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This annex provides detailed information on each of the tax measures proposed in the Budget.
Table A2.1 lists these measures and provides estimates of their budgetary impact.
The annex also provides the Notices of Ways and Means Motions to amend the Income Tax Act,the Excise Tax Act, the Excise Act, 2001 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|
|Adoption Expense Tax Credit||–||–||–||–||–||–||–|
|First-Time Donor’s Super Credit||–||25||25||25||30||20||125|
|Lifetime Capital Gains Exemption||–||5||15||25||30||35||110|
|Deduction for Safety Deposit Boxes||–||(5)||(30)||(40)||(40)||(40)||(155)|
|Dividend Tax Credit||–||(125)||(505)||(535)||(570)||(605)||(2,340)|
|Registered Pension Plans: Correcting Contribution Errors||–||–||–||–||–||–||–|
|Extended Reassessment Period: Tax Shelters and Reportable Transactions||–||–||–||–||–||–||–|
|Taxes in Dispute and Charitable Donation Tax Shelters||–||–||–||–||–||–||–|
|Extension of the Mineral Exploration Tax Credit for Flow-Through Share Investors||–||135||(35)||–||–||–||100|
|Labour-Sponsored Venture Capital Corporations Tax Credit||–||–||(15)||(65)||(115)||(160)||(355)|
|Character Conversion Transactions||–||(15)||(25)||(35)||(45)||(55)||(175)|
|Trust Loss Trading||–||(65)||(65)||(65)||(70)||(70)||(335)|
|Consultation on Graduated Rate Taxation of Trusts and Estates||–||–||–||–||–||–||–|
|Business Income Tax Measures|
|Manufacturing and Processing Machinery and Equipment: Accelerated Capital Cost Allowance||–||–||140||555||645||55||1,395|
|Clean Energy Generation Equipment: Accelerated Capital Cost Allowance||–||–||1||1||1||2||5|
|Scientific Research and Experimental Development Program||–||–||–||–||–||–||–|
|Mining Expenses – Pre-Production Mine Development Expenses||–||–||–||(5)||(15)||(25)||(45)|
|Mining Expenses – Accelerated Capital Cost Allowance for Mining||–||–||–||–||–||(10)||(10)|
|Reserve for Future Services||–||–||–||–||–||–||–|
|Additional Deduction for Credit Unions||–||(10)||(25)||(40)||(55)||(75)||(205)|
|Leveraged Life Insurance Arrangements
– Leveraged Insured Annuities
|Leveraged Life Insurance Arrangements
– 10/8 Arrangements
|Restricted Farm Losses||–||5||5||5||5||5||25|
|Corporate Loss Trading||–||(5)||(10)||(20)||(25)||(35)||(95)|
|Taxation of Corporate Groups||–||–||–||–||–||–||–|
|International Tax Evasion and Aggressive Tax Avoidance|
|International Electronic Funds Transfers2||–||2||5||3||3||3||15|
|Information Requirements Regarding Unnamed Persons||–||–||–||–||–||–||–|
|Stop International Tax Evasion Program||–||–||–||–||–||–||–|
| Extended Reassessment Period:
|Revised Form T1135||–||–||–||–||–||–||–|
|Foreign Reporting Requirements:
|Thin Capitalization Rules – Canadian-
|Thin Capitalization Rules – Non-Resident Corporations and Trusts||–||–||–||–||–||–||–|
|International Banking Centres||–||–||–||–||–||–||–|
|Sales and Excise Tax Measures|
|GST/HST on Home and Personal Care Services||–||5||5||5||5||5||25|
|GST/HST on Reports and Services for
Non-Health Care Purposes
|GST/HST Pension Plan Rules||–||–||–||–||–||–||–|
|GST/HST Business Information Requirement||–||–||–||–||–||–||–|
|GST/HST on Paid Parking||–||–||–||–||–||–||–|
|GST/HST Treatment of the Governor General||–||–||–||–||–||–||–|
|Excise Duty Rate on Manufactured Tobacco||(2)||(75)||(65)||(60)||(55)||(50)||(307)|
|Electronic Suppression of Sales Software Sanctions||–||–||–||–||–||–||–|
|Aboriginal Tax Policy||–||–||–||–||–||–||–|
|Customs Tariff Measures|
|Tariff Relief for Canadian Consumers||–||76||76||76||76||76||380|
|Modernizing Canada’s General Preferential Tariff Regime for Developing Countries||–||–||(83)||(333)||(333)||(333)||(1,082)|
|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. The totals may not add due to rounding.
2 The cost of this measure is attributable to program expenditure.
The Adoption Expense Tax Credit (AETC) is a 15-per-cent non-refundable tax credit that allows adoptive parents to claim eligible adoption expenses relating to the completed adoption of a child under the age of 18 (up to a maximum of $11,669 in expenses per child for 2013).
The AETC may be claimed only for the taxation year in which an adoption is finalized. The AETC applies in respect of eligible adoption expenses incurred between the time that a child is matched with his or her adoptive family and the time that the child begins to permanently reside with the family.
However, adoptive parents may be required to incur significant adoption-related expenses prior to being matched with a child, such as fees for a provincially required home study and fees to complete adoption courses or other necessary training. These expenses are currently ineligible for the AETC because they are generally incurred before a child is matched with his or her adoptive family.
To better recognize that there are costs that adoptive parents must incur prior to being matched with a child, Budget 2013 proposes to extend the adoption period by treating the time at which the adoption period begins as:
- the time that an adoptive parent makes an application to register with a provincial ministry responsible for adoption or with an adoption agency licensed by a provincial government; or
- if an adoption-related application is made to a Canadian court at an earlier time, that earlier time.
This measure will apply to adoptions finalized after 2012.
The Charitable Donations Tax Credit (CDTC) provides an individual with a non-refundable tax credit of 15 per cent for the first $200 of annual charitable donations and a credit of 29 per cent for the portion of donations that exceeds $200. As an administrative practice, the Canada Revenue Agency permits an individual to claim donations made by either the individual or the individual’s spouse or common-law partner.
To encourage charitable giving by new donors, Budget 2013 proposes to introduce a temporary First-time Donor’s Super Credit (FDSC). The FDSC will supplement the CDTC with an additional 25-per-cent tax credit for a first-time donor on up to $1,000 of donations. Accordingly, a first-time donor will be entitled to a 40-per-cent federal credit for donations of $200 or less, and a 54-per-cent federal credit for the portion of donations over $200 but not exceeding $1,000. Only donations of money will qualify for the FDSC.
An individual will be considered a first-time donor if neither the individual nor the individual’s spouse or common-law partner has claimed the CDTC or FDSC in any taxation year after 2007. For the purpose of this determination, an individual’s spouse or common-law partner will be the individual’s spouse or common-law partner on December 31 of the taxation year in respect of which the FDSC is claimed. First-time donor couples may share the FDSC in a taxation year. However, the total amount that may be claimed by the individual and his or her spouse or common-law partner cannot exceed the amount that would be allowed if only one were to claim the FDSC.
The FDSC will be available in respect of donations made on or after Budget Day and may be claimed only once in the 2013 or a subsequent taxation year before 2018.
The income tax system currently provides an individual with a Lifetime Capital Gains Exemption (LCGE) on up to $750,000 of capital gains realized on the disposition of qualified property: qualified small business corporation shares, and qualified farm and qualified fishing property.
Budget 2013 proposes to increase the LCGE by $50,000 so that it will apply on up to $800,000 of capital gains realized by an individual on qualified property, effective for the 2014 taxation year.
In addition, the LCGE will be indexed to inflation for taxation years after 2014. The new LCGE limit will apply for all individuals, even those who have previously used the LCGE.
The income tax rules allow a taxpayer to deduct an expense incurred for the purpose of earning business or property income to the extent that the amount of the expense is reasonable in the circumstances and is not otherwise prohibited.
As a consequence, expenses incurred, for example, in connection with a taxpayer’s investment portfolio, such as interest and safekeeping charges, may be deductible in computing the taxpayer’s net income derived from the portfolio. The cost of renting a safety deposit box is customarily placed in this category and allowed if the reason for renting the safety deposit box is to store and protect papers relating to the portfolio.
The importance of retaining paper copies of documents – either for income-earning or personal purposes – is declining as electronic records become the norm. Therefore, taxpayers using safety deposit boxes are increasingly likely to be using the boxes for personal purposes (e.g., to safeguard valuables), rather than for an income-earning purpose.
Budget 2013 therefore proposes to make the cost to a taxpayer of renting a safety deposit box from a financial institution non-deductible for income tax purposes.
This measure will apply to taxation years that begin on or after Budget Day.
Income earned by corporations is subject to corporate income tax and, on distribution as dividends to individuals, personal income tax. The result is that dividends received by Canadian taxpayers are taxed at both the corporate and the personal levels. The dividend tax credit (DTC), provided within the personal income tax system, is intended to compensate a taxable individual for corporate income taxes that are presumed to have been paid. The DTC is an important structural element of the tax system and is generally meant to ensure that income earned by a corporation and paid out to an individual as a dividend will be subject to the same amount of tax as income earned directly by the individual.
The DTC mechanism calculates a proxy for pre-tax corporate profits and then provides a tax credit to individuals in recognition of corporate-level tax. Under this approach, an individual is first required to include the grossed-up amount of taxable dividends (i.e., the proxy for pre-tax profits) in income. Using the grossed-up amount, the tax system in effect treats the individual as having directly earned the amount that the corporation is presumed to have earned in order to pay the dividend. The DTC then compensates the individual for the amount of corporate-level tax presumed to have been paid on the grossed-up amount.
The tax system has two DTC rates and gross-up factors to recognize the two different corporate income tax rates that generally apply to corporations. The enhanced DTC and gross-up are applied to dividends distributed to an individual from corporate income taxed at the general corporate tax rate (eligible dividends). The ordinary DTC and gross-up are applied to dividends distributed to an individual from corporate income not taxed at the general corporate tax rate (non-eligible dividends).
The current DTC and gross-up factor applicable to non-eligible dividends overcompensate individuals for income taxes presumed to have been paid at the corporate level on active business income. As such, an individual who receives dividend income from a corporation is in a better tax position than if the individual had earned the income directly.
To ensure the appropriate tax treatment of dividend income, Budget 2013 proposes to adjust the gross-up factor applicable to non-eligible dividends from 25 per cent to 18 per cent and the corresponding DTC from 2/3 of the gross-up amount to 13/18. Expressed as a percentage of the grossed-up amount of a non-eligible dividend, the effective rate of the DTC in respect of such a dividend will be 11 per cent.
This measure will apply to non-eligible dividends paid after 2013.
The income tax rules that apply to registered pension plans (RPPs) currently allow RPP over-contributions to be refunded to plan members or employers, if the refund is made to avoid the revocation of registration of the RPP. However, in situations where RPP contribution limits have not been exceeded, there is no legislative provision that permits the refund of a contribution that was made as the result of a reasonable error (e.g., an employer made a mistake in calculating the members’ or employer’s contributions for a particular year). Instead, refunds of such contributions are currently allowed at the discretion of the Canada Revenue Agency (CRA) on a case-by-case basis.
