Annex 2 - Tax Measures: Supplementary Information
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, and draft amendments to various GST/HST regulations.
Table A2.2 lists integrity and fairness tax measures introduced since Budget 2010 and provides estimates of their budgetary impact.
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||–||2||2||2||2||2||10|
|Medical Expense Tax Credit||–||–||–||–||–||–||–|
|Search and Rescue Volunteers Tax Credit||1||4||4||4||4||4||21|
|Extension of the Mineral Exploration Tax Credit for Flow-Through Share Investors||–||60||(15)||–||–||–||45|
|Farming and Fishing Businesses||–||–||–||–||–||–||–|
|Tax Deferral for Farmers||–||–||–||–||–||–||–|
|Amateur Athlete Trusts||–||–||–||–||–||–||–|
|Pension Transfer Limits||3||5||5||5||5||5||28|
|GST/HST Credit Administration||–||–||–||–||–||–||–|
|Tax on Split Income||(10)||(35)||(35)||(35)||(35)||(40)||(190)|
|Graduated Rate Taxation of Trusts and Estates||–||–||(20)||(70)||(75)||(80)||(245)|
|Charities and Non-Profit Organizations|
|Donations of Ecologically Sensitive Land||–||–||–||–||–||–||–|
|Donations of Certified Cultural Property||–||(4)||(4)||(4)||(4)||(4)||(20)|
|State Supporters of Terrorism||–||–||–||–||–||–||–|
|Consultation on Non-Profit Organizations||–||–||–||–||–||–||–|
|Business Income Tax Measures|
|Remittance Thresholds for Employer Source Deductions2||–||5||15||20||25||30||95|
|Tax Incentives for Clean Energy Generation||–||–||1||3||5||5||14|
|Consultation on Eligible Capital Property||–||–||–||–||–||–||–|
|International Tax Measures|
|Offshore Regulated Banks||–||–||(30)||(55)||(50)||(50)||(185)|
|Consultation on Tax Planning by Multinational Enterprises||–||–||–||–||–||–||–|
|Consultation on Treaty Shopping||–||–||–||–||–||–||–|
|Update on the Automatic Exchange of Information for Tax Purposes||–||–||–||–||–||–||–|
|Update on Tax Treaties and Tax Information Exchange Agreements||–||–||–||–||–||–||–|
|Sales and Excise Tax Measures|
|Improving the Application of the GST/HST to the Health Care Sector||–||10||10||10||10||10||50|
|GST/HST Election for Closely Related Persons||–||–||–||–||–||–||–|
|Strengthening Compliance with GST/HST Registration||–||–||–||–||–||–||–|
|Rate of Excise Duty on Cigarettes||(95)||(675)||(650)||(630)||(610)||(590)||(3,250)|
|Excise Duty Treatment of Tobacco Products in Duty Free Markets||(1)||(10)||(10)||(10)||(10)||(10)||(51)|
|Standardizing Sanctions Related to False Statements in Excise Tax Returns||–||–||–||–||–||–||–|
|Aboriginal Tax Policy||–||–||–||–||–||–||–|
|Customs Tariff Measures|
|Customs Tariff Treatment of the Governor General||–||–||–||–||–||–||–|
|Supporting Offshore Oil and Gas Development||–||–||–||–||–||–||–|
|1 A “–” indicates a nil amount, a small amount (less than $1 million) or an amount that cannot be determined in respect of a measure that is intended to protect the tax base.
2 This measure will not affect the amount of tax revenues, but the changes in the timing of remittances will have an impact on public debt charges.
Personal Income Tax Measures
Adoption Expense Tax Credit
The Adoption Expense Tax Credit 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 $11,774 in expenses per child for 2014).
Eligible adoption expenses include, for example, fees paid to a licensed adoption agency and mandatory immigration expenses in respect of the child. The Adoption Expense Tax Credit may be claimed in the taxation year in which an adoption is completed.
To better recognize the costs unique to adopting a child, Budget 2014 proposes to increase the maximum amount of eligible expenses to $15,000 per child for 2014. This maximum amount will be indexed to inflation for taxation years after 2014.
Medical Expense Tax Credit
The Medical Expense Tax Credit (METC) recognizes the effect of above-average medical and disability-related expenses on a taxpayer’s ability to pay income tax. The METC provides federal income tax relief equal to 15 per cent of eligible medical and disability-related expenses in excess of a threshold that is the lesser of three per cent of the taxpayer’s net income and an indexed dollar amount ($2,171 in 2014). The list of expenses eligible for the METC is regularly reviewed and updated in light of disability-specific or medically-related developments and new technologies.
Currently, the METC provides tax relief for amounts paid for therapy provided to an individual with a severe and prolonged mental or physical impairment who is eligible for the Disability Tax Credit. The therapy must be prescribed by, and administered under the general supervision of, a medical doctor or an occupational therapist (or, in the case of a mental impairment, a medical doctor or psychologist). In some instances, effective therapy requires that a plan be designed to meet the specific needs of an individual (e.g., applied behaviour analysis therapy for children with autism). The design of a plan normally includes both its initial development and its subsequent adjustment as necessary.
Budget 2014 proposes that amounts paid for the design of an individualized therapy plan be eligible for the METC if the cost of the therapy itself would be eligible for the METC and the following conditions are met:
- an individualized therapy plan is required to access public funding for specialized therapy, or a medical doctor or an occupational therapist (or, in the case of a mental impairment, a medical doctor or psychologist) prescribes an individualized therapy plan;
- the plan is designed for an individual with a severe and prolonged mental or physical impairment who is, because of the impairment, eligible for the Disability Tax Credit; and
- the amounts are paid to persons ordinarily engaged in the business of providing such services to unrelated individuals.
Budget 2014 also proposes to add to the list of expenditures eligible under the METC expenses for service animals specially trained to assist an individual in managing their severe diabetes. Eligible expenses will include the cost of the service animal and its care and maintenance, as well as reasonable travel expenses incurred for the individual to attend a facility that trains individuals in the handling of these service animals.
These measures will apply to expenses incurred after 2013.
Search and Rescue Volunteers Tax Credit
In recognition of the important role played by search and rescue volunteers in contributing to the security and safety of Canadians, Budget 2014 proposes a Search and Rescue Volunteers Tax Credit (SRVTC) to allow eligible ground, air and marine search and rescue volunteers to claim a 15-per-cent non-refundable tax credit based on an amount of $3,000.
An eligible individual will be a search and rescue volunteer who performs at least 200 hours of volunteer search and rescue services in a taxation year, for one or more ground, air or marine search and rescue organizations, that consist primarily of responding to and being on call for search and rescue and related emergencies, attending meetings held by the search and rescue organization and participating in required training related to search and rescue.
Volunteer search and rescue service hours performed for a search and rescue organization will be ineligible if the individual also provides search and rescue services, otherwise than as a volunteer, to that organization.
An individual who performs both eligible volunteer firefighting services and eligible volunteer search and rescue services for a total of at least 200 hours in the year will be able to claim either the Volunteer Firefighters Tax Credit (VFTC) or the SRVTC.
An individual who claims the VFTC or the SRVTC will be ineligible for the existing tax exemption of up to $1,000 for honoraria paid by a government, municipality or public authority to an emergency services volunteer.
Eligible search and rescue organizations will include search and rescue organizations that are members of the Search and Rescue Volunteer Association of Canada, of the Civil Air Search and Rescue Association, and of the Canadian Coast Guard Auxiliary. Other organizations whose status as a search and rescue organization is recognized by a provincial, municipal or public authority will also qualify.
The Minister of National Revenue may require an individual who claims the SRVTC to obtain written certification from a team president, or other individual who fulfills a similar role, of an eligible search and rescue organization confirming the number of hours of eligible volunteer search and rescue services performed. Governments, municipalities and public authorities who pay honoraria, described above, to individuals in respect of their services as volunteers will be required to report those amounts to the Canada Revenue Agency as part of their annual reporting of remuneration paid.
This measure will apply to the 2014 and subsequent taxation years.
Extension of the Mineral Exploration Tax Credit for Flow-Through Share Investors
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 2014 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, 2015. 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 2015 can support eligible exploration until the end of 2016.
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.
Farming and Fishing Businesses
The income tax rules allow for a tax deferral (“rollover”) of capital gains, and of the recapture of depreciation, on intergenerational transfers of farming property and fishing property from an individual to the individual’s child. As well, the income tax rules provide a $800,000 Lifetime Capital Gains Exemption (LCGE) on certain farming or fishing property, shares or interests. To simplify the tax rules relating to the intergenerational rollover and the LCGE, Budget 2014 proposes to adjust these rules to better accommodate taxpayers involved in a combination of farming and fishing.
Property Held Directly or Through a Partnership
Where an individual carries on a farming or fishing business as a sole proprietor, or through a partnership, in order to be eligible for the intergenerational rollover and LCGE, the qualifying property is required to be used principally in a farming business or a fishing business. A property used in a combination of farming and fishing can currently qualify for the LCGE only if it is used principally (generally interpreted as 50 per cent or more) in one of those activities. For example, a property that is used 40 per cent of the time for farming, 35 per cent of the time for fishing, and 25 per cent of the time in a third business activity cannot qualify as either farming or fishing property.
Budget 2014 proposes to extend eligibility for the intergenerational rollover and the LCGE to property of an individual used principally in a combination of farming and fishing.
Shares or Partnership Interests
In order for an individual’s shares in a family corporation or interest in a family partnership to qualify for the intergenerational rollover and LCGE, all or substantially all (generally interpreted as 90 per cent or more) of the fair market value of the property of the entity must be property used principally in a farming business or a fishing business. A property held by a family farm corporation or partnership that is used in a combination of farming and fishing must be used principally in farming in order to count towards the “all or substantially all” test. A similar rule applies for a property held by a family fishing corporation or partnership. Corporations (and partnerships) with a mix of assets, some of which are used in farming and some of which are used in fishing, will generally not qualify as either a family farm corporation or a family fishing corporation (or a family farm partnership or a family fishing partnership, as the case may be).
Budget 2014 proposes to extend eligibility for the intergenerational rollover and the LCGE to an individual’s shares in a corporation, or interest in a partnership, where the corporation or partnership carries on both a farming business and a fishing business. In particular, if a property of the corporation or partnership is used principally in either business, or is used principally in a combination of farming and fishing, the property will count towards the all or substantially all test.
This measure will apply to dispositions and transfers that occur in the 2014 and subsequent taxation years.
Tax Deferral for Farmers
Farmers who dispose of breeding livestock due to drought, flood or excess moisture conditions existing in prescribed regions in a given year are permitted to defer up to 90 per cent of the sale proceeds from inclusion in their taxable income until the year following the sale, or a later year if the conditions persist. This allows farmers to use the sale proceeds to fund the acquisition of replacement livestock. The inclusion in taxable income in the year of replacement will be largely offset by the cost of the replacement livestock.
Regions are prescribed in the Income Tax Regulations for a taxation year upon the recommendation of the Minister of Agriculture and Agri-Food. Generally, forage yields of less than 50 per cent of the long-term average, over an area large enough to have an impact on industry, constitute an impact severe enough to warrant the prescription of the regions in that area.
The tax deferral is targeted at breeding livestock because its sale is akin to disposing of long-term productive assets. Breeding livestock that currently qualify for the deferral include, for example:
- cattle, goats and sheep that are over 12 months of age and are kept for breeding; and
- horses that are over 12 months of age and are kept for breeding in the commercial production of pregnant mares’ urine.
Budget 2014 proposes to extend this tax deferral to bees, and to all types of horses that are over 12 months of age, that are kept for breeding.
This measure will apply to the 2014 and subsequent taxation years.
