 2012 proposes to improve the integrity and fairness of the thin capitalization rules by:
- reducing the debt-to-equity ratio from 2-to-1 to 1.5-to-1;
- extending the scope of the thin capitalization rules to debts of partnerships of which a Canadian-resident corporation is a member;
- treating disallowed interest expense under the thin capitalization rules as dividends for Part XIII withholding tax purposes; and
- preventing double taxation in certain circumstances where a Canadian-resident corporation borrows money from its controlled foreign affiliate.
The intent of the thin capitalization rules generally, and the debt-to-equity ratio in particular, is to allow Canadian corporations to finance themselves using a reasonable amount of debt owing to certain non-residents, while protecting the tax base against excessive interest deductions in respect of such debt. A useful guidepost for setting the debt-to-equity ratio is the typical capital structure of Canadian corporations generally. The Advisory Panel concluded that the permitted 2-to-1 debt-to-equity ratio is high compared to actual industry ratios in the Canadian economy, suggesting it allows inappropriately high levels of foreign related party debt. Analysis by the Government indicates that this conclusion continues to hold.
Canada’s debt-to-equity ratio also appears high relative to world standards because the ratios in many other countries apply to broader measures of debt (which the Advisory Panel also noted). For example, some countries include in their ratios third-party debt which is guaranteed by a foreign parent corporation, while others take into account all debt owing to third parties.
In order to better protect the tax base, Budget 2012 proposes to reduce the debt-to-equity ratio in the thin capitalization rules from 2-to-1 to 1.5-to-1.
This measure will apply to corporate taxation years that begin after 2012.
Partnerships are not taxable under the Income Tax Act. A partnership calculates its income or loss as if it were a separate person resident in Canada and the income or loss is then allocated to its partners.
While Canada’s thin capitalization rules restrict the deductibility of interest expense incurred by Canadian-resident corporations, the rules do not reference interest expense incurred by partnerships. The Advisory Panel recommended that the scope of the thin capitalization rules be extended to partnerships.
Budget 2012 proposes to extend the thin capitalization rules to debts owed by partnerships of which a Canadian-resident corporation is a member. In particular, for the purpose of determining the corporation’s debt-to-equity ratio under the thin capitalization rules, debt obligations of the partnership will be allocated to its members based on their proportionate interest in the partnership.
In circumstances where a corporate partner’s permitted debt-to-equity ratio is exceeded, the partnership’s interest deduction will not be denied but an amount will be included in computing the income of the partner from a business or property, as appropriate. The source of this income inclusion will be determined by reference to the source against which the interest is deductible at the partnership level. This inclusion will equal the amount of the interest on the portion of the allocated partnership debt that exceeds the permitted debt-to-equity ratio.
Canco 1 and Canco 2 are Canadian-resident corporations and are equal partners in a partnership that earns income from a business. Canco 1 is wholly owned by Forco, a non-resident corporation. The Canco 1 shares owned by Forco have paid-up capital of $4,000 but Canco 1 has no other capital for the purposes of the thin capitalization rules. Forco lends $3,000 to the partnership and lends $8,500 directly to Canco 1.
Canco 1 has a 50-per-cent interest in the partnership and will therefore be allocated 50 per cent of the partnership loan ($1,500) for thin capitalization purposes. Canco 1 has capital of $4,000 and is considered to have outstanding debts to a specified non-resident (Forco) of $10,000 ($8,500 debt owed by Canco 1 to Forco plus $1,500 in debt allocated from the partnership).
With a permitted debt-to-equity ratio of 1.5-to-1, Canco 1 has $4,000 of total excess debt – that is, ($10,000 – 1.5 x $4,000)/10,000, or 2/5, of $10,000. This 2/5 ratio is applied to interest on the debt owed directly to Forco by Canco 1 as well as the debt allocated from the partnership to determine how much interest is denied, or added back to income, respectively. Accordingly, 2/5 of the interest deduction in respect of the $8,500 direct loan from Forco will be denied and an amount equal to 2/5 of the deductible interest expense in respect of the $1,500 debt allocated from the partnership will be required to be included in computing the income of Canco 1 from the partnership's business.
This measure will apply in respect of debts of a partnership that are outstanding during corporate taxation years that begin on or after Budget Day.
The Advisory Panel encouraged the Government to review the withholding tax treatment of interest that is disallowed under the thin capitalization rules. Interest expense of a corporation that is not deductible as a result of the application of the thin capitalization rules is, for income computation purposes under Part I of the Income Tax Act, treated the same as a non-deductible return on equity (i.e., a dividend). It is nevertheless treated as interest for withholding tax purposes under Part XIII of the Income Tax Act.