Budget 2013 proposes to enable administrators of RPPs to make refunds of contributions in order to correct reasonable errors without first obtaining approval from the CRA, if the refund is made no later than December 31 of the year following the year in which the inadvertent contribution was made. If an RPP administrator seeks to correct a contribution error after the deadline, the existing procedure of seeking authorization from the CRA will continue to apply. Refunds to an RPP member will generally be reported as income of the member in the year received and deductions claimed by the member in a prior year will generally not be adjusted. For employers, who generally use the accrual method of calculating income, a refund of RPP contributions will normally reduce the RPP contribution expense for the year to which it relates.
This measure will apply in respect of RPP contributions made on or after the later of January 1, 2014 and the day of Royal Assent to the enacting legislation.
After a taxpayer files an income tax return, the Canada Revenue Agency (CRA) is required to perform an initial assessment of tax payable with all due dispatch. The CRA has a period of time after its initial assessment in which to audit and reassess the liability. The normal reassessment period for most taxpayers is three years. Budget 2013 proposes to extend the normal reassessment period in certain circumstances.
Existing tax rules set out the circumstances under which a tax shelter must be registered and an information return filed with the CRA by a promoter of the tax shelter. The purpose of this reporting requirement is to assist the CRA in identifying and auditing inappropriate claims. However, the normal reassessment period of a participant in the tax shelter is not extended even if the information return is not filed or is filed late. A delay in filing effectively reduces the time available for the CRA to obtain the information necessary for a proper audit of the tax shelter.
Budget 2010 announced consultations on proposals to introduce information reporting requirements for certain tax avoidance transactions. Legislative proposals, following those consultations, are included in Bill C-48, the Technical Tax Amendments Act, 2012, which was tabled in Parliament on November 21, 2012. Under those proposals, the tax benefits of a “reportable transaction” are not recognized pending the filing of the required information return and, if the return is filed late, pending the payment of a penalty. As with tax shelter reporting, the late-filing or non-filing of an information return would not extend the normal reassessment period of a participant in a reportable transaction.
Budget 2013 proposes to extend the normal reassessment period in respect of a participant in a tax shelter or reportable transaction where an information return that is required for the tax shelter or reportable transaction is not filed on time. In particular, the normal reassessment period in respect of the tax shelter or reportable transaction will be extended to three years after the date that the relevant information return is filed.
This measure will apply to taxation years that end on or after Budget Day.
The Canada Revenue Agency (CRA) is generally prohibited from taking collection action in respect of assessed income taxes and related interest and penalties where a taxpayer has objected to the assessment. The CRA has been successful in challenging charitable donation tax shelter cases in the Tax Court and the Federal Court of Appeal, but some taxpayers continue to participate in these questionable tax shelters. Prolonged litigation of these disputes can delay final collection of the taxes.
In order to discourage participation in questionable charitable donation tax shelters and to reduce the risk that unpaid amounts will ultimately become uncollectible, Budget 2013 proposes to modify the prohibition on the CRA from taking collection action in these cases. If a taxpayer has objected to an assessment of tax, interest or penalties that results from the disallowance of a deduction or tax credit claimed in respect of a tax shelter (as reported by the taxpayer or determined by the Minister of National Revenue) that involves a charitable donation, the CRA will be permitted, pending the ultimate determination of the taxpayer’s liability, to collect 50 per cent of the disputed tax, interest or penalties.
This measure will apply in respect of amounts assessed for the 2013 and subsequent taxation years.
Flow-through shares allow companies to renounce or “flow through” tax expenses associated with their Canadian exploration activities to investors, who can deduct the expenses in calculating their own taxable income. This facilitates the raising of equity to fund exploration by enabling companies to sell their shares at a premium. The Mineral Exploration Tax Credit is an additional benefit, available to individuals who invest in flow-through shares, equal to 15 per cent of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors.
Budget 2013 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, 2014. 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 2014 can support eligible exploration until the end of 2015.
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.
Labour-Sponsored Venture Capital Corporations (LSVCCs) are a type of mutual fund corporation, sponsored by labour unions or other labour organizations, that make venture capital investments in small- and medium‑sized businesses. LSVCCs may be referred to by other names under provincial legislation.
A 15-per-cent federal tax credit is provided to individuals for the acquisition of shares of LSVCCs on investments of up to $5,000 each year, providing up to $750 in federal tax relief. Select provinces provide a similar tax credit, although Ontario recently eliminated its credit. In addition, LSVCC shares may be held inside Registered Retirement Savings Plans and benefit from the tax assistance provided to investments in these plans.
Federally registered LSVCCs are subject to the rules set out in the Income Tax Act. Provincially registered LSVCCs are subject to the rules set out in the legislation of the province in which they are registered and are prescribed for purposes of the Income Tax Act. This prescription allows individuals investing in provincially registered LSVCCs to claim the federal tax credit.
The federal LSVCC tax credit was introduced in the 1980s, when access to venture capital for small- and medium-sized businesses was limited. The economic environment and the structure of the venture capital market have changed significantly since then. The LSVCC tax credit has been criticized by a number of commentators, including the Organisation for Economic
Co-operation and Development (OECD), as being an ineffective means of stimulating a healthy venture capital sector.
Budget 2013 proposes to phase out the federal LSVCC tax credit. The federal LSVCC tax credit will remain at 15 per cent when it is claimed for a taxation year that ends before 2015 and will be reduced to 10 per cent for the 2015 taxation year and 5 per cent for the 2016 taxation year. The federal LSVCC tax credit will be eliminated for the 2017 and subsequent taxation years.
|Taxation Year||2013||2014||2015||2016||After 2016|
|LSVCC tax credit rate||15%||15%||10%||5%||–|
|Note: An individual who acquires shares of an LSVCC in the first 60 days of a taxation year may claim the tax credit for the year of the acquisition or the prior year.|
Budget 2013 also proposes to end new federal LSVCC registrations, as well as the prescription of new provincially registered LSVCCs in the Income Tax Act. An LSVCC will not be federally registered if the application for registration is received on or after Budget Day. A provincially registered LSVCC will not be prescribed for purposes of the federal LSVCC tax credit unless the application was submitted before Budget Day.
In order to assist with an orderly phase-out of the federal LSVCC tax credit, the Government is seeking stakeholder input on potential changes to the tax rules governing LSVCCs, including the rules related to investment requirements, wind-ups and redemptions. The Government will also work with provincial governments with respect to the phase-out of the federal LSVCC tax credit.
Stakeholders are encouraged to submit comments with respect to potential changes by May 31, 2013. In preparing draft legislation, which will be released for further public comment, the Department of Finance will consider suggestions, and issues identified, in the comments received.
Certain financial arrangements (synthetic disposition transactions) seek to defer tax or obtain other tax benefits by allowing a taxpayer to economically dispose of a property while continuing to own it for income tax purposes.
A synthetic disposition transaction typically involves a taxpayer entering into an arrangement under which the taxpayer eliminates their future risk of loss and opportunity for gain or profit in respect of a property and acquires another property (or a right to acquire another property) the value of which approximates what the taxpayer would have received as proceeds from disposing of the property. A taxpayer may enter into a synthetic disposition transaction to defer the tax associated with a sale or to obtain tax benefits associated with the continued ownership of a property (e.g., to avoid the application of the stop-loss rules in section 112 of the Income Tax Act).
Depending on their particular facts, synthetic disposition transactions can be challenged by the Government based on existing rules in the Income Tax Act. However, as any such challenge could be both time-consuming and costly, the Government is introducing specific legislative measures to ensure that the appropriate tax consequences apply to these transactions.
To ensure that taxpayers cannot avoid the tax consequences of disposing of a property by entering into a synthetic disposition transaction, Budget 2013 proposes to treat certain transactions as dispositions for income tax purposes. This measure will apply where a taxpayer (or a person who does not deal at arm’s length with the taxpayer) enters into one or more agreements that have the effect of eliminating all or substantially all the taxpayer’s risk of loss and opportunity for gain or profit in respect of a property of the taxpayer. Where a person that does not deal at arm’s length with the taxpayer enters into such an agreement or agreements, the measure will not apply if it is reasonable to conclude that the non-arm’s length person did so without knowledge of the taxpayer’s ownership of the property.
This measure will apply regardless of the particular form of the agreement or agreements. For example, it could apply to a forward sale of property (whether or not combined with a secured loan), a put-call collar in respect of an underlying property, the issuance of certain indebtedness that is exchangeable for property, a total return swap in respect of property, or a securities borrowing to facilitate a short sale of property that is identical or economically similar to a property of the taxpayer (or a non-arm’s length person), depending on the circumstances. On the other hand, this measure will generally not apply, for example, to ordinary hedging transactions, which typically only involve managing the risk of loss. Nor will this measure generally affect the tax treatment of ordinary-course securities lending arrangements. Lastly, this measure will not apply to ordinary commercial leasing transactions.
If a taxpayer (or a person who does not deal at arm’s length with the taxpayer) enters into one or more agreements (or arrangements) that have the effect of eliminating all or substantially all the taxpayer’s risk of loss and opportunity for gain or profit in respect of a property of the taxpayer, the taxpayer will be deemed to have disposed of the property for proceeds equal to its fair market value. The taxpayer will also be deemed to have reacquired the property immediately after the deemed disposition at a cost equal to that fair market value. The deemed disposition and reacquisition will not have tax consequences for other parties involved in the synthetic disposition transaction.
To ensure that taxpayers cannot obtain tax benefits associated with the continued ownership of a property after entering into a synthetic disposition transaction, Budget 2013 also proposes that if a taxpayer is, as described above, deemed to have disposed of and reacquired a property, the taxpayer will be considered to not own the property for the purposes of determining whether the taxpayer meets the holding-period tests in, for example, the stop-loss rules in section 112 and the foreign tax credit rules in subsection 126(4.2) of the Income Tax Act.
If the taxpayer later regains the risk of loss or the opportunity for gain or profit in respect of the property such that it is no longer the case that all or substantially all the risk of loss and opportunity for gain or profit lies with someone other than the taxpayer, the property would be considered to be owned from that point onward for the purposes of these holding-period tests.
This measure will apply to agreements and arrangements entered into on or after Budget Day. It will also apply to agreements and arrangements entered into before Budget Day if their term is extended on or after Budget Day.
Certain financial arrangements (character conversion transactions) seek to reduce tax by converting, through the use of derivative contracts, the returns on an investment that would have the character of ordinary income to capital gains, only 50 per cent of which are included in income.
A character conversion transaction typically involves an agreement (called a forward agreement) to buy or sell a capital property at a specified future date. The purchase or sale price of the capital property under a derivative forward agreement is not based on the performance of the capital property between the date of the agreement and the future date – instead, the price is determined, in whole or in part, by reference to some other measure, often the performance of a portfolio of investments. The reference portfolio typically contains investments that generally produce fully taxable ordinary income.