Amateur Athlete Trusts
Under the Income Tax Act, an amateur athlete who is a member of a registered Canadian amateur athletic association and is eligible to compete in international sporting events as a Canadian national team member is permitted to place certain income in an arrangement known as an amateur athlete trust, of which the amateur athlete is the beneficiary. Income that is endorsement income, prize money, or income from public appearances or speeches may be contributed to an amateur athlete trust, if it is received in connection with the athlete’s participation in international sporting events.
For tax purposes, amounts contributed to an amateur athlete trust are excluded from the income of the amateur athlete for the year in which the contribution is made. In addition, no tax is payable by an amateur athlete trust, including on investment income earned by the trust. Property in an amateur athlete trust is included in the beneficiary’s income on distribution or, at the latest, eight years after the last year in which the individual competed as a Canadian national team member. If any property remains in the trust at the end of the eight-year period, it is deemed to have been distributed to the beneficiary.
An individual’s annual Registered Retirement Savings Plan (RRSP) contribution limit is generally equal to 18 per cent of the individual’s earned income for the previous year up to a specified dollar limit ($24,270 for 2014), minus a pension adjustment that reflects saving in a Registered Pension Plan by the individual for the previous year, plus any unused RRSP contribution room the individual has carried forward from previous years. Since income that is contributed to an amateur athlete trust is exempt from income tax, it is not treated as earned income in determining an athlete’s annual RRSP contribution limit. This treatment can reduce the amount of RRSP room that would otherwise be available to shelter income, such as amounts distributed from an amateur athlete trust, from tax.
Budget 2014 proposes to allow income that is contributed to an amateur athlete trust to qualify as earned income for the purpose of determining the RRSP contribution limit of the trust’s beneficiary.
This measure will apply in respect of contributions made to amateur athlete trusts after 2013. In addition, individuals who contributed to an amateur athlete trust before 2014 will be permitted to make an election to have income that was contributed to the trust in 2011, 2012 and 2013 also qualify as earned income. An individual’s RRSP limit will be re-determined for each of these years based on the additional earned income created as a result of the election and any additional RRSP room will be added to the individual’s RRSP contribution room for 2014. An individual will be required to make the election in writing and submit it to the Canada Revenue Agency on or before March 2, 2015.
Pension Transfer Limits
Under the Income Tax Act, the pension transfer limit formula determines the portion of a lump-sum commutation payment from a defined benefit Registered Pension Plan (RPP), received by a plan member who is leaving the RPP, that may be transferred to a Registered Retirement Savings Plan (RRSP) on a tax-free basis (i.e., the transferable amount). Generally, in situations where a plan member’s commutation payment is reduced due to plan underfunding, the transferable amount is based on that lower commutation payment. The portion of a plan member’s commutation payment that exceeds the transferable amount must be included in the taxpayer’s income for the year in which it is received.
In 2011, the Government introduced a special rule that applies in certain circumstances to allow a member leaving an RPP whose estimated pension benefit has been reduced due to plan underfunding to disregard that benefit reduction in calculating their transferable amount. If the rule applies, the maximum transferable amount for a plan member who is leaving an underfunded RPP will be the same as if the RPP were fully funded. This rule generally applies only in circumstances where an underfunded RPP with broad membership, sponsored by an insolvent employer, is being wound up and the Minister of National Revenue has approved its application.
Budget 2014 proposes to allow this rule to apply in additional situations. In particular, the rule will be available in respect of a commutation payment to a plan member who is leaving an RPP if that payment has been reduced due to plan underfunding and either:
- where the plan is an RPP other than an individual pension plan, the reduction in the estimated pension benefit that results in the reduced commutation payment is approved pursuant to the applicable pension benefits standards legislation; or
- where the plan is an individual pension plan, the commutation payment to the plan member is the last payment made from the plan (i.e., the plan is being wound up).
The existing requirement that the application of this rule must be approved by the Minister of National Revenue will be maintained.
This measure will apply in respect of commutation payments made after 2012.
GST/HST Credit Administration
The Goods and Services Tax/Harmonized Sales Tax (GST/HST) Credit is a non-taxable benefit that is paid to individuals based on their adjusted family net income. An individual may apply for the GST/HST Credit by checking the GST/HST Credit application box on their annual income tax return. When an individual does so, the Minister of National Revenue is required to send the individual a notice of determination as to their eligibility for the GST/HST Credit.
Budget 2014 proposes to eliminate the need for an individual to apply for the GST/HST Credit and to allow the Canada Revenue Agency to automatically determine if an individual is eligible to receive the GST/HST Credit. A notice of determination will be sent to each individual who is eligible for the GST/HST Credit. In the case of eligible couples, the GST/HST Credit will be paid to the spouse or common-law partner whose tax return is assessed first.
Notices of determination will not be sent to ineligible individuals. An ineligible individual, however, will be able to obtain a notice of determination upon request, which will preserve their right to object to the determination.
This measure will apply in respect of income tax returns for the 2014 and subsequent taxation years.
Tax on Split Income
The Canadian income tax system applies a progressive marginal rate structure to the taxation of personal income. The Income Tax Act contains a number of rules intended to reduce the ability of a higher-income taxpayer to split taxable income inappropriately with lower-income individuals. One of these rules, referred to as the “tax on split income”, limits income-splitting techniques that seek to shift certain types of income from a higher-income individual to a lower-income minor. The highest marginal tax rate (currently 29 per cent) applies to “split income” paid or payable to a minor, which generally comprises:
- taxable dividends (and shareholder benefits) received directly, or indirectly through a partnership or trust, in respect of unlisted shares of Canadian and foreign corporations (other than shares of a mutual fund corporation);
- capital gains from dispositions of those types of shares to persons who do not deal at arm’s length with the minor; and
- income from a partnership or trust that is derived from providing property or services to, or in support of, a business carried on by a person related to the minor or in which the related person participates.
The tax on split income does not currently apply to situations where a minor is allocated income from a partnership or trust that is derived from business or rental activities conducted with third parties. As a result, certain taxpayers who engage in those activities are using trust and partnership structures to split business and rental income with minors. For example, an adult might provide services to clients of a partnership of which the adult’s minor child is a member (either directly or through a trust of which the child is a beneficiary). The child is allocated a share of the partnership’s income – income that was earned as a result of the services provided by the adult.
Budget 2014 proposes a targeted measure to maintain the integrity of the tax on split income. It is proposed that the definition “split income” in the Income Tax Act be modified to include income that is, directly or indirectly, paid or allocated to a minor from a trust or partnership, if:
- the income is derived from a source that is a business or a rental property; and
- a person related to the minor
- is actively engaged on a regular basis in the activities of the trust or partnership to earn income from any business or rental property, or
- has, in the case of a partnership, an interest in the partnership (whether held directly or through another partnership).
This measure will apply to the 2014 and subsequent taxation years.
Graduated Rate Taxation of Trusts and Estates
Budget 2013 announced the Government’s intention to consult on possible measures to eliminate the special tax benefits that arise from taxing at graduated rates the taxable income of testamentary trusts and grandfathered inter vivos trusts (i.e., certain inter vivos trusts created before June 18, 1971). A consultation paper was released on June 3, 2013. It contained possible measures that would apply flat top-rate taxation to estates for taxation years that end more than 36 months after the death of the relevant individual and to all grandfathered inter vivos trusts and trusts created by will. The paper also invited comments on possible measures to amend a number of related tax rules. The public consultation ended on December 2, 2013.
The current tax treatment of these trusts and estates effectively allows their beneficiaries access to more than one set of graduated rates. To address this issue, Budget 2014 proposes to generally proceed with the measures described in the consultation paper.
Specifically, Budget 2014 proposes to apply flat top-rate taxation to grandfathered inter vivos trusts, trusts created by will and certain estates (including a number of consequential changes). Two exceptions to this treatment are proposed. First, as proposed in the consultation paper, graduated rates will apply for the first 36 months of an estate that arises on and as a consequence of an individual’s death and that is a testamentary trust. This recognizes that estates require a period of administration and that estates are generally administered within their first 36 months. If the estate remains in existence more than 36 months after the death, it will become subject to flat top-rate taxation at the end of that 36-month period.
Second, during the consultation the Government heard from a number of stakeholders that the existing graduated rate taxation of testamentary trusts for the benefit of disabled individuals was an important tool in preserving access by these individuals to income-tested benefits, in particular provincial social assistance benefits. In response to these submissions, graduated rates will continue to be provided in respect of such trusts having as their beneficiaries individuals who are eligible for the federal Disability Tax Credit. More detail regarding the parameters of this exception will be released in the coming months.
Also under this proposal, testamentary trusts (other than estates for their first 36 months) and grandfathered inter vivos trusts will not benefit from special treatment under a number of related tax rules, in particular:
- an exemption from the income tax instalment rules;
- an exemption from the requirement that trusts have a calendar year taxation year and fiscal periods that end in the calendar year in which the period began;
- the basic exemption in computing alternative minimum tax;
- preferential treatment under Part XII.2 of the Income Tax Act;
- classification as a personal trust without regard to the circumstances in which beneficial interests in the trust have been acquired;
- the ability to make investment tax credits available to a trust’s beneficiaries; and
- a number of tax administration rules that otherwise apply only to ordinary individuals.
Testamentary trusts that do not already have a calendar year taxation year will have a deemed taxation year-end on December 31, 2015 (or in the case of an estate for which that 36-month period ends after 2015, the day on which that period ends).
This measure will apply to the 2016 and subsequent taxation years.
The Income Tax Act contains rules to prevent the use of non-resident trusts by taxpayers 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. An exemption (the 60-month exemption) from the deemed residence rules applies if the contributors to the trust are individuals each of whom is resident in Canada for a total period of not more than 60 months (i.e., newly resident Canadians).
Where the 60-month exemption applies the trust is not subject to Canadian taxation on its foreign-source income. Canadian-resident persons who are beneficiaries under, or contributors to, these trusts obtain indirect tax benefits as a result of the non-imposition of Canadian tax in these circumstances. These benefits are not available to Canadian-resident persons who earn similar income directly or through a Canadian-resident trust. The 60-month exemption raises tax fairness, tax integrity and tax neutrality concerns.
Budget 2014 proposes to eliminate the 60-month exemption from the deemed residence rules, including related rules that apply to non-resident trusts.
This measure will apply in respect of trusts for taxation years:
- that end after 2014 if (i) at any time that is after 2013 and before Budget Day the 60-month exemption applies in respect of the trust, and (ii) no contributions are made to the trust on or after Budget Day and before 2015; or
- that end on or after Budget Day in any other case.
Charities and Non-Profit Organizations
Donations of Ecologically Sensitive Land
The Ecological Gifts Program provides a way for Canadians with ecologically sensitive land to contribute to the protection of Canada’s environmental heritage. Under this program, certain donations of ecologically sensitive land, or easements, covenants and servitudes on such land, are eligible for special tax assistance. Individual donors are eligible for a Charitable Donations Tax Credit, while corporate donors are eligible for a Charitable Donations Deduction. As with other charitable donations, amounts not claimed for a year may be carried forward for up to five years. In addition, capital gains associated with the donation of ecologically sensitive land are exempt from tax.
To permit donors to take greater advantage of tax assistance and thereby encourage larger donations, Budget 2014 proposes to extend to ten years the carry-forward period for donations of ecologically sensitive land, or easements, covenants and servitudes on such land.
This measure will apply to donations made on or after Budget Day.
Donations made by an individual to a registered Canadian charity or other qualified donee are eligible for a Charitable Donations Tax Credit (CDTC). Subject to certain limits, a CDTC in respect of the eligible amount of the donation may be applied against the individual’s income tax otherwise payable. The eligible amount is generally the fair market value of the donated property at the time that the donation is made (subject to any reduction required under the income tax rules). The individual may claim a CDTC for the year in which the donation is made or for any of the five following years.