Consistent with the treatment of disallowed interest for income computation purposes, Budget 2012 proposes to recharacterize disallowed interest expense (including for this purpose any amount that is required to be included in computing the income of a corporation in respect of an amount deductible by a partnership of which the corporation is a member) as a dividend for non-resident withholding tax purposes.
The calculations required for compliance with the thin capitalization rules are required to be made after the end of a corporation’s taxation year. Under this proposal, disallowed interest expense of a corporation for a taxation year will be allocated to specified non-residents in proportion to the corporation’s debt owing in the taxation year to all specified non-residents (taking into account debts owing by partnerships of which the corporation is a member). The corporation will be allowed to allocate the disallowed interest expense to the latest interest payments made to any particular specified non-resident in the taxation year. Where the disallowed interest expense has not been paid by the end of the taxation year of the corporation, the disallowed interest expense will be deemed to have been paid as a dividend by the corporation at the end of that taxation year.
The relevant withholding tax will be due at the time that it would have been due if the deemed dividend had been paid at the time the disallowed interest expense was paid or deemed to have been paid. In circumstances where the amount withheld exceeds the withholding tax payable, the non-resident creditor will be able to obtain a refund of the excess.
This measure will apply to taxation years that end on or after Budget Day. For taxation years that include Budget Day, the measure will apply to an amount of disallowed interest expense that is based on a pro-ration for the number of days in the taxation year that are on or after Budget Day.
Under the existing definition of “outstanding debts to specified non-residents” in subsection 18(5) of the Income Tax Act, the thin capitalization rules can, in some circumstances, apply to loans made to a Canadian-resident corporation from a controlled foreign affiliate of the corporation.
The Canadian tax system also contains rules that protect the tax base by preventing taxpayers from shifting passive income to low-tax jurisdictions. Under these rules, foreign accrual property income (FAPI), which includes certain interest income earned by controlled foreign affiliates of a taxpayer, is taxable in the hands of the taxpayer on an accrual basis.
The combination of these rules can result in double taxation where, for example, a particular Canadian-resident corporation that is owned by a widely held Canadian public company has borrowed money from its controlled foreign affiliate. In these circumstances the particular corporation may be prevented from deducting interest on the loan under the thin capitalization rules while at the same time the interest is taxable in its hands as FAPI.
Budget 2012 proposes to exclude interest expense of a Canadian-resident corporation from the application of the thin capitalization rules to the extent that a portion of that interest is taxable in the hands of the corporation in respect of the FAPI of a controlled foreign affiliate of the corporation.
This measure will apply to taxation years, of Canadian-resident corporations, that end on or after Budget Day.
The Government strongly supports cross-border trade and investment. However, it is important to ensure that cross-border investment is not used as a tool to erode the corporate tax base. The Advisory Panel on Canada’s System of International Taxation (the Advisory Panel) identified certain types of foreign affiliate “dumping” transactions as being abusive: such transactions reduce the Canadian tax base without providing any significant economic benefit to Canadians. The Advisory Panel recommended that a targeted measure be introduced to curtail these transactions while ensuring that bona fide business transactions are not affected.
Foreign affiliate dumping transactions often involve a Canadian subsidiary using borrowed funds to acquire shares of a foreign affiliate from its foreign parent corporation. These transactions are carried out in the expectation that interest paid by the Canadian subsidiary on such borrowed money is deductible in computing income for tax purposes while, at the same time, most dividends received by the Canadian subsidiary on the shares of the foreign affiliate are exempt from taxation, resulting in the erosion of the Canadian corporate tax base. The thin capitalization rules, including the amendments proposed in this Budget, do not provide adequate protection against these transactions.
The Government also has concerns with variations of these transactions, including, for example:
- acquisitions of shares of a foreign affiliate that are made with internal funds of the Canadian subsidiary – such transactions provide a mechanism for foreign parent corporations to extract earnings from their Canadian subsidiaries free of Canadian dividend withholding tax;
- acquisitions of newly-issued shares of a foreign affiliate, whether financed with internal or borrowed funds, where previously-issued shares of the foreign affiliate are owned by the foreign parent or another non-resident member of the same corporate group;
- acquisitions of foreign affiliate shares from a foreign subsidiary of the foreign parent; and
- acquisitions of foreign affiliate shares from an arm’s length party at the request of the foreign parent.
Although existing anti-avoidance rules in the Income Tax Act may apply in some cases to foreign affiliate dumping transactions, immediate action is being taken to discourage such transactions from being undertaken in the future.