Depending on their particular facts, character conversion transactions can be challenged by the Government based on existing rules in the Income Tax Act. However, as any such challenge could be both time-consuming and costly, the Government is introducing specific legislative measures to ensure that the appropriate tax consequences apply to these transactions.
Character conversion transactions link a derivative investment with the purchase or sale of an otherwise unrelated capital property to form a derivative forward agreement. If the derivative investment were made separately from the purchase or sale of the capital property (i.e., as a cash-settled derivative financial instrument), any income from the derivative investment would be taxed as ordinary income.
To ensure the appropriate tax treatment of the derivative-based return on a derivative forward agreement, Budget 2013 proposes to treat this return as being distinct from the disposition of a capital property that is purchased or sold under the derivative forward agreement. This measure will apply to derivative forward agreements that have a duration of more than 180 days. Whether a particular property is held on income or capital account is largely a factual determination and is unaffected by this measure.
Any return arising under a derivative forward agreement that is not determined by reference to the performance of the capital property being purchased or sold will be treated as being on income account. The determination of income (or loss) will vary depending on whether a derivative forward sale agreement or derivative forward purchase agreement is used. For example, if a derivative forward sale agreement is used and the sale price of a capital property is based entirely on the performance of a reference portfolio, the taxpayer would have an income inclusion equal to the amount by which the amount paid under the agreement for the property exceeds the fair market value of the capital property at the time the agreement is entered into. A loss would arise to the extent that the fair market value of the capital property at the time the agreement is entered into exceeds the amount paid under the agreement for the property.
If a derivative forward purchase agreement is used and the value of the capital property to be delivered is based entirely on the performance of a reference portfolio, the taxpayer would have an income inclusion equal to the amount by which the fair market value of the property delivered when the agreement is settled exceeds the amount paid for the capital property. A loss would arise to the extent that the amount paid for the capital property exceeds the fair market value of the property delivered when the agreement is settled.
The income (or loss) will be included (or deductible) in computing income at the time of disposition if the capital property is subject to a derivative forward sale agreement and at the time of acquisition if the capital property is subject to a derivative forward purchase agreement.
In order to prevent double tax, Budget 2013 also proposes that the income (or loss) described above be added to (or deducted from) the adjusted cost base of the capital property.
This measure will apply to derivative forward agreements entered into on or after Budget Day. It will also apply to derivative forward agreements entered into before Budget Day if the term of the agreement is extended on or after Budget Day.
The Income Tax Act contains rules for determining when losses may be recognized and used for income tax purposes. If a taxpayer is unable to use a loss in the year in which it is recognized, the unused loss may be carried forward or back for use in other taxation years. In addition, the Income Tax Act contains a number of provisions meant to constrain the trading of tax attributes, such as non-capital losses, net capital losses, investment tax credits and scientific research and experimental development expenditure balances, among arm’s length persons.
Arm’s length loss trading transactions have been developed that purport to enable one taxpayer to access the unused losses of another. Under a typical loss trading transaction a taxpayer acquires an ownership interest in an arm’s length entity (trust or corporation) that has unused losses and transfers income-producing assets to the entity or merges the entity with a profitable entity with the intention that, for income tax purposes, any income produced would be offset by the unused losses.
As noted above, tax rules constrain the ability of taxpayers to engage in arm’s length loss trading transactions. For example, loss-streaming rules apply to limit a corporation’s use of certain tax attributes where a person or group of persons acquires control of the corporation. In particular, the corporation’s pre-acquisition unused losses are restricted from being carried forward for use by the corporation after the acquisition of control. As well, the corporation’s post-acquisition losses are restricted from being carried back for use before the acquisition of control. Other tax attributes, such as the corporation’s unused investment tax credits and scientific research and development expenses, can be similarly restricted. In certain circumstances these restrictions do not apply with respect to non-capital losses from a business where the business in which the losses were incurred continues to be carried on.
The Income Tax Act does not contain similar loss-streaming and related rules for trusts. Budget 2013 proposes to extend, with appropriate modifications, to trusts the loss-streaming and related rules that currently apply on the acquisition of control of a corporation, including the limited exception allowing the ongoing use of non-capital losses from a business. The proposed measure will trigger the application of loss-streaming and related rules to a trust if the trust is subject to a “loss restriction event”, as described below.
A trust will be subject to a loss restriction event when a person or partnership becomes a majority-interest beneficiary of the trust or a group becomes a majority-interest group of beneficiaries of the trust. The concepts of majority-interest beneficiary and majority-interest group of beneficiaries will apply as they do under the existing income tax provisions for affiliated persons, with appropriate modifications. In general under the affiliated persons provisions, a majority-interest beneficiary of a trust is a beneficiary who, together with persons and partnerships with which the beneficiary is affiliated, has a beneficial interest in the trust’s income or capital with a fair market value that exceeds 50 per cent of the fair market value of all the beneficial interests in income or capital, respectively, in the trust.
Existing rules that deem certain transactions or events to involve (or not involve) an acquisition of control of a corporation will be extended to apply, with appropriate modifications, in determining whether a trust is subject to a loss restriction event. For example, rules similar to the continuity of ownership rules that deem a corporate acquisition of control not to occur in certain circumstances involving the death of a shareholder, or involving transactions within certain groups of shareholders, will also apply in the context of trusts and their beneficiaries.
It is expected that many of the typical transactions or events involving changes in the beneficiaries of a personal (i.e., family) trust will not, because of the continuity of ownership rules, result in the trust being subject to a loss restriction event. This result is appropriate from a tax policy perspective. The Government invites stakeholders to submit comments within 180 days after Budget Day as to whether there are additional transactions or events that should be treated similarly in determining whether such a personal trust is subject to a loss restriction event.
This measure, including any relieving changes that may be made as a result of the public consultation, will apply to transactions that occur on or after Budget Day, other than transactions that the parties are obligated to complete pursuant to the terms of an agreement in writing between the parties entered into before Budget Day. Parties will be considered not to be obligated to complete a transaction if one or more of those parties may be excused from completing the transaction as a result of changes to the Income Tax Act.
The Income Tax Act contains rules designed to prevent the use by taxpayers of non-resident trusts to avoid Canadian tax. If a person resident in Canada contributes property to a non-resident trust, rules (the deemed residence rules) may apply to treat the non-resident trust as resident in Canada.
Another rule (the trust attribution rule) may apply to attribute to a Canadian-resident taxpayer the income from property held by a trust, including a non‑resident trust, if the property is held by the trust in circumstances that grant effective ownership of the property to the taxpayer. Specifically, the trust attribution rule may apply in respect of property held by a trust on condition that:
- the property can revert to the taxpayer; or
- the taxpayer has influence over the trust’s dealings in respect of the property.
A related rule prevents a tax-deferred distribution of property from a trust where property of the trust is, or has been, subject to the trust attribution rule.
The interpretation of the trust attribution rule in a recent decision of the Federal Court of Appeal (The Queen v. Sommerer, 2012 FCA 207) was not in accordance with the intended tax policy. In particular, the Court held that the trust attribution rule did not apply, in the particular circumstances of the case, to property received by a non-resident trust in exchange for fair market value consideration.
To respond to the decision in Sommerer and to protect the integrity of the tax rules that apply where a Canadian-resident taxpayer maintains effective ownership over property held by a non-resident trust, Budget 2013 proposes to amend the deemed residence rules to apply if a trust holds property on conditions that grant effective ownership of the property (as described above in the context of the trust attribution rule) to such a taxpayer. In these circumstances, any transfer or loan of the property (regardless of the consideration exchanged) made directly or indirectly by the Canadian-resident taxpayer will be treated as a transfer or loan of restricted property (as defined in the tax rules) by the taxpayer. As a result, the Canadian-resident taxpayer will generally be treated as having made a contribution to the trust and the deemed residence rules will apply to the trust. As well, the rule described above with respect to trust distributions will be extended to apply to the trust.
To clarify the application of the tax rules that apply to non-resident trusts, Budget 2013 also proposes to restrict the application of the trust attribution rule so that it applies only in respect of property held by a trust that is resident in Canada (determined without regard to the deemed residence rules).
This measure will apply to taxation years that end on or after Budget Day.
Certain estates and trusts created by will (testamentary trusts) and inter vivos trusts created before June 18, 1971 (grandfathered inter vivos trusts) compute federal income tax on taxable income using the graduated tax rates applicable to individuals. Other trusts (ordinary inter vivos trusts) pay federal tax at a flat rate of 29 per cent, which is the highest federal tax rate for individuals.
The taxation of testamentary trusts and grandfathered inter vivos trusts at graduated rates allows the beneficiaries of those trusts to effectively access more than one set of graduated rates. This tax treatment raises questions of both tax fairness and neutrality in comparison to the treatment of beneficiaries of ordinary inter vivos trusts and taxpayers receiving equivalent income directly.
The Government is also concerned with potential growth in the tax-motivated use of testamentary trusts and the associated impact on the tax base. Current tax planning opportunities associated with the availability of trust-level graduated rates include the use of multiple testamentary trusts, tax-motivated delays in completing the administration of estates, and avoidance of the OAS Recovery Tax. Subjecting ordinary inter vivos trusts to tax at a high flat rate helps to prevent the tax-motivated use of these trusts.
Budget 2013 announces the Government’s intention to consult on possible measures to eliminate the tax benefits that arise from taxing at graduated rates grandfathered inter vivos trusts, trusts created by will, and estates (after a reasonable period of estate administration). A consultation paper will be publicly released to provide stakeholders with an opportunity to comment on those possible measures.
Machinery and equipment acquired by a taxpayer, after March 18, 2007 and before 2014, primarily for use in Canada for the manufacturing or processing of goods for sale or lease qualifies for a temporary accelerated capital cost allowance (CCA) rate of 50 per cent calculated on a straight-line basis under Class 29 of Schedule II to the Income Tax Regulations. These eligible assets would otherwise be included in Class 43 and qualify for a CCA rate of 30 per cent calculated on a declining-balance basis.
Budget 2013 proposes to extend the temporary support for investment in machinery and equipment for the manufacturing and processing sector by an additional two years. Manufacturing and processing machinery and equipment that would otherwise be included in Class 43 and that is acquired in 2014 or 2015 will qualify for the 50-per-cent straight-line CCA rate. Such eligible assets will be included in Class 29.
Eligible assets acquired in 2016 and subsequent years will qualify for the regular 30-per-cent declining-balance rate and will be included in Class 43.
The “half-year rule”, which allows half the CCA deduction otherwise available in the taxation year that an asset is first available for use by a taxpayer, will apply to machinery and equipment subject to this measure.
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 a fuel 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 2013 proposes to expand Class 43.2 by making biogas production equipment that uses more types of organic waste eligible for inclusion in Class 43.2. Budget 2013 also proposes to broaden the range of cleaning and upgrading equipment used to treat eligible gases from waste that is eligible for inclusion in Class 43.2.
