Tax Measures: Supplementary Information
This volume provides detailed information on each of the tax measures proposed in Budget 2016.
Table 1 lists these measures and provides estimates of their budgetary impact.
The volume also includes the Notices of Ways and Means Motions to amend the Income Tax Act, the Excise Tax Act, the Excise Act, 2001 and other tax legislation, draft amendments to various GST/HST regulations and explanatory notes in respect of draft legislative proposals relating to eligible capital property.
References to “Budget Day” are to be read as references to the day on which Budget 2016 is presented.
Personal Income Tax Measures
Canada Child Benefit
There are currently two main federal instruments for the provision of financial assistance to families with children under age 18: the Canada child tax benefit (CCTB) and the universal child care benefit (UCCB).
The CCTB is a non-taxable benefit that is paid monthly, based on adjusted family net income and the number of children in the family. The CCTB has three components (amounts shown are for the 2016-17 benefit year):
- a CCTB base benefit for low- and middle-income families, of up to $1,490 each for the first and second child and $1,594 for the third and each subsequent child;
- a national child benefit supplement for low-income families of up to $2,308 for a first child, $2,042 for a second child and $1,943 for each subsequent child; and
- a child disability benefit of up to $2,730, provided to families caring for a child under age 18 who is eligible for the disability tax credit.
The UCCB provides a taxable benefit of $160 per month for each child under the age of six and $60 per month for each child aged 6 through 17.
To simplify and consolidate existing child benefits while ensuring that help is better targeted to those who need it most, Budget 2016 proposes to replace the CCTB and UCCB with a new Canada Child Benefit.
The Canada Child Benefit will provide a maximum benefit of $6,400 per child under the age of 6 and $5,400 per child aged 6 through 17. On the portion of adjusted family net income between $30,000 and $65,000, the benefit will be phased out at a rate of 7 per cent for a one-child family, 13.5 per cent for a two-child family, 19 per cent for a three-child family and 23 per cent for larger families. Where adjusted family net income exceeds $65,000, remaining benefits will be phased out at rates of 3.2 per cent for a one-child family, 5.7 per cent for a two-child family, 8 per cent for a three-child family and 9.5 per cent for larger families, on the portion of income above $65,000.
|Number of children (for phase-out rates)||Phase-Out Rates (%)|
|$30,000 to $65,000||Over $65,000|
|4 or more children||23.0||9.5|
To recognize the additional costs of caring for a child with a severe disability, Budget 2016 proposes to continue to provide an additional amount of up to $2,730 per child eligible for the disability tax credit. The phase-out of this additional amount will be made to generally align with the Canada Child Benefit. Specifically, it will be phased out at a rate of 3.2 per cent for families with one eligible child and 5.7 per cent for families with more than one eligible child, on adjusted family net income in excess of $65,000, effective July 1, 2016. This additional amount will be included in the Canada Child Benefit payments made to eligible families.
Entitlement to the Canada Child Benefit for the July 2016 to June 2017 benefit year will be based on adjusted family net income for the 2015 taxation year.
Budget 2016 proposes two specific changes that would take effect with the introduction of the Canada Child Benefit.
Eligibility of foreign-born individuals who are Indians under the Indian Act
Foreign-born individuals who are Indians under the Indian Act and who are not Canadian citizens, or permanent residents under the Immigration and Refugee Protection Act,may legally reside in Canada and be entitled to certain programs and services offered by federal and provincial governments (such as the goods and services tax credit, working income tax benefit, old age security and employment insurance).
Budget 2016 proposes to ensure that all individuals who are Indians under the Indian Act and residents of Canada for tax purposes are eligible to receive the Canada Child Benefit where all other eligibility requirements are met.
Currently, an individual can apply to receive retroactive payments of the CCTB and UCCB as far back as when the programs were introduced, provided they would have been eligible to receive the benefits at the time.
In contrast, a taxpayer who has not claimed, on a previous tax return, tax credits or benefits to which they would otherwise have been entitled (such as the goods and services tax credit, working income tax benefit or disability tax credit) may request a tax reassessment in respect of a taxation year up to 10 calendar years after the end of that taxation year, in order to receive retroactive payment of these amounts.
To be consistent with the time limit on retroactive claims of other tax amounts, Budget 2016 proposes to allow a taxpayer to request a retroactive payment of the Canada Child Benefit, CCTB or UCCB in respect of a month on or before the day that is 10 years after the beginning of that month, effective for requests made after June 2016.
In other respects, the rules governing the Canada Child Benefit will generally be based on those which apply to the CCTB. For example,
- The Canada Child Benefit will be paid monthly to eligible families.
- Amounts received under the new Canada Child Benefit will not be taxable and will not reduce benefits paid under the goods and services tax credit. They will also not be included in income for the purposes of federal income-tested programs delivered outside of the income tax system, such as the Guaranteed Income Supplement, the Canada education savings grant, the Canada learning bond, the Canada disability savings bond and the Canada disability savings grant.
- To be eligible for the Canada Child Benefit, an individual must be a resident of Canada for tax purposes and must reside with the qualified dependant and be the parent who primarily fulfils the responsibility for the care and upbringing of the qualified dependant or be a shared-custody parent.
Children’s Special Allowance
The children’s special allowance is generally paid to provincial and territorial child protection agencies to assist with the costs of caring for a child under the care of a child protection agency. The current allowance is equivalent to the maximum benefit under the existing CCTB and UCCB system.
To ensure consistent treatment for children under the care of a child protection agency, Budget 2016 proposes to increase the children’s special allowance to the same level as is proposed under the Canada Child Benefit, effective July 1, 2016.
Timing of the Changes to Child Benefits
Canada Child Benefit payments under this measure will start in July 2016. The UCCB and CCTB will be eliminated for months after June 2016.
Under the current system, provinces and territories may enter into an agreement with the federal government to restructure CCTB base benefit amounts based on the age of the child and/or the number of children in a family. Under the new rules, provinces and territories will be able to negotiate an agreement with similar parameters in order to reconfigure the Canada Child Benefit within the same fiscal envelope, if they wish to do so, starting for the 2017-18 benefit year.
Income Splitting Credit
A non-refundable income splitting tax credit is available for couples with at least one child under the age of 18. The credit allows a higher-income spouse or common-law partner to notionally transfer up to $50,000 of taxable income to their spouse or common-law partner for the purpose of reducing the couple’s total income tax liability by up to $2,000.
Budget 2016 proposes to eliminate the income splitting tax credit for couples with at least one child under the age of 18 for the 2016 and subsequent taxation years.
Northern Residents Deductions
Individuals who live in prescribed areas in northern Canada for at least six consecutive months beginning or ending in a taxation year may claim the northern residents deductions in computing their taxable income for that year. These include both a residency deduction and a deduction for certain travel benefits.
The residency deduction allows each member of a household to deduct up to $8.25 per day. Alternatively, one member of a household can claim a maximum residency deduction of $16.50 per day if no other member of the household claims the residency deduction (including where there is no other member of the household). In addition, a deduction can be claimed to offset the amount of any taxable benefits in respect of up to two employer-paid vacation trips per year and an unlimited number of employer-paid medical trips.
The amounts that a taxpayer may deduct under the northern residents deductions depend on whether the taxpayer resides in the Northern Zone or the Intermediate Zone. Residents of the Northern Zone are eligible to deduct the full amounts, while residents of the Intermediate Zone may deduct half of the amounts.
Budget 2016 proposes to increase the maximum residency deduction that each member of a household may claim from $8.25 to $11 per day and, where no other member of the household claims the residency deduction, to increase the maximum residency deduction from $16.50 to $22 per day for the 2016 taxation year. Residents of the Intermediate Zone will be entitled to deduct half of these increased amounts.
Labour-Sponsored Venture Capital Corporations Tax Credit
A labour-sponsored venture capital corporation (LSVCC) is a form of mutual fund corporation, sponsored by an eligible labour body. LSVCCs are mandated, under their enabling legislation, to provide venture capital to small and medium-sized businesses.
Prior to 2015, individuals acquiring LSVCC shares qualified for a 15-per-cent federal tax credit for investments of up to $5,000 each year. The federal LSVCC tax credit was reduced to 10 per cent for the 2015 taxation year and to five per cent for the 2016 taxation year. The credit is scheduled to be eliminated for the 2017 and subsequent taxation years.
A number of provinces offer a similar tax credit, at varying investment limits and tax credit rates. LSVCCs may be referred to by different names under provincial legislation.
Federally registered LSVCCs are subject to the rules set out in the Income Tax Act. Provincially registered LSVCCs are subject to the rules set out in their enabling provincial legislation. To be eligible for the federal tax credit, a provincially registered LSVCC must be prescribed for purposes of the Income Tax Act.
Consistent with the scheduled reduction and elimination of the federal tax credit, new federal LSVCC registrations are not permitted, and new provincially registered LSVCCs are not permitted to be prescribed for the purposes of the federal tax credit.
To support provinces that use LSVCC programs to facilitate access to venture capital for small and medium-sized businesses, Budget 2016 proposes to restore the federal LSVCC tax credit to 15 per cent for share purchases of provincially registered LSVCCs prescribed under the Income Tax Act for the 2016 and subsequent taxation years.
Budget 2016 also proposes that newly registered LSVCCs under existing provincial legislation be eligible for prescription if the provincial legislation is currently prescribed for purposes of the federal LSVCC tax credit. New provincial regimes will be eligible for prescription under the Income Tax Act, provided the enabling provincial legislation is patterned on currently prescribed provincial legislation. For instance, to be eligible, any new provincial regime would need to:
- provide a provincial tax credit of at least 15 per cent of an individual’s net cost of shares purchased in an LSVCC;
- require that the LSVCC be sponsored by an eligible labour body; and
- mandate that the LSVCC invest and maintain a minimum of 60 per cent of its shareholder equity in eligible investments, generally investments in small and medium-sized enterprises.
While significant funding to small and medium-sized businesses has been provided in a number of provinces through provincial LSVCC programs, the national LSVCC program has not had a similar impact. For this reason, the federal LSVCC tax credit for federally registered LSVCCs will remain at five per cent for the 2016 taxation year and be eliminated for the 2017 and subsequent taxation years. The prohibition on new federal LSVCC registrations and the transition rules for federally registered LSVCCs will be maintained.
Teacher and Early Childhood Educator School Supply Tax Credit
Teachers and early childhood educators often incur at their own expense the cost of supplies for the purpose of teaching or otherwise enhancing students’ learning in the classroom or learning environment.
To provide tax recognition for these costs, Budget 2016 proposes to introduce a teacher and early childhood educator school supply tax credit. This measure will allow an employee who is an eligible educator to claim a 15-per-cent refundable tax credit based on an amount of up to $1,000 in expenditures made by the employee in a taxation year for eligible supplies.
For the cost of supplies to qualify for the credit, employers will be required to certify that the supplies were purchased for the purpose of teaching or otherwise enhancing learning in a classroom or learning environment. Individuals making claims will be required to retain their receipts for verification purposes.
The teacher and early childhood educator school supply tax credit will not be available in respect of an amount that has already been claimed under any other provision of the Income Tax Act.
Teachers will qualify as eligible educators if they hold a teacher’s certificate that is valid in the province or territory in which they are employed. Likewise, early childhood educators will qualify as eligible educators if they hold a certificate or diploma in early childhood education recognized by the province or territory in which they are employed.
Expenditures will be eligible for the teacher and early childhood educator school supply tax credit if they were made to purchase eligible supplies for use in a school or in a regulated child care facility for the purpose of teaching or otherwise enhancing students’ learning in the classroom or learning environment. Eligible supplies will include the following durable goods: games and puzzles; supplementary books for classrooms; educational support software; or containers (such as plastic boxes or banker boxes for themes and kits). Eligible supplies will also include consumable goods, such as:
- construction paper for activities, flashcards or activity centres;
- items for science experiments, such as seeds, potting soil, vinegar, baking soda and stir sticks;
- art supplies, such as paper, glue and paint; and
- various stationery items, such as pens, pencils, posters and charts.
This measure will apply to supplies acquired on or after January 1, 2016.
Ontario Electricity Support Program
The Ontario Electricity Support Program (OESP) is a program of the Government of Ontario that, effective January 1, 2016, provides assistance to low-income households in Ontario for the cost of electricity. The OESP reduces the cost of household electricity by providing a monthly credit on a recipient’s electricity bill. The credit depends on household income and how many people live in the household.