Consistent with the Advisory Panel’s recommendation, Budget 2012 proposes to implement a measure that will curtail foreign affiliate dumping while at the same time preserving the ability of Canadian subsidiaries of foreign parents to undertake legitimate expansions of their Canadian-based businesses. This measure proposes that, where certain conditions are met, a dividend will be deemed to be paid by a Canadian subsidiary to its foreign parent to the extent of any non-share consideration given by the Canadian subsidiary for the acquisition of the shares of a foreign affiliate. Any deemed dividend will be subject to non-resident withholding tax, as reduced by any applicable tax treaty. It further proposes to disregard the paid-up capital of any shares of the Canadian subsidiary that are given as consideration. This measure effectively extends an existing cross-border surplus stripping rule to cover transactions involving foreign affiliates.
This measure will not apply to transactions that meet a “business purpose” test. The primary factors to consider in applying this test are non-tax factors that will be set out in the Income Tax Act and explained further in the accompanying explanatory notes. In general, the factors are intended to assist in determining whether it is reasonable to conclude that the investment in, and ownership of, the foreign affiliate belongs in the Canadian subsidiary more than in any other entity in the foreign parent’s group. If it is reasonable to so conclude, then this measure will not apply. The Government recognizes that distinguishing between foreign affiliate dumping transactions and transactions that are undertaken with a view to the legitimate expansion of a Canadian-based business is not straightforward. Accordingly, to assist with the finalization of the legislation to implement this measure, the Government invites stakeholders to submit comments concerning the details of the proposed “business purpose” test, as set out in the Notice of Ways and Means Motion for this measure, before June 1, 2012.
This measure will apply to transactions that occur on or after Budget Day, other than transactions that occur before 2013 between parties that deal at arm’s length and that are obligated to complete the transaction pursuant to the terms of an agreement in writing between the parties that is entered into before Budget Day. A party will be considered not to be obligated to complete a transaction if the party may be excused from completing the transaction as a result of amendments to the Income Tax Act.
As indicated above, the Government’s intention is to curtail foreign affiliate dumping. The Government will monitor developments in this area to determine whether further action is warranted.
Budget 2012 proposes that amendments be made to the so-called “base erosion” rules in the Income Tax Act’s foreign accrual property income regime. Amendments will be developed to alleviate the tax cost to Canadian banks of using excess liquidity of their foreign affiliates in their Canadian operations. Amendments will also be developed to ensure that certain securities transactions undertaken in the course of a bank’s business of facilitating trades for arm’s length customers are not inappropriately caught by the base erosion rules.
These amendments will be developed in conjunction with industry representatives and will include appropriate safeguards to ensure the Canadian tax base is adequately protected.
Employees who are residents of Canada and who qualify for the Overseas Employment Tax Credit (OETC) are entitled to a tax credit equal to the federal income tax otherwise payable (calculated using the employee’s average tax rate) on 80 per cent of their qualifying foreign employment income, up to a maximum foreign employment income of $100,000. The OETC is deductible in determining the employee’s tax payable.
Generally, the OETC is available where:
- the employee is employed outside Canada for a period of more than six consecutive months by a person resident in Canada (or a foreign affiliate of such a person); and
- the employee’s foreign employment income is derived from employment in connection with the exploration for or exploitation of certain natural resources, activities performed under a contract with the United Nations, or construction, installation, engineering or agricultural activities.
The OETC was originally introduced in Budget 1979 (as a deduction in computing income) as a targeted measure to maintain the competitiveness of Canadian firms in certain sectors in bidding for overseas contracts. At the time, the tax legislation of many of Canada’s foreign competitors provided some degree of similar tax relief. The environment in which the OETC operates has changed significantly since then. In particular, the Government has implemented substantial, broad-based tax reductions that support investment and growth in all sectors of the economy and most of Canada’s foreign competitors (for example, the United States, United Kingdom and France) do not have analogous tax preferences. In addition, recent court decisions have expanded the application of the OETC beyond its original intent.
Budget 2012 proposes to phase out the OETC over four taxation years, beginning with the 2013 taxation year. During the phase-out period, the factor (currently 80 per cent) applied to an employee’s qualifying foreign employment income in determining the employee’s OETC will be reduced to 60 per cent for the 2013 taxation year, 40 per cent for the 2014 taxation year and 20 per cent for the 2015 taxation year. The OETC will be eliminated for the 2016 and subsequent taxation years.
These phase-out rules will not apply with respect to qualifying foreign employment income earned by an employee in connection with a project or activity to which the employee’s employer had committed in writing before Budget Day. For example, if an employer has tendered an irrevocable bid in writing for a project before Budget Day, the employer will be considered to have committed in writing to the project irrespective of whether the bid has been accepted before Budget Day. In such instances, the factor applied to an employee’s qualifying foreign employment income in determining the employee’s OETC will remain at 80 per cent for the 2013, 2014 and 2015 taxation years. The OETC will be eliminated for the 2016 and subsequent taxation years.