Where an individual makes a donation by will, the donation is treated for income tax purposes as having been made by the individual immediately before the individual’s death. Similar provisions apply where an individual designates, under a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), Tax-Free Savings Account (TFSA) or life insurance policy, a qualified donee as the recipient upon the individual’s death of the proceeds of the plan or policy. Under these circumstances, the CDTC available may be applied against only the individual’s income tax otherwise payable.
On the other hand, a CDTC available in respect of a donation made by an individual’s estate may be applied against only the estate’s income tax otherwise payable.
Budget 2014 proposes to provide more flexibility in the tax treatment of charitable donations made in the context of a death that occurs after 2015. Donations made by will and designation donations will no longer be deemed to be made by an individual immediately before the individual’s death. Instead, these donations will be deemed to have been made by the estate, at the time at which the property that is the subject of the donation is transferred to a qualified donee.
In addition, the trustee of the individual’s estate will have the flexibility to allocate the available donation among any of: the taxation year of the estate in which the donation is made; an earlier taxation year of the estate; or the last two taxation years of the individual. The current limits that apply in determining the total donations that are creditable in a year will continue to apply. A qualifying donation will be a donation effected by a transfer, within the first 36 months after the individual’s death, of property to a qualified donee. In the case of a transfer from an RRSP, RRIF, TFSA or insurer, the existing rules for determining eligible property for designation donations will apply. In any other case, the donated property will be required to have been acquired by the estate on and as a consequence of the death (or to have been substituted for such property).
An estate will continue to be able to claim a CDTC in respect of other donations in the year in which the donation is made or in any of the five following years.
This measure will apply to the 2016 and subsequent taxation years.
Donations of Certified Cultural Property
For the purpose of calculating a Charitable Donations Tax Credit (for individuals) or a Charitable Donations Deduction (for corporations), the value of a gift of property is deemed to be no greater than its cost to the donor if, generally, the donor acquired the property as part of a tax shelter gifting arrangement or held the property for a short period. Gifts of certified cultural property are exempt from this rule and also benefit from a capital gains exemption. As a result, Canadians are encouraged to donate culturally significant property to designated institutions and public authorities to help preserve Canada’s national heritage.
Representations as to the fair market value of certified cultural property are reviewed by the Canadian Cultural Property Export Review Board. As part of its duties, the Board is responsible for certifying cultural property for income tax purposes, including determining its fair market value.
The donation of certified cultural property could be a target for abuse by tax shelter promoters because of the combination of its favourable tax treatment, inherent uncertainties in appraising the value of art and artifacts, and the exemption from the rule that deems the value of a gift to be no greater than its cost to the donor in certain circumstances. Budget 2014 proposes to remove, for certified cultural property acquired as part of a tax shelter gifting arrangement, the exemption from the rule that deems the value of a gift to be no greater than its cost to the donor. Other donations of certified cultural property will not be affected by this measure.
This measure will apply to donations made on or after Budget Day.
State Supporters of Terrorism
To prevent potential abuse of the charitable sector by foreign state supporters of terrorism, Budget 2014 proposes that where a charity (or a Canadian amateur athletic association) accepts a donation from a foreign state listed as a supporter of terrorism for purposes of the State Immunity Act, or from an agency of such a state, the Minister of National Revenue may refuse to register the charity (or amateur athletic association) or may revoke its registration. The Minister of National Revenue will take into consideration the specific facts of each case, exercising this authority in a fair and judicious manner.
The Canada Revenue Agency helps charities understand and meet their compliance obligations. The Agency will provide information about best practices for exercising due diligence when accepting gifts and for preventing terrorist abuse of the registration system for charities.
The Canada Revenue Agency will utilize existing compliance reporting and, as such, the measure will not impose an additional reporting burden on charities.
This measure will apply to donations accepted on or after Budget Day.
Consultation on Non-Profit Organizations
A non-profit organization (NPO) that is a club, society or association organized and operated exclusively for social welfare, civic improvement, pleasure or for any other purpose except profit, qualifies for an income tax exemption if it meets certain conditions. This income tax exemption for NPOs has changed little since its introduction in 1917. Today, NPOs include such varied groups as professional associations, recreational clubs, civic improvement organizations, cultural groups, housing corporations, advocacy groups and trade associations.
Concerns have been raised that some organizations claiming the NPO tax exemption may be earning profits that are not incidental to carrying out the organization’s non-profit purposes, making income available for the personal benefit of members or maintaining disproportionately large reserves. In addition, because reporting requirements for NPOs are limited, members of the public may not be adequately able to assess the activities of these organizations, and it may be challenging for the Canada Revenue Agency to evaluate the entitlement of an organization to the tax exemption.
In this context, Budget 2014 announces the Government’s intention to review whether the income tax exemption for NPOs remains properly targeted and whether sufficient transparency and accountability provisions are in place. This review will not extend to registered charities or registered Canadian amateur athletic associations. As part of the review, the Government will release a consultation paper for comment and will further consult with stakeholders as appropriate.
Business Income Tax Measures
Remittance Thresholds for Employer Source Deductions
Employers are required to remit source deductions in respect of employees’ income tax, Canada Pension Plan contributions and Employment Insurance premiums. An employer is included in a particular category of remitter on the basis of the employer’s total average monthly withholding amount in preceding calendar years in respect of these source deductions. Two of these categories are:
- employers who had, two calendar years ago, a total average monthly withholding amount of at least $15,000, but less than $50,000 – these employers are required to remit deductions up to twice per month, depending on their payroll frequency; and
- employers who had, two calendar years ago, a total average monthly withholding amount of at least $50,000 – these employers are required to remit deductions up to four times per month, depending on their payroll frequency.
In order to reduce the tax compliance burden, Budget 2014 proposes to reduce the frequency of remittance of source deductions for these employers. In particular, Budget 2014 will:
- increase the threshold level of average monthly withholdings at which employers are required to remit up to two times per month to $25,000 from $15,000; and
- increase the threshold level of average monthly withholdings at which employers are required to remit up to four times per month to $100,000 from $50,000.
This measurewill apply in respect of amounts to be withheld after 2014.
Tax Incentives for Clean Energy Generation
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 energy 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 and energy conservation equipment.
Budget 2014 proposes to expand Class 43.2 to include water-current energy equipment and equipment used to gasify eligible waste fuel for use in a broader range of applications. These measures will encourage investment in technologies that can contribute to a reduction in emissions of greenhouse gases and air pollutants, in support of Canada’s targets set out in the Federal Sustainable Development Strategy. These measures could also contribute to the diversification of Canada’s energy supply.
Water-Current Energy Equipment
Water-current energy equipment converts the kinetic energy of flowing water (for example, in a river) into electricity without the use of physical barriers, such as a dam, or flow diversion. Currently, wave and tidal energy equipment, which use similar technologies, are generally eligible under Class 43.2.
Budget 2014 proposes to expand eligibility under Class 43.2 to include water-current energy equipment. Eligible property will include equipment used primarily for the purpose of generating electricity using the kinetic energy from flowing water (otherwise than by using physical barriers or flow diversion), including support structures, submerged cables, transmission equipment, and control, conditioning and battery storage equipment. Eligible property will not include buildings, distribution equipment or auxiliary electricity generating equipment.
Accelerated CCA will be available in respect of eligible property only if, at the time the property becomes first available for use, the requirements of all Canadian environmental laws, by-laws and regulations applicable in respect of the property have been met. This latter requirement will also be extended to wave and tidal energy equipment, which uses similar technologies and is already eligible for inclusion in Class 43.1 and 43.2.
This measure will apply to property acquired on or after Budget Day that has not been used or acquired for use before that date.
Gasification is a process that converts organic or fossil-based materials into hydrogen, carbon monoxide and carbon dioxide. The resulting product is a gaseous fuel generally called “producer gas” (also known as syngas). Gasification equipment is eligible for inclusion in Class 43.2 as “fuel upgrading equipment” when used in an eligible cogeneration facility (producing electricity and heat) or in an eligible waste-fuelled thermal energy facility (producing heat).
Budget 2014 proposes to expand Class 43.2 to include property used to gasify eligible waste fuel for other applications (for example, to sell the producer gas for domestic or commercial use). Eligible property will include equipment used primarily to produce producer gas, including related piping, storage equipment, feeding equipment, ash-handling equipment and equipment to remove non-combustibles and contaminants from the producer gas. Eligible property will not include buildings or other structures, or heat rejection equipment. Accelerated CCA will be available in respect of eligible property only if, at the time the property becomes first available for use, the requirements of all Canadian environmental laws, by-laws and regulations applicable in respect of the property have been met.
This measure will apply to property acquired on or after Budget Day that has not been used or acquired for use before that date.
Consultation on Eligible Capital Property
The eligible capital property (ECP) regime governs the tax treatment of certain expenditures of a capital nature (eligible capital expenditures) and receipts (eligible capital receipts) that are not otherwise accounted for as business revenues or expenses, or under the rules relating to capital property.
An eligible capital expenditure is generally a capital expenditure incurred to acquire rights or benefits of an intangible nature for the purpose of earning income from a business, other than an expenditure that is deductible as a current expense or that is incurred to acquire an intangible property that is depreciable under the capital cost allowance (CCA) rules. Eligible capital expenditures include the cost of goodwill when a business is purchased. They also include the cost of certain intangible property such as customer lists and licences, franchise rights and farm quotas of indefinite duration. Under the ECP regime, 75 per cent of an eligible capital expenditure is added to the cumulative eligible capital (CEC) pool in respect of the business and is deductible at a rate of 7 per cent per year on a declining-balance basis.
An eligible capital receipt is generally a capital receipt for rights or benefits of an intangible nature that is received in respect of a business, other than a receipt that is included in income or in the proceeds of disposition of a capital property. The ECP regime provides that 75 per cent of an eligible capital receipt is first applied to reduce the CEC pool and then results in the recapture of any CEC previously deducted. Once all of the previously deducted CEC has been recaptured, any excess receipt (an ECP gain) is included in income from the business at a 50-per-cent inclusion rate, which is also the inclusion rate that applies to capital gains.
Over the years, the ECP regime has become increasingly complicated and many stakeholders have suggested that this complexity could be significantly reduced if the ECP regime were replaced with a new class of depreciable property to which the CCA rules would apply.
Budget 2014 announces a public consultation on a proposal to repeal the ECP regime, replace it with a new CCA class available to businesses and transfer taxpayers’ existing CEC pools to the new CCA class. The proposal is not intended to affect the application of the Goods and Services Tax/Harmonized Sales Tax (GST/HST) in this area. Detailed draft legislative proposals will be released for comment at an early opportunity. The timing of the implementation of this proposal will be determined following the consultation.
New CCA class
A new class of depreciable property for CCA purposes would be introduced. Expenditures that are currently added to CEC (at a 75-per-cent inclusion rate) would be included in the new CCA class at a 100-per-cent inclusion rate. Because of this increased expenditure recognition, the new class would have a 5-per-cent annual depreciation rate (instead of 7 per cent of 75 per cent of eligible capital expenditures). To retain the simplification objective, the existing CCA rules would generally apply, including rules relating to recapture, capital gains and depreciation (e.g., the “half-year rule”).
The definition of “property” for income tax purposes is broad and includes, for example, a right of any kind whatever. As a result, most, but not all, eligible capital expenditures and eligible capital receipts relate to acquisitions or dispositions of specific property and consequently would result in an adjustment to the balance of the new CCA class when the specific property is acquired or disposed of. These amounts would also be relevant in the calculation of recapture and gains for the specific property.
Special rules would apply in respect of goodwill and in respect of expenditures and receipts that do not relate to a specific property of the business and that would be eligible capital expenditures or eligible capital receipts under the ECP regime. Such expenditures and receipts would be accounted for by adjusting the capital cost of the goodwill of the business. Every business would be considered to have goodwill associated with it, even if there had not been an expenditure to acquire goodwill. An expenditure that did not relate to property would increase the capital cost of the goodwill of the business and, consequently, the balance of the new CCA class.