This type of assistance received in a year is generally required to be included in income. While an offsetting deduction is provided so that the assistance is effectively non-taxable, amounts received may affect income-tested federal or provincial/territorial benefits, such as child benefits.
To ensure that income-tested benefits are not reduced as a result of OESP amounts, Budget 2016 proposes to exempt from income amounts received under the OESP.
This measure will apply to the 2016 and subsequent taxation years.
Mineral Exploration Tax Credit for Flow-Through Share Investors
Flow-through shares allow resource 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. The mineral exploration tax credit provides an additional income tax benefit for individuals who invest in mining flow-through shares, which augments the tax benefits associated with the deductions that are flowed through. This credit is equal to 15 per cent of specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors. Like flow-through shares, the credit facilitates the raising of equity to fund exploration by enabling companies to issue shares at a premium.
Budget 2016 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, 2017. 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 2017 can support eligible exploration until the end of 2018.
Mineral exploration, as well as new mining and related processing activities 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.
Education and Textbook Tax Credits
The education tax credit provides a 15-per-cent non-refundable tax credit of $400 per month of full-time enrolment in a qualifying educational program and $120 per month of part-time enrolment in a specified educational program at a designated educational institution. The textbook tax credit provides a 15-per-cent non-refundable tax credit of $65 per month of full-time enrolment in a qualifying educational program and $20 per month of part-time enrolment in a specified educational program at a designated educational institution.
A tuition tax credit is also available that provides a 15-per-cent non-refundable tax credit on eligible fees for tuition and eligible examination fees paid to certain educational institutions.
A student must first claim any education, textbook and tuition credits earned in a year on their own tax return to bring tax payable to zero. Unused portions of the credits can be transferred to a supporting individual, up to a limit, or carried forward by the student for use in a future year.
Budget 2016 proposes to eliminate the education and textbook tax credits. This measure does not eliminate the tuition tax credit. Changes will be made to ensure that other income tax provisions—such as the tax exemption for scholarship, fellowship and bursary income—that currently rely on eligibility for the education tax credit or use terms defined for the purpose of the education tax credit will be unaffected by its elimination.
This measure will apply effective January 1, 2017. Unused education and textbook credit amounts carried forward from years prior to 2017 will remain available to be claimed in 2017 and subsequent years.
Children’s Fitness and Arts Tax Credits
The children’s fitness tax credit provides a 15-per-cent refundable tax credit on up to $1,000 of eligible fitness expenses for children under 16 years of age at the beginning of the taxation year. For children who are eligible for the disability tax credit and have at least $100 of eligible expenses, the credit amount is increased by $500 and is extended to children under 18 years of age.
The children’s arts tax credit provides a 15-per-cent non-refundable tax credit on up to $500 in eligible fees for programs of artistic, cultural, recreational and developmental activity for children under 16 years of age. As with the children’s fitness tax credit, the age limit of the children’s arts tax credit is extended to children under 18 years of age and an additional $500 credit amount is available in respect of children eligible for the disability tax credit.
Budget 2016 proposes to phase out the children’s fitness and arts tax credits by reducing the 2016 maximum eligible amounts to $500 from $1,000 for the children’s fitness tax credit (which will remain refundable for 2016) and to $250 from $500 for the children’s arts tax credit. The supplemental amounts for children eligible for the disability tax credit will remain at $500 for 2016. Both credits will be eliminated for the 2017 and subsequent taxation years.
Top Marginal Income Tax Rate – Consequential Amendments
On December 7, 2015, the Government announced a reduction of the second personal income tax rate to 20.5 per cent from 22 per cent and the introduction of a 33-per-cent personal income tax rate on individual taxable income in excess of $200,000, effective for the 2016 and subsequent taxation years. These proposals were included as part of Bill C-2 (An Act to amend the Income Tax Act), which was tabled on December 9, 2015.
A number of amendments were included in Bill C-2 that were consequential to the introduction of the new 33-per-cent top personal income tax rate. The Income Tax Act contains a series of rules that are intended to maintain the neutrality, fairness and integrity of the income tax system. A number of these rules either use the top personal income tax rate or use rates or formulas that reflect it. The consequential amendments that were announced adjust a number of the most significant of these rules. The Government also announced that it would review other income tax rules to determine whether they require adjustment.
Budget 2016 proposes further amendments to reflect the new top marginal income tax rate for individuals that will:
- provide a 33-per-cent charitable donation tax credit (on donations above $200) to trusts that are subject to the 33-per-cent rate on all of their taxable income;
- apply the new 33-per-cent top rate on excess employee profit sharing plan contributions;
- increase from 28 per cent to 33 per cent the tax rate on personal services business income earned by corporations;
- amend the definition of “relevant tax factor” in the foreign affiliate rules to reduce the relevant tax factor from the current 2.2 to 1.9;
- amend the capital gains refund mechanism for mutual fund trusts to reflect the new 33-per-cent top rate in the formulas that are used in computing refundable tax;
- increase the Part XII.2 tax rate on the distributed income of certain trusts from 36 per cent to 40 per cent; and
- amend the recovery tax rule for qualified disability trusts to refer to the new 33-per-cent top rate.
These measures will apply to the 2016 and later taxation years. The charitable donation tax credit measure will be limited to donations made after the 2015 taxation year. In the case of the rate increase on personal services business income earned by corporations in taxation years that straddle 2015 and 2016, the rate increase will be prorated according to the number of days in the taxation year that are after 2015.
The measure will also extend the proposed 33-per-cent charitable donation tax credit in Bill C-2 (which currently applies to donations made after 2015) to be available for donations made by a graduated rate estate during a taxation year of the estate that straddles 2015 and 2016.
Taxation of Switch Fund Shares
Canadian mutual funds can be in the legal form of a trust or a corporation. While most funds are structured as mutual fund trusts, some are structured as mutual fund corporations.
Many of these mutual fund corporations are organized as “switch funds”. These offer different types of asset exposure in different funds, but each fund is structured as a separate class of shares within the mutual fund corporation. Investors are able to exchange shares of one class of the mutual fund corporation for shares of another class, in order to switch their economic exposure between the mutual fund corporation’s different funds. By virtue of a general provision in the Income Tax Act that applies to convertible corporate securities, this exchange is deemed not to be a disposition for income tax purposes. This deferral benefit that is available to taxable investors in switch funds is not available to taxpayers investing in mutual fund trusts or investing on their own account directly in securities.
To ensure the appropriate recognition of capital gains, Budget 2016 proposes to amend the Income Tax Act so that an exchange of shares of a mutual fund corporation (or investment corporation) that results in the investor switching between funds will be considered for tax purposes to be a disposition at fair market value. The measure will not apply to switches where the shares received in exchange differ only in respect of management fees or expenses to be borne by investors and otherwise derive their value from the same portfolio or fund within the mutual fund corporation (e.g., the switch is between different series of shares within the same class).
This measure will apply to dispositions of shares that occur after September 2016.
Sales of Linked Notes
A linked note is a debt obligation, most often issued by a financial institution, the return on which is linked in some manner to the performance of one or more reference assets or indexes over the term of the obligation. The reference asset or index – which can be a basket of stocks, a stock index, a commodity, a currency or units of an investment fund – is generally unrelated to the operations or securities of the issuer.
The two main types of linked notes are principal-protected notes and principal-at-risk notes. Under a principal-protected note, the amount payable to the investor at maturity is equal to the principal amount invested plus a return, if any, wholly or partially linked to the performance of the reference asset or index. Under a principal-at-risk note, there is a risk, depending on the performance of the reference asset or index, that the amount payable to the investor at maturity may be less than the principal amount invested.
The Income Tax Act contains rules that deem interest to accrue on a prescribed debt obligation, which includes a typical linked note. These rules require an investor in a linked note to accrue the maximum amount of interest that could be payable on the note in respect of a given taxation year. Investors generally take the position that there is no deemed accrual of interest on a linked note prior to the maximum amount of interest becoming determinable. Instead, the full amount of the return on the note is included in the investor’s income in the taxation year when it becomes determinable, which is generally shortly before maturity.
A specific rule provides that interest accrued to the date of sale of a debt obligation is included in the income of the vendor for the year in which the sale occurs. However, some investors, who hold their linked notes as capital property, sell them prior to the determination date to, in effect, convert the return on the notes from ordinary income to capital gains, only 50 per cent of which is included in their income. These investors take the position that no amount in respect of the return on a linked note is accrued interest on the date of sale of the note for the purposes of this specific rule. On that basis, these investors include the full amount of the return on a linked note in the proceeds of disposition and claim the return on the note as a capital gain.
To facilitate this planning, issuers of linked notes often establish a secondary market where investors can sell their linked notes prior to maturity to an affiliate of the issuer.
Budget 2016 proposes to amend the Income Tax Act so that the return on a linked note retains the same character whether it is earned at maturity or reflected in a secondary market sale. Specifically, a deeming rule will apply for the purposes of the rule relating to accrued interest on sales of debt obligations. This deeming rule will treat any gain realized on the sale of a linked note as interest that accrued on the debt obligation for a period commencing before the time of the sale and ending at that time. When a linked note is denominated in a foreign currency, foreign currency fluctuations will be ignored for the purposes of calculating this gain. An exception will also be provided where a portion of the return on a linked note is based on a fixed rate of interest. In that case, any portion of the gain that is reasonably attributable to market interest rate fluctuations will be excluded.
This measure will apply to sales of linked notes that occur after September 2016.
Business Income Tax Measures
Expanding Tax Support for Clean Energy
Under the capital cost allowance (CCA) regime, Classes 43.1 and 43.2 of Schedule II to the Income Tax Regulations provide accelerated CCA rates (30 per cent and 50 per cent, respectively, on a declining-balance basis) for investments in specified clean energy generation and conservation equipment. Both classes include eligible equipment that generates or conserves energy by:
- using a renewable energy source (e.g., wind, solar or small hydro);
- using a fuel from waste (e.g., landfill gas, wood waste or manure); or
- making efficient use of fossil fuels (e.g., high efficiency cogeneration systems, which simultaneously produce electricity and useful heat).
Providing accelerated CCA 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.
In addition, if the majority of the tangible property in a project is eligible for inclusion in Class 43.1 or 43.2, certain intangible project start-up expenses (for example, engineering and design work and feasibility studies) are treated as Canadian renewable and conservation expenses. These expenses may be deducted in full in the year incurred, carried forward indefinitely for use in future years, or transferred to investors using flow-through shares.
Electric Vehicle Charging Stations
Renewable energy generation and electric vehicles are complementary technologies. Using electricity from renewable sources improves the environmental benefits of electric vehicles. In addition, displacing emission-intensive fuels such as gasoline or diesel with renewable energy for transportation purposes helps maximize the environmental benefits of renewable energy generation. Electric vehicle charging stations are generally included in Class 8, which provides a CCA rate of 20 per cent calculated on a declining-balance basis.
Budget 2016 proposes to expand Classes 43.1 and 43.2 by making electric vehicle charging stations eligible for inclusion in Class 43.1 or 43.2, based upon whether they meet certain power thresholds. Electric vehicle charging stations set up to supply at least 90 kilowatts of continuous power will be eligible for inclusion in Class 43.2. Those charging stations set up to supply more than 10 kilowatts but less than 90 kilowatts of continuous power will be eligible for inclusion in Class 43.1.
Eligible equipment of a taxpayer will include equipment downstream of an electricity meter, owned by an electric utility and used for billing purposes or owned by the taxpayer to measure electricity generated by the taxpayer, provided that more than 75 per cent of the annual electricity consumed in connection with the equipment is used to charge electric vehicles, including: charging stations, transformers, distribution and control panels, circuit breakers, conduits, wiring and related electrical energy storage equipment.
These measures will encourage investment in technologies that can contribute to a reduction in emissions of greenhouse gases and air pollutants, in support of targets set out in the Federal Sustainable Development Strategy.
The measure will apply in respect of property acquired for use on or after Budget Day that has not been used or acquired for use before Budget Day.
Electrical Energy Storage
Electrical energy storage equipment converts electricity into a form of energy that can be stored and then converts the energy back into electricity at a later time. Storage can provide environmental benefits by displacing fossil-fuelled power generation when demand is highest and by facilitating the integration of electricity generated from intermittent renewable energy sources.