Basic health care services are treated as exempt from the Goods and Services Tax/Harmonized Sales Tax (GST/HST). Exempt treatment means that suppliers of exempt health care services do not charge GST/HST to patients, but they cannot claim input tax credits to recover the GST/HST paid on inputs in relation to these supplies. In addition, certain medical devices, prescription drugs and certain other drugs used to treat life-threatening conditions are zero-rated. Zero-rating means that suppliers do not charge purchasers GST/HST on these medical devices and drugs and are entitled to claim input tax credits to recover the GST/HST paid on inputs in relation to these supplies.
Budget 2012 proposes to improve the application of the GST/HST to a number of health care services, drugs and medical devices to reflect the evolving nature of the health care sector.
Pharmacists’ professional practice has traditionally been limited to performing the services of dispensing prescription drugs. To ensure that no tax applies to prescription drugs, pharmacists’ drug dispensing services and prescription drugs have both been zero-rated since the inception of the GST.
A number of provincial governments have recently expanded the health care services that pharmacists are authorized to perform in the course of their professional practice beyond those of dispensing drugs. Examples of non-dispensing health care services that pharmacists are authorized to provide in certain provinces include:
- ordering and interpreting lab tests (e.g., to determine if a medication is creating an adverse reaction);
- administering medications and vaccinations (e.g., administering flu vaccines);
- changing drug dosages; and
- prescribing drugs for minor ailments.
Budget 2012 proposes to exempt from the GST/HST services rendered by pharmacists within a pharmacist-patient relationship for the promotion of the patient’s health or for the prevention or treatment of a disease, disorder or dysfunction of the patient. The proposal will result in an exemption for the non-dispensing health care services that pharmacists are authorized to provide in the course of their professional practice. Pharmacists’ services of dispensing prescription drugs will continue to be zero-rated.
Under the current rules, a prescribed list of diagnostic health care services, such as blood tests, are exempt when ordered by certain health care professionals, such as physicians or registered nurses. Budget 2012 proposes to expand the exemption for these diagnostic services to include those ordered by pharmacists when the pharmacists are authorized to issue such orders under the laws of a province.
These measures will apply to supplies made after Budget Day.
Under the GST/HST, corrective eyewear that is supplied on the written order of an eye care professional authorized by provincial law to prescribe eyeglasses or contact lenses is zero-rated.
Under recent provincial law changes, opticians have been authorized in certain circumstances to conduct vision assessments and produce records of the assessment that authorize dispensing of corrective eyewear. Budget 2012 proposes to zero-rate corrective eyeglasses or contact lenses supplied under the authority of an assessment record produced by a person who is entitled under the laws of the province in which the person practices to produce the record authorizing dispensing of corrective eyewear.
This measure will apply to supplies made after Budget Day and to supplies made on or before that day if GST/HST was not charged, collected or remitted in respect of the supply.
Medical and assistive devices that are specially-designed to assist an individual in coping with a chronic disease or illness or a physical disability are zero-rated under the GST/HST. The medical devices eligible for zero-rating are listed in the GST/HST legislation.
Included in the list of zero-rated medical and assistive devices are certain monitoring or metering devices (e.g., blood-sugar monitoring or metering devices and associated test strips and reagents that assist individuals in determining their appropriate dosage of insulin).
Budget 2012 proposes to add blood coagulation monitoring or metering devices and associated test strips and reagents to the zero-rated medical device list. These devices are specially-designed for use by individuals requiring blood coagulation monitoring or metering, for example to determine appropriate levels of medications that alter their rate of blood coagulation to prevent strokes caused by blood clots.
This measure will apply to supplies made after Budget Day.
In the case of certain medical and assistive devices, the devices are eligible for zero-rating only when supplied on the written order of a medical practitioner. This requirement is intended to ensure that tax relief is specifically targeted to individuals with a chronic disease or illness or a physical disability.
Registered nurses, occupational therapists and physiotherapists do not qualify as medical practitioners for purposes of these rules. However, they are increasingly involved in assessing when medical and assistive devices are needed. Accordingly, Budget 2012 proposes to zero-rate supplies of the devices, that currently qualify for zero-rating only when supplied on the written order of a medical practitioner, when supplied on the written order of a registered nurse, occupational therapist or physiotherapist as part of their professional practice.
This measure will apply to supplies made after Budget Day.
Under the GST/HST, prescription drugs and a list of non-prescription drugs that are used to treat life-threatening diseases are zero-rated.
Budget 2012 proposes to add the drug “Isosorbide-5-mononitrate” to the list of zero-rated non-prescription drugs. This drug is similar in chemical composition and effect to the currently listed drug “Isosorbide dinitrate” and both are used to treat congestive heart failure.
This measure will apply to supplies made after Budget Day and to supplies made on or before that day if GST/HST was not charged, collected or remitted in respect of the supply.