A receipt that did not relate to a specific property would reduce the capital cost of the goodwill of the business and, consequently, the balance of the new CCA class, by the lesser of the capital cost of the goodwill (which could be nil) and the amount of the receipt. If the amount of the receipt exceeded the capital cost of the goodwill, the excess would be a capital gain. Previously deducted CCA would be recaptured to the extent that the amount of the receipt exceeds the balance of the new CCA class.
Under the proposal, CEC pool balances would be calculated and transferred to the new CCA class as of an implementation date. The opening balance of the new CCA class in respect of a business would be equal to the balance at that time of the existing CEC pool for that business. For the first ten years, the depreciation rate for the new CCA class would be 7 per cent in respect of expenditures incurred before the implementation of the new rules.
Some receipts received after the time at which the new rules are implemented could relate to property acquired, or expenditures otherwise made, before that time. In this regard, certain qualifying receipts would reduce the balance of the new CCA class at a 75-per-cent rate. Receipts that qualify for the reduced rate would generally be receipts from the disposition of property the cost of which was included in the taxpayer’s CEC and receipts that do not represent the proceeds of disposition of property. The total amount of such qualifying receipts, for which only 75 per cent of the receipt would reduce the new CCA class, would generally equal the amount that could have been received under the ECP regime before triggering an ECP gain. This rule would ensure that receipts do not result in excess recapture when applied to reduce the balance of the new CCA class.
Special rules to simplify the transition for small businesses will be considered as part of the consultation process.
International Tax Measures
The Canadian tax system contains rules that protect the tax base by preventing taxpayers from shifting certain Canadian-source income to no- or low-tax jurisdictions. Under these rules, such income earned by a controlled foreign affiliate of a taxpayer resident in Canada is considered foreign accrual property income (FAPI) and is taxable in the hands of the Canadian taxpayer on an accrual basis.
A specific anti-avoidance rule in the FAPI regime is intended to prevent Canadian taxpayers, e.g., financial institutions, from shifting income from the insurance of Canadian risks (i.e., risks in respect of persons resident in Canada, property situated in Canada or businesses carried on in Canada) offshore. This rule provides that income from the insurance of Canadian risks is FAPI where 10 per cent or more of the gross premium income (net of reinsurance ceded) of a foreign affiliate of the Canadian taxpayer in respect of all risks insured by the affiliate is premium income from Canadian risks. However, some taxpayers have entered into sophisticated tax-planning arrangements (sometimes referred to as “insurance swaps”) designed to circumvent this rule. These arrangements generally involve transferring Canadian risks, originally insured in Canada, to a wholly owned foreign affiliate of the taxpayer. The Canadian risks are then exchanged with a third party for foreign risks that were originally insured outside of Canada, while at the same time ensuring that the affiliate’s overall risk profile and economic returns are essentially the same as they would have been had the affiliate not entered into the exchange.
The Government is challenging these arrangements where appropriate under existing provisions of the Income Tax Act, including under the general anti-avoidance rule. However, as such challenges can be both time-consuming and costly, specific legislative action is being undertaken to clarify that these arrangements give rise to FAPI.
Budget 2014 proposes to amend the existing anti-avoidance rule in the FAPI regime relating to the insurance of Canadian risks. In particular, it will be clarified that the rule applies where:
- taking into consideration one or more agreements or arrangements entered into by the foreign affiliate, or by a person or partnership that does not deal at arm’s length with the affiliate, the affiliate’s risk of loss or opportunity for gain or profit in respect of one or more foreign risks can – or could if the affiliate had entered into the agreements or arrangements directly – reasonably be considered to be determined by reference to the returns from one or more other risks (the tracked risks) that are insured by other parties; and
- at least 10 per cent of the tracked risks are Canadian risks.
Where the anti-avoidance rule applies, the affiliate’s income from the insurance of the foreign risks and any income from a connected agreement or arrangement will be included in computing its FAPI.
This measure will apply to taxation years of taxpayers that begin on or after Budget Day.
Offshore Regulated Banks
The foreign accrual property income regime generally requires that income from property earned by, and income from certain businesses carried on by, a controlled foreign affiliate of a taxpayer resident in Canada be included in the taxpayer’s income on an accrual basis. Income from an investment business carried on by a foreign affiliate of a taxpayer is included in the affiliate’s foreign accrual property income. An investment business is generally defined as a business the principal purpose of which is to derive income from property. Most financial services businesses would be considered investment businesses but for certain exceptions in the definition of investment business.
One of the exceptions (the regulated foreign financial institution exception) is for a business carried on by an affiliate as a foreign bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities or commodities, the activities of which are regulated under the laws of the country in which the business is principally carried on or another relevant foreign jurisdiction. The purpose of the regulated foreign financial institution exception is to treat certain bona fide financial services businesses carried on by foreign affiliates as active businesses rather than as investment businesses.
Certain Canadian taxpayers that are not financial institutions purport to qualify for the regulated foreign financial institution exception (and thus avoid Canadian tax) by establishing foreign affiliates and electing to subject those affiliates to regulation under foreign banking and financial laws. However, the main purpose of these affiliates is often to engage in proprietary activities – that is, to invest or trade in securities on their own account – and not to facilitate financial transactions for customers. It is not intended that the exception be satisfied in these circumstances.
Depending on the particular facts, the Government can challenge arrangements on the basis that they do not qualify for the regulated foreign financial institution exception. However, as any such challenge could be both time consuming and costly, Budget 2014 proposes to address this concern by adding new conditions for qualifying under the regulated foreign financial institution exception. The exception will be available where the following conditions are satisfied:
- The relevant taxpayer (i.e., the Canadian taxpayer of which the foreign corporation is a foreign affiliate) is a regulated Canadian financial institution (defined for this purpose to mean a Schedule I bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities or commodities that is resident in Canada, and carries on a business the activities of which are supervised by the Superintendent of Financial Institutions or a similar provincial regulator), a subsidiary wholly-owned corporation of such an institution or a corporation that wholly owns such an institution (and is also subject to regulation).
- More than 50 per cent of the total taxable capital employed in Canada (as defined in Part I.3 of the Income Tax Act) of the taxpayer and all related Canadian corporations is attributable to taxable capital employed in Canada of regulated Canadian financial institutions. Certain regulated Canadian financial institutions that have (or that are deemed under an applicable federal statute to have) equity of at least $2 billion will be deemed to satisfy this second condition. Subsidiary wholly-owned corporations of such institutions or corporations that wholly own such institutions will also be deemed to satisfy this condition.
In effect, the status of a Canadian taxpayer will be used as a proxy for whether a foreign affiliate of the taxpayer may be considered to carry on a bona fide regulated financial services business. However, satisfying these new conditions will not guarantee that income of a foreign affiliate of a taxpayer from proprietary activities will be considered income from an active business. For this to result, the affiliate must carry on a regulated foreign financial services business, as required under the existing law, and the proprietary activities must comprise part of that business.
The Government will continue to monitor developments in this area to determine whether any further action is required to ensure that the regulated foreign financial institution exception, as modified by this proposal, is not used by taxpayers to obtain unintended tax advantages.
This measure will apply to taxation years of taxpayers that begin after 2014. To ensure that the measure is appropriately targeted, stakeholders are invited to submit comments concerning its scope within 60 days after Budget Day.
Both the thin capitalization rules and Part XIII of the Income Tax Act govern the tax treatment of certain interest payments made by taxpayers to non-resident persons.
The thin capitalization rules limit the deductibility of interest expense of a corporation or a trust in circumstances where the amount of debt owing to certain non-residents exceeds a 1.5-to-1 debt-to-equity ratio. These rules apply, in the case of a corporation, to debts owing to a specified shareholder (a person that, either alone or together with persons with which the person is not dealing at arm’s length, owns shares representing at least 25 per cent of the votes or value of the corporation) that is not resident in Canada and to debts owing to any other non-resident that does not deal at arm’s length with a specified shareholder. In the case of a trust, the rules apply to debts owing to a specified beneficiary that is not resident in Canada and to debts owing to any other non-resident that does not deal at arm’s length with a specified beneficiary.
Part XIII generally applies a 25-per-cent withholding tax, subject to reduction under a tax treaty, on interest paid or credited by a Canadian-resident person (or a non-resident person if the interest is deductible in computing the non-resident person’s taxable income earned in Canada) to a non-arm’s length non-resident person.
Some taxpayers have sought to avoid either or both the thin capitalization rules (including an existing anti-avoidance provision in those rules) and Part XIII withholding tax through the use of so-called “back-to-back loan” arrangements. These arrangements generally involve interposing a third party (e.g., a foreign bank) between two related taxpayers (such as a foreign parent corporation and its Canadian subsidiary) in an attempt to avoid the application of rules that would apply if a loan were made, and interest paid on the loan, directly between the two taxpayers.
Such transactions may be subject to challenge under existing anti-avoidance rules. However, Budget 2014 proposes to address back-to-back loan arrangements by adding a specific anti-avoidance rule in respect of withholding tax on interest payments, and by amending the existing anti-avoidance provision in the thin capitalization rules. Specifically, a back-to-back loan arrangement will exist where, as a result of a transaction or series of transactions, the following conditions are met:
- a taxpayer has an outstanding interest-bearing obligation owing to a lender (the intermediary); and
- the intermediary or any person that does not deal at arm’s length with the intermediary
- is pledged a property by a non-resident person as security in respect of the obligation (a guarantee, in and of itself, will not be considered a pledge of property),
- is indebted to a non-resident person under a debt for which recourse is limited, or
- receives a loan from a non-resident person on condition that a loan be made to the taxpayer.
Where a back-to-back loan arrangement exists, appropriate amounts in respect of the obligation, and interest paid or payable thereon, will be deemed to be owing by the taxpayer to the non-resident person for purposes of the thin capitalization rules. The taxpayer will, in general terms, be deemed to owe an amount to the non-resident person (the deemed amount owing) that is equal to the lesser of:
- the outstanding amount of the obligation owing to the intermediary; and
- the fair market value of the pledged property or the outstanding amount of the debt for which recourse is limited or the loan made on condition, as the case may be.
The taxpayer will, in general terms, also be deemed to have an amount of interest paid or payable to the non-resident person that is equal to the proportion of the interest paid or payable by the taxpayer on the obligation owing to the intermediary that the deemed amount owing is of that obligation.
Part XIII withholding tax will generally apply in respect of a back-to-back loan arrangement to the extent that it would otherwise be avoided by virtue of the arrangement. The non-resident person and the taxpayer will be jointly and severally (or solidarily) liable for the additional Part XIII withholding tax.
This measure will apply (i) in respect of the thin capitalization rules, to taxation years that begin after 2014, and (ii) in respect of Part XIII withholding tax, to amounts paid or credited after 2014.
Consultation on Tax Planning by Multinational Enterprises
Canada’s international tax rules are constantly reviewed as part of the Government’s ongoing efforts to protect the Canadian tax base and ensure tax fairness. The Government is committed to continuing to improve the integrity of its international tax rules.
Other countries share Canada’s recognition of the importance of an effective international tax system. The Organisation for Economic Co-operation and Development (OECD), of which Canada is a member, has launched a project aimed at addressing “base erosion and profit shifting” (BEPS) strategies used by multinational enterprises (MNEs). This project reflects growing concerns that governments are losing substantial corporate tax revenue because of international tax planning that exploits the interaction between domestic and international tax rules to shift profits away from the countries where income-producing activities take place.
Members of the OECD and the G-20 are working together on the issues identified in the BEPS Action Plan, which was released by the OECD in July 2013. The Government is actively involved in the work of the OECD and the G-20.