Only limited kinds of electrical energy storage equipment are currently eligible for accelerated capital cost allowance (CCA) treatment when ancillary to electricity generation technologies eligible for inclusion in CCA Classes 43.1 (30-per-cent rate) and 43.2 (50-per-cent rate) of Schedule II to the Income Tax Regulations. The eligibility of energy storage equipment for this treatment depends on the technology being used to generate electricity. In some instances, only short-term storage equipment is considered eligible and only as an interpretation of more general language including ancillary equipment. Stand-alone electrical energy storage equipment – not associated with a Class 43.1 or Class 43.2 generation source – is not eligible for accelerated CCA. Storage equipment which does not qualify for inclusion in these classes is generally included in Class 8, which provides a CCA rate of 20 per cent.
Budget 2016 proposes two changes in this area. First, it proposes to clarify and expand the range of electrical energy storage property that is eligible for accelerated CCA on the basis that it is ancillary to eligible generation equipment, to include a broad range of short- and long-term storage equipment. If the storage equipment is part of an electricity generation system that is eligible for Class 43.2 (e.g., an eligible renewable, waste-fueled or high-efficiency cogeneration system), it will be included in Class 43.2. If the storage equipment is part of an electricity generation system that is eligible for Class 43.1 (i.e., a mid-efficiency cogeneration system), it will be included in Class 43.1.
Second, it is proposed to allow stand-alone electrical energy storage property to be included in Class 43.1 provided that the round trip efficiency of the equipment is greater than 50 per cent. The round trip efficiency measures the extent to which energy is maintained in the process of converting electricity into another form of energy and then back into electricity.
A fuel cell which uses hydrogen produced by electrolysis equipment, where all or substantially all of the electricity used to power the electrolysis process is generated from specified renewable sources, will remain eligible for Class 43.2 regardless of its round trip efficiency. The eligible generation sources will be expanded to include electricity generated by the other renewable energy sources currently included in Class 43.2: geothermal; waves; tides; and the kinetic energy of flowing water.
For both purposes, eligible electrical energy storage property will include equipment such as batteries, flywheels and compressed air energy storage. It will also include any ancillary equipment and structures. Eligible electrical energy storage property will not include: pumped hydroelectric storage; hydroelectric dams and reservoirs; or a fuel cell system where the hydrogen is produced via steam reformation of methane. Consistent with the policy intent of Classes 43.1 and 43.2, certain uses of electrical energy storage equipment will also be excluded from eligibility: back up electricity generation; motive uses (e.g., in battery electric vehicles or fuel cell electric vehicles); and mobile uses (e.g., consumer batteries).
This measure will encourage investment in technologies that can contribute to a reduction in emissions of greenhouse gases and air pollutants in support of targets set out in the Federal Sustainable Development Strategy. Accelerated CCA will only be available in respect of eligible stand-alone property if, at the time the property first becomes available for use, the requirements of all Canadian environmental laws, by-laws and regulations applicable in respect of the property have been met.
The measure will apply in respect of property acquired for use on or after Budget Day that has not been used or acquired for use before Budget Day.
Emissions Trading Regimes
Under emissions trading regimes, governments impose an obligation on regulated emitters to deliver emissions allowances to the government. The amount of the allowances required to be delivered is determined by reference to the amount of emissions of a regulated substance (e.g., greenhouse gases) that are produced. These allowances may be purchased by emitters in the market or at auction, earned in relation to emissions reduction activities or provided by the government at a reduced price or no cost.
The tax treatment of transactions under emissions trading regimes is currently determined under general tax principles. No specific tax rules exist to deal with emissions trading regimes. In addition, there are currently no Canadian or international accounting standards that are specific to these regimes.
Stakeholders have expressed concern that there is uncertainty about the tax treatment of transactions under emissions trading regimes. In addition, an issue has been raised with respect to the tax treatment of emissions allowances provided to certain emitters by a government for no consideration, which can result in double taxation.
For a regulated emitter, emissions allowances are generally treated as an eligible capital property. As eligible capital property, taxpayers are allowed to deduct a 7-per-cent annual “depreciation” in respect of 75 per cent of the cost of the allowance (on a declining balance basis). Budget 2016 proposes to replace the eligible capital property regime with a new class of depreciable property. For more information, see the discussion under “Eligible Capital Property” below.
The characterization of emissions allowances as eligible capital property (or depreciable property) raises tax policy concerns for the following reasons:
- Capital property generally includes property of an enduring nature. While emissions allowances can be enduring in nature through their ability to be “banked” for use in a future period, they are more commonly viewed as one-time-use property.
- The treatment of allowances as capital property could result in a mismatch where the obligation to remit allowances is deductible as a current expense.
Free Emissions Allowances
Assistance provided by a government that is received by a taxpayer in the course of carrying on a business is generally included in computing the taxpayer’s income from the business. However, where an emissions allowance is provided by a government for no consideration (a “free allowance”) and included in income as government assistance, there is no tax rule to adjust the cost amount of the emissions allowance to reflect this income inclusion. This would result in taxpayers being subject to double tax on disposition of the emissions allowance.
Timing – Income and Expense Recognition
A taxpayer in a regulated industry may be required to provide a government with emissions allowances, in respect of its emissions in a particular year, at its “true-up” date in a subsequent year. In claiming a deduction from income for the cost of its emissions, the taxpayer may have claimed the deduction in the year that its business emits the regulated substance as part of its revenue-generating activities or in a later year when it becomes liable to remit allowances in respect of its emissions produced in the previous year.
Further issues can arise where a taxpayer receives a free allowance. If the value of this benefit is included in the taxpayer’s income in the year that the allowance is received and an offsetting deduction for emissions incurred is not available until a subsequent year, this can raise cash flow concerns.
Budget 2016 proposes to amend the Income Tax Act to introduce specific rules to clarify the tax treatment of emissions allowances and to eliminate the double taxation of certain free allowances. Specifically, these rules will provide that emissions allowances be treated as inventory for all taxpayers. However, the “lower of cost and market” method for the valuation of inventory will not be available in respect of emissions allowances because of the potential volatility in their value.
If a regulated emitter receives a free allowance, there will be no income inclusion on receipt of the allowance. In addition, the deduction in respect of an accrued emissions obligation will be limited to the extent that the obligation exceeds the cost of any emissions allowances that the taxpayer has acquired and that can be used to settle the obligation. Each year that a taxpayer claims a deduction in respect of an emissions obligation, the taxpayer will quantify its deduction based on the cost of emission allowances that it has acquired and which can be used to settle its emissions obligation, plus the fair market value of any emissions allowances that it still needs to obtain to fully satisfy its obligation. If a deduction is claimed in respect of an emissions obligation that accrues in one year (for example, 2017) and that will be satisfied in a future year (for example, 2018), the amount of this deduction will be brought back into income in the subsequent year (2018) and the taxpayer will be required to evaluate the deductible obligation again each year, until it is ultimately satisfied.
If a taxpayer disposes of an emissions allowance otherwise than in satisfaction of an obligation under the emissions allowance regime, any proceeds received in excess of the taxpayer’s cost, if any, for the allowance will be included in computing income.
This measure will apply to emissions allowances acquired in taxation years beginning after 2016. It will also apply on an elective basis in respect of emissions allowances acquired in taxation years ending after 2012.
Small Business Taxation
Small businesses benefit from a reduced federal corporate income tax rate of 10.5 per cent – a preference relative to the general corporate income tax rate of 15 per cent. Specifically, the small business deduction reduces to 10.5 per cent the federal corporate income tax rate applying to the first $500,000 per year of qualifying active business income of a Canadian-controlled private corporation (CCPC). There is a requirement to allocate the annual eligible income limit of $500,000 (referred to as the “business limit”) among associated corporations. Where a business is carried on through a partnership, the members of the partnership share one $500,000 limit in respect of that business. Access to the small business deduction is also phased out on a straight-line basis for a CCPC and its associated corporations having between $10 million and $15 million of taxable capital employed in Canada. Gradual reductions in the small business tax rate are currently legislated for 2017, 2018 and 2019.
The dividend tax credit (DTC), provided within the personal income tax system, is intended to compensate a taxable individual receiving dividends for corporate income taxes that are presumed to have been paid on the corporate income that funded those dividends. The DTC is generally meant to ensure that income earned by a corporation and paid out to an individual as a dividend will be subject to the same amount of tax as income earned directly by the individual.
Small Business Tax Rate
Budget 2016 proposes that the small business tax rate remain at 10.5 per cent after 2016. In order to preserve the integration of the personal and corporate income tax systems, Budget 2016 also proposes to maintain the current gross-up factor and DTC rate applicable to non-eligible dividends (generally, dividends distributed from corporate income taxed at the small business tax rate). Specifically, the gross-up factor applicable to non-eligible dividends will be maintained at 17 per cent and the corresponding DTC rate at 21/29 of the gross-up amount. Expressed as a percentage of the grossed-up amount of a non-eligible dividend, the effective rate of the DTC in respect of such a dividend will remain at 10.5 per cent after 2016, in line with the small business tax rate.
Multiplication of the Small Business Deduction
The small business deduction includes rules that are intended to preclude the multiplication of access to the deduction. Budget 2016 proposes changes to address concerns about partnership and corporate structures that multiply access to the small business deduction.
The specified partnership income rules in the Income Tax Act are intended to eliminate the multiplication of the small business deduction in respect of a partnership of corporations that are not associated with each other. In such a case, a single business limit applies with respect to the partnership’s business. In the absence of these rules, each CCPC that is a member of a partnership could claim a separate small business deduction of up to $500,000 in respect of the portion of the partnership’s active business income allocated to it.
In general terms, the small business deduction that a CCPC that is a member of a partnership can claim in respect of its income from the partnership is limited to the lesser of the active business income that it receives as a member of the partnership (its “partnership ABI”) and its pro-rata share of a notional $500,000 business limit determined at the partnership level (its specified partnership income limit, or “SPI limit”). A CCPC’s specified partnership income is added to its active business income from other sources, if any, and the CCPC can claim the small business deduction on the total (subject to its annual business limit).
Some taxpayers have implemented structures to circumvent the application of the specified partnership income rules. In a typical structure, a shareholder of a CCPC is a member of a partnership and the partnership pays the CCPC as an independent contractor under a contract for services. As a result, the CCPC claims a full small business deduction in respect of its active business income earned in respect of the partnership because, although the shareholder of the CCPC is a member of the partnership, the CCPC is not a member.
To address this tax planning, Budget 2016 proposes to extend the specified partnership income rules to partnership structures in which a CCPC provides (directly or indirectly, in any manner whatever) services or property to a partnership during a taxation year of the CCPC where, at any time during the year, the CCPC or a shareholder of the CCPC is a member of the partnership or does not deal at arm’s length with a member of the partnership. In general terms, for the purpose of the specified partnership rules:
- a CCPC will be deemed to be a member of a partnership throughout a taxation year if
- it is not otherwise a member of the partnership in the taxation year,
- it provides services or property to the partnership at any time in the taxation year,
- a member of the partnership does not deal at arm’s length with the CCPC, or a shareholder of the CCPC, in the taxation year, and
- it is not the case that all or substantially all of the CCPC’s active business income for the taxation year is from providing services or property to arm’s length persons other than the partnership;
- a CCPC that is a member of a partnership (including a deemed member) will have its active business income from providing services or property to the partnership deemed to be partnership ABI; and
- the SPI limit of a deemed member of a partnership will initially be nil (as it does not receive any allocations of income from the partnership). However, an actual member of the partnership who does not deal at arm’s length with a deemed member of the partnership will be entitled to notionally assign to the deemed member all of or a portion of the actual member’s SPI limit in respect of a fiscal period of the partnership that ends in the deemed member’s taxation year (and where the actual partner is an individual, the assignable SPI limit of all members of the partnership will be determined as if they were corporations).
- Kerry and Chris are married.
- Kerry and Leslie each have a 50% interest in the limited liability partnership (LLP).
- Leslie deals at arm’s length with Kerry and Chris.
- None of K Co, C Co or Chris are members of the LLP.
- LLP provides accounting services to the public.
- Kerry owns 100% of K Co and Chris owns 100% of C Co.
- LLP has $200,000 of net income to allocate to its members.
- K Co and C Co each earn $400,000 from providing accounting services to LLP.
- Kerry and Leslie, as partners of LLP, are each taxable on the $100,000 (50% of $200,000) allocation of partnership income at personal income tax rates.
- K Co and C Co are each taxable on their $400,000 of income from providing services to LLP and each pays $42,000 of federal tax (income eligible for the small business deduction ($400,000) multiplied by the effective tax rate (10.5%)).
- Leslie remains taxable on $100,000 at personal income tax rates.
- Kerry remains taxable on $100,000 at personal income tax rates.
- K Co is deemed to be a partner of LLP because it does not deal at arm’s length with Kerry and provides services to LLP.