To promote literacy, a rebate of the GST (and the federal portion of the HST) is provided for printed books (including audio recordings of printed books and printed versions of religious scriptures) acquired by public libraries, educational institutions, as well as charities and qualifying non-profit organizations prescribed by regulation and whose primary purpose is the promotion of literacy. Currently, the rebate does not apply to tax paid on printed books purchased to be sold or given away.
Budget 2012 proposes to allow charity and qualifying non-profit literacy organizations prescribed by regulation to claim a rebate of the GST (and the federal portion of the HST) they pay to acquire printed books to be given away. This change will allow literacy organizations, if prescribed by regulation, to claim a rebate of tax paid on printed books that are, for example, purchased to be given to children from low income households who might not otherwise be able to afford them. Information on the process for charity and qualifying non-profit literacy organizations to apply to be prescribed by regulation for this purpose is available from the Canada Revenue Agency.
This measure will apply to acquisitions and importations of printed books in respect of which tax becomes payable after Budget Day.
Most small businesses and most public service bodies (PSBs) can elect to use the Quick or Special Quick Method of accounting respectively to determine the amount of GST/HST to remit. These methods are intended to simplify GST/HST compliance. Under these methods, taxpayers multiply eligible GST/HST-included sales by a specified remittance rate and remit that amount to the Canada Revenue Agency in lieu of tracking GST/HST paid on purchases and GST/HST collected on sales. Generally, small businesses may elect to use the Quick Method if their annual taxable sales (including those of their associates) do not exceed $200,000 (GST/HST-included). Under the Special Quick Method that PSBs can generally elect to use, no sales threshold restriction applies.
Most small businesses and most small PSBs can also elect to use the Streamlined Input Tax Credit Method, which provides a simplified process for determining input tax credits (ITCs). The Streamlined Input Tax Credit Method is generally available to a business or a PSB with annual taxable sales (including the sales of associates) not exceeding $500,000 and annual taxable purchases (excluding zero-rated purchases) not exceeding $2 million.
Under this method, rather than tracking the actual GST/HST paid on eligible business purchases in order to determine the ITCs they can claim, businesses (or PSBs) can calculate their ITCs based on a portion of their eligible total business purchases subject to tax, including the amounts of GST, HST and non-refundable provincial sales tax paid or payable (referred to as tax-included business purchases). The portion, or tax factor, used to calculate ITC entitlements is based on the tax rate applicable to the purchases. For instance, where all purchases were subject to only the 5-per-cent GST, the business (or PSB) would multiply the sum of their tax-included business purchases by a “5/105” tax factor. The result of that calculation would be the amount of ITCs the business (or PSB) can claim. For purchases made in HST provinces, the current tax factors are: 12/112 for British Columbia, 13/113 for Ontario, New Brunswick and Newfoundland and Labrador, and 15/115 for Nova Scotia. As well, most PSBs that fall under the same thresholds may use the Prescribed Method for Calculating Rebates, a similar simplified method for calculating their PSB rebate entitlement.
To further simplify GST/HST compliance for small businesses and PSBs, and in support of the objectives of the Red Tape Reduction Commission’s report presented to the Government on January 18, 2012, Budget 2012 proposes to double the existing streamlined accounting thresholds. Specifically:
- the annual taxable sales threshold at or below which eligible businesses can elect to use the Quick Method will increase to $400,000 (from $200,000) of GST/HST-included taxable sales; and
- the annual taxable sales and taxable purchases thresholds at or below which eligible businesses or PSBs can elect to use the Streamlined Input Tax Credit Method and eligible PSBs can elect to use the Prescribed Method for Calculating Rebates will increase:
- to $1,000,000 (from $500,000) of taxable sales, and
- to $4,000,000 (from $2,000,000) of taxable purchases.
This measure will be effective in respect of a GST/HST reporting period of a person (or a claim period of a person, in the case of the Prescribed Method for Calculating Rebates) beginning after 2012.
Currently, rental vehicles that are registered in another country (foreign-based rental vehicles) and temporarily imported by Canadian residents are generally subject to full taxes at the border (i.e., the GST on the full value of the vehicle, the Green Levy and the automobile air conditioner tax apply). Such importations were, until recently, also prohibited under federal vehicle safety rules unless it could be shown that the vehicle in question satisfied all Canadian standards. Generally, no taxes or similar restrictions apply to foreign-based rental vehicles temporarily imported by foreign residents visiting Canada.
As part of the Federal Tourism Strategy, the Government committed to review existing restrictions that make it difficult for Canadian residents to drive foreign-based rental vehicles into Canada and consider how these restrictions can be eased. Federal vehicle safety rules were amended in Bill C-13, Keeping Canada’s Economy and Jobs Growing Act, which came into force on December 15, 2011, to generally enable the temporary importation of these rental vehicles for a period not exceeding 30 days.