Input from stakeholders on issues related to international tax planning by MNEs – and on other issues, such as ensuring the effective collection of sales tax on e-commerce sales by foreign-based vendors – would help the Government to set its priorities and inform Canada’s participation in international discussions. The Government is interested in obtaining views on how to ensure fairness among different categories of taxpayers (e.g., MNEs, small businesses and individuals) and how to better protect the Canadian tax base, while maintaining an internationally competitive tax system that is attractive for investment.
Recognizing the Government’s commitment to ensuring tax fairness and protecting the Canadian tax base, the Government is seeking the views of stakeholders as set out below. In addition, the Government is conducting a consultation on a proposed rule to prevent treaty shopping – more information on this consultation and how to participate is provided in the section “Consultation on Treaty Shopping”.
The Government invites input on the following questions:
- What are the impacts of international tax planning by MNEs on other participants in the Canadian economy?
- Which of the international corporate income tax and sales tax issues identified in the BEPS Action Plan should be considered the highest priorities for examination and potential action by the Government?
- Are there other corporate income tax or sales tax issues related to improving international tax integrity that should be of concern to the Government?
- What considerations should guide the Government in determining the appropriate approach to take in responding to the issues identified – either in general or with respect to particular issues?
- Would concerns about maintaining Canada’s competitive tax system be alleviated by coordinated multilateral implementation of base protection measures?
In addition, the Government is inviting input from stakeholders on what actions the Government should take to ensure the effective collection of sales tax on e-commerce sales to residents of Canada by foreign-based vendors. For example, should the Government adopt the approach taken in some other countries (such as in South Africa and the European Union) and require foreign-based vendors to register with the Canada Revenue Agency and charge the Goods and Services Tax/Harmonized Sales Tax (GST/HST) if they make e-commerce sales to residents of Canada?
The Government invites interested parties to submit comments within 120 days after Budget Day. Please send your comments to firstname.lastname@example.org or to:
International Tax Consultation
Tax Policy Branch
Department of Finance
140 O’Connor Street
Parties making a submission are asked to indicate whether they consent to have the submission posted on the Department of Finance website; and, if so, the name of the individual or the organization which should be identified on the website as having made the submission. Submissions which are to be posted should preferably be provided electronically in PDF format or in plain text. The Department will not post submissions that do not clearly indicate consent to posting.
Consultation on Treaty Shopping
Budget 2013 set out the Government’s concerns with the abuse of Canada’s tax treaties through “treaty shopping”. This term is commonly used to refer to arrangements under which a person not entitled to the benefits of a particular tax treaty with Canada uses an entity that is a resident of a state with which Canada has concluded a tax treaty to obtain Canadian tax benefits. Budget 2013 stressed the importance of developing safeguards to ensure that taxpayers cannot make improper use of Canada’s tax treaties and announced consultations to seek the views of interested parties regarding possible approaches to address treaty shopping. A consultation paper was released on August 12, 2013 to serve as the basis for a discussion aimed at reaching a workable solution to this issue. Stakeholders had until December 13, 2013 to provide comments.
Since Budget 2013, international developments have confirmed that many of Canada’s main economic partners also have concerns with treaty shopping. In July 2013, the Organisation for Economic Co-operation and Development (OECD) issued an Action Plan to address the issue of aggressive tax planning by multinational enterprises, referred to as “base erosion and profit shifting” (BEPS). One of the issues identified for action is the abuse of tax treaties. The Action Plan calls for the development of “model treaty provisions and recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances”. Canada is an active participant in the OECD work on the BEPS project. The OECD is expected to issue its recommendations in this regard in September 2014. These recommendations will be relevant in developing a Canadian approach to address treaty shopping.
Different approaches can be used to address treaty shopping. The consultation paper noted that most countries that have addressed the issue in their tax treaties have used a general rule, i.e., a rule that denies a tax treaty benefit if one of the main purposes for entering into a transaction is to obtain the benefit. The consultation paper also noted that some countries (e.g., the United States and Japan) address the issue with relatively more specific rules governing limitations on benefits.
As stated in the consultation paper, in the Canadian context, there are several factors that support the use of a general approach based on a main purpose provision. Canada has already included such a rule in several of its tax treaties, as have other countries in hundreds of tax treaties worldwide. Thus, a main purpose rule is an approach that is relatively familiar to Canadian taxpayers, tax professionals and Canada’s tax treaty partners.
The Government received several comments from stakeholders on the consultation paper, addressing the respective merits of a general approach and of a more specific approach, and the advantages and disadvantages of a domestic law approach, a treaty-based approach, or a combination of both.
Stakeholders expressed concerns that a general approach might produce less certain outcomes in some cases (compared to a more specific approach). Several stakeholders indicated a preference for the adoption of a more specific rule that would, they suggest, provide greater certainty for taxpayers. The example cited in this regard is the limitation on benefits provision included in U.S. tax treaties (such as Article XXIX A of the Canada-U.S. tax treaty). While the U.S. limitation on benefits provision arguably provides a high level of certainty, it does not capture, at least on its own, all forms of treaty shopping. In particular, it does not prevent treaty shopping arrangements that use certain entities, such as publicly-traded corporations or trusts. A general approach may serve to prevent a wider range of treaty shopping arrangements.
Several stakeholders expressed a preference for a solution to treaty shopping that would require the re-negotiation of Canada’s tax treaties. This is based, in large part, on the view that a domestic law response to treaty shopping would alter the balance of compromises reached in the negotiation of tax treaties. However, the absence of an anti-treaty shopping rule in a tax treaty does not mean that there is an implicit obligation to provide benefits in respect of abusive arrangements. As discussed in the consultation paper, domestic law provisions to prevent tax treaty abuse are not considered by the OECD or the United Nations to be in conflict with tax treaty obligations and a number of other countries have enacted legislation to that effect.
In addition, some stakeholders have asserted that only a few of Canada’s tax treaties would need to be re-negotiated in order to significantly curtail treaty shopping. As stated in the consultation paper, even if it were possible to re-negotiate – within a reasonable period of time – Canada’s treaties with certain countries where conduit entities are common, other conduit countries may emerge. Accordingly, a treaty-based approach would not be as effective as a domestic law rule.
The Government invites comments from interested parties on a proposed rule to prevent treaty shopping. The rule would address arrangements identified as an improper use of Canada’s tax treaties in the consultation paper and, therefore, protect the integrity of Canada’s tax treaties. The rule would use a general approach focussed on avoidance transactions and, in order to provide more certainty and predictability for taxpayers, building on comments received on the 2013 consultation paper, the rule would contain specific provisions setting out the ambit of its application. The approach would ensure that treaty benefits are provided with respect to ordinary commercial transactions and that, if the rule applies, the benefit that would be reasonable under the circumstances would be provided. Interested parties are requested to provide comments within 60 days after Budget Day.
In order to further advance the discussion, set out below are the main elements of a proposed rule to address treaty shopping:
- Main purpose provision: subject to the relieving provision, a benefit would not be provided under a tax treaty to a person in respect of an amount of income, profit or gain (relevant treaty income) if it is reasonable to conclude that one of the main purposes for undertaking a transaction, or a transaction that is part of a series of transactions or events, that results in the benefit was for the person to obtain the benefit.
- Conduit presumption: it would be presumed, in the absence of proof to the contrary, that one of the main purposes for undertaking a transaction that results in a benefit under a tax treaty (or that is part of a series of transactions or events that results in the benefit) was for a person to obtain the benefit if the relevant treaty income is primarily used to pay, distribute or otherwise transfer, directly or indirectly, at any time or in any form, an amount to another person or persons that would not have been entitled to an equivalent or more favourable benefit had the other person or persons received the relevant treaty income directly.
- Safe harbour presumption: subject to the conduit presumption, it would be presumed, in the absence of proof to the contrary, that none of the main purposes for undertaking a transaction was for a person to obtain a benefit under a tax treaty in respect of relevant treaty income if:
- the person (or a related person) carries on an active business (other than managing investments) in the state with which Canada has concluded the tax treaty and, where the relevant treaty income is derived from a related person in Canada, the active business is substantial compared to the activity carried on in Canada giving rise to the relevant treaty income;
- the person is not controlled, directly or indirectly in any manner whatever, by another person or persons that would not have been entitled to an equivalent or more favourable benefit had the other person or persons received the relevant treaty income directly; or
- the person is a corporation or a trust the shares or units of which are regularly traded on a recognized stock exchange.
- Relieving provision: If the main purpose provision applies in respect of a benefit under a tax treaty, the benefit is to be provided, in whole or in part, to the extent that it is reasonable having regard to all the circumstances.
Even if a transaction results in a tax treaty benefit for a taxpayer, it does not necessarily follow that one of the main purposes for undertaking the transaction was to obtain the benefit. One of the objectives of tax treaties is to encourage trade and investment and, therefore, it is expected that tax treaty benefits will generally be a relevant consideration in the decision of a resident of a state with which Canada has a tax treaty to invest in Canada. The proposed rule would not apply in respect of an ordinary commercial transaction solely because obtaining a tax treaty benefit was one of the considerations for making an investment.
The rule, if adopted, could be included in the Income Tax Conventions Interpretation Act so that it would apply in respect of all of Canada’s tax treaties. The rule would apply to taxation years that commence after the enactment of the rule into Canadian law. The Government also requests comments as to whether transitional relief would be appropriate.
Comments are invited on the following examples in relation to the intended application of the proposed rule to a number of arrangements.
Example 1 – Assignment of income
Aco, a company that is a resident of State A, owns intellectual property used by its subsidiary, Canco, a corporation that is a resident of Canada. State A does not have a tax treaty with Canada and, therefore, payments of royalties by Canco to Aco would be subject to a withholding tax rate of 25 per cent in Canada. Aco incorporates Bco, an intermediary corporation in State B, a state with which Canada has a tax treaty that provides for a nil rate of withholding tax in Canada on royalties paid to a resident of State B. Aco assigns to Bco the right to receive royalty payments from Canco. In exchange for the rights granted under the assignment agreement, Bco agrees to remit 80 per cent of the royalties received to Aco within 30 days. Bco pays tax in State B on its net amount of royalty income. State B does not impose a withholding tax on the payment of royalties made to non-residents.
The royalties received by Bco from Canco are primarily used to pay an amount to Aco and Aco would not have been entitled to a tax treaty benefit had it received the royalties directly from Canco. As a result, under the conduit presumption it would be presumed, in the absence of proof to the contrary, that one of the main purposes for the assignment of the royalties is for Bco to obtain the benefit of the withholding tax reduction under the tax treaty between Canada and State B. Consequently, the main purpose provision would apply to deny the benefits under the tax treaty between State B and Canada in respect of the royalty payments. Depending on all the circumstances, it might be possible that, by virtue of the relieving provision, Bco would be allowed the benefits of the tax treaty in respect of the portion of the royalty payments that is not used by Bco to pay an amount to Aco.
If, instead, only 45 per cent of the royalties received by Bco from Canco were used to pay an amount to Aco, the conduit presumption would not apply to create a presumption as to the main purpose of the transaction, and it would be a question of fact whether the main purpose provision applied.
Example 2 – Payment of dividends
The shares of Canco, a Canadian resident corporation, are owned by Bco, a corporation that is a resident of State B. The sole investment of Bco consists of the shares of Canco. Bco was established in State B by its two corporate shareholders, Aco and Cco, residents of State A and State C respectively. Canada has a tax treaty with State B. Canada also has tax treaties with States A and C, which provide a higher rate of withholding tax on dividends than the rate under the tax treaty with State B. Under the terms of a shareholders agreement, Bco is required to distribute the entire dividend received from Canco to Aco and Cco almost immediately. Under the domestic laws of State A and State C, dividends received from foreign corporations are subject to tax.