These measures will encourage investment in technologies that can contribute to a reduction in emissions of greenhouse gases and air pollutants and to an improvement in water quality and quantity, 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.
Class 43.2 includes equipment used to produce biogas through anaerobic digestion of eligible organic waste. A typical biogas plant consists primarily of a large, airtight tank in which bacteria act on the organic waste to produce biogas. Biogas, after minimal treatment, can be burned to generate electricity or heat for a limited range of applications (for example, providing heat on a dairy farm). The biogas production equipment that is currently included in Class 43.2 is limited to equipment using organic waste that is sludge from an eligible sewage treatment facility, food and animal waste, manure, plant residue or wood waste.
Budget 2013 proposes to expand the biogas production equipment that is eligible for inclusion in Class 43.2 by providing that more types of eligible organic waste can be used in qualifying biogas production equipment and specifically, to include pulp and paper waste and wastewater, beverage industry waste and wastewater (for example, winery and distillery wastes) and separated organics from municipal waste.
This measure will apply in respect of property acquired on or after Budget Day that has not been used or acquired for use before Budget Day.
Biomethane is a gas that can be used as a substitute for natural gas in applications such as electricity and heat generation. It is obtained by cleaning and upgrading gases from waste. Currently, the CCA treatment of cleaning and upgrading equipment (for example, equipment used to remove contaminants and non-combustibles) used to treat eligible gases from waste to obtain biomethane varies with the type of eligible gas being treated and the type of equipment used to treat the gas. The eligible gases from waste are biogas, digester gas and landfill gas.
The eligibility of cleaning and upgrading equipment under Class 43.2 is currently limited to equipment that is ancillary to landfill gas and digester gas collection equipment, and biogas scrubbing equipment. Budget 2013 proposes to expand eligibility under Class 43.2 by removing these restrictions, such that all types of cleaning and upgrading equipment that can be used to treat eligible gases from waste will be included in Class 43.2. This will ensure consistency in the tax treatment of the various types of equipment that can be used in the production of biomethane.
This measure will apply in respect of property acquired on or after Budget Day that has not been used or acquired for use before Budget Day.
Budget 2013 introduces measures to provide the Canada Revenue Agency with new resources and administrative tools to better respond to the minority of Scientific Research and Experimental Development (SR&ED) program tax preparers and SR&ED performers who participate in claims where the risk of non-compliance is perceived to be high and eligibility for the SR&ED program unlikely.
One of these measures will require more detailed information to be provided on SR&ED program claim forms about SR&ED program tax preparers and billing arrangements. In particular, in instances where one or more third parties have assisted with the preparation of a claim, the Business Number of each third party will be required, along with details about the billing arrangements including whether contingency fees were used and the amount of the fees payable. In instances where no third party was involved, the claimant will be required to certify that no third party assisted in any aspect of the preparation of the SR&ED program claim. This information will facilitate the identification of SR&ED program claims with a higher risk of non-compliance.
In order to support the requirement to provide more detailed information, Budget 2013 proposes that a new penalty of $1,000 be imposed in respect of each SR&ED program claim for which the information about SR&ED program tax preparers and billing arrangements is missing, incomplete or inaccurate. In the case where a third-party SR&ED program tax preparer has been engaged, the SR&ED program claimant and tax preparer will be jointly and severally, or solidarily, liable for the penalty.
This measure will apply to SR&ED program claims filed on or after the later of January 1, 2014 and the day of Royal Assent to the enacting legislation.
Budget 2013 proposes changes to better align the deductions available for expenses in the mining sector with those available in the oil and gas sector. This proposal is consistent with the announcement in Budget 2007 of the phase-out of the accelerated capital cost allowance for tangible assets in oil sands projects, and the announcement in Budget 2011 of changes to the deduction rates for intangible expenses for new oil sands mines. Transitional relief for the proposed mining changes will be provided using time frames of the same duration as those applicable to the oil sands measures.
The alignment of deductions will affect the mining sector generally, including coal producers. Canada, along with other members of the G-20, has committed to rationalize and phase out over the medium-term inefficient fossil fuel subsidies. These are further measures that the Government is taking in support of its G-20 commitment.
Pre-production mine development expenses refer to intangible expenses (e.g., expenses for removing overburden or sinking a mine shaft) incurred for the purpose of bringing a new mine for a mineral resource located in Canada into production in reasonable commercial quantities. These expenses are treated as Canadian exploration expense (CEE) and may be deducted in full in the year incurred or carried forward indefinitely for use in future years. In contrast, intangible mine development expenses incurred after a mine comes into production are treated as Canadian development expense (CDE) and are deductible at a rate of 30 per cent per year on a declining-balance basis. In the oil and gas sector, intangible pre- and post-production development expenses are both treated as CDE.
Budget 2013 proposes that pre-production mine development expenses, as described in paragraph (g) of the definition CEE in subsection 66.1(6) of the Income Tax Act, be treated as CDE. The transition from CEE to CDE treatment will be phased in, with pre-production mine development expenses being allocated proportionally to CEE and CDE according to the following schedule based on the calendar year in which the expense is incurred:
This measure will generally apply to expenses incurred on or after Budget Day. In recognition of the long time-frames involved in developing new mines, the existing CEE treatment for pre-production mine development expenses will be maintained for expenses incurred before Budget Day; and will also apply for expenses incurred before 2017 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 was started by, or on behalf of, the taxpayer before Budget Day, or
- the engineering and design work for the construction, as evidenced in writing, was started by, or on behalf of, the taxpayer before Budget Day.
Obtaining permits or regulatory approvals, conducting environmental assessments, community consultations or impact benefit studies, and similar activities will not be considered construction or engineering and design work.
The tax treatment of intangible costs is only one of many factors that influence decisions to invest in mining projects. These changes will help ensure that investment decisions are based on market factors rather than income tax treatment, subject to applicable regulations. To the extent that these changes remove incentives that may contribute to a higher level of investment than would otherwise have occurred, they could contribute indirectly to goals in the Federal Sustainable Development Strategy relating to reducing emissions of greenhouse gases and minimizing threats to air quality, protecting water quality, and conserving ecosystems and habitat.
Most machinery, equipment and structures used to produce income from a mine or an oil or gas project are currently eligible for a capital cost allowance (CCA) rate of 25 per cent on a declining-balance basis. The 25-per-cent rate also applies to assets that are used in the initial processing of oil or gas, or ore from a mineral resource.
In addition to the regular 25-per-cent CCA deduction, accelerated CCA is provided for certain assets acquired for use in new mines or eligible mine expansions. The accelerated CCA takes the form of an additional allowance that supplements the regular CCA deduction. The additional allowance allows the taxpayer to deduct in computing income for a taxation year up to 100 per cent of the remaining cost of eligible assets acquired for use in a new mine or an eligible mine expansion, not exceeding the taxpayer’s income for the year from the mining project (calculated after deducting regular CCA). This accelerated CCA effectively defers taxation until the cost of eligible assets has been recovered by the taxpayer from the mining project.
Budget 2013 proposes to phase out the additional allowance available for mining (other than for bituminous sands and oil shale, for which the phase-out will be complete in 2015). The additional allowance will be phased out over the 2017 to 2020 calendar years. A taxpayer will be allowed to claim a percentage of the amount of the additional allowance otherwise permitted under the existing rules according to the following schedule:
Where a taxpayer’s taxation year includes more than one calendar year the additional allowance will be prorated, based on the number of days in each calendar year.
This measure will generally apply to expenses incurred on or after Budget Day. In recognition of the long time-frames involved in developing mining projects, the existing additional allowance will be maintained for eligible assets acquired before Budget Day; and will also apply for such assets acquired before 2018 for a new mine or a mine expansion either:
- under a written agreement entered into by the taxpayer before Budget Day; or
- as part of the development of a new mine or as part of a mine expansion where
- the construction was started by, or on behalf of, the taxpayer before Budget Day, or
- the engineering and design work for the construction, 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 or impact benefit studies, and similar activities will not be considered construction or engineering and design work.
The tax treatment of tangible costs is only one of many factors that influence decisions to invest in mining projects. These changes will help ensure that investment decisions are based on market factors rather than income tax treatment, subject to applicable regulations. To the extent that these changes remove incentives that may contribute to a higher level of investment than would otherwise have occurred, they could contribute indirectly to goals in the Federal Sustainable Development Strategy relating to reducing emissions of greenhouse gases and minimizing threats to air quality, protecting water quality, and conserving ecosystems and habitat.
Under paragraph 20(1)(m) of the Income Tax Act, a taxpayer earning income from a business may generally claim for a taxation year a reserve for amounts received in respect of, among other things, services that may reasonably be expected to be rendered after the end of the taxation year. The reserve applies only if the amounts received have been included in computing the taxpayer’s income for the year or a previous year. This reserve could be available, for instance, where services have yet to be rendered to a customer who has already paid for them.
This reserve is not intended to provide relief for taxpayers who have rendered services to customers, but who have future obligations (other than to a customer) arising from providing such services. For example, some taxpayers charge their customers amounts that are intended to compensate for the cost of future reclamation obligations, such as a waste disposal facility that charges its customers fees to cover the future cost of reclaiming its landfill.
Taxpayers with future reclamation obligations (e.g., the costs of reclaiming land previously used for waste disposal purposes, or for addressing pipeline abandonment) are generally eligible to use the Qualifying Environmental Trust rules. Under these rules, a taxpayer may claim a deduction for amounts contributed to a Qualifying Environmental Trust established for the purpose of funding the future reclamation of a qualifying site.
To clarify the tax treatment of amounts set aside to meet future reclamation obligations, Budget 2013 proposes to amend the Income Tax Act to ensure that the reserve for future services under paragraph 20(1)(m) cannot be used by taxpayers with respect to amounts received for the purpose of funding future reclamation obligations.
This measure will apply to amounts received on or after Budget Day, other than amounts received that are directly attributable to future reclamation costs, that were authorized by a government or regulatory authority before Budget Day and that are received
- under a written agreement between the taxpayer and another party (other than a government or regulatory authority) that was entered into before Budget Day and not extended or renewed on or after Budget Day, or
- before 2018.
The small business deduction effectively provides a preferential income tax rate, on up to $500,000 of qualifying business income, to Canadian-controlled private corporations (CCPCs) with taxable capital employed in Canada of less than $15 million. Credit unions have access to this preferential income tax rate on the same basis as CCPCs.
An additional deduction, available only to credit unions, provides access to the preferential income tax rate for income that is not eligible for the small business deduction. The amount of taxable income eligible for the additional deduction is subject to a limit based on the credit union’s cumulative taxable income that was taxed at the preferential rate (including as a result of the additional deduction) and the amount of their deposits and member shares.
The additional deduction for credit unions was implemented in the early 1970s to provide credit unions with access to the small business deduction similar to that for CCPCs. Since that time, the design of the small business deduction has changed significantly. As a result of those changes, the additional deduction for credit unions now provides access to the preferential income tax rate to credit unions that is not available to CCPCs.