Following a review of existing tax provisions, Budget 2012 proposes changes to the tax treatment of rental vehicles temporarily imported by Canadian residents. Specifically, Budget 2012 proposes to:
- fully relieve GST/HST on foreign-based rental vehicles temporarily imported by Canadian residents who have been outside Canada for at least 48 hours;
- levy GST/HST on a partial basis, as described below, on foreign-based rental vehicles temporarily imported by Canadian residents who have not been outside Canada for at least 48 hours; and
- fully relieve the Green Levy and the automobile air conditioner tax on all foreign-based rental vehicles temporarily imported by Canadian residents.
In the case of a Canadian resident who has been outside Canada for less than 48 hours and who temporarily imports a foreign-based rental vehicle, the GST/HST will be levied on fixed monetary values, intended to approximate the average cost of a weekly rental of the same type of vehicle in Canada, for each week or part of a week that the vehicle is in Canada. These weekly fixed monetary values will be set out in regulations and will generally be as follows:
- $200 for cars;
- $300 for pickup trucks, sport utility vehicles and vans; and
- $1,000 for recreational vehicles, such as motor homes.
Where GST/HST applies on these rental vehicles, the GST/HST rate applicable will be that of the province where the vehicle enters Canada. For example, travellers who enter Canada at Windsor, Ontario would pay the Ontario HST rate of 13 per cent at the time of entry.
This tax treatment will apply only to foreign-based rental vehicles temporarily imported for a period not exceeding 30 days, which is consistent with the revised federal vehicle safety rules that now permit the temporary importation of these vehicles for a period not exceeding 30 days.
This measure will apply to foreign-based rental vehicles temporarily imported by Canadian residents on or after June 1, 2012.
The Green Levy applies on certain fuel-inefficient vehicles, in accordance with the vehicle’s fuel efficiency rating. The Green Levy applies to automobiles that have a weighted average (i.e., 55 per cent city/45 per cent highway) fuel consumption rating of 13 or more litres per 100 kilometres, as determined in accordance with information published by the Government of Canada under the EnerGuide mark.
On February 17, 2012, the Minister of Natural Resources announced that Canada will change the vehicle fuel consumption testing requirements to better align with those in the United States.
To ensure that this change does not affect the application of the Green Levy, Budget 2012 proposes that the Excise Tax Act be amended so that the weighted average fuel consumption rating for the purposes of the Green Levy continues to be determined by reference to the current test method. The necessary legislative amendments will apply on Royal Assent to the enacting legislation.
In general, donations made by Canadians to foreign charities are not eligible for the Charitable Donations Tax Credit or Deduction. However, a foreign charitable organization that receives a gift from the Government of Canada may register as a qualified donee under the Income Tax Act. As a qualified donee, a foreign charitable organization may issue an official donation receipt for a gift received from a Canadian donor, entitling the donor to a credit or deduction in computing Canadian income or tax. A Canadian registered charity may also make a gift to a foreign charitable organization that is a qualified donee.
Budget 2012 proposes to modify the rules for registering certain foreign charitable organizations as qualified donees. Foreign charitable organizations that receive a gift from the Government may apply for qualified donee status if they pursue activities:
- related to disaster relief or urgent humanitarian aid; or
- in the national interest of Canada.
After consultation with the Minister of Finance, the Minister of National Revenue will have the discretionary power to grant qualified donee status to a foreign charitable organization that meets these criteria. Qualified donee status will be made public, and will be granted for a 24-month period that begins on the date chosen by the Minister of National Revenue, which normally would be no later than the date of the gift from the Government.
Granting qualified donee status in these situations will ensure that Canadians receive tax relief for donations made to approved foreign charitable organizations that carry out activities of significance to, and in the interest of, the Canadian public. The Canada Revenue Agency will develop guidance regarding the administration of this measure.
Foreign charitable organizations that have received qualified donee status under the existing rules will continue to be qualified donees until the expiration of the period of their current status.
This measure will apply to applications made by foreign charitable organizations on or after the later of January 1, 2013 and Royal Assent to the enacting legislation.
Under the Income Tax Act, registered charities are required to operate exclusively for charitable purposes and to devote their resources exclusively to charitable activities. Charitable purposes include the relief of poverty, the advancement of education or religion and certain other purposes as recognized by the courts.
A charity is, however, allowed to engage in political activity as long as the activities represent a limited portion of its resources, are non-partisan and are ancillary and incidental to its charitable purposes and activities.
Concerns have been raised that some charities may be exceeding these limitations and that there is currently no requirement for a charity to disclose the extent to which it receives funding from foreign sources for political activities.