Canco pays a dividend to Bco and Bco uses the dividend to pay a dividend to Aco and Cco. Aco and Cco would not have been entitled to an equivalent or more favourable tax treaty benefit had they received the dividend directly from Canco. As a result, under the conduit presumption it would be presumed, in the absence of proof to the contrary, that one of the main purposes for the establishment of Bco is to obtain the benefit of the withholding tax reduction under the tax treaty between Canada and State B and, subject to the relieving provision, the benefit would be denied.
In this example, the benefits that would have applied if Bco had not been established may be provided under the relief provision to the extent it is reasonable having regard to all the circumstances. For instance, if Aco and Cco are taxable in State A and State C respectively on the dividend they received from Bco, it may be reasonable in the circumstances to provide the benefits that Aco and Cco would have been entitled to under the tax treaty between Canada and States A and C respectively had the dividend they received been paid directly from Canco.
Example 3 – Change of residence
Aco, a corporation that is a resident of State A, owns shares of a corporation that is a resident of Canada and is contemplating their sale. Such a sale would trigger a capital gain that would be taxable in Canada. Canada does not have a tax treaty with State A. Shortly before the sale, Aco is continued into, and becomes a resident of, State B, a state that does not impose tax on capital gains. The tax treaty between Canada and State B provides an exemption from tax for capital gains on shares of a Canadian corporation disposed by residents of State B. Aco sells the shares and retains the proceeds of disposition. Aco claims the capital gains exemption available under the tax treaty.
In this example, since the proceeds of disposition remain with Aco, the conduit presumption would not apply. However, the main purpose provision would apply because, based on these facts and in the absence of other circumstances, it is reasonable to conclude that one of the main purposes of the continuation of Aco into State B was to obtain the benefit of the capital gains exemption provided under the tax treaty.
If, instead of becoming a resident of State B shortly before the sale, Aco was already a resident of State B at the time of the initial acquisition of the shares of the Canadian corporation, it would need to be determined whether is it reasonable to conclude that one of the main purposes for the establishment of Aco as a resident of State B was to obtain the capital gains exemption under the tax treaty between Canada and State B. This is a question of fact and all the relevant circumstances would need to be considered, including, for example, the lapse of time between the establishment of Aco in State B and the realization of the capital gains, and any other intervening events.
Example 4 – Bona fide investments
B-trust is a widely held trust that is a resident of State B, a state with which Canada has a tax treaty. B-trust pursues a strategy of managing a diversified portfolio of investments in the international market. Through recent investments in Canada, B-trust currently holds 10 per cent of its portfolio in shares of Canadian corporations, in respect of which it receives annual dividends. Under the tax treaty between Canada and State B, the withholding tax rate on dividends is reduced to 15 per cent.
Investors in B-trust seek to maximize the return on their investments and rely on the solid reputation of B-trust’s management to make optimal investment decisions. These investment decisions take into account the existence of tax benefits provided under State B’s extensive tax treaty network. Several investors in B-trust are residents of State B, but a majority of investors are residents of states with which Canada does not have a tax treaty. B-trust annually distributes all of its income to its investors.
In this example, because dividends received by B-trust from Canadian corporations are primarily used to distribute income to persons that are not entitled to tax treaty benefits, it would be presumed under the conduit presumption that one of the main purposes for B-trust to undertake its investments in Canadian corporations and for third state investors to undertake their investments in B-trust, either alone or as part of a series of transactions, was to obtain the benefit under the tax treaty between Canada and State B.
To rebut this presumption, it would have to be clearly established that none of the main purposes for undertaking these investments, either alone or as part of a series of transactions, was to obtain the benefit of the tax treaty between Canada and State B. Investors’ decisions to invest in B-trust are not driven by any particular investments made by B-trust, and B-trust’s investment strategy is not driven by the tax position of its investors. In this example, and in the absence of other circumstances, there would be sufficient facts to rebut the above presumptions. It follows that the main purpose provision would not apply to deny the tax treaty benefit.
Example 5 – Safe harbour (active business)
Aco is a corporation that is a resident of State A, a state with which Canada does not have a tax treaty. Aco owns all the shares of Finco, a corporation that is a resident of State B. Canada has a tax treaty with State B. Finco acts as a financing corporation for Aco’s wholly owned subsidiaries, including Canco (a resident of Canada) and Bco (a resident of State B). Bco carries on an active business in State B and that business is substantial in comparison to the activities carried on by Canco. Aco’s other subsidiaries are residents of other states with which Canada has tax treaties which provide tax treaty benefits on payments of interest that are equivalent to those provided under the tax treaty between Canada and State B. Finco receives payments of interest from Aco subsidiaries and reinvests its profits.
In this example, since the interest payments received by Finco from Canco are primarily used to pay an amount to persons that would have been entitled to an equivalent benefit had they received the interest payment directly from Canco, the conduit presumption would not apply.
The safe harbour presumption describes categories of persons that, unless they are used in conduit arrangements, are generally considered not to be engaged in treaty shopping in the course of their normal operations. Since Bco carries on a substantial active business in State B and is related to Finco, it would be presumed under the safe harbour presumption, in the absence of proof to the contrary, that none of the main purposes for Finco to undertake the investment in Canada was for Finco to obtain the benefits of the tax treaty between Canada and State B.
To rebut this presumption, it would have to be clearly established that one of the main purposes for undertaking the investment in Canada was to obtain the benefits of the tax treaty. In this example and in the absence of other circumstances, the above presumption would not be rebutted and the main purpose provision would not apply to deny the tax treaty benefit.
Update on the Automatic Exchange of Information for Tax Purposes
The exchange of tax information between countries is an important tool for implementing the Government’s commitment to combat tax evasion in order to protect the revenue base and ensure public confidence in the fairness and equity of the tax system.
Provisions to facilitate the exchange of tax information are a long-standing feature of Canada’s tax treaties. Canada’s exchange of information relationships were made more effective in Budget 2007 when the Government announced that all future tax treaties and updates to existing treaties would include the current Organisation for Economic Co-operation and Development (OECD) standard for information exchange and that the Government would be pursuing tax information exchange agreements that include comprehensive exchange of information provisions.
In order to ensure that jurisdictions that have made commitments to exchange information in accordance with the current OECD standard actually do so, the Global Forum on Transparency and Exchange of Information for Tax Purposes has been conducting comprehensive peer reviews of the information exchange practices of its 121 member jurisdictions since 2009. Canada, which was subject to a peer review in 2010-2011, has been determined to be fully compliant with the OECD standard. Canada supports the work of the Global Forum and recognizes the importance of its peer review process to promote best practices and monitor the effectiveness of agreements to exchange information for tax purposes.
In 2010, the U.S. enacted provisions known as the Foreign Account Tax Compliance Act (FATCA). FATCA would require non-U.S. financial institutions to identify accounts held by U.S. persons, which include U.S. citizens living abroad, and report to the U.S. Internal Revenue Service (IRS) information in respect of these accounts. FATCA has raised a number of concerns in Canada—among both U.S. citizens living in Canada and Canadian financial institutions. Without an intergovernmental agreement between Canada and the U.S., Canadian financial institutions and U.S. persons holding financial accounts in Canada would be required to comply with FATCA regardless, starting July 1, 2014 as per the FATCA legislation enacted by the U.S. unilaterally.
In response to these concerns, the Government of Canada successfully negotiated an intergovernmental agreement with the U.S. which contains significant exemptions and other relief. Under the approach in the Canada-U.S. agreement, which was signed on February 5, 2014, Canadian financial institutions will report to the Canada Revenue Agency (CRA) information in respect of U.S. persons that will be transmitted by the CRA to the IRS under the Canada-U.S. tax treaty and be subject to its confidentiality safeguards. A variety of registered accounts (including Registered Retirement Savings Plans, Registered Retirement Income Funds, Registered Education Savings Plans, Registered Disability Savings Plans, and Tax-Free Savings Accounts) and smaller deposit-taking institutions, such as credit unions, with assets of less than $175 million will be exempt from reporting. Meanwhile, the CRA will receive information from the U.S. in respect of Canadian resident taxpayers that hold accounts at U.S. financial institutions, which will assist Canadian tax authorities in administering and enforcing compliance with Canadian tax laws.
While the Canada-U.S. tax treaty contains a provision that allows a country to collect the taxes imposed by the other country, the CRA will not collect the U.S. tax liability of a Canadian citizen if the individual was a Canadian citizen at the time the liability arose (whether or not the individual was also a U.S. citizen at that time).
This new reporting regime will come into effect starting in July 2014, with Canada and the U.S. beginning to receive enhanced tax information from each other in 2015. A number of other countries have negotiated or are negotiating similar agreements with the U.S.
The intergovernmental agreement is consistent with Canada’s support for recent G-8 and G-20 commitments to multilateral automatic exchange of information. In September 2013, G-20 Leaders committed to the automatic exchange of information as the new global standard and endorsed an OECD proposal to develop a global model for the automatic exchange of tax information.
Update on Tax Treaties and Tax Information Exchange Agreements
The Government continues to actively negotiate and conclude tax treaties to reduce tax barriers to international trade and investment, combat international tax evasion and aggressive tax avoidance, strengthen Canada’s bilateral economic relationships, and create enhanced opportunities for Canadian businesses abroad. Since the tabling of Economic Action Plan 2013 and as of February 1, 2014:
- New tax treaties with Hong Kong, Poland and Serbia have come into force.
- Protocols to update tax treaties with Austria, Barbados, France and Luxembourg have come into force.
- An agreement concerning the exchange of information provisions of the Canada-Switzerland tax treaty has come into force.
- The Convention on Mutual Administrative Assistance in Tax Matters has been ratified by Canada.
- Tax information exchange agreements (TIEAs) with Liechtenstein and Panama have come into force.
- TIEAs with Bahrain, the British Virgin Islands and Brunei have been signed.
Canada now has 92 tax treaties in force, 3 tax treaties signed but not yet in force, and 8 tax treaties and protocols under negotiation.
The Government is committed to combating international tax evasion and to ensuring tax fairness by implementing the standard developed by the OECD for the effective exchange of tax information in tax treaties and TIEAs. Since 2007, the Government has brought into force 18 TIEAs, signed 4 TIEAs that are not yet in force and is negotiating TIEAs with 8 other jurisdictions.
Sales and Excise Tax Measures
Improving the Application of the GST/HST to the Health Care Sector
There are two key policies underlying the Goods and Services Tax/Harmonized Sales Tax (GST/HST) treatment of health-related goods and services:
- Basic health care services are exempt from the GST/HST. This means that suppliers of exempt health care services do not charge GST/HST to patients, but they cannot claim input tax credits to recover the GST/HST paid on their inputs.
- Prescription drugs and medical and assistive devices that are specially designed to assist an individual in coping with a chronic disease or illness or a physical disability are generally zero-rated under the GST/HST. This means that suppliers do not charge purchasers GST/HST on these drugs and medical and assistive devices and are entitled to claim input tax credits.
Budget 2014 proposes three changes to improve the application of the GST/HST to certain health-related services and medical and assistive devices to reflect the evolving nature of the health care sector.
Designing Training for Individuals with a Disorder or Disability
A GST/HST exemption is provided for training that is specially designed to assist individuals with a disorder or disability in coping with the effects of the disorder or disability or to alleviate or eliminate those effects. In many instances, an individualized training plan is prepared that sets the specific needs and training objectives for the individual. The current GST/HST exemption for specialized training does not cover the services of designing such a training plan.
Budget 2014 proposes to expand the exemption for training that is specially designed to assist individuals with a disorder or disability to also exempt the services of designing such training. The exemption will apply to the initial development and design of the plan and any subsequent adjustments.