- The full $250,000 of Kerry’s SPI limit is assigned by Kerry to K Co (i.e., 50% of the partnership’s $500,000 business limit is what Kerry’s SPI limit would be if Kerry were a corporation). (Alternatively, Kerry could have assigned all or a portion of his $250,000 SPI limit to C Co.)
- K Co pays $48,750 of federal tax on $400,000 (income eligible for the small business deduction ($250,000) multiplied by the small business tax rate (10.5%) plus income not eligible for the small business deduction ($150,000) multiplied by the general federal corporate tax rate (15%)).
Chris /C Co
- C Co is deemed to be a partner of LLP because it does not deal at arm’s length with Kerry and provides services to LLP.
- C Co pays $60,000 of federal tax on $400,000 (income not eligible for the small business deduction ($400,000) multiplied by the general federal corporate tax rate (15%)).
This measure will apply to taxation years that begin on or after Budget Day. However, an actual member of a partnership will be entitled to notionally assign all or a portion of the member’s SPI limit in respect of their taxation year that begins before and ends on or after Budget Day.
The tax planning described above could use a corporation (instead of a partnership) to multiply access to the small business deduction. Such multiplication could occur in circumstances where a CCPC earns active business income from providing services or property (directly or indirectly, in any manner whatever) to a private corporation during the CCPC’s taxation year when, in the taxation year, the CCPC, one of its shareholders or a person who does not deal at arm’s length with such a shareholder has a direct or indirect interest in the private corporation.
Budget 2016 proposes to amend the Income Tax Act to address such corporate structures. A CCPC’s active business income from providing services or property (directly or indirectly, in any manner whatever) in its taxation year to a private corporation will be ineligible for the small business deduction where, at any time during the year, the CCPC, one of its shareholders or a person who does not deal at arm’s length with such a shareholder has a direct or indirect interest in the private corporation. This ineligibility for the small business deduction will not apply to a CCPC if all or substantially all of its active business income for the taxation year is earned from providing services or property to arm’s length persons other than the private corporation.
A private corporation that is a CCPC will be entitled to assign all or a portion of its unused business limit to one or more CCPCs that are ineligible for the small business deduction under this proposal because they provided services or property to the private corporation. The amount of active business income earned by a CCPC from providing services or property to the private corporation that will be eligible for the small business deduction (subject to the CCPC’s own business limit) will be the least of:
- the CCPC’s income from providing services or property to the private corporation;
- the amount, if any, of the private corporation’s unused business limit – for its taxation year(s) ending in the taxation year of the CCPC in which it provided services or property to the private corporation – that is assigned to the CCPC; and
- the amount determined by the Minister of National Revenue to be reasonable in the circumstances.
This measure will apply to taxation years that begin on or after Budget Day. However, a private corporation will be entitled to assign all or a portion of its unused business limit in respect of its taxation year that begins before and ends on or after Budget Day.
Avoidance of the Business Limit and the Taxable Capital Limit
The associated corporation rules in the Income Tax Act are relevant for applying both the $500,000 business limit and the $15 million taxable capital limit to CCPCs. The rules strike a balance between allowing different family members to carry on businesses through separate CCPCs eligible for the small business deduction and addressing tax planning arrangements used by a single economic group as an attempt to multiply the small business deduction.
There are a number of technical rules that apply for the purpose of determining if two or more corporations are associated with each other. For instance, two CCPCs are associated where they are controlled by the same person (or group of persons), or by different related persons if one of the related persons (or their CCPC) owns at least 25% of the shares of the other CCPC. However, a corporation that is wholly owned by an individual is generally not associated with a corporation that is wholly owned by the individual’s spouse, sibling or another related individual.
There is a special rule, in subsection 256(2), under which two corporations that would not otherwise be associated will be treated as associated if each of the corporations is associated with the same third corporation. Since the $15 million taxable capital limit is based on the capital of associated corporations, none of the corporations is eligible to claim the small business deduction if the total taxable capital of the three corporations exceeds $15 million.
There is an exception to this special rule: two corporations that are associated because they are associated with the same third corporation will not be treated as being associated with each other if the third corporation is not a CCPC or, if it is a CCPC, it elects not to be associated with the other two corporations for the purpose of determining entitlement to the small business deduction. The effect of this exception is that the third corporation cannot itself claim the small business deduction (if it is a CCPC), but the other two corporations may each claim a $500,000 small business deduction subject to their own taxable capital limit.
The above exception does not affect the associated corporation status for the purpose of another rule that treats a CCPC’s investment income (e.g., interest and rental income) as active business income eligible for the small business deduction if that income is derived from the active business of an associated corporation (subsection 129(6)). Accordingly, two corporations may not be associated for the purpose of claiming the maximum small business deduction while retaining the ability to treat investment income that one receives from the other as active business income.
Where the third corporation is not a CCPC, or is a CCPC that files an election, the other two corporations may claim the small business deduction on investment income that traces to the active business of the third corporation, even though the third corporation could not have claimed the deduction either because the third corporation is not a CCPC or because an election was filed. In addition, where the other two corporations directly earn active business income, their small business deductions are determined without regard to the taxable capital of the third corporation to which they are each associated.
CCPCs that are currently misusing the election to multiply their small business deduction are being challenged by the Government under a specific anti-avoidance rule, and under the general anti-avoidance rule, where the small business deduction is being claimed on investment income that is treated as active business income. However, as any such challenge could be time-consuming and costly, the Government is introducing specific legislative measures to ensure that the appropriate tax consequences apply.
Budget 2016 proposes to amend the Income Tax Act to ensure that investment income derived from an associated corporation’s active business will be ineligible for the small business deduction and be taxed at the general corporate income tax rate where the exception to the deemed associated corporation rule applies (i.e., an election not to be associated is made or the third corporation is not a CCPC). In addition, where this exception applies (such that the two corporations are deemed not to be associated with each other), the third corporation will continue to be associated with each of the other corporations for the purpose of applying the $15 million taxable capital limit.
This measure will apply to taxation years that begin on or after Budget Day.
Consultation on Active versus Investment Business
Budget 2015 announced a review of the circumstances in which income from a business, the principal purpose of which is to earn income from property, should qualify as active business income and therefore potentially be eligible for the small business deduction. The consultation period ended August 31, 2015.
The small business deduction is available on up to $500,000 of active business income of a CCPC. Active business income does not include income from a “specified investment business”, which is generally a business the principal purpose of which is to derive income from property. A “specified investment business” does not include a business that has more than five full-time employees, with the result that income earned from such a business is eligible for the small business deduction even though its principal purpose is to derive income from property.
The number of employees of a business carried on by a CCPC is not relevant to the CCPC’s eligibility for the small business deduction, unless the principal purpose of that business is to earn income from property. Where a business has the principal purpose of earning income from property, the CCPC may still be eligible for the small business deduction if the business has more than five full-time employees.
Whether the principal purpose of a business is to earn income from property is a question of fact. The Canada Revenue Agency has published guidance and a significant body of case law has developed relating to the factors that are relevant in making this determination.
The examination of the active versus investment business rules is now complete. The Government is not proposing any modification to these rules at this time.
Life Insurance Policies
Distributions InvolvingLife Insurance Proceeds
Life insurance proceeds received as a result of the death of an individual insured under a life insurance policy (a “policy benefit”) are generally not subject to income tax. A private corporation may add the amount of a policy benefit it receives to its capital dividend account, which consists of certain non-taxable amounts. A private corporation may elect to pay a dividend as a capital dividend to the extent that the corporation’s capital dividend account has a positive balance. Capital dividends are received tax-free by shareholders.
The income tax rules for partnerships also account for a policy benefit being non-taxable. The adjusted cost base of a partner’s interest in a partnership is increased to the extent of the partner’s share of a policy benefit received by the partnership. A partner can generally withdraw funds from a partnership tax-free to the extent of the partner’s adjusted cost base.
In the life insurance context, only the portion of the policy benefit received by the corporation or partnership that is in excess of the policyholder’s adjusted cost basis of the policy (the “insurance benefit limit”) may be added to the capital dividend account of a corporation or to the adjusted cost base of a partner’s interest in a partnership.
Some taxpayers have structured their affairs so that the insurance benefit limit may not apply as intended, resulting in an artificial increase in a corporation’s capital dividend account balance. A similar result could be achieved under the rules for computing the adjusted cost base of a partner’s interest in a partnership. This planning may allow those taxpayers to avoid income tax on dividends payable by a private corporation or on gains from the disposition of a partnership interest. These results are unintended and erode the tax base.
Although the Government is challenging a number of these structures under the existing tax rules, Budget 2016 proposes to amend the Income Tax Act to ensure that the capital dividend account rules for private corporations, and the adjusted cost base rules for partnership interests, apply as intended. This measure will provide that the insurance benefit limit applies regardless of whether the corporation or partnership that receives the policy benefit is a policyholder of the policy. To that end, the measure will also introduce information-reporting requirements that will apply where a corporation or partnership is not a policyholder but is entitled to receive a policy benefit.
This measure will apply to policy benefits received as a result of a death that occurs on or after Budget Day.
Transfers of Life Insurance Policies
Where a policyholder disposes of an interest in a life insurance policy to an arm’s length person, the fair market value of any consideration is included in computing the proceeds of the disposition. In contrast, where a policyholder disposes of such an interest to a non-arm’s length person, a special rule (the “policy transfer rule”) deems the policyholder’s proceeds of the disposition, and the acquiring person’s cost, of the interest to be the amount that the policyholder would be entitled to receive if the policy were surrendered (the “interest’s surrender value”).
Where the policy transfer rule applies, the amount by which any consideration given for the interest exceeds the interest’s surrender value is not taxed as income under the rules that apply to dispositions of interests in life insurance policies. In addition, this excess will ultimately be reflected in the policy benefit under that policy. Where the policy benefit is received by a private corporation, it can be paid tax-free to that corporation’s shareholders. Where this is the case and consideration to acquire the interest was not recognized under the policy transfer rule, the amount of the excess is effectively extracted from the private corporation a second time as a tax-free, rather than as a taxable, amount. These results are unintended and erode the tax base. Similar concerns also arise in the partnership context and where an interest in a policy is contributed to a corporation as capital.
Budget 2016 proposes amendments to the Income Tax Act to ensure that amounts are not inappropriately received tax-free by a policyholder as a result of a disposition of an interest in a life insurance policy. The measure will, in applying the policy transfer rule, include the fair market value of any consideration given for an interest in a life insurance policy in the policyholder’s proceeds of the disposition and the acquiring person’s cost. In addition, where the disposition arises on a contribution of capital to a corporation or partnership, any resulting increase in the paid-up capital in respect of a class of shares of the corporation, and the adjusted cost base of the shares or of an interest in the partnership, will be limited to the amount of the proceeds of the disposition.
This measure will apply to dispositions that occur on or after Budget Day.
Budget 2016 also proposes to amend the capital dividend account rules for private corporations and the adjusted cost base rules for partnership interests. This amendment will apply where an interest in a life insurance policy was disposed of before Budget Day for consideration in excess of the proceeds of the disposition determined under the policy transfer rule. In this case, the amount of the policy benefit otherwise permitted to be added to a corporation’s capital dividend account, or the adjusted cost base of an interest in a partnership, will be reduced by the amount of the excess. In addition, where an interest in a life insurance policy was disposed of before Budget Day under the policy transfer rule to a corporation or partnership as a contribution of capital, any increase in the paid-up capital in respect of a class of shares of the corporation, and the adjusted cost base of the shares or of an interest in the partnership, that may otherwise have been permitted will be limited to the amount of the proceeds of the disposition.
This measure will apply in respect of policies under which policy benefits are received as a result of deaths that occur on or after Budget Day.
Debt Parking to Avoid Foreign Exchange Gains
In general, all amounts relevant to the computation of income under the Income Tax Act must be reported in Canadian dollars. Therefore, if any such amount is denominated in a foreign currency, it must be converted into Canadian dollars at the relevant dates. Consequently, a taxpayer may realize a gain or a loss on the repayment of a debt denominated in a foreign currency as a result of the fluctuation of the foreign currency relative to the Canadian dollar.
A specific rule for computing foreign exchange capital gains and losses on a debt deems a gain made or loss sustained on a foreign currency debt that is on capital account to be a capital gain or loss from the disposition of the foreign currency. For this purpose, a gain or loss is generally considered to have been made or sustained only when it is realized, such as when the debt is settled or extinguished.