To support the administrative measures proposed in this Budget to enhance compliance and increase disclosure by charities regarding political activities, Budget 2012 also proposes to provide additional enforcement tools to the Canada Revenue Agency (CRA). These measures will also apply to registered Canadian amateur athletic associations.
These measures will apply on Royal Assent to the enacting legislation.
Where a charity does not comply with its obligations under the Income Tax Act, the CRA generally takes a graduated approach to addressing non-compliance. First, the CRA works with the charity and provides it with an opportunity to comply voluntarily. If compliance issues become more serious, the CRA may apply intermediate sanctions, such as monetary penalties or a one-year suspension of the charity’s tax-receipting privileges. The CRA may also revoke the registration of a charity. Intermediate sanctions are not, however, currently available in the context of political activities.
Budget 2012 proposes to grant to the CRA the authority to suspend for one year the tax-receipting privileges of a charity that exceeds the limitations on political activities. Further, to ensure that charities are accurately reporting in respect of all the activities in which they engage, the CRA will be granted the authority to suspend the tax-receipting privileges of a charity that provides inaccurate or incomplete information in its annual information return until the charity provides the required information.
Where a charity makes a gift to another qualified donee, the Income Tax Act currently treats the amount of the gift to have been devoted to its charitable purposes and activities, even if the gift is earmarked for political activities. This treatment allows a charity to indirectly pursue political activities beyond what would be permitted if it engaged in those activities directly.
Budget 2012 proposes that, where a gift is made by a charity and it can reasonably be considered that a purpose of the gift is to support the political activities of a qualified donee, the gift will be considered to be an expenditure made by the charity on political activities.
The registration of tax shelters and the reporting requirements imposed on tax shelter promoters are important tools that assist the Canada Revenue Agency (CRA) in identifying, investigating and challenging abusive tax planning arrangements. Budget 2012 proposes to encourage tax shelter registration and reporting by:
- modifying the calculation of the penalty applicable to a promoter when a person participates in an unregistered charitable donation tax shelter;
- introducing a new penalty for a promoter who fails to meet their reporting obligations with respect to annual information returns; and
- limiting the period for which a tax shelter identification number is valid to one calendar year.
The Income Tax Act imposes a penalty on any person (normally the tax shelter promoter) who sells an interest in, or accepts consideration in respect of, a tax shelter that is not registered with the CRA, or who files false information in an application to register a tax shelter. Where this penalty applies, a participant in the tax shelter cannot make any related claim or deduction until the tax shelter is registered and the penalty is paid.
Currently, the penalty is the greater of $500 and 25 per cent of the consideration received or receivable in respect of the tax shelter. For example, if a participant were to pay $12,000 to acquire from a promoter a property that is an unregistered tax shelter, the penalty to the promoter would equal $3,000. This penalty is intended to encourage compliance by making a promoter liable for a significant proportion of the tax savings that the promoter asserts are available to participants in the tax shelter.
In the context of some charitable donation tax shelters, the cost to participants of the property acquired is relatively small in relation to the tax savings that the promoter asserts are available to participants. In these cases, the penalty may be less effective in encouraging compliance by the promoter.
Budget 2012 therefore proposes that, in the case of a charitable donation tax shelter, this penalty be the greater of the amount determined under the existing rules and 25 per cent of the amount asserted by the promoter to be the value of property that participants in the tax shelter can transfer to a donee.
This measure will generally apply on Royal Assent to the enacting legislation.
A promoter who accepts consideration, or acts as a principal or agent, in respect of a tax shelter is required to file an annual information return, which must include the amount paid by each participant who has acquired an interest in the tax shelter. The penalty for not filing this return on time is the greater of $100 and $25 multiplied by the number of days that the return is outstanding, to a maximum of $2,500. Since one of the primary purposes of the tax shelter registration system is to provide timely and accurate information regarding tax shelters to the CRA, there is a need for a stronger incentive for promoters to provide the required information.
Budget 2012 proposes that an additional penalty be imposed if a promoter fails to either:
- file an annual information return in response to a demand by the CRA to file the return; or
- report in the return an amount paid by a participant in respect of the tax shelter.
The new penalty will equal 25 per cent of the consideration received or receivable by a promoter in respect of all interests in the tax shelter that should have been, but were not, reported in an annual information return, or, in the case of a charitable donation tax shelter for which amounts paid by the participants are not reported, the greater of 25 per cent of the consideration received or receivable by the promoter and the amount asserted by the promoter to be the value of the property that those participants can transfer to a donee.
This measure will apply:
- in the case of the failure to file an annual information return, to demands to file made by the CRA after Royal Assent to the enacting legislation; and
- in the case of the failure to report in an annual information return an amount paid by a participant, to returns filed after Royal Assent to the enacting legislation.