In keeping with the conditions for specially-designed training to be exempt, it is proposed that the service of designing such training be exempt if:
- the design service is supplied by a government or the cost of the design service is fully or partially subsidized under a government program; or
- the design service is certified in writing by a recognized health care professional whose services are GST/HST exempt, in the course of a professional-client relationship with an individual coping with a disorder or disability, as being for training that is an appropriate means to assist the individual in coping with the effects of the disorder or disability or to alleviate or eliminate those effects.
This measure will apply to supplies made after Budget Day.
Acupuncturists’ and Naturopathic Doctors’ Services
Under the GST/HST, services covered under a provincial public health care plan are exempt in that province. Exemptions are also provided for services rendered to individuals by physicians, dentists and nurses and certain other health care practitioners, such as optometrists and midwives. The list of other health care practitioners whose services are exempt is set out in the GST/HST legislation.
The professional services of acupuncturists and naturopathic doctors are now regulated as a health profession in at least five provinces. Accordingly, Budget 2014 proposes that acupuncturists and naturopathic doctors be added to the list of health care practitioners whose professional services rendered to individuals are exempt from the GST/HST.
This measure will apply to supplies made after Budget Day.
Eyewear Specially Designed to Electronically Enhance the Vision of Individuals with Vision Impairment
Medical and assistive devices that are specially designed to assist an individual in coping with a chronic disease or illness or a physical disability are generally zero-rated under the GST/HST. The medical and assistive devices eligible for zero-rating are listed in the GST/HST legislation, and the list includes corrective eyeglasses and contact lenses sold on the written order of a person authorized under provincial law to issue such an order.
Recent advances in electronic technology have allowed for the development of corrective eyewear that is specially designed to electronically enhance the vision of individuals with vision impairment, such as macular degeneration. This new electronic eyewear is not eyeglasses or contact lenses and therefore does not qualify under the existing zero-rating provision for corrective eyeglasses or contact lenses, although it serves the same purpose of correcting a defect of vision.
Budget 2014 proposes to add eyewear specially designed to treat or correct a defect of vision by electronic means, if supplied on the written order of a physician or optometrist for use by a consumer named in the order, to the list of GST/HST zero-rated medical and assistive devices.
This measure will apply to supplies made after Budget Day.
GST/HST Election for Closely Related Persons
Under the Goods and Services Tax/Harmonized Sales Tax (GST/HST), a group relief election, generally referred to as the “nil consideration election”, is available allowing registrants that are resident in Canada, engaged exclusively in commercial activities and members of a closely related group to not account for tax on certain transactions between them. A closely related group is generally a group of corporations or partnerships with a degree of common ownership of at least 90 per cent.
Currently, the election may not be available to a new member of a closely related group at the time of initial acquisition of assets from another member of that group if, for example, the new member does not have other property before making the election. It would be appropriate for the group relief election to apply under these circumstances. To address this issue, Budget 2014 proposes to extend, effective January 1, 2015, the availability of the group relief to new members that have not yet acquired any property, provided that the new members continue as going concerns engaged exclusively in commercial activities.
It is also proposed that a filing requirement in relation to the group relief election be introduced. Effective January 1, 2015, parties to a new election will be required to file that election in a prescribed manner with the Canada Revenue Agency. Generally, the election will have to be filed by the first date on which any of the parties to the election is required to file a return for the period in which the election becomes effective. Parties to an election made before January 1, 2015 that is in effect on January 1, 2015 will also be required to comply with this filing requirement, but will have until January 1, 2016 to do so.
In addition, Budget 2014 proposes that parties to an existing or new group relief election (or persons that conduct themselves as if such election were in effect) be subject to a joint and several (or solidary) liability provision with respect to the GST/HST liability that may arise in relation to supplies made between them on or after January 1, 2015.
Under the Goods and Services Tax/Harmonized Sales Tax (GST/HST), participants in certain joint ventures are allowed to make an election (a joint venture election) that simplifies the GST/HST accounting obligations in respect of their joint venture activities. The joint venture election simplifies GST/HST accounting obligations by allowing the joint venture participants to elect one person to be responsible for accounting for the GST/HST on the supplies, acquisitions and importations that are made in the course of their joint venture activities.
Currently, the joint venture election is available only if the activities of the joint venture are prescribed by regulation as eligible activities for purposes of the election. This means that the compliance simplification benefits available under the joint venture election are currently not available to certain commercial joint ventures.
In order to allow more commercial joint venture activities and participants access to the GST/HST simplification benefits available under the joint venture election, the Government intends to propose new joint venture election measures, as well as complementary anti-avoidance measures, that will allow the participants in a joint venture to make the joint venture election as long as the activities of the joint venture are exclusively commercial and the participants are engaged exclusively in commercial activities.
To ensure that businesses and other stakeholders who will be affected by these proposed measures have an opportunity to provide input, the Government will release draft legislative proposals later in the year and invite stakeholders to provide their views. This will allow for stakeholder views to be taken into consideration prior to the tabling of the enacting legislation.
Strengthening Compliance with GST/HST Registration
Generally, a business that makes over $30,000 in taxable supplies annually is required to register for Goods and Services Tax/Harmonized Sales Tax (GST/HST) purposes and to collect and remit the GST/HST on its taxable supplies. During the course of their enforcement programs, Canada Revenue Agency (CRA) officials may identify businesses that should be registered, but are not. While efforts are made to ensure that businesses meet their tax obligations, a business that fails to register as required cannot currently be compelled to do so.
In an effort to strengthen GST/HST compliance and help the CRA combat the underground economy, Budget 2014 proposes that the Minister of National Revenue be given the discretionary authority to register and assign a GST/HST registration number where a person fails to comply with the requirement to register, even after having been notified of the requirement to register by the CRA.
The CRA will continue to first contact non-compliant businesses to have them register as required. Only if those attempts are unsuccessful will the CRA issue a formal notification indicating that the person will be registered for GST/HST purposes effective 60 days from the date of the notice.
This measure will help improve the effectiveness of CRA’s GST/HST compliance efforts and level the playing field for those businesses that are complying with the GST/HST requirements.
This measure will apply on Royal Assent to the enacting legislation.
Taxing tobacco products at a sustainable level is an important element of the Government’s health strategy to discourage smoking among Canadians. To ensure that tobacco taxes continue to support the Government’s health goals, Budget 2014 proposes a number of changes to restore the effectiveness of the excise duty on tobacco products.
Rate of Excise Duty on Cigarettes
At present, cigarettes are subject to an excise duty of $0.425 for each five cigarettes or fraction thereof (e.g., $17.00 per carton of 200). The effective rate of excise duty on cigarettes has not changed since 2002. To restore the effectiveness of the excise duty on cigarettes, Budget 2014 proposes to adjust the rate of excise duty on cigarettes to account for inflation since 2002. Specifically, this adjustment will increase the rate of excise duty on cigarettes from $0.425 to $0.52575 for each five cigarettes or fraction thereof (e.g., from $17.00 to $21.03 per 200 cigarettes).
The excise duty rates for other tobacco products will also be adjusted accordingly. Budget 2014 proposes a corresponding increase in the rate of excise duty on tobacco sticks from $0.085 to $0.10515 per stick (e.g., from $17.00 to $21.03 per 200 tobacco sticks), and on manufactured tobacco (e.g., chewing tobacco or fine-cut tobacco for use in roll-your-own cigarettes) from $5.3125 to $6.57188 per 50 grams or fraction thereof (e.g., from $21.25 to $26.29 per 200 grams). The rate of excise duty on cigars is proposed to increase from $18.50 to $22.88559 per 1,000 cigars, and the additional duty on cigars from the greater of $0.067 per cigar and 67 per cent of the sale price or duty-paid value to the greater of $0.08226 per cigar and 82 per cent of the sale price or duty-paid value.
These rate changes will be effective after Budget Day.
Excise Duty Treatment of Tobacco Products in Duty Free Markets
To reduce the availability of low-cost tobacco products and to help support health goals, an excise duty is imposed on all Canadian-made cigarettes, tobacco sticks and manufactured tobacco for sale in domestic and foreign duty free shops, as well as on imports of these tobacco products for sale in Canadian duty free shops or brought into Canada by returning travellers. This duty is known as the “duty free” rate on tobacco products available through duty free markets.
Currently, the “duty free” rates are: $0.374875 for each five cigarettes or fraction thereof, in the case of Canadian-made cigarettes, or $0.075 per cigarette, in the case of imported cigarettes (e.g., $15.00 per 200 cigarettes); $0.074975 per tobacco stick (e.g., $15.00 per 200 tobacco sticks); and $4.685938 per 50 grams or fraction thereof of manufactured tobacco (e.g., $18.74 per 200 grams of manufactured tobacco). These “duty free” rates are lower than the corresponding excise duty rates for the same tobacco products for sale in the domestic market. For instance, a carton of 200 cigarettes for sale in a duty free shop currently receives a $2 excise duty preference compared to the same carton for sale in the domestic market.
To eliminate this preferential treatment, Budget 2014 proposes to increase the “duty free” rate for cigarettes to $0.52575 for each five cigarettes or fraction thereof, in the case of Canadian-manufactured cigarettes, or $0.10515 per cigarette, in the case of imported cigarettes (e.g., $21.03 per 200 cigarettes), for tobacco sticks to $0.10515 per tobacco stick (e.g., $21.03 per 200 tobacco sticks), and for manufactured tobacco to $6.57188 per 50 grams or fraction thereof (e.g., $26.29 per 200 grams of manufactured tobacco). Going forward, changes to these “duty free” rates will be legislatively linked to changes in the excise duty.
These rate changes will be effective after Budget Day.
Indexing Tobacco Taxes to the Consumer Price Index
Going forward, to ensure that tobacco taxes retain their real value in the future, the excise duty rates on tobacco products, including the “duty free” rates, will be indexed to the Consumer Price Index and automatically adjusted accordingly every five years. The first inflationary rate adjustment will be effective December 1, 2019.
Inventory Tax on Cigarettes
Excise duty is imposed on tobacco products manufactured in Canada at the time manufacturers package them and on imported tobacco products at the time of importation. To ensure that the rate changes are applied in a consistent manner to all cigarettes, it is proposed that inventories of cigarettes held by manufacturers, importers, wholesalers and retailers at the end of Budget Day be subject to a per cigarette tax of 2.015 cents. Taxpayers may use any reasonable method for establishing their inventories of these products, including a physical count.
In order to simplify compliance, this inventory tax will not apply to taxpayers holding 30,000 or fewer cigarettes (equivalent to 150 cartons of cigarettes) at the end of the day on Budget Day. In addition, the tax will not apply to cigarettes held in vending machines. Taxpayers will have until April 30, 2014 to file returns and pay the tax. Interest will apply after that date on late or deficient payments.
An inventory tax on cigarettes will also apply at the time of each inflationary excise duty adjustment, which will occur every five years, beginning with the first inflationary adjustment on December 1, 2019.
Standardizing Sanctions Related to False Statements in Excise Tax Returns
To help ensure that tax returns contain accurate information, federal tax legislation typically includes both an administrative monetary penalty and a criminal offence that can apply if a taxpayer makes a false statement or omission in a tax return.
Currently, unlike other federal tax legislation, the excise tax legislation for fuels, fuel-inefficient vehicles and automobile air-conditioners (i.e., the non-Goods and Services Tax/Harmonized Sales Tax (GST/HST) portion of the Excise Tax Act) does not contain an administrative monetary penalty for false statements.
In addition, the related criminal offence for this purpose does not provide for the possibility of prosecution by indictment. Also, a person who is guilty of having committed the offence is liable only to a fine, as the legislation does not provide for imprisonment unless the taxpayer defaults on the payment of the fine. In contrast, other federal tax legislation, such as Part IX of the Excise Tax Act (i.e., the GST/HST portion of the Excise Tax Act), does provide for the possibility of indictment and potential prison sentences.