To avoid realizing a foreign exchange gain on the repayment of a foreign currency debt, some taxpayers have entered into debt-parking transactions. In a typical debt-parking transaction, instead of directly repaying a debt with an accrued foreign exchange gain, the debtor would arrange for a person with which it does not deal at arm’s length to acquire the debt from the initial creditor for a purchase price equal to its principal amount. Thus, from the initial creditor’s perspective, the debt would effectively be repaid. However, from the debtor’s perspective, the debt would remain owing. Specifically, the transfer of the debt by the initial creditor to the non-arm’s length person would generally avoid settling or extinguishing the debt. The non-arm’s length person, as the new creditor, would then let the debt remain outstanding to avoid the debtor realizing a foreign exchange gain.
The debt-parking rules in the Income Tax Act were introduced to address the use of this technique to avoid the application of the debt forgiveness rules. Where the debt-parking rules apply to a debt, it is deemed to have been repaid for an amount equal to its cost to the new creditor. Any difference between this amount and the principal amount of the debt is treated as a forgiven amount, which is first applied to reduce the tax attributes of the debtor; one-half of any residual amount is then generally included in the debtor’s income. While the debt-parking rules would deem the foreign currency debt to have been settled at the time of the acquisition by the new creditor, any foreign exchange gain realized on the debt would not be taken into account in determining the forgiven amount of the debtor. As a result, the foreign exchange gain would neither reduce the tax attributes, nor be included in the income, of the debtor.
Debt-parking transactions undertaken to avoid foreign exchange gains can be challenged by the Government under the existing general anti-avoidance rule. However, as any such challenge could be both time-consuming and costly, the Government is introducing a specific legislative measure to ensure that the appropriate tax consequences apply.
Budget 2016 proposes to introduce rules so that any accrued foreign exchange gains on a foreign currency debt will be realized when the debt becomes a parked obligation. More particularly, the debtor will be deemed to have made the gain, if any, that it otherwise would have made if it had paid an amount (expressed in the currency in which the debt is denominated) in satisfaction of the principal amount of the debt equal to:
- where the debt becomes a parked obligation as a result of its acquisition by the current holder, the amount for which the debt was acquired; and
- in other cases, the fair market value of the debt.
For this purpose, a foreign currency debt will become a parked obligation at any particular time where:
- at that time, the current holder of the debt does not deal at arm’s length with the debtor or, where the debtor is a corporation, has a significant interest in the corporation; and
- at any previous time, a person who held the debt dealt at arm’s length with the debtor and, where the debtor is a corporation, did not have a significant interest in the corporation.
In general, a person will have a significant interest in a corporation if the person (and non-arm’s length persons) owns shares of the corporation to which 25 per cent or more of the votes or value are attributable. Rules similar to those contained in the debt forgiveness rules will be introduced to determine whether a creditor is related to, and therefore not dealing at arm’s length with, a debtor where trusts and partnerships are involved. In particular, each partnership and trust will be treated as a corporation having a single class of capital stock of 100 voting shares. The members of the partnership, or the beneficiaries under the trust, will be treated as owning such shares in accordance with their proportionate interests in the partnership or trust. The proportionate interest of a partner or a beneficiary will be based on the fair market value of the partner’s or beneficiary’s interest in the partnership or trust.
Exceptions will be provided so that a foreign currency debt will not become a parked obligation in the context of certain bona fide commercial transactions. In particular, a foreign currency debt will not be a parked obligation if the debt is acquired by the current holder as part of a transaction or series of transactions that results in the acquisition of a significant interest in, or control of, the debtor by the current holder (or a person related to the current holder) unless one of the main purposes of the transaction or series of transactions was to avoid a foreign exchange gain. In addition, a change of status between the debtor and the current holder (i.e., from dealing at arm’s length to not dealing at non-arm’s length or, where the debtor is a corporation, from the current holder not having a significant interest in the debtor to having one) will not cause the debt to become a parked obligation unless one of the main purposes of the transaction or series of transactions that gave rise to the change of status was to avoid a foreign exchange gain.
Related rules will provide relief to financially distressed debtors. This relief will be similar to the deductions currently available to debtors with respect to amounts included in income because of the application of the debt forgiveness rules. For instance, where a debtor is a corporation resident in Canada, a rule will ensure that the combined federal/provincial taxes payable on a deemed foreign exchange capital gain will not result in the corporation’s liabilities exceeding the fair market value of its assets.
This measure will apply to a foreign currency debt that meets the conditions to become a parked obligation on or after Budget Day. There will be an exception where the meeting of these conditions occurs before 2017 and results from a written agreement entered into before Budget Day.
Valuation for Derivatives
The Income Tax Act contains rules for the valuation of property held as inventory for the purpose of computing a taxpayer’s income or loss from a business. In most cases, a taxpayer can choose to value each inventory property at the lower of its cost and its fair market value at the end of the year.
Under this lower of cost and market method, the taxpayer compares the cost of each inventory property with its fair market value at the end of the year. If the fair market value of the property is less than its cost, the difference is deductible in computing the taxpayer’s income for the year. For the purpose of the lower of cost and market method, this lower amount is then used as the property’s cost for the subsequent year. However, if the fair market value of the property at the end of the year is greater than its cost, no amount is added to the taxpayer’s income for the year. The lower of cost and market method therefore effectively permits losses on inventory property to be recognized on an accrual basis while gains on the same property are recognized only when it is ultimately sold.
The asymmetrical nature of this inventory valuation method does not generally raise tax policy concerns when applied to conventional types of inventory, such as tangible goods held for sale. However, a recent decision of the Tax Court of Canada held that a derivative that provides rights to a taxpayer and is held on income account would be considered inventory property. On that basis, derivatives held on income account that are neither mark-to-market property (which are not considered to be inventory property) nor property of a business that is an adventure or concern in the nature of trade (which must be valued at its cost to the taxpayer) could potentially qualify for the lower of cost and market method under the inventory valuation rules.
The application of the lower of cost and market method to these derivatives could lead to significant tax base concerns given their potentially higher volatility and longer holding periods, as compared to conventional inventory property.
To protect the Canadian tax base, Budget 2016 proposes to exclude derivatives from the application of the inventory valuation rules while maintaining the status of such property as inventory. A related rule will also be introduced to ensure that taxpayers are not able to value derivatives using the lower of cost and market method under the general principles for the computation of profit for tax purposes.
The measure will apply to derivatives entered into on or after Budget Day.
Eligible Capital Property
Budget 2014 announced a consultation on the conversion of eligible capital property (ECP) into a new class of depreciable property. This conversion will simplify the tax compliance burden for affected taxpayers. The Government has received a number of comments from stakeholders responding to the policy underlying the proposal.
Some stakeholders have noted that this proposal will result in the elimination of a tax deferral opportunity that arises from the treatment of gains on the sale of ECP as active business income. In contrast, gains on the disposition of depreciable property are taxed as capital gains. This outcome is consistent with the overall intent of the proposal to treat ECP as a type of depreciable property.
Budget 2016 proposes to repeal the ECP regime, replace it with a new capital cost allowance (CCA) class available to businesses and provide rules to transfer taxpayers’ existing cumulative eligible capital (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.
The 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 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 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.
New CCA class
Under this proposal, a new class of depreciable property for CCA purposes will be introduced. Expenditures that are currently added to CEC (at a 75-per-cent inclusion rate) will be included in the new CCA class at a 100-per-cent inclusion rate. Because of this increased expenditure recognition, the new class will 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 will 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 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 will result in an adjustment to the balance of the new CCA class when the specific property is acquired or disposed of. These amounts will also be relevant in the calculation of recapture and gains for the specific property.
Special rules will 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 will be accounted for by adjusting the capital cost of the goodwill of the business. Every business will 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 will 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 will 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 exceeds the capital cost of the goodwill, the excess will be a capital gain. Previously deducted CCA will 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 will be calculated and transferred to the new CCA class as of January 1, 2017. The opening balance of the new CCA class in respect of a business will 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 will be 7 per cent in respect of expenditures incurred before January 1, 2017.
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 will reduce the balance of the new CCA class at a 75-per-cent rate. Receipts that qualify for the reduced rate will 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 will reduce the new CCA class, will generally equal the amount that could have been received under the ECP regime before triggering an ECP gain. This rule will ensure that receipts do not result in excess recapture when applied to reduce the balance of the new CCA class.
Budget 2016 also proposes the following special rules to simplify the transition for small businesses:
- To allow small initial balances to be eliminated quickly, a taxpayer will be permitted to deduct as capital cost allowance, in respect of expenditures incurred before 2017, the greater of $500 per year and the amount otherwise deductible for that year. This additional allowance will be provided for taxation years that end prior to 2027.
- In the past, many businesses have had relatively small CEC balances, which were solely due to their incorporation expenses. To reduce compliance burdens in respect of these expenses, a separate business deduction will be provided for these expenditures, such that the first $3,000 of these expenditures will be treated as a current expense rather than being added to the new CCA class. This will allow approximately 80 per cent of newly incorporated businesses to deduct the full amount of the incorporation expenses in their initial year.
This measure, including the transitional rules, will apply as of January 1, 2017.
Back-to-Back Loan Rules: Shareholder Loans
See the discussion of this item under “Extension of the Back-to-Back Loan Rules” in International Tax Measures, below.
International Tax Measures
Base Erosion and Profit Shifting
The Government recognizes the importance of protecting the integrity of the Canadian tax base and ensuring that everyone pays their fair share of tax. Doing so is consistent with the principles of fairness, economic efficiency and responsible fiscal management.
Consistent with these objectives, Canada has been actively engaged in the multilateral efforts of the G20 and the Organisation for Economic Co-operation and Development (OECD) to address base erosion and profit shifting (BEPS). BEPS refers to tax planning arrangements undertaken by multinational enterprises (MNEs) which, though often legal, exploit the interaction between domestic and international tax rules to minimize taxes. These arrangements result in taxable profits being shifted away from the jurisdiction where the underlying economic activity has taken place, often to low- or no-tax jurisdictions. The BEPS project aims to improve the integrity of international tax rules to ensure that businesses pay taxes on their profits based on where the economic activities giving rise to those profits take place and where value is created.
On October 5, 2015, the OECD released the package of final reports from the BEPS project, responding to a series of issues that had been identified in the July 2013 BEPS Action Plan. At the November 2015 G20 Leaders’ Summit, Canada and the other G20 members endorsed the package of recommendations developed under the BEPS project. They noted that widespread and consistent implementation will be critical to the effectiveness of the project.
To improve the integrity of Canada’s international tax system, the Government is moving forward with a number of initiatives to address BEPS. Budget 2016 proposes new legislation to strengthen transfer pricing documentation by introducing country-by-country reporting for large MNEs.
The Government is also acting on certain other recommendations from the BEPS project:
- The Canada Revenue Agency is applying revised international guidance on transfer pricing by multinational enterprises, which provides an improved interpretation of the arm’s length principle.
- Canada is participating in international work to develop a multilateral instrument to streamline the implementation of treaty-related BEPS recommendations, including addressing treaty abuse.
- The Canada Revenue Agency will undertake the spontaneous exchange with other tax administrations of tax rulings that could potentially give rise to BEPS concerns in the absence of such exchanges.
Details on these initiatives are set out below.
The Government is continuing to examine the recommendations pertaining to the other aspects of BEPS. Canada is committed to the BEPS project and will continue to work with the international community to ensure a coherent and consistent response to BEPS.
Transfer Pricing Documentation - Country-by-Country Reporting
The expression “transfer prices” refers to the prices at which goods, services and intangibles are traded across international borders between persons who do not deal with each other at arm’s length. In order to ensure that taxable income in each jurisdiction reflects the market value of intra-group activity, the tax rules in Canada and many other countries generally require MNEs to set transfer prices in transactions between their affiliated entities in different countries on an arm’s length basis. These rules also require MNEs to prepare transfer pricing documentation to describe their intra-group transactions and the methodologies they applied to set prices for these transactions.
The OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations provide guidance on the application of the arm’s length principle. The recommendations arising from the BEPS project include changes to the Guidelines to incorporate new standards for transfer pricing documentation. These common standards are intended to help align transfer pricing documentation across jurisdictions. This will provide tax administrations with better information for conducting risk assessments, while reducing compliance costs for businesses. The recommendations include a minimum standard for country-by-country reporting.
The country-by-country report is a form that a large MNE will be required to file with the tax administration of the country in which the MNE’s ultimate parent entity resides. A country-by-country report will include the global allocation, by country, of key variables for the MNE including: revenue, profit, tax paid, stated capital, accumulated earnings, number of employees and tangible assets, as well as the main activities of each of its subsidiaries. These reports will provide high-level overviews of the global operations of large MNEs to enhance transparency and assist tax administrations in performing effective risk assessments.
