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2012 Federal Budget Part 2 - Draft Legislation Released - by Brian Mustard 

Canadian Tax Adviser

 

August 21, 2012

 

Brian Mustard
Montreal, International Corporate Tax

 

The Department of Finance released draft legislation for most of the remaining tax items announced in the 2012 federal budget on August 14, 2012. This article provides a quick summary of the changes in the 53-page draft legislation and 77-page related explanatory notes, including changes affecting the international tax, scientific research and experimental development (SR&ED) program and other corporate and personal tax rules. Finance has requested comments by September 13, 2012.

These measures apply as indicated in the 2012 federal budget, generally after March 28, 2012. In a few cases, modifications to the measures have been made that will apply as of August 14, 2012 (i.e., the "Announcement Date").

 

International taxation
The proposed legislation includes international tax provisions to:

 

  • Introduce foreign affiliate dumping rules that are fairly consistent with the description of the rules in the 2012 budget documents. However, there were some changes made to:
    • Broaden the scope of transactions included in the definition of a investment in a foreign affiliate (FA) caught by the foreign affiliate dumping rules
    • Change the "business purpose exception" introduced in the budget
    • Introduce an election to permit loans by a Canadian corporation to an FA meeting the definition of "pertinent loan or indebtedness" to be subject to deemed interest benefit rules in new section 17.1 instead of having deemed dividend rules apply
    • Introduce an election to permit a reduction of the PUC of a Canadian corporation's shares instead of suffering the consequences of a deemed dividend as a result of an investment in a FA
    • Introduce proposals that allow a number of internal reorganization to be exempt from the debt dumping rules in certain non-arm's-length situations.
  • Amend the thin capitalization rules to:
    • Reduce the debt-to-equity ratio to 1.5:1 (from 2:1) for taxation years beginning after 2012
    • Include partnership debt in the debt-to-equity ratio
    • Treat disallowed interest expense as dividends for Part XIII withholding tax purposes for taxation years that end after March 28, 2012, subject to the coming-into-force provision
    • Exclude interest on foreign affiliate loans that is treated as foreign accrual property income (FAPI).

 

SR&ED
The proposed legislation includes SR&ED measures to:

 

  • Reduce the general investment tax credit rate to 15% (from 20%), effective January 1, 2014
    • Make a consequential adjustment to the additional investment tax credit rate available to qualifying corporations to 20% (from 15%), effective January 1, 2014
  • Reduce the prescribed proxy amount used to claim SR&ED overhead expenditures to 60% (from 65%) in 2013 and 55% (from 60%) in 2014
  • Limit arm's-length contract payments to 80% of the amount paid for the purpose of the calculation of SR&ED investment tax credits
  • Remove capital expenditures from the base of SR&ED eligible expenditures for expenditures made after 2013.

 

Business tax changes
The proposed legislation includes corporate tax measures to:

 

  • Introduce an election to apply a deemed interest imputation rule under new section 17.1 (instead of having a deemed dividend) on loans to certain non-residents created after March 28, 2012 and meeting the definition of "pertinent loans or indebtedness"
  • Prevent tax avoidance using partnerships by:
    • Broadening the scope of section 100 to apply to the sale of a partnership interest to a non-resident person or an indirect transfer of a partnership interest to a non-resident person and/or a tax-exempt entity. New anti-avoidance provisions were introduced with the draft legislation
    • Limiting the application of the section 88 "bump" in respect of a partnership interest to the extent that the accrued gain in respect of the partnership interest is reasonably attributable to the unrealized gain or recapture of "ineligible" property.
  • Amend the eligibility for accelerated capital cost allowance for clean energy generation equipment under Class 43.1 and 43.2
  • Phase out the Corporate Mineral Exploration and Development Tax Credit
  • Change the eligibility for the Atlantic Investment Tax Credit.

 

Personal tax changes
The proposed legislation includes personal tax measures to:

 

  • Introduce the prohibited investment rules for retirement compensation arrangements
  • Introduce a new tax on excess Employees Profit Sharing Plans (EPSP) amounts
  • Enhance the Registered Disability Savings Plans (RDSP) provisions
  • Change the taxable benefits for an employer's contributions to a group sickness or accident insurance plan.

 

Not included
Relieving amendments to the base erosion test for Canadian banks are not included in the draft legislation.

 

For more information, contact your KPMG adviser.

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