A tax shelter identification number does not have an expiration date, meaning that a promoter may market for an indefinite period a tax shelter for which an identification number has been issued. As a result, when an annual information return in respect of a tax shelter has not been filed, the CRA may need to allocate resources to determine whether the return has not been filed because the promoter is not complying with their filing obligations, or because no interests in the tax shelter were sold in the year.
Budget 2012 proposes that a tax shelter identification number be valid only for the calendar year identified in the application for the number filed with the CRA.
This measure will apply to applications made on or after Budget Day. Tax shelter identification numbers issued as a result of applications made before Budget Day will be valid until the end of 2013.
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 33 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 has enacted legislation to facilitate such arrangements.
Budget 2012 proposes tariff relief to support the energy industry. In keeping with the Government’s commitment to make Canada a tariff-free zone for industrial manufacturers, Budget 2012 will eliminate the 5 percent Most-Favoured-Nation (MFN) rate of duty on certain imported oils used as production inputs in gas and oil refining as well as electricity production. Eliminating these duties will improve the competitiveness of certain manufacturers of goods such as gasoline, diesel, electricity and jet fuel.
This tariff elimination will be given effect by amendments to the Customs Tariff and will be effective in respect of goods imported on or after March 30, 2012.
Under existing provisions in the Customs Tariff, Canadian travellers may qualify for an exemption which allows returning residents to bring back goods valued up to a specified dollar limit without having to pay duties or taxes, including customs duty, GST/HST and federal excise levies. Further, the provinces generally provide a matching exemption from provincial sales and product taxes.
Budget 2012 proposes to increase the travellers’ exemption to $200 from $50 for returning Canadian residents who are out of the country for 24 hours or more. Budget 2012 similarly proposes to increase exemption levels for travellers who are out of the country for 48 hours or more to $800. This new threshold will replace the current 48-hour exemption of $400 and the current 7-day exemption of $750.
There will continue to be no duty or tax exemptions for absences of less than 24 hours. Volume and quantity limits on alcohol and tobacco products also remain unchanged.
The new exemption levels, to be given effect by amendments to the Customs Tariff, will be effective in respect of travellers returning to Canada on or after June 1, 2012.
Budget 2012 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:
- Legislative proposals released on July 16, 2010 relating to income tax technical and bijuralism amendments;
- Legislative proposals released on August 27, 2010 (including measures announced in the March 4, 2010 Budget and those relating to foreign affiliates);
- Legislative proposals released on November 5, 2010 relating to income tax technical amendments;
- Legislative proposals released on December 16, 2010 relating to real estate investment trusts;
- Proposed changes to certain GST/HST rules relating to financial institutions released on January 28, 2011;
- Legislative proposals released on March 16, 2011 relating to the deductibility of contingent amounts, withholding tax on interest paid to certain non-residents, and the tax treatment of certain life insurance corporation reserves;
- Measures announced on July 20, 2011 relating to specified investment flow-through entities, real estate investment trusts and publicly traded corporations;
- Legislative proposals released on August 19, 2011 relating to foreign affiliates;
- Legislative proposals released on October 31, 2011 relating to income tax and sales and excise tax technical amendments;
- Measures announced on November 10, 2011 relating to improving the caseload management of the Tax Court of Canada;
- Income tax and GST/HST amendments to accommodate the introduction of Pooled Registered Pension Plans (including legislative proposals released on December 14, 2011);
- Automobile expense amounts for 2012 announced on December 29, 2011; and
- Measures announced on February 17, 2012 relating to transitional rules for the elimination of the Harmonized Sales Tax in British Columbia.
Budget 2012 also reaffirms the Government’s commitment to move forward as required with technical amendments to improve the operation of the tax system.
 The carry forward of RDSP grants and bonds introduced in Budget 2010 allows RDSP beneficiaries to claim unused entitlements for CDSGs and CDSBs for the preceding 10 years (starting from 2008, the year RDSPs became available).
 “Specified employee” is defined in subsection 248(1) of the Income Tax Act and generally includes an employee who has a significant equity interest in their employer or who does not deal at arm’s length with their employer.
 The second component will be zero if the specified employee’s province of residence is Quebec.
 The cash surrender value is the amount available to the policyholder on surrender of the policy during lifetime.
 The modified net premium reserve is equal to the present value of future benefits minus the present value of future modified net premiums.
 Class 43.1 was introduced in 1994 and provides an accelerated CCA rate of 30 per cent (per year on a declining balance basis) for properties acquired after February 21, 1994. Class 43.2 was introduced in 2005 and it is available for properties acquired after February 22, 2005 and before 2020. The eligibility criteria for these two CCA classes are generally the same, except that cogeneration systems that use fossil fuels must meet a higher efficiency standard in order to qualify for Class 43.2.