Where a jurisdiction receives a country-by-country report from a member of an MNE, that jurisdiction will automatically exchange the report with other jurisdictions in which the MNE operates, provided that, in each case, the other jurisdiction has implemented country-by-country reporting, the two jurisdictions have a legal framework in place for automatic exchange of information (e.g., under a bilateral tax treaty or the multilateral Convention on Mutual Administrative Assistance in Tax Matters), and they have entered into a competent authority agreement relating to country-by-country reporting. If the jurisdiction where a subsidiary resides cannot obtain the country-by-country report from the parent’s jurisdiction through automatic exchange of information, then in certain cases the tax administration of the subsidiary’s jurisdiction may require the subsidiary to file the country-by-country report. An MNE may avoid having this filing requirement imposed on multiple subsidiaries in multiple jurisdictions by designating one of its subsidiaries to be a “surrogate” for filing purposes. As a result of this designation, provided that the surrogate is located in a jurisdiction which has implemented country-by-country reporting, the surrogate would file the country-by-country report on behalf of the MNE as a whole.
Consistent with the recommendations of the BEPS project, Budget 2016 proposes to implement country-by-country reporting. This measure will apply only to MNEs with total annual consolidated group revenue of €750 million or more. Where such an MNE has an ultimate parent entity that is resident in Canada (or a Canadian resident subsidiary in the circumstances set out above), it will be required to file a country-by-country report with the Canada Revenue Agency within one year of the end of the fiscal year to which the report relates. First exchanges between jurisdictions of country-by-country reports are expected to occur by June 2018. Before any exchange with another jurisdiction, the Canada Revenue Agency will formalize an exchange arrangement with the other jurisdiction and will ensure that it has appropriate safeguards in place to protect the confidentiality of the reports. Draft legislative proposals will be released for comment in the coming months.
Consistent with the BEPS project recommendations released in autumn 2015, country-by-country reporting will be required for taxation years that begin after 2015.
Revised Transfer Pricing Guidance
The principle discussed above that transfer prices on intra-group transactions by an MNE should reflect arm’s length terms is the basis of Article 9 of the OECD and United Nations Model Tax Conventions. This principle is included in most bilateral tax treaties, including all of Canada’s tax treaties. Many countries also include the arm’s length principle in their legislation. In Canada, the arm’s length principle is mandated by section 247 of the Income Tax Act.
As noted above, the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations provide guidance on the application of the arm’s length principle. Although the Transfer Pricing Guidelines are not explicitly incorporated into Canada’s legislation, they are used by taxpayers, the Canada Revenue Agency and the courts for interpreting and applying section 247. Consistent application of the arm’s length principle across jurisdictions, through application of the Transfer Pricing Guidelines, helps to ensure the proper measurement of taxable income in each jurisdiction, avoid double taxation, minimize inter-jurisdictional conflict between tax administrations and promote international trade and investment.
The recommendations arising from the BEPS project include revisions to the Transfer Pricing Guidelines. These revisions provide an improved interpretation of the arm’s length principle, and are intended to better ensure alignment of the profits of MNEs with the economic activities generating those profits. The clarifications provided in the revisions generally support the Canada Revenue Agency’s current interpretation and application of the arm’s length principle, as reflected in its audit and assessing practices. These revisions are thus being applied by the Canada Revenue Agency as they are consistent with current practices.
In two areas, however, where the revisions to the Transfer Pricing Guidelines are not yet complete, the Canada Revenue Agency will not be adjusting its administrative practices at this time. The BEPS project participants are still engaged in follow-up work on the development of a threshold for the proposed simplified approach to low value-adding services. Work is also continuing to clarify the definition of risk-free and risk-adjusted returns for minimally functional entities (often referred to as “cash boxes”). Canada will decide on a course of action with regards to these measures after the outstanding work is complete.
The BEPS project identifies treaty abuse, and in particular treaty shopping, as one of the most important sources of BEPS concerns. Treaty shopping occurs, for example, where a third-country resident creates an intermediary holding company in a treaty country for purposes of channelling, through the company, income and gains sourced in Canada to access benefits granted under a tax treaty that would not otherwise have been available to them.
Treaty shopping effectively extends tax treaty benefits to third-country residents in circumstances that were not contemplated when the tax treaty was entered into and without any reciprocal benefits accruing to Canadian investors or to Canada. This practice undermines the bilateral nature of tax treaties and the balance of compromise reached between Canada and its treaty partners.
The BEPS treaty abuse minimum standard requires countries to include in their tax treaties an express statement that their common intention is to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements. In addition, the treaty abuse minimum standard requires countries to implement this common intention by adopting in their tax treaties one of two approaches to treaty anti-abuse rules. The first of these is a general anti-abuse rule that uses the criterion of whether one of the principal purposes of an arrangement or transaction was to obtain treaty benefits in a way that is not in accordance with the object and purpose of the relevant treaty provisions (a principal purpose test). The second approach is the use of a more mechanical and specific anti-abuse rule that requires satisfaction of a series of tests in order to qualify for treaty benefits (a limitation on benefits rule).
Budget 2016 confirms the Government’s commitment to address treaty abuse in accordance with the minimum standard. Canada currently has one treaty that has adopted a limitation-on-benefits approach as well as several treaties that have adopted a limited principal purpose test. Going forward, Canada will consider either minimum standard approach, depending on the particular circumstances and discussions with Canada’s tax treaty partners. Amendments to Canada’s tax treaties to include a treaty anti-abuse rule could be achieved through bilateral negotiations, the multilateral instrument that will be developed in 2016, or a combination of the two. The multilateral instrument is a tax treaty that many countries could sign modifying certain provisions of existing bilateral treaties. Canada is actively participating in international work to develop the multilateral instrument, which would streamline the implementation of treaty-related BEPS recommendations, including treaty abuse.
Spontaneous Exchange of Tax Rulings
The lack of transparency in connection with certain tax rulings provided by tax administrations was identified as an area of concern by the BEPS project. This lack of transparency can give rise to mismatches in tax treatment and instances of double non-taxation.
The BEPS project developed a framework for the spontaneous exchange of certain tax rulings that could give rise to BEPS concerns in the absence of such exchanges. The framework covers six categories of rulings: (i) rulings related to preferential regimes; (ii) cross-border unilateral advance pricing arrangements; (iii) rulings giving a downward adjustment to profits; (iv) permanent establishment rulings; (v) conduit rulings; and (vi) any other type of ruling agreed to in the future.
The Canada Revenue Agency has an established exchange of information program and exchanges information under Canada’s tax treaties, tax information exchange agreements and the multilateral Convention on Mutual Administrative Assistance in Tax Matters. These agreements include provisions to restrict the use of the exchanged information, typically limiting its use to the enforcement of tax laws, and to ensure the confidentiality of the information. Any information exchanged with respect to the targeted tax rulings will be subject to the confidentiality provisions in the relevant agreement and therefore protected in the same manner as taxpayer information.
Budget 2016 confirms the Government’s intention to implement the BEPS minimum standard for the spontaneous exchange of certain tax rulings. The Canada Revenue Agency will commence exchanging tax rulings in 2016 with other jurisdictions that have committed to the minimum standard.
Cross-Border Surplus Stripping
The paid-up capital (PUC) of the shares of a Canadian corporation generally represents the amount of capital that has been contributed to the corporation by its shareholders. PUC is a valuable tax attribute because it can be returned to shareholders free of tax. Retained earnings in excess of PUC that are distributed to shareholders are normally treated as taxable dividends that are, for non-resident shareholders, subject to a 25-per-cent withholding tax (unless reduced under an applicable tax treaty).
The Income Tax Act contains an “anti-surplus-stripping” rule (section 212.1) that is intended to prevent a non-resident shareholder from entering into a transaction to extract free of tax (or “strip”) a Canadian corporation’s retained earnings (or “surplus”) in excess of the PUC of its shares or to artificially increase the PUC of the shares. When applicable, the anti-surplus-stripping rule results in a deemed dividend to the non-resident or a suppression of the PUC of the shares that would otherwise have been increased as a result of the transaction.
An exception to this anti-surplus-stripping rule is found in subsection 212.1(4). It applies where a Canadian corporation (the “Canadian purchaser corporation”) acquires shares of a non-resident corporation that itself owns shares of a Canadian corporation – that is, where the non-resident is “sandwiched” between the two Canadian corporations – and the non-resident disposes of shares of the lower-tier Canadian corporation to the Canadian purchaser corporation in order to unwind the sandwich structure. Some non-resident corporations with Canadian subsidiaries have misused this exception by reorganizing the group into a sandwich structure with a view to qualifying for this exception, as part of a series of transactions designed to artificially increase the PUC of shares of those Canadian subsidiaries.
Budget 2016 proposes to amend the exception in subsection 212.1(4) to ensure that it applies as intended. In particular, it will be clarified that, consistent with the policy of the anti-surplus-stripping rule, the exception does not apply where a non-resident both (i) owns, directly or indirectly, shares of the Canadian purchaser corporation, and (ii) does not deal at arm’s length with the Canadian purchaser corporation.
Transactions that misuse subsection 212.1(4) are currently being challenged by the Government under existing provisions of the Income Tax Act, including the general anti-avoidance rule; these challenges will continue with respect to transactions that occurred prior to Budget Day. This measure is intended to promote certainty and clarify the intended scope of the existing exception.
To address the possibility of situations where it may be uncertain whether consideration has been received by a non-resident from the Canadian purchaser corporation in respect of the disposition by the non-resident of shares of the lower-tier Canadian corporation, Budget 2016 also proposes to clarify the application of the anti-surplus-stripping rule by deeming the non-resident to receive non-share consideration from the Canadian purchaser corporation in such situations. The amount of this deemed consideration will be determined by reference to the fair market value of the shares of the lower-tier Canadian corporation received by the Canadian purchaser corporation.
This measure will apply in respect of dispositions occurring on or after Budget Day.
Extension of the Back-to-Back Rules
The Income Tax Act contains “back-to-back loan” rules that prevent taxpayers from interposing a third party between a Canadian borrower and a foreign lender in an attempt to avoid the application of rules that would otherwise apply if a loan were made directly between the two taxpayers. In particular, the back-to-back loan rules in Part XIII of the Income Tax Act ensure that the amount of withholding tax in respect of a cross-border interest payment cannot be reduced through the use of a back-to-back arrangement.
To prevent the erosion of the Canadian tax base through the use of back-to-back arrangements, Budget 2016 proposes to build on the existing back-to-back loan rules by:
- amending the existing back-to-back loan rules in Part XIII to extend their application to rents and royalties;
- adding character substitution rules to the back-to-back rules in Part XIII;
- adding back-to-back loan rules to the existing shareholder loan rules in the Income Tax Act; and
- clarifying the application of the back-to-back loan rules to multiple-intermediary structures.
Back-to-Back Rules for Rents, Royalties and Similar Payments
Part XIII generally imposes a 25-per-cent withholding tax on cross-border payments of rents, royalties or similar payments (collectively referred to as “royalties”) made by Canadian-resident persons to non-residents. This 25-per-cent withholding tax rate is often reduced by a tax treaty. Given that not all tax treaties negotiated by Canada provide the same withholding rates and that some countries do not have a tax treaty with Canada, there is an incentive for some taxpayers to interpose, between a Canadian-resident payor of royalties and a non-resident payee, an intermediary entity located in a favourable tax treaty country.
While such transactions may be subject to challenge under existing anti-avoidance rules, Budget 2016 proposes to address these back-to-back arrangements by extending the basic concepts of the back-to-back loan rules under Part XIII to royalty payments. Where they apply, the proposed rules for royalty payments will deem the Canadian-resident payor to have made a royalty payment directly to the ultimate non-resident recipient, and an amount of withholding tax, equal to the amount of withholding tax otherwise avoided as a result of the back-to-back arrangement, will become payable on the deemed royalty payment.