To improve the neutrality and fairness of the tax system, Budget 2013 proposes to phase out the additional deduction for credit unions over five calendar years, beginning in 2013. For 2013, a credit union will be permitted to deduct only 80 per cent of the amount of the additional deduction otherwise calculated. The percentage of the additional deduction, otherwise calculated, that a credit union will be permitted to deduct will be 60 per cent for 2014, 40 per cent for 2015 and 20 per cent for 2016. For 2017 and subsequent years, the additional deduction will be eliminated.
This measure will apply to taxation years that end on or after Budget Day. For a taxation year that includes Budget Day, the measure will be prorated to apply only to the portion of the year that is on or after Budget Day. The measure will also be prorated for all taxation years during the phase-out period that do not coincide with the calendar year.
In order to improve the integrity and fairness of the tax system, the Government is acting to eliminate multiple and unintended tax benefits relating to two leveraged life insurance arrangements commonly referred to as “leveraged insured annuities” and “10/8 arrangements”.
A leveraged insured annuity involves the use of borrowed funds in connection with a lifetime annuity and a life insurance policy, both of which are issued on the life of an individual. Typically in these cases, the life insurance policy provides coverage for the entire lifetime of the individual whose life is insured, the death benefit under the policy equals the amount invested in the annuity, and both the policy and the annuity are assigned to the lender of the borrowed funds. These arrangements are typically sold to a closely-held private corporation.
A leveraged insured annuity is an investment product that is acquired with borrowed funds and provides fixed and guaranteed income to an investor until the death of an individual, at which time the capital invested in the annuity is returned in the form of a tax-free death benefit. Leveraged insured annuities are integrated investment products and are marketed and sold as such. However, for income tax purposes, each element of a leveraged insured annuity is treated separately. As a result, investors in leveraged insured annuities are provided with multiple tax benefits that are not available in relation to comparable investment products.
Specifically, leveraged insured annuities allow part of the income earned on the capital invested to be tax-free (because the life insurance policy is an exempt policy), while the interest on the borrowed funds is generally tax-deductible, and a deduction is also allowed on part of the capital invested (for the policy premium). In addition, for closely-held private corporations and their owners, the arrangement results in the elimination of tax on retained earnings in the corporation by avoiding taxation on capital gains on the death of the owners and, as a result of an increase in the corporation’s capital dividend account, on dividends paid after the death of the owners.
Budget 2013 proposes to eliminate these unintended tax benefits by introducing rules for “LIA policies”. A life insurance policy issued on the life of an individual will be an LIA policy if:
- a person or partnership becomes obligated on or after Budget Day to repay an amount to another person or partnership (the lender) at a time determined by reference to the death of the individual; and
- an annuity contract, the terms of which provide that payments are to continue for the life of the individual, and the policy are assigned to the lender.
Income accruing in an LIA policy will be subject to annual accrual-based taxation, no deduction will be allowed for any portion of a premium paid on the policy, and the capital dividend account of a private corporation will not be increased by the death benefit received in respect of the policy. In addition, for the purposes of a deemed disposition on death, the fair market value of an annuity contract assigned to the lender in connection with an LIA policy will be deemed to be equal to the total of the premiums paid under the contract.
This measure will apply to taxation years that end on or after Budget Day. This measure will not apply in respect of leveraged insured annuities for which all borrowings were entered into before Budget Day.
The Government will monitor developments in this area and, if structures or transactions emerge that undermine the effectiveness of the measure, evaluate whether further action is warranted, with possible retrospective application.
A 10/8 arrangement involves investing in a life insurance policy with a view to borrowing against that investment for the purpose of creating an annual interest-expense tax deduction for a long period of time (i.e., until the death of an individual whose life is insured under the policy). In the absence of the tax benefits, the investing and borrowing would not be undertaken.
In a typical 10/8 arrangement, a taxpayer (usually an individual or a closely‑held private corporation) creates an annual tax deduction for interest expense by entering into transactions that result in a circular flow of funds. Specifically:
- the taxpayer invests an amount of money in a life insurance policy;
- the taxpayer then borrows an equal amount and the borrowing is secured by the policy or an investment account in respect of the policy; and
- the taxpayer then invests the borrowed amount in income-producing assets (to ensure that interest paid or payable on the borrowed amount is tax-deductible).
Under a 10/8 arrangement, the taxpayer pays interest expense on the borrowed amount and earns interest income on the amount invested in the policy. The interest rate earned by the taxpayer (typically eight per cent) on the amount invested in the policy is equal to the interest rate on the borrowed amount (typically ten per cent) less a fixed spread (typically two percentage points). The taxpayer takes the position that the interest expense on the amount borrowed is deductible while the interest income earned on the amount invested in the policy is not included in income (because the policy is an exempt policy for income tax purposes).
In order to maximize the annual interest-expense deduction, the total amount borrowed is increased by repeating the transactions described above each year for a number of years and by setting a high interest rate on the borrowing. In addition, 10/8 arrangements may also provide other unintended tax benefits, namely an annual tax deduction for a portion of the premiums paid under the policy and an increase, up to the total amount borrowed, in the capital dividend account of a private corporation that is a beneficiary under the policy.
The Government is challenging 10/8 arrangements under existing income tax provisions. Since these challenges are both time-consuming and costly, the Government is also acting now to introduce legislative measures to prevent 10/8 arrangements from being used in the future.
Budget 2013 proposes to ensure that unintended tax benefits are not available in relation to 10/8 arrangements. In respect of taxation years that end on or after Budget Day, if a life insurance policy, or an investment account under the policy, is assigned as security on a borrowing, and either the interest rate payable on an investment account under the policy is determined by reference to the interest rate payable on the borrowing or the maximum value of an investment account under the policy is determined by reference to the amount of the borrowing, then the following income tax benefits will be denied:
- the deductibility of interest paid or payable on the borrowing that relates to a period after 2013;
- the deductibility of a premium that is paid or payable under the policy that relates to a period after 2013; and
- the increase in the capital dividend account by the amount of the death benefit that becomes payable after 2013 under the policy and that is associated with the borrowing.
In order to facilitate the termination of existing 10/8 arrangements before 2014, Budget 2013 also proposes to alleviate the income tax consequences on a withdrawal, from a policy under a 10/8 arrangement, made to repay a borrowing under the arrangement, if the withdrawal is made on or after Budget Day and before January 1, 2014.
The Government will monitor developments in this area and, if structures or transactions emerge that undermine the effectiveness of the measure, evaluate whether further action is warranted, with possible retroactive application.
The restricted farm loss (RFL) rules apply to taxpayers who have incurred a loss from farming, unless their chief source of income for a taxation year is farming or a combination of farming and some other source of income. The RFL rules limit the deduction of farm losses to a maximum of $8,750 annually ($2,500 plus ½ of the next $12,500). Farm losses incurred in a year in excess of that limit can be carried forward for 20 years to be claimed against farming income.
The RFL rules were introduced in 1951. In 1977, the Supreme Court of Canada in Moldowan v. The Queen, 1 SCR 480, interpreted the chief source of income test in the RFL rules. The Court held that farming that results in a loss could satisfy the chief source of income test (and the RFL rules would therefore not apply) if farming is the taxpayer’s chief source of income in combination with a non-farming source of income that is a subordinate source or a side-line employment or business. The Moldowan decision is consistent with the purpose of the chief source of income test, which is to ensure that taxpayers for whom farming is not the principal occupation are limited in their ability to deduct farm losses from their non-farm income.
In 2012, in The Queen v. Craig, 2012 SCC 43, the Supreme Court overruled Moldowan by holding that the particular taxpayer could meet the chief source of income test even though his primary source of income was practicing law, and farming (i.e., horse racing) was a subordinate source of income. In effect, the Court established a test that permits the full deduction of farming losses where a taxpayer places significant emphasis on both farming and
non-farming sources of income, even if farming is subordinate to the other source of income.
To restore the intended policy of the RFL rules, Budget 2013 proposes to amend them to codify the chief source of income test as interpreted in Moldowan. This amendment will clarify that a taxpayer’s other sources of income must be subordinate to farming in order for farming losses to be fully deductible against income from those other sources.
Recognizing that the deductible limit under the RFL rules has not been increased since 1988, Budget 2013 also proposes to increase the RFL limit to $17,500 of deductible farm losses annually ($2,500 plus ½ of the next $30,000).
These measures will apply to taxation years that end on or after Budget Day.
As noted above under Trust Loss Trading, the Income Tax Act contains a number of provisions meant to constrain the trading of corporate tax attributes (those corporate attributes are referred to here as “loss pools”), among arm’s length persons. Despite the various provisions meant to curtail the inappropriate trading of loss pools, transactions intended to circumvent these provisions continue to be undertaken. Under one such transaction, a profitable corporation (Profitco) transfers, directly or indirectly, income-producing property to an unrelated corporation with loss pools (Lossco) in return for shares of Lossco. Profitco seeks to avoid acquiring control of Lossco because that would result in restrictions being imposed on the subsequent use of those loss pools. Profitco acquires shares of Lossco that represent more than 75 per cent (often greater than 90 per cent) of the fair market value of all Lossco’s shares, but that – in order to avoid an acquisition of control and the attendant tax consequences – do not give Profitco voting control of Lossco. Lossco uses its loss pools to shelter from tax all or part of the income derived from the property. Lossco then pays Profitco tax-free
These loss-trading transactions constitute aggressive tax avoidance and undermine the integrity of the income tax provisions that constrain the trading of corporate loss pools among arm’s length persons. Depending on their particular facts, these transactions can be challenged by the Government based on existing rules in the Income Tax Act. However, as any such challenge could be both time-consuming and costly, the Government is introducing specific legislative measures to ensure that the appropriate tax consequences apply to these transactions.
Budget 2013 proposes to introduce an anti-avoidance rule to support the existing loss restriction rules that apply on the acquisition of control of a corporation. The rule will deem there to have been an acquisition of control of a corporation that has loss pools when a person (or group of persons) acquires shares of the corporation that have more than 75 per cent of the fair market value of all the shares of the corporation without otherwise acquiring control of the corporation, if it is reasonable to conclude that one of the main reasons that control was not acquired is to avoid the restrictions that would have been imposed on the use of loss pools. Related rules are also proposed to ensure that this anti-avoidance rule is not circumvented.
This measure will apply to a corporation the shares of the capital stock of which are acquired on or after Budget Day unless the shares are acquired as part of a transaction that the parties are obligated to complete pursuant to the terms of an agreement in writing between the parties entered into before Budget Day. Parties will be considered not to be obligated to complete a transaction if one or more of those parties may be excused from completing the transaction as a result of changes to the Income Tax Act.
The Government will continue to monitor the effectiveness of the constraints on the trading of loss pools and determine whether further action is warranted.