Budget 2014 proposes to add a new administrative monetary penalty, and to amend the existing criminal offence, for the making of false statements or omissions in an excise tax return and related offences under the non-GST/HST portion of the Excise Tax Act. These provisions will be consistent with the GST/HST portion of the Excise Tax Act. Specifically, the new administrative monetary penalty will be the greater of $250 and 25 per cent of the tax avoided. For the revised criminal offence: the fine will range from 50 to 200 per cent of the tax evaded, along with a potential maximum two year term of imprisonment, on summary conviction; and the fine will range from 100 to 200 per cent of the tax evaded, along with a potential maximum five year term of imprisonment, on conviction on an indictment. When the amount of tax evaded is not ascertainable, the fine will range from $1,000 to $25,000 on summary conviction, and $2,000 to $25,000 on conviction on an indictment.
These measures will apply to excise tax returns filed after the day of Royal Assent to the enacting legislation.
Aboriginal Tax Policy
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 35 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.
Customs Tariff Measures
Customs Tariff Treatment of the Governor General
Under a longstanding special exemption in the Customs Tariff, imported articles for use by the Governor General are exempted from paying customs duties. The Governor General is the only individual with such a special, extraordinary exemption.
Building on tax amendments undertaken in the past two years concerning the Governor General, the Customs Tariff will be amended to make the Governor General subject to the same tariff rules as other Government office holders.
The elimination of the exemption provided by tariff item 9809.00.00, and consequential amendments to tariff item 9833.00.00, will be given effect by amendments to the Customs Tariff.
To ensure consistent tax and tariff treatment, consequential amendments to the Goods and Services Tax/Harmonized Sales Tax importation rules will also be proposed.
Supporting Offshore Oil and Gas Development
Mobile offshore drilling units (MODUs) used in oil and gas exploration and development can be temporarily imported into Canada on a duty-free basis under the Mobile Offshore Drilling Units Remission Order. This Remission Order was extended in 2009 for another five years and is now set to expire in May 2014.
Budget 2014 proposes to eliminate the 20-per-cent Most-Favoured-Nation rate of duty on imported MODUs. This measure will permanently eliminate a disincentive to exploration leading to oil and gas discoveries in offshore Atlantic and Arctic regions and create a level playing field with other major oil and gas countries competing for offshore petroleum industry investment.
This tariff elimination will be given effect by amendments to the Customs Tariff and will be effective in respect of goods imported into Canada on or after May 5, 2014.
Previously Announced Measures
Budget 2014 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 automobile expense deduction limits and the prescribed rates for the automobile operating expense benefit for 2012 announced on December 29, 2011, and for 2013 announced on December 28, 2012;
- Legislative proposals released on November 27, 2012 relating to income tax rules applicable to Canadian banks with foreign affiliates;
- Legislative proposals released on July 12, 2013 relating to income tax and excise duties and sales tax technical amendments;
- Legislative proposals released on August 16, 2013 relating to the foreign affiliate dumping rules;
- Legislative proposals released on August 23, 2013 relating to changes to the life insurance policyholder exemption test;
- Modifications to the Customs Tariff to implement the Notice of Ways and Means Motion tabled by the Government in Parliament on November 22, 2013, which clarified the tariff classification of certain imported food products;
- Legislative proposals released on November 27, 2013 relating to the tax rules governing Labour-Sponsored Venture Capital Corporations;
- Legislative proposals released on January 9, 2014 to require that international electronic funds transfers of $10,000 or more be reported to the Canada Revenue Agency;
- Legislative proposals released on January 17, 2014 clarifying GST/HST rules to prevent input tax credit claims that exceed tax actually paid; and
- Legislative proposals released on January 24, 2014 relating to the provision of a GST/HST exemption for hospital parking for patients and visitors.
Budget 2014 also reaffirms the Government’s commitment to move forward as required with technical amendments to improve the certainty of the tax system.
|Medical Expense Tax Credit – Purely Cosmetic Procedures||40||40||40||40||40||45||45||45||45||380|
|Employee Stock Options||175||210||240||245||245||250||250||255||255||2,125|
|Interest on Overpaid Taxes||45||100||140||170||190||210||220||230||235||1,540|
|Scholarship Exemption and Education Tax Credit||-||-||-||-||-||-||-||-||-||-|
|Specified Investment Flow-Through (SIFT) Conversions and Loss Trading||-||-||-||-||-||-||-||-||-||-|
|Foreign Tax Credit Generators||-||-||-||-||-||-||-||-||-||-|
|Foreign Investment Entities and Non-Resident Trusts||-||-||-||-||-||-||-||-||-||-|
|Specified Leasing Property Rules||-||-||-||-||-||-||-||-||-||-|
|Information Reporting of Tax Avoidance Transactions||-||-||-||-||-||-||-||-||-||-|
|GST/HST and Purely Cosmetic Procedures||-||-||-||-||-||-||-||-||-||-|
|Total for Budget 2010||260||350||420||455||475||505||515||530||535||4,045|
|Registered Retirement Savings Plans (RRSPs) – Anti-Avoidance Rules||-||100||100||100||100||100||100||100||105||805|
|Individual Pension Plans||-||15||15||15||15||15||15||15||15||120|
|Tax on Split Income – Capital Gains||-||15||15||15||15||15||15||20||20||130|
|Enhance the Regulatory Regime for Qualified Donees||-||-||-||-||-||-||-||-||-||-|
|Safeguard Charitable Assets through Good Governance||-||-||-||-||-||-||-||-||-||-|
|Recover Tax Assistance for Returned Gifts||-||-||-||-||-||-||-||-||-||-|
|Gifts of Non-Qualifying Securities||-||-||-||-||-||-||-||-||-||-|
|Granting of Options to Qualified Donees||-||-||-||-||-||-||-||-||-||-|
|Donations of Publicly Listed Flow-Through Shares||-||50||55||55||60||60||65||65||70||480|
|Stop-Loss Rules on the Redemption of a Share||-||75||95||80||80||80||80||80||80||650|
|Partnerships – Deferral of Corporate Tax||-||-||490||1,080||1,220||1,160||1,290||650||60||5,950|
|Total for Budget 2011||-||255||770||1,345||1,490||1,430||1,565||930||350||8,135|
|Economic Action Plan 2012|
|Retirement Compensation Arrangements||-||-||-||-||-||-||-||-||-||-|
|Employees Profit Sharing Plans||-||-||10||35||40||40||40||45||45||255|
|Tax Avoidance Through the Use of Partnerships||-||-||-||-||-||-||-||-||-||-|
|Thin Capitalization – Partnerships||-||-||-||-||-||-||-||-||-||-|
|Thin Capitalization – Debt-to-Equity Ratio||-||-||-||35||70||45||40||35||35||260|
|Thin Capitalization – Disallowed Interest Treated as a Dividend||-||-||-||1||1||1||1||1||1||6|
|Foreign Affiliate Dumping||-||-||90||205||265||350||460||570||670||2,610|
|Tax Shelter Administrative Changes||-||-||-||-||-||-||-||-||-||-|
|Total for Economic Action Plan 2012||-||-||100||276||376||436||541||651||751||3,131|
|Economic Action Plan 2013|
|Thin Capitalization Rules – Non-Resident Corporations and Trusts||-||-||-||-||-||-||-||-||-||-|
|Thin Capitalization Rules – Canadian-Resident Trusts||-||-||-||-||-||-||-||-||-||-|
|Trust Loss Trading||-||-||-||65||65||65||70||70||70||405|
|Corporate Loss Trading||-||-||-||5||10||20||25||35||40||135|
|Restricted Farm Losses – Reinstating Moldowan||-||-||-||-||-||-||-||-||-||-|
|Character Conversion Transactions||-||-||-||15||25||35||45||55||60||235|
|Extended Reassessment Period: Tax Shelters and Reportable Transactions||-||-||-||-||-||-||-||-||-||-|
|Extended Reassessment Period: Form T1135||-||-||-||-||-||-||-||-||-||-|
|Taxes in Dispute and Charitable Donation Tax Shelters||-||-||-||-||-||-||-||-||-||-|
|Information Requirements Regarding Unnamed Persons||-||-||-||-||-||-||-||-||-||-|
|International Electronic Funds Transfers||-||-||-||-||-||-||-||-||-||-|
|Leveraged Life Insurance Arrangements – Leveraged Insured Annuities||-||-||-||5||15||20||25||35||40||140|
|Leveraged Life Insurance Arrangements – 10/8 Arrangements||-||-||-||10||50||60||65||75||85||345|
|Reserve for Future Services||-||-||-||-||-||-||-||-||-||-|
|Scientific Research and Experimental Development Program||-||-||-||-||-||-||-||-||-||-|
|GST/HST Business Information Requirement||-||-||-||-||-||-||-||-||-||-|
|GST/HST on Reports and Services for Non-Health Care Purposes||-||-||-||1||1||1||2||2||2||9|
|GST/HST on Paid Parking||-||-||-||-||-||-||-||-||-||-|
|Electronic Suppression of Sales Software Sanctions||-||-||-||-||-||-||-||-||-||-|
|Tax Fairness Measures|
|Mining Expenses – Pre-Production Mine Development Expenses||-||-||-||-||-||5||15||25||40||85|
|Mining Expenses – Accelerated Capital Cost Allowance for Mining||-||-||-||-||-||-||-||10||20||30|
|Additional Deduction for Credit Unions||-||-||-||10||30||40||60||80||85||305|
|Dividend Tax Credit||-||-||-||135||555||595||635||675||720||3,315|
|Labour-Sponsored Venture Capital Corporations Tax Credit||-||-||-||-||15||65||115||160||160||515|
|Deduction for Safety Deposit Boxes||-||-||-||5||30||40||40||40||40||195|
|Excise Duty Rate on Manufactured Tobacco||-||-||2||75||65||60||55||50||45||352|
|Total for Economic Action Plan 2013||-||-||2||326||861||1,006||1,152||1,312||1,407||6,066|
|Subtotal: Savings announced prior to Economic Action Plan 2014||260||605||1,292||2,402||3,202||3,377||3,773||3,423||3,043||21,377|
|Economic Action Plan 2014|
|Tax on Split Income||-||-||-||10||35||35||35||35||40||190|
|Donations of Certified Cultural Property||-||-||-||-||4||4||4||4||4||20|
|State Supporters of Terrorism||-||-||-||-||-||-||-||-||-||-|
|Offshore Regulated Banks||-||-||-||-||-||30||55||50||50||185|
|Strengthening Compliance with GST/HST Registration||-||-||-||-||-||-||-||-||-||-|
|Standardizing Sanctions Related to False Statements in Excise Tax Returns||-||-||-||-||-||-||-||-||-||-|
|Tax Fairness Measures|
|Graduated Rate Taxation of Trusts and Estates||-||-||-||-||-||20||70||75||80||245|
|Total for Economic Action Plan 2014||-||-||-||10||44||389||439||429||454||1,765|
|Total Including Economic Action Plan 2014||260||605||1,292||2,412||3,246||3,766||4,212||3,852||3,497||23,142|
|Note: Totals may not add due to rounding. The estimated savings from the measures introduced in Budgets 2010 and 2011 and Economic Action Plans 2012 and 2013 reflect updated tax data and economic projections.
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 transfer could also be to a Registered Retirement Income Fund, a money purchase (defined contribution) RPP, or a Pooled Registered Pension Plan.
 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 applies to 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 and waste-fuelled electricity generation systems must meet a higher efficiency standard in order to qualify for Class 43.2. While the description of proposed Budget 2014 changes refers only to Class 43.2, the changes will apply to both Class 43.1 and Class 43.2.
 Since 2002, the federal excise duty has been adjusted twice to offset the impact of the two percentage point reduction in the Goods and Services Tax.
 On December 30, 2013 the Government announced that for 2014 these rates and limits would not be changed from their 2013 levels.