Similar to the existing back-to-back loan rules in Part XIII, the proposed rules for royalties will consider two arrangements to form a back-to-back arrangement if they are sufficiently connected. Specifically, a back-to-back arrangement will exist where a Canadian-resident person makes a royalty payment in respect of a particular lease, licence or similar agreement (the “Canadian leg”) to a person or entity resident in a tax treaty country (referred to as the “intermediary”) and the intermediary (or a person or partnership that does not deal at arm’s length with the intermediary) has an obligation to pay an amount to another non-resident person in respect of a lease, licence or similar agreement, or of an assignment or an instalment sale (the “second leg”), if one of the following conditions is met:
- the amount that the intermediary is obligated to pay is established, in whole or in part, by reference to
- the royalty payment made by, or the royalty payment obligation of, the Canadian-resident person; or
- the fair market value of property; any revenue, profits, income, or cash flow from property; or any other similar criteria in respect of property, where a right to use the property is granted under the Canadian leg; or
- it can reasonably be concluded based upon all the facts and circumstances that the Canadian leg was entered into or permitted to remain in effect because the second leg was, or was anticipated to be, entered into. In this regard, the fact that the Canadian leg and the second leg are in respect of the same property would generally not be considered sufficient on its own to support the conclusion that this condition has been met.
As under the existing back-to-back loan rules in Part XIII, the proposed rules for royalties will apply to a back-to-back arrangement where the withholding tax that is payable under Part XIII on a royalty payment to the intermediary is less than the tax that would be payable under Part XIII on a direct payment to the other non-resident.
This measure will apply to royalty payments made after 2016.
Character Substitution Rules
The back-to-back loan rules contemplate a loan between a Canadian-resident person and an intermediary in combination with a loan between the intermediary and another non-resident person. Similarly, the proposed back-to-back rules for royalties involve a combination of two agreements that relate to royalty payments. However, in each case, arrangements that provide payments that are economically similar to interest or royalty payments can be substituted between the intermediary and the other non-resident person.
Budget 2016 proposes to extend the back-to-back rules in Part XIII to prevent their avoidance through the substitution of economically similar arrangements between the intermediary and another non-resident person. Specifically, a back-to-back arrangement may exist in situations where
- interest is paid by a Canadian-resident person to an intermediary and there is an agreement that provides payments in respect of royalties between the intermediary and a non-resident person;
- royalties are paid by a Canadian-resident person to an intermediary and there is a loan between the intermediary and a non-resident person; or
- interest or royalties are paid by a Canadian-resident person to an intermediary and a non-resident person holds shares of the intermediary that include certain obligations to pay dividends or that satisfy certain other conditions (e.g., they are redeemable or cancellable).
Under these proposed character substitution rules, a back-to-back arrangement will exist where a sufficient connection is established between the arrangement under which an interest or royalty payment is made from Canada and the intermediary’s obligations in each of the three situations described above. The presence of such a connection will be determined by applying tests similar to those used for back-to-back loans and back-to-back royalty arrangements, but adapted to reflect the particular circumstances of these arrangements. Where a back-to-back arrangement exists under these proposed rules, an additional payment of the same character as that paid by the Canadian resident to the intermediary will be deemed to have been made directly by the Canadian resident payor to the other non-resident person.
This measure will apply to interest and royalty payments made after 2016.
Back-to-Back Shareholder Loan Rules
The shareholder loan rules generally apply where a shareholder of a corporation owes a debt to the corporation. If the shareholder loan rules apply in respect of a debt owing to a corporation by its shareholder, either (i) where certain conditions are met (generally, if the debt remains outstanding for more than one year after the end of the corporation’s taxation year), the amount of the debt is included in the shareholder’s income on the basis that such debt is, in substance, equivalent to a distribution of the corporation’s profits, or (ii) an amount determined by reference to a prescribed rate is included in the shareholder’s income as a shareholder benefit. Where the shareholder is a non-resident, these inclusions are deemed to be dividends subject to withholding tax under Part XIII.
In situations where the shareholder loan rules would otherwise apply in respect of a debt owing by a shareholder to a corporation, there is an incentive to use a back-to-back arrangement to avoid their application by interposing a third party (that is not connected to the shareholder) between the corporation and its shareholder, in order to avoid the income inclusion or withholding tax. To address the use of back-to-back arrangements to circumvent the shareholder loan rules, Budget 2016 proposes to amend the shareholder loan rules to include rules that are similar to the existing back-to-back loans rules, except that the proposed rules will apply to debts owing to Canadian-resident corporations rather than debts owing by Canadian-resident taxpayers.
If the proposed rules apply in respect of a debt owing by a shareholder of a Canadian-resident corporation, the shareholder will be deemed to be indebted directly to the corporation. A back-to-back shareholder loan arrangement will be considered to exist where a particular person or partnership (referred to as the “intermediary”), that is not connected with the shareholder, is owed an amount (the “shareholder debt”) by the shareholder (or a person or partnership that is connected with the shareholder or that is a member of a partnership that is a shareholder) and one of the following two conditions is met:
- the intermediary owes an amount (the “intermediary debt”) to the Canadian-resident corporation and either recourse in respect of the intermediary debt is limited in whole or in part to amounts recovered by the intermediary on the shareholder debt, or it can reasonably be concluded that the shareholder debt became owing or was permitted to remain owing because the intermediary debt was or was anticipated to be entered into; or
- the intermediary has a “specified right” in respect of a particular property that was granted by the Canadian-resident corporation and either the existence of the specified right is required under the terms of the shareholder debt or it can reasonably be concluded that the shareholder debt became owing or was permitted to remain owing because the specified right was or was anticipated to be granted.
The expression “specified right” will have the same meaning as in the existing back-to-back loan rules.
If a back-to-back shareholder loan arrangement exists, the shareholder will be deemed to become indebted to the Canadian-resident corporation in an amount that is equal to the lesser of: (i) the amount of the shareholder debt, and (ii) the amount of the intermediary debt plus the total fair market value of property over which the intermediary was granted a specified right. Further, to the extent that the amount of the deemed indebtedness that would be determined in this manner either increases or decreases at any time after the debt is deemed to arise, (i) in the case of an increase, an additional debt equal to the increase will be deemed to become owing at that time, and (ii) in the case of a decrease, an amount equal to the decrease will generally be deemed to be repaid on the deemed debt on a first-in, first-out basis.
This measure will apply to back-to-back shareholder loan arrangements as of Budget Day. For back-to-back shareholder loan arrangements that are in place on Budget Day, the deemed indebtedness will be deemed to have become owing on Budget Day.
The existing back-to-back loan rules in Part XIII apply to back-to-back financing structures that involve a single intermediary that borrows funds from a non-resident person and in turn makes a corresponding loan to a Canadian resident (as well as certain financially equivalent arrangements). Although the rules can apply to structures that include two or more intermediaries (e.g., back-to-back-to-back structures involving two intermediaries), and such structures raise similar tax policy concerns as back-to-back structures, the manner in which the existing rules apply to certain multiple-intermediary structures may not be entirely clear.
Budget 2016 proposes to clarify the application of the existing back-to-back rules in Part XIII to back-to-back arrangements involving multiple intermediaries. The proposed back-to-back rules for royalty payments will also apply to multiple-intermediary back-to-back arrangements. Under these proposed rules, a back-to-back arrangement will comprise all the arrangements that are sufficiently connected to the arrangement under which a Canadian resident makes a cross-border payment of interest or royalties to an intermediary. The presence of such a connection will be established by applying similar tests to those that are used to establish a sufficient connection in a single intermediary context. Where a back-to-back arrangement involving multiple intermediaries exists, an additional payment (of the same character as that paid by the Canadian resident to the first intermediary) will be deemed to have been paid directly by the Canadian resident to the ultimate non-resident recipient in a chain of connected arrangements.
Budget 2016 also proposes to include rules addressing multiple-intermediary arrangements within the proposed back-to-back shareholder loan rules.
This measure will apply to payments of interest or royalties made after 2016 and to shareholder debts as of January 1, 2017.
Sales and Excise Tax Measures
Medical and Assistive Devices
Medical and assistive devices that are specially designed to assist an individual in treating or coping with a chronic disease or illness or a physical disability are generally zero-rated under the Goods and Services Tax/Harmonized Sales Tax (GST/HST). Zero-rating means that suppliers do not charge purchasers GST/HST on these medical devices and are entitled to claim input tax credits to recover the GST/HST paid on inputs in relation to these supplies. The medical devices eligible for zero-rating are listed in the GST/HST legislation.
Budget 2016 proposes to add insulin pens, insulin pen needles and intermittent urinary catheters to the list of zero-rated medical devices to reflect the evolving nature of the health care sector.
Insulin Pens and Insulin Pen Needles
Insulin infusion pumps and insulin syringes are currently included in the list of zero-rated medical devices. These devices are used to inject insulin for the treatment of diabetes. Insulin itself is currently zero-rated as a drug.
Insulin pens are also used to inject insulin for the treatment of diabetes, and are an alternative to infusion pumps or syringes. Budget 2016 proposes to add insulin pens and insulin pen needles to the list of zero-rated medical devices.
This measure will apply to supplies made after Budget Day and to supplies made on or before Budget Day unless the supplier charged, collected or remitted GST/HST in respect of the supply.
Intermittent Urinary Catheters
Urinary appliances that are designed to be worn by an individual are currently included in the list of zero-rated medical devices. Intermittent urinary catheters are an alternative to catheters that are left in place.
Budget 2016 proposes to add intermittent urinary catheters, if supplied on the written order of a medical doctor, registered nurse, occupational therapist or physiotherapist 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.
Purely Cosmetic Procedures
Supplies of purely cosmetic procedures are not considered to be supplies of basic health care and are intended to be subject to the GST/HST, regardless of the status of the supplier.
Budget 2016 proposes to clarify that the GST/HST generally applies to supplies of purely cosmetic procedures provided by all suppliers, including registered charities. Taxable procedures will generally include surgical and non-surgical procedures aimed at enhancing or altering an individual’s appearance, such as liposuction, hair replacement procedures, hair removal, botulinum toxin injections and teeth whitening.
A cosmetic procedure will continue to be exempt if it is required for medical or reconstructive purposes, such as surgery to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease. As well, cosmetic procedures paid for by a provincial health insurance plan will continue to be exempt.
This measure will apply to supplies made after Budget Day.
Exported Call Centre Services
Under the GST/HST rules, exported supplies are generally relieved (i.e., zero-rated) from the GST/HST. This means that suppliers do not charge purchasers GST/HST on these supplies and are entitled to claim input tax credits to recover the GST/HST paid on inputs used in relation to these supplies.
Budget 2016 proposes to modify the zero-rating rules for certain exported supplies of call centre services. Specifically, the supply of a service of rendering technical or customer support to individuals by means of telecommunications (e.g., by telephone, email or web chat) will generally be zero-rated for GST/HST purposes if:
- the service is supplied to a non-resident person that is not registered for GST/HST purposes; and
- it can reasonably be expected at the time the supply is made that the technical or customer support is to be rendered primarily to individuals who are outside Canada at the time the support is rendered to those individuals.
This measure will apply to supplies made after Budget Day. It will also apply to supplies made on or before Budget Day in cases where the supplier did not, on or before that day, charge, collect or remit an amount as or on account of tax under Part IX of the Excise Tax Act in respect of the supply.
Reporting of Grandparented Housing Sales
Under the transitional rules that applied when a province either joined the harmonized value-added tax system since 2010 or increased its HST rate, certain sales of newly constructed or substantially renovated homes were grandparented for HST purposes. This meant that the housing sale was not subject to the provincial component of the HST or the increased HST rate, as applicable. A housing sale was generally grandparented if the agreement of purchase and sale was entered into in writing on or before the announcement date of the transitional rules and ownership and possession of the housing was transferred on or after the date on which the HST, or the increased HST rate, came into effect.
Under the current rules, builders are subject to special reporting requirements, which involve reporting their grandparented housing sales where the purchaser was not entitled to a GST New Housing Rebate or a GST New Residential Rental Property Rebate. The rules also include penalties for misreporting (i.e., under-reporting, over-reporting or failing to report).
Budget 2016 proposes to simplify builder reporting by:
- limiting the reporting requirement to those grandparented housing sales for which the consideration is equal to or greater than $450,000; and
- providing builders with an opportunity to correct past misreporting and avoid potential penalties by allowing them to elect to report all past grandparented housing sales for which the consideration was equal to or greater than $450,000.
This measure will apply in respect of any reporting period of a person that ends after Budget Day. In addition, if the above election is made, the measure will also apply to any supply of grandparented housing in respect of which the federal component of the HST became payable on or after July 1, 2010. Builders will generally have between May 1, 2016 and December 31, 2016 to make the election.