Canada does not have a formal system of corporate group taxation, although corporate groups are often able to make use of flexibility in the tax system to transfer income or losses between related corporations through financing arrangements, reorganizations, and transfers of property on a tax-deferred basis. Budget 2010 and Budget 2012 noted the Government’s interest in exploring the issue of whether new rules for the taxation of corporate groups – such as the introduction of a formal system of loss transfers or consolidated reporting – could improve the functioning of the corporate tax system in Canada. The Government conducted extensive public consultations on this issue. Businesses indicated that they are primarily interested in a system of group taxation that would allow them to easily transfer losses, tax credits and other tax attributes between members of a corporate group. Provinces and territories signaled their concerns about the possibility that a new system of corporate group taxation could reduce their revenues.
Feedback from the consultation exercise and discussions with provincial and territorial officials have not produced a consensus regarding how the Government could move forward in a way that would improve the tax system and address the concerns that have been raised by the business community and the provinces and territories. Analysis also suggests that there could be significant upfront costs for governments associated with introducing a new approach to the taxation of corporate groups.
The examination of the taxation of corporate groups is now complete. The Government has determined that moving to a formal system of corporate group taxation is not a priority at this time. Going forward, the Government will continue to work with provinces and territories regarding their concerns about the uncertainty of the cost associated with the current approach to loss utilization.
Budget 2013 proposes a number of measures to strengthen the capacity of the Canada Revenue Agency (CRA) to combat international tax evasion and to address international aggressive tax avoidance. These additional tools will improve the CRA’s ability to protect the Government’s revenue base and are consistent with the Government’s commitment to tax fairness.
It is often difficult and time-consuming to obtain information about a taxpayer’s financial affairs outside of Canada. Some taxpayers may deliberately engage in foreign financial transactions to make it more difficult for the CRA to verify the accuracy of their tax reporting.
It is important for the CRA to have the tools to discourage taxpayers who might seek to move funds outside of Canada in an attempt to conceal for tax purposes those funds or the income they produce. Accordingly, Budget 2013 proposes that the Income Tax Act, the Excise Tax Act and the Excise Act, 2001 be amended to require that certain financial intermediaries report to the CRA international electronic funds transfers (EFTs) of $10,000 or more.
This requirement will apply to the same financial intermediaries that are currently required to report international EFTs to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. This includes banks, credit unions, caisses populaires, trust and loan companies, money services businesses and casinos.
As well, the international EFT reporting requirements will be the same as the current EFT reporting requirements imposed under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The EFT reports will be required to be made to the CRA no later than five working days after the day of the transfer and will require financial intermediaries to provide information on the person conducting the transaction, on the receiver of the funds, on the transaction itself and on the financial intermediaries facilitating the transaction.
The CRA will be provided with $15 million over five years to fund this initiative.
Reporting will be required beginning in 2015.
Currently, tax rules allow the CRA to require any person to provide information or documents for the purposes of tax administration or enforcement. However, the Income Tax Act, the Excise Tax Act and the Excise Act, 2001 contain rules requiring the CRA to first obtain judicial authorization (i.e., a court order) before issuing a requirement to a third party to provide information for the purpose of verifying compliance by unnamed persons. The tax rules currently contemplate that the CRA will obtain this judicial authorization on an ex parte basis, that is, without the CRA being legally required to notify the third party of the application. As a matter of practice, however, the CRA normally does notify the third party. Because of the potential ex parte nature of the application, the tax rules also provide the third party with specific rights to seek a review of the issuance of the court order, with the usual rights of further appeal.
If the third party seeks a review of the court order, it can significantly delay the obtaining of the information and consequently the audit and tax reassessment process. In order to streamline the court order process, Budget 2013 proposes to eliminate the ex parte aspect. Instead, the CRA will have to give notice to the third party when it initially seeks a court order from a judge of the Federal Court. As a result, the third party will be required to make any representations it chooses to make at the hearing of the application for the order, thus eliminating the need for a review for that purpose.
This measure will apply on Royal Assent to the enacting legislation.
The CRA will launch the Stop International Tax Evasion Program under which it will pay rewards to individuals with knowledge of major international tax non-compliance when they provide information to the CRA that leads to the collection of outstanding taxes due. The CRA will enter into a contract that will pay an individual only if the information results in total additional assessments or reassessments exceeding $100,000 in federal tax. The contract will provide for payment of up to 15 per cent of the federal tax collected (i.e., not including penalties, interest and provincial taxes). Payments will be made only after the taxes have been collected. Awards will be paid only where the non-compliant activity involves foreign property or property located or transferred outside Canada, or transactions conducted partially or entirely outside Canada.
To be eligible, individuals seeking rewards will have to meet program criteria. For example, individuals who have been convicted of the tax evasion about which they have information will not be eligible for a payment under the program. All reward payments will be subject to income tax.
The CRA will announce further details on the program in the coming months.
A Canadian-resident individual, corporation or trust that, at any time during a year, owns specified foreign property costing more in total than $100,000 must file a Foreign Income Verification Statement (Form T1135) with the CRA. Specified foreign property generally includes most types of income-earning property held outside of Canada, other than personal property and property used in carrying on an active business. Form T1135 must also be filed by certain partnerships that hold specified foreign property.
After a taxpayer files an income tax return, the CRA is required to perform an initial assessment of tax payable with all due dispatch. The CRA has a period of time after its initial assessment in which to audit and reassess the liability. The normal reassessment period for most taxpayers is three years.
When a taxpayer has income from foreign sources, it is often difficult for the CRA to determine from a review of a taxpayer’s income tax return whether that income has been reported accurately. A review of a taxpayer’s Form T1135 helps the CRA to assess the risk that the foreign income has not been reported accurately. A delay in the filing of a Form T1135 effectively reduces the time available for the CRA to obtain the information necessary for a proper examination of the foreign income reported on the taxpayer’s income tax return.
Budget 2013 proposes to extend the normal reassessment period for a taxation year of a taxpayer by three years if:
- the taxpayer has failed to report income from a specified foreign property on their annual income tax return; and
- the Form T1135 was not filed on time by the taxpayer, or a specified foreign property was not identified, or was improperly identified, on the Form T1135.
This measure will apply to the 2013 and subsequent taxation years.
Form T1135 currently requires only general information regarding where specified foreign property is located and what income it generates. To improve the usefulness of Form T1135 to the CRA in determining whether taxpayers are correctly reporting foreign income, the CRA will revise Form T1135. The revised form will require taxpayers to provide more detailed information regarding each specified foreign property, including:
- the name of the specific foreign institution or other entity holding funds outside of Canada;
- the specific country to which the property relates; and
- the foreign income generated from the property.
These new requirements will improve the administration of the tax system and help to ensure that Canadian taxpayers pay an appropriate amount of Canadian tax on income accruing from their foreign holdings.
The revised Form T1135 will be required to be used for the 2013 and subsequent taxation years.
Some taxpayers have indicated that it is difficult to comply with their foreign reporting requirements because they find the instructions on filing Form T1135 to be unclear and Form T1135 cannot be filed electronically. To help taxpayers meet their filing obligations with respect to Form T1135, the CRA will make certain improvements to the Form T1135 filing process. Beginning with the 2013 taxation year:
- the CRA will remind taxpayers, on their Notices of Assessment, of the obligation to file Form T1135 if they have checked the “Yes” box on their income tax returns, indicating that they have specified foreign property in the taxation year with a total cost of more than $100,000; and
- the filing instructions on Form T1135 will be clarified.
The CRA is also in the process of developing a system that will allow Form T1135 to be filed electronically. The CRA will announce when electronic filing becomes available.
The thin capitalization rules limit the deductibility of interest expense of a Canadian-resident corporation in circumstances where the amount of debt owing to specified non-residents exceeds a 1.5-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 specified non-residents.
In its 2008 report, the Advisory Panel on Canada’s System of International Taxation made a number of recommendations relating to the thin capitalization rules, including extending the rules to partnerships, trusts and Canadian branches of non-resident corporations. Budget 2012 extended the thin capitalization rules to apply to partnerships of which a Canadian-resident corporation is a member. Such a corporation must now include its share of the partnership’s debts with its own debts for the purpose of determining whether it has exceeded its permitted debt-to-equity ratio. An amount equal to the interest on the portion of the debt allocated from a partnership that exceeds the partner’s permitted debt-to-equity ratio is added to the partner’s income.
Budget 2013 proposes to further improve the integrity and fairness of the thin capitalization rules by extending the scope of their application to:
- Canadian-resident trusts; and
- non-resident corporations and trusts that operate in Canada.
The Budget 2013 thin capitalization proposals build on the Budget 2012 partnership changes and will apply where a Canadian-resident trust or a non‑resident corporation or trust is a member of a partnership.
Budget 2013 proposes to extend the thin capitalization rules to apply to Canadian-resident trusts. The existing thin capitalization rules for corporations will be modified to reflect the legal nature of trusts. In particular, trust beneficiaries will be used in place of shareholders for the purpose of determining whether a person is a specified non-resident in respect of the trust and, therefore, whether a debt owing to that person is included in the trust’s outstanding debts to specified non-residents. The current rules dealing with rights to acquire shares in determining who is a specified shareholder will be modified to address discretionary powers. In addition, a trust’s “equity” for the purposes of the thin capitalization rules will generally consist of contributions to the trust from specified non-residents plus the tax-paid earnings of the trust, less any capital distributions from the trust to specified non-residents. The permitted 1.5-to-1
debt-to-equity ratio will remain unchanged.
Where interest expense of a trust is not deductible as a result of the application of the thin capitalization rules, the trust will be entitled to designate the non-deductible interest as a payment of income of the trust to a non-resident beneficiary (i.e., the recipient of the non-deductible interest). In such a case, the trust will be able to deduct the designated payment in computing its income, but the designated payment will be subject to non-resident withholding tax under Part XIII of the Income Tax Act and potentially tax under Part XII.2, depending on the character of the income earned by the trust.
This proposal will also extend the thin capitalization rules to apply to partnerships in which a Canadian-resident trust is a member. As with debt owed directly by the trust, where these rules result in an amount being included in computing the income of a trust, the trust will be entitled to designate the included amount as having been paid to a non-resident beneficiary as income of the trust.
Since some trusts may not have complete historical information, any trust that exists on Budget Day will be able to elect to determine the amount of its equity for thin capitalization purposes as at Budget Day based on the fair market value of its assets less the amount of its liabilities. Each beneficiary of the trust would then be considered to have made a contribution to the trust equal to the beneficiary’s share (determined by reference to the relative fair market value of their beneficial interest in the trust) of this deemed trust equity. Contributions to the trust, tax-paid earnings of the trust and distributions from the trust on or after Budget Day would then increase or decrease (as appropriate) trust equity for thin capitalization purposes.
This measure will apply to taxation years that begin after 2013 and will apply with respect to existing as well as new borrowings.
Budget 2013 proposes to extend the thin capitalization rules to non-resident corporations and trusts that carry on business in Canada. As a Canadian branch of a non-resident corporation or trust is, in many ways, comparable to a wholly owned subsidiary of the non-resident corporation or trust, the application and effect of the thin capitalization rules for a non-resident carrying on business in Canada will be similar to those in respect of a wholly owned Canadian subsidiary of a non-resident. However, since a Canadian branch is not a separate person from the non-resident corporation or trust, the branch does not have shareholders or equity for purposes of the thin capitalization rules. Therefore, the thin capitalization rules for non-resident corporations and trusts will differ from the rules for Canadian-resident corporations in certain respects.
A loan that is used in a Canadian branch of a non-resident corporation or trust will be an outstanding debt to a specified non-resident for thin capitalization purposes if it is a loan from a non-resident who does not deal at arm’s length with the non-resident corporation or trust. In addition, a debt-to-asset ratio of 3-to-5 will be used, which parallels the 1.5-to-1
debt-to-equity ratio used for Canadian-resident corporations. Where the non-resident is a corporation, the application of the thin capitalization rules could increase its liability for branch tax under Part XIV of the Income Tax Act.
A non-resident corporation or trust that earns rental income from certain Canadian properties may elect to be taxed on its net income under Part I of the Income Tax Act rather than being subject to non-resident withholding tax under Part XIII on its gross rental income. The election allows the non-resident to compute its taxable income as if it were a resident of Canada, with such modifications to the tax rules as the circumstances require. Where an election is made, the thin capitalization rules for non-resident corporations and trusts, rather than those for Canadian residents, will apply in computing the non-resident’s Part I tax liability.
This proposal will also extend the thin capitalization rules to apply to partnerships in which a non-resident corporation or trust is a member. Any income inclusion for a non-resident partner that arises as a consequence of the application of the thin capitalization rules will be deemed to have the same character as the income against which the partnership’s interest deduction is applied.
This measure will apply to taxation years that begin after 2013 and will apply with respect to existing as well as new borrowings.
The International Banking Centre (IBC) rules exempt prescribed financial institutions from tax on certain income earned through a branch or office in the metropolitan areas of Montreal and Vancouver. To be eligible for this exemption, the financial institution must designate the branch or office as an IBC. The IBC exemption is available only in respect of the designated location’s income and losses from the making of loans to and accepting deposits from non-residents of Canada.
The IBC rules were introduced in 1987 to attract to Canada banking activity normally conducted abroad. That policy rationale no longer applies because of changes to the structures of financial institutions and the nature of their activities since the rules were introduced. In particular, there has been virtually no use of the provision in recent years.
Budget 2013 proposes to repeal the IBC rules. Eliminating the IBC rules is consistent with the goals of simplifying Canada’s tax system and making it more neutral across business sectors and regions. In addition, the international community has identified the provision as resembling preferential regimes in some tax havens. Its elimination reinforces the Government’s commitment to ensuring tax fairness.
This measure will apply to taxation years that begin on or after Budget Day.
Canada enters into bilateral tax treaties with other countries for the purposes of supporting cross-border trade and investment, and preventing international tax evasion and avoidance. The first objective is achieved, in part, through tax treaty provisions that prevent double taxation and reduce rates of withholding taxes imposed on cross-border payments of various types of income. In general, Canada is prepared to reduce the tax burden it imposes on the Canadian-source income of residents of treaty countries in exchange for the same treatment being made available to Canadians investing in the other country.
In certain circumstances, the benefits conferred under Canada’s tax treaties are effectively enjoyed by residents of third countries that are not a party to the particular tax treaty. Third country residents may, for example, create a company in the treaty country for purposes of channelling, through the company, income and gains sourced in Canada. Third country residents using intermediary entities in this fashion seek to access benefits granted under a tax treaty that would not otherwise have been available to them. This practice is often referred to as “treaty shopping”.
Treaty shopping effectively extends tax treaty benefits to third country residents in circumstances that were not contemplated when the tax treaty was entered into and without any reciprocal benefits accruing to Canadian investors or to Canada. This practice undermines the bilateral nature of tax treaties and the balance of compromises reached between Canada and its treaty partners. The Government has been largely unsuccessful in challenging treaty shopping cases in court and is concerned that this practice poses significant risks to the tax base. Other countries are also concerned with treaty shopping and several have either implemented provisions in their domestic law to combat such practices or have successfully challenged treaty shopping arrangements in their courts.
Budget 2013 announces the Government’s intention to consult on possible measures that would protect the integrity of Canada’s tax treaties while preserving a business tax environment that is conducive to foreign investment. A consultation paper will be publicly released to provide stakeholders with an opportunity to comment on possible measures.
A key policy underlying the Goods and Services Tax/Harmonized Sales Tax (GST/HST) is that basic health care services and certain health-related assistive services, such as government-supported homemaker services, are exempt from GST/HST. Exempt treatment means that suppliers of exempt services do not charge GST/HST, but they cannot claim input tax credits to recover the GST/HST paid on inputs in relation to these supplies.
Budget 2013 proposes to improve the application of the GST/HST to health-related assistive home care services to reflect the evolving nature of the health care sector and to clarify the application of the GST/HST to reports, examinations and other services performed for non-health care purposes.
Government-supported home care services form an important adjunct to publicly-provided health care services. In line with the GST/HST exemption for basic health care, an exemption from the GST/HST is provided for publicly subsidized or funded homemaker services, such as cleaning, laundering, meal preparation and child care, which are rendered to an individual who, due to age, infirmity or disability, requires assistance in his or her home.
In addition to homemaker services, provincial and territorial governments are also subsidizing or funding personal care services, such as bathing, feeding, and assistance with dressing and taking medication, for individuals who require assistance with these activities in their home. Such services are currently not covered under the exemption for homemaker services.
Budget 2013 proposes to expand the GST/HST exemption for homemaker services to exempt publicly subsidized or funded personal care services, such as bathing, feeding, and assistance with dressing and taking medication, rendered to an individual who, due to age, infirmity or disability, requires assistance in his or her home. The proposal will result in an exemption for home and personal care services that is more in line with current provincial and territorial practices for health-related assistive services delivered to persons in their homes.
This measure will apply to supplies made after Budget Day.
Under the GST/HST, services that are provided solely for non-health care purposes, even if supplied by health care professionals, are not considered to be basic health care and are not intended to be eligible for the exemption. For instance, the GST/HST legislation specifies that GST/HST applies to all supplies of purely cosmetic procedures.
To address court decisions that have expanded the scope of the exemption beyond the policy intent to limit the GST/HST exemption to basic health care services, Budget 2013 proposes to clarify that GST/HST applies to reports, examinations and other services that are not performed for the purpose of the protection, maintenance or restoration of the health of a person or for palliative care. For example, taxable supplies would include reports, examinations and other services performed solely for the purpose of determining liability in a court proceeding or under an insurance policy. Supplies of property and services in respect of a taxable report, examination or other service would also be taxable. For example, charges for an x-ray or lab test in relation to a taxable examination would also be taxable.
A report, examination or other service will continue to be exempt if it is performed for use in the protection, maintenance or restoration of the health of a person or use in palliative care. As well, reports, examinations or other services paid for by a provincial or territorial health insurance plan will continue to be exempt.
This measure will apply to supplies made after Budget Day.
Under the current GST/HST rules, an employer that participates in a registered pension plan is deemed to have made a taxable supply, and the employer is deemed to have collected the GST/HST in respect of that taxable supply, when the employer acquires, uses or consumes property or services (“inputs”) for use in activities relating to the pension plan. The employer is required to add this GST/HST to its net tax. An employer is required to account for GST/HST under the deemed taxable supply rules even where the employer is also required to account for GST/HST on an actual taxable supply to the pension trust or corporation, referred to as a
“pension entity”, under the general GST/HST rules. Where an employer is required to account for GST/HST twice (i.e., on both an actual taxable supply and a deemed taxable supply), the employer is allowed to make a “tax adjustment” in respect of its net tax so as to ensure that tax is remittable only on one supply.
Budget 2013 proposes two measures to simplify employer compliance with these rules in certain circumstances.
Budget 2013 proposes that an employer participating in a registered pension plan be permitted to jointly elect with a pension entity of that pension plan to treat an actual taxable supply by the employer to the pension entity as being for no consideration where the employer accounts for and remits tax on the deemed taxable supply. This measure would simplify compliance for employers as they would not have to account for tax on the actual taxable supply and would not have to make a subsequent tax adjustment to net tax.
Once a joint election is made, it would remain in effect until it is jointly revoked by the employer and the pension entity effective from the beginning of a fiscal year of the employer. Also, the Minister of National Revenue would have discretion to cancel the election, effective from the beginning of a fiscal year of the employer, if the employer has failed to remit tax on deemed taxable supplies made in that fiscal year where those deemed taxable supplies relate to actual taxable supplies to the pension entity. The Minister could then assess the employer for both the tax on deemed taxable supplies and the tax on all actual taxable supplies made since the effective date of the election’s cancellation (with “tax adjustments” that otherwise would be available under the GST/HST legislation in respect of those tax amounts) and the employer could be subject to interest.
This measure will apply to supplies made after Budget Day.
Currently, under the GST/HST rules, an employer that participates in a registered pension plan is required to account for and remit GST/HST under the deemed taxable supply rules in respect of every acquisition, use or consumption of the employer’s resources in pension activities even where the employer’s involvement in the pension plan is minimal, such as where an employer’s activities are limited to collecting and remitting pension contributions.
To simplify employer compliance with the GST/HST rules, Budget 2013 proposes that an employer participating in a registered pension plan be permitted to be fully or partially relieved from accounting for tax on deemed taxable supplies where the employer’s pension plan-related activities fall below certain thresholds.
Specifically, an employer would be relieved from applying the deemed taxable supply rules for a fiscal year of the employer where the amount of the GST (and the federal component of the HST) that the employer was (or would have been, but for this measure) required to account for and remit under the deemed taxable supply rules in the preceding fiscal year of the employer is less than each of the following amounts:
- $5,000; and
- 10 per cent of the total net GST (and the federal component of the HST) paid by all pension entities of the pension plan in that preceding fiscal year.
An employer is not permitted to benefit from the full relief proposed under this measure for deemed taxable supplies made in a fiscal year of the employer where the employer has a joint election in effect to not account for tax on actual taxable supplies made in that fiscal year.
For employers not satisfying the above $5,000 and 10 per cent thresholds, more limited relief would be available in certain circumstances, in respect of an employer’s “internal pension activities”, for inputs acquired for consumption or use in activities of the employer that relate to the pension plan other than in making supplies to a pension entity (e.g., time spent by a payroll employee determining an employer’s pension contribution deductions). Specifically, an employer would be relieved from applying the deemed taxable supply rules with respect to its internal pension activities if the amount of the GST (and the federal component of the HST) that the employer was (or would have been, but for this measure) required to account for and remit in the preceding fiscal year of the employer, under the deemed taxable supply rules in respect of those activities only, was below the $5,000 and 10 per cent thresholds. This limited relief rule would be available even where an employer has a joint election in effect to not account for tax on actual taxable supplies in that fiscal year.
Specific rules would apply with respect to the application of the $5,000 and 10 per cent thresholds in the cases of related employers participating in the pension plans, and mergers, amalgamations or wind-ups of participating employers.