GST/HST on Donations to Charities
The GST/HST does not apply to a donation if the donor does not receive anything in return. However, if the donor receives property or services in exchange for the donation, even if the value of the donation exceeds the value of the offered property or services, the GST/HST generally applies on the full value of the donation. (A number of exceptions to this treatment apply, including where the service or property offered by the charity relates to a special fundraising event, such as a gala dinner, annual cookie sale or charity auction, or where the charity provides the donor goods that were previously gifted to the charity. Such supplies are exempt from GST/HST. In addition, a charity that qualifies as a “small supplier” (e.g., makes under $50,000 of taxable sales annually) is not required to collect GST/HST.)
Special rules are provided under the Income Tax Act to deal with transactions where property or services are supplied in exchange for or in recognition of a donation to a charity. Under the Income Tax Act “split-receipting” rules, where a charity encourages or recognizes a donation by supplying property or services in exchange, the charity generally may issue a donation receipt for the amount paid by the donor less the value of any property or service that the donor receives. Consequently, such donations are treated less favourably under the GST/HST than under the Income Tax Act.
To bring the GST/HST treatment of this type of exchange into line with the treatment under the Income Tax Act split-receipting rules, Budget 2016 proposes a relieving change to provide that when a charity supplies property or services in exchange for a donation and when an income tax receipt may be issued for a portion of the donation, only the value of the property or services supplied will be subject to GST/HST. The proposal will apply to supplies that are not already exempt from GST/HST. It will ensure that the portion of the donation that exceeds the value of the property or services supplied is not subject to the GST/HST.
This measure will apply to supplies made after Budget Day.
In addition, where a charity did not collect GST/HST on the full value of donations made in exchange for an inducement, for supplies made between December 21, 2002 (when the income tax split-receipting rules came into effect) and Budget Day, the following transitional relief will be provided:
- If GST/HST was charged on only the value of the inducement, consistent with the income tax split-receipting rules, or if the value of the inducement was less than $500, the donors’ and charities’ GST/HST obligations will effectively be satisfied, resulting in no further GST/HST owing.
- In other cases, the charity will be required to remit GST/HST on the value of the inducement only (i.e., the relieving split-receipting rules will apply).
De Minimis Financial Institutions
Under the GST/HST, special rules apply to financial institutions, particularly in determining their entitlement to input tax credits. For GST/HST purposes, financial institutions include persons whose main business is providing financial services such as banks, insurance companies, investment dealers and investment plans. The GST/HST legislation also includes rules to ensure that other persons that provide a significant amount of financial services, such that they may be in competition with traditional financial institutions, are also treated as financial institutions for GST/HST purposes. For example, a person will generally be treated as a financial institution throughout a taxation year if the person’s income for the preceding taxation year from interest, fees or other charges with respect to the making of an advance, the lending of money, the granting of credit, or credit card operations, exceeds $1 million.
Under this rule, a person that earns more than $1 million in interest income in respect of bank deposits in a taxation year will be considered to be a financial institution for GST/HST purposes for its following taxation year even though the earning of such interest would generally not, by itself, bring that person into competition with traditional financial institutions.
To allow a person to engage in basic deposit-making activity without that activity leading it to being treated as a financial institution for GST/HST purposes, Budget 2016 proposes that interest earned in respect of demand deposits, as well as term deposits and guaranteed investment certificates with an original date to maturity not exceeding 364 days, not be included in determining whether the person exceeds the $1 million threshold.
This measure will apply to taxation years of a person beginning on or after Budget Day and to the fiscal year of a person that begins before Budget Day and ends on or after that day for the purposes of determining if the person is required to file the Financial Institution GST/HST Annual Information Return.
Application of GST/HST to Cross-Border Reinsurance
The GST/HST applies to domestic purchases as well as to importations of property and services. GST/HST rules require certain recipients of imported taxable supplies of services and intangible personal property to pay tax on a self-assessment basis. Additionally, special GST/HST imported supply rules for financial institutions require a financial institution, including an insurer, with a presence outside Canada (e.g., in the form of a branch or a subsidiary) to self-assess GST/HST on certain expenses incurred outside Canada that relate to its Canadian activities.
Budget 2016 proposes to clarify that two specific components of imported reinsurance services, ceding commissions and the margin for risk transfer, do not form part of the tax base that is subject to the self-assessment provisions contained in the GST/HST imported supply rules for financial institutions and to set out specific conditions under which the special rules for financial institutions do not impose GST/HST on reinsurance premiums charged by a reinsurer to a primary insurer.
This measure will apply as of the introduction of the special GST/HST imported supply rules for financial institutions (i.e., in respect of any specified year of a financial institution that ends after November 16, 2005). In addition, this measure will allow a financial institution to request a reassessment by the Minister of National Revenue of the amount of tax owing by the financial institution under the special GST/HST imported supply rules for a past specified year of the financial institution, as well as any related penalties or interest, but solely for the purpose of taking into account the effect of this measure. A financial institution will have until the day that is one year after the day that these amendments receive Royal Assent to request such a reassessment.
Closely Related Test
Under the GST/HST, special relieving rules allow the members of a group of closely related corporations or partnerships to neither charge nor collect GST/HST on certain intercompany supplies. To qualify for these relieving rules, each member of this group must, among other requirements, be considered to be closely related to each other member of the group, supporting the assumption that the members effectively operate as a single entity.
In the case of a subsidiary corporation owned by a parent corporation or partnership, the closely related concept is reflected in a test that requires the parent to have nearly complete ownership and voting control over the subsidiary corporation. The current test requires that the parent corporation or partnership own 90 per cent or more of the value and number of the shares of the subsidiary corporation that have full voting rights under all circumstances. However, due to the complexity of share capital structures, it has been suggested that a parent corporation or partnership could be considered to be closely related to a subsidiary corporation even if it lacks nearly complete voting control over the subsidiary corporation.
To ensure that the closely related test applies only in situations where nearly complete voting control exists, Budget 2016 proposes to require that, in addition to meeting the conditions of the current test, a corporation or partnership must also hold and control 90 per cent or more of the votes in respect of every corporate matter of the subsidiary corporation (with limited exceptions) in order to be considered closely related.
This measure will generally apply as of the day that is one year after Budget Day. The measure will apply as of the day after Budget Day for the purposes of determining whether the conditions of the closely related test are met in respect of elections under section 150 and section 156 of the Excise Tax Act that are filed after Budget Day and that are to be effective as of a day that is after Budget Day.
Restricting the Relief of Excise Tax on Diesel and Aviation Fuel
The Excise Tax Act imposes an excise tax on diesel and aviation fuel manufactured and delivered in, or imported into, Canada. The Excise Tax Act contains a limited number of provisions that relieve the application of the excise tax on diesel fuel in specific circumstances. These provisions include relief for diesel fuel used as heating oil or to generate electricity. Over time, court decisions have expanded these relief provisions. To ensure that the scope of these relief provisions remains targeted, Budget 2016 proposes two measures to clarify instances in which relief is provided.
The existing excise tax relief for heating oil broadly applies to diesel fuel that is consumed to produce heat for any purpose, including in industrial processes (e.g., using diesel fuel as part of an explosive blasting agent).
To ensure that the relief provided for heating oil applies only to heating in respect of buildings, Budget 2016 proposes to define heating oil, for excise tax purposes, as fuel oil that is consumed exclusively for providing heat to a home, building or similar structure, and is not consumed for generating heat in an industrial process.
This measure will apply to fuel delivered or imported after June 2016, and to fuel delivered or imported before July 2016 that is used, or intended to be used, after June 2016.
Generation of Electricity
Diesel fuel consumed for motive purposes is subject to excise tax. However, the excise tax exemption for diesel fuel used in the generation of electricity currently applies to diesel fuel used in or by a vehicle to generate electricity, if more than half of the electricity generated is used for purposes other than the operation of the vehicle. This treatment complicates the administration of the tax system.
Budget 2016 proposes to remove the generation of electricity exemption for diesel fuel used in or by a vehicle, including a conveyance attached to the vehicle, of any mode of transportation. As such, no relief will apply to fuel used to produce electricity in any vehicle (e.g., trains, ships, airplanes), irrespective of the purpose for which the electricity is used.
This measure will apply to fuel delivered or imported after June 2016, and to fuel delivered or imported before July 2016 that is used, or intended to be used, after June 2016.
Enhancing Certain Security and Collection Provisions in the Excise Act, 2001
The excise duty frameworkcontains a number of provisions with respect to the enforcement of, and compliance with, the excise duties imposed under the Excise Act, 2001 on tobacco products, spirits and wine. To help ensure that these provisions continue to protect the excise duty base, Budget 2016 proposes to enhance certain security and collection rules in the Excise Act, 2001.
Under the Excise Act, 2001, manufacturers of tobacco products must hold a licence and all tobacco products for entry into the Canadian duty-paid market must have a duty-paid stamp affixed to them. Tobacco manufacturers and other prescribed persons that import tobacco products must provide and maintain security with the Canada Revenue Agency (CRA) in order to be issued a tobacco licence or any duty-paid stamps. The amount of security is generally based on monthly excise duty remittances or the quantity of duty-paid stamps issued, to a maximum of $2 million. This security requirement has been capped at $2 million since the inception of the Excise Act, 2001.
To ensure that this security requirement better reflects current tobacco duty rates, Budget 2016 proposes to increase the maximum amount of security required for a person to be issued a licence or any duty-paid stamps from $2 million to $5 million.
This change will be effective on the later of the day following the day of Royal Assent to the legislation enacting the new collection proposal set out below or three months following Budget Day.
In general, when a person objects to, or appeals, an assessment of an amount payable under the Excise Act, 2001, the CRA is restricted from taking certain collection actions while a decision or judgment is pending, and there is no obligation under the Excise Act, 2001 on the person to ensure payment of an amount that has been assessed.
To enhance certain enforcement measures under the Excise Act, 2001, Budget 2016 proposes to give the Minister of National Revenue the authority to require security for payment of assessed amounts and penalties in excess of $10 million that are not otherwise collected under the Excise Act, 2001. If the requested security is not furnished to the Minister, Budget 2016 also proposes that the Minister be provided with the authority to collect an amount equivalent to the amount of security that the Minister had required.
This measure will apply to amounts assessed and penalties after the day of Royal Assent to the enacting legislation.
Aboriginal Tax Policy
In successive budgets since 1997, the Government of Canada has expressed its willingness to put into effect taxation arrangements with interested Aboriginal governments. To date, the Government of Canada has entered into more than 50 taxation arrangements in respect of sales tax and personal income tax with Aboriginal governments. The Government of Canada confirms 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 will continue to facilitate such arrangements.
Status of Outstanding Tax Measures
Budget 2016 confirms the Government’s intention to proceed with the following tax and related measures that were announced in the current session of Parliament but have not yet been legislated:
- the common reporting standard established by the Organisation for Economic Co-operation and Development for the automatic exchange of financial account information between tax authorities; and
- legislative proposals on the income tax rules for certain trusts and their beneficiaries (draft legislative proposals were released for comment on January 15, 2016).
A number of tax measures that were originally proposed in previous budgets or during the last Parliament were not legislated before Parliament was dissolved as a result of the election call. Most of these measures would close tax loopholes and improve the integrity of the tax system, relieve taxpayers of certain tax consequences or improve the administration of the tax system.
Budget 2016 confirms the Government’s intention to proceed with tax and related measures, as modified, to take into account consultations and deliberations since their announcement or release, relating to:
- “synthetic equity arrangements” under the dividend rental arrangement rules;
- the conversion of capital gains into tax-deductible inter-corporate dividends (section 55);
- the offshore reinsurance of Canadian risks;
- alternative arguments in support of an assessment;
- an exception to the withholding tax requirements for payments by qualifying non-resident employers to qualifying non-resident employees;
- the repeated failure to report income penalty;
- the acquisition or holding of limited partnership interests by registered charities;
- the qualification of certain costs associated with undertaking environmental studies and community consultations as Canadian exploration expenses;
- the sharing of taxpayer information within the Canada Revenue Agency to facilitate the collection of certain non-tax debts;
- the sharing of taxpayer information with the Office of the Chief Actuary;
- the tax deferral in respect of the commercialization of the Canadian Wheat Board;
- the Goods and Services Tax/Harmonized Sales Tax joint venture election; and
- the relief of the Goods and Services Tax/Harmonized Sales Tax for feminine hygiene products.
Budget 2016 also announces the Government’s intention not to proceed with the measure announced in Budget 2015 that would provide an exemption from capital gains tax for certain dispositions of private corporation shares or real estate where cash proceeds from the disposition are donated to a registered charity or other qualified donee within 30 days.
Budget 2016 affirms the Government’s commitment to move forward as required with technical amendments to improve the certainty of the tax system.
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