This measure will apply in respect of any fiscal year of an employer that begins after Budget Day.
At the time of GST/HST registration, a business is generally required to provide the Canada Revenue Agency (CRA) with basic business identification information including the business’s operating name and legal name, ownership details, business activity and contact information.
The CRA uses this registration information to manage business accounts and to improve tax compliance, including detecting fraud. There is currently a penalty of $100 under the Excise Tax Act for failure to provide this required information. However, this penalty is not a sufficient deterrent.
Budget 2013 proposes that the Minister of National Revenue be given the authority to withhold GST/HST refunds claimed by a business until such time as all the prescribed business identification information is provided. This measure will aid the CRA in its abilities to authenticate GST/HST registrations and will enhance the CRA’s compliance activities by improving the quality of data that the CRA uses to assess compliance risk. The CRA attempts on an ongoing basis to obtain missing information from taxpayers and will continue to do so. The Minister of National Revenue will exercise this authority to withhold refunds in a fair and judicious manner.
This measure will apply on Royal Assent to the enacting legislation.
Under the GST/HST, supplies of paid parking are taxable, whether provided by the private or public sector, as supplying paid parking is a commercial activity. To maintain competitive equity with private sector suppliers, since the introduction of the GST, paid parking has been excluded from the general exempting provision for supplies made by a public sector body (PSB). For the purposes of the GST/HST, a PSB is a municipality, university, public college, school authority, hospital authority, charity,
non-profit organization or government.
Budget 2013 proposes two measures to clarify that certain special exempting provisions for PSBs do not apply to supplies of paid parking.
A special provision exempts from GST/HST all of a PSB’s supplies of a property or a service if all or substantially all – generally 90 per cent or more – of the supplies of the property or service are made for free. This provision is intended to simplify the application of GST/HST for PSBs by relieving them of the obligation to collect tax on occasional sales of a good or service they provide for free substantially all of the time. It was never intended that this provision would exempt a commercial activity, such as paid parking provided on a regular basis by a PSB that may compete with others providing paid parking services.
Budget 2013 proposes to clarify that this special simplifying exempting provision does not apply to supplies of paid parking that are made by way of lease, licence or similar arrangement in the course of a business carried on by a PSB. Taxable parking would include paid parking provided on a regular basis by a PSB, such as parking spaces or parking facilities operated by a municipality or hospital. Occasional supplies of paid parking by a PSB, such as those made as part of a special fund-raising event, would continue to qualify for the exemption.
This measure clarifies that GST/HST applies to commercial paid-parking facilities and spaces operated by a PSB, even where the PSB provides a significant amount of parking at no charge. This clarification is intended to ensure that the legislation provides for the application of the GST/HST to paid parking provided in the course of a business as intended, as generally understood by suppliers and taxpayers, and administered by the Canada Revenue Agency.
This measure will be effective the date the GST legislation was enacted.
A special exemption from GST/HST applies to parking provided by charities that are not a municipality, university, public college, school or hospital. This special exemption is intended to reduce the GST/HST collection and accounting obligation of charities, many of which are small and rely on volunteers.
Budget 2013 proposes to clarify that the special GST/HST exemption for parking supplied by charities does not apply to supplies of paid parking that are made by way of lease, licence or similar arrangement in the course of a business carried on by a charity set up or used by a municipality, university, public college, school or a hospital to operate a parking facility. This measure is intended to ensure consistent tax treatment of supplies of paid parking made directly by municipalities, universities, public colleges, schools, hospitals and supplies made by charities set up or used by these entities to supply their parking.
This measure will apply to supplies made after Budget Day.
Under a special exemption in the Excise Tax Act, no GST/HST is payable on purchases for the use of the Governor General. However, the Governor General voluntarily pays GST/HST on his personal purchases.
Following consultations between the Governor General and the Government, it has been agreed that the current GST/HST exemption for the Governor General should end and that GST/HST will be payable on purchases for the use of the Governor General. The Governor General and his Office will be able to recover the GST/HST they pay on purchases for official use under the GST Federal Government Departments Remission Order, in the same way as federal departments.
This approach will simplify compliance for vendors by eliminating the need to keep special records to justify the non-collection of tax.
This measure will apply to supplies made after June 30, 2013.
At present, a carton of 200 cigarettes is subject to an excise duty of $17.00, and manufactured tobacco (e.g., chewing tobacco or fine-cut tobacco used in roll-your-own cigarettes) is subject to an excise duty of $2.8925 per 50 grams or fraction thereof (e.g., $11.57 per 200 grams). In addition, less than one gram of manufactured tobacco is typically required to produce one cigarette, meaning that 200 grams of manufactured tobacco can produce more than 200 cigarettes. Manufactured tobacco is therefore currently receiving a significant tax preference vis-à-vis cigarettes.
To eliminate the preferential excise duty treatment of manufactured tobacco, Budget 2013 proposes to increase the rate of excise duty on manufactured tobacco to $5.3125 per 50 grams or fraction thereof (e.g., $21.25 per 200 grams). This change will be effective after Budget Day.
Taxpayers are required to maintain adequate books and records for the determination of their Goods and Services Tax/Harmonized Sales Tax (GST/HST) and income tax liabilities and obligations, and the amount of any benefits (e.g., refunds) to which they may be entitled. Taxpayers are also responsible for maintaining all of their electronic data files. The integrity of Canada’s self-assessment tax system relies on the accuracy of these records.
Electronic suppression of sales (ESS) software (also commonly known as “zapper” software) has been used by some businesses to hide their sales to evade the payment of GST/HST and income taxes. ESS software selectively deletes or modifies, without a record of the deletion or modification, sales transactions from the records of point-of-sale systems (e.g., electronic cash registers) and businesses’ accounting systems.
Budget 2013 proposes new administrative monetary penalties and criminal offences under the Excise Tax Act (i.e., in respect of GST/HST) and the Income Tax Act to combat this type of tax evasion. Specifically, it is proposed that the following new administrative monetary penalties and criminal offences apply:
New Administrative Monetary Penalties
- For the use of ESS software, an administrative monetary penalty of $5,000 on the first infraction and $50,000 on any subsequent infraction.
- For the possession or acquisition of ESS software, an administrative monetary penalty of $5,000 on the first infraction and $50,000 on any subsequent infraction, except where a person exercised due diligence.
- For the manufacture, development, sale, possession for sale, offer for sale or otherwise making available of ESS software, an administrative monetary penalty of $10,000 on the first infraction and $100,000 on any subsequent infraction, except where a person exercised due diligence.
The due diligence defence will generally require that, to avoid the penalties, a person establish that they exercised the degree of care, diligence and skill to prevent the contravention with respect to ESS software that a reasonably prudent person would have exercised in comparable circumstances.
New Criminal Offences
- For the use, possession, acquisition, manufacture, development, sale, possession for sale, offer for sale or otherwise making available of ESS software:
- on summary conviction, a fine of not less than $10,000 and not more than $500,000 or imprisonment for a term of not more than 2 years, or both; or
- on conviction by indictment, a fine of not less than $50,000 and not more than $1,000,000 or imprisonment for a term of not more than 5 years, or both.
The proposed new administrative monetary penalties and criminal offences will help protect tax revenues and ensure that all taxpayers meet their tax obligations. They will supplement other existing administrative monetary penalties and offences for making false statements or omissions under each of the Excise Tax Act and the Income Tax Act, as well as existing criminal sanctions under the Criminal Code.
The Canada Revenue Agency will undertake a communications program concerning the new monetary penalties and criminal offences alerting businesses to the need to take steps to ensure that they do not possess ESS software. To provide businesses with time to detect and remove ESS software, these measures will apply on the later of January 1, 2014 and Royal Assent to the enacting legislation.
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 34 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, 14 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 2013 proposes to permanently eliminate all tariffs on baby clothes and sports and athletic equipment (excluding bicycles). This measure will support Canadian families and encourage physical activity and healthy living by lowering the costs of importing these goods.
Tariffs on affected goods vary from 2.5 per cent to 20 per cent, and reductions apply to 37 tariff items as currently listed in the Schedule to the Customs Tariff. For these items, the Most-Favoured-Nation (MFN) rates of duty will be reduced to “Free” as outlined in the Notice of Ways and Means Motion to Amend the Customs Tariff.
In certain instances, these MFN reductions are leading to consequential reductions to the rates of duty under other tariff treatments, namely the General Preferential Tariff, the Peru Tariff, the Costa Rica Tariff, the Australia Tariff and the New Zealand Tariff.
The tariff reductions will be given effect by amendments to the Customs Tariff and will be effective in respect of goods imported into Canada on or after April 1, 2013.
Budget 2013 proposes changes to Canada’s General Preferential Tariff (GPT) regime under the Customs Tariff to ensure that this form of development assistance is appropriately aligned with the global economic landscape. These changes also align Canada’s GPT system with other major tariff-preference granting countries, and target the benefits to countries most in need.
The Department of Finance consulted extensively with stakeholders in preparing this measure, including through the publication of a notice in the Canada Gazette on December 22, 2012.
As announced in the Canada Gazette notice, the Government will withdraw GPT eligibility from 72 higher-income and export-competitive countries, including all G-20 countries. The economic criteria used to determine country eligibility for the GPT will be applied every two years on a forward basis to determine beneficiary country eligibility, similar to the process that exists in many major industrialized nations.
The Government will also ensure that graduating countries from the GPT regime does not reduce the benefits of the Least Developed County Tariff (LDCT) regime. The General Preferential Tariff and Least Developed Country Tariff Rules of Origin Regulations will be amended in order to continue allowing the duty-free importation of textiles and apparel from least developed countries that are produced using textile inputs from current GPT beneficiaries.
The changes to the GPT, to be given effect by amendments to the Customs Tariff and related regulations, are effective in respect of goods imported into Canada on or after January 1, 2015, and will be extended for ten years, until December 31, 2024.
Budget 2013 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:
- Proposed changes to certain GST/HST rules relating to financial institutions released on January 28, 2011;
- Automobile expense amounts for 2012 announced on December 29, 2011, and for 2013 announced on December 28, 2012;
- Legislative proposals implementing the proposed changes to the life insurance policyholder exemption test announced in the March 29, 2012 Budget;
- Legislative proposals released on June 8, 2012 relating to improving the caseload management of the Tax Court of Canada;
- Legislative proposals released on July 25, 2012 relating to specified investment flow-through entities, real estate investment trusts and publicly-traded corporations;
- Legislative proposals released on November 27, 2012 relating to income tax rules applicable to Canadian banks with foreign affiliates; and
- Legislative proposals released on December 21, 2012 relating to income tax technical amendments.
Budget 2013 also reaffirms the Government’s commitment to move forward as required with technical amendments to improve the certainty of the tax system.
 Class 43.1 was introduced in 1994 and provides an accelerated CCA rate of 30 per cent (on a declining-balance basis). 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 must meet a higher efficiency standard in order to qualify for Class 43.2.