March 21, 2013
Finance Minister Jim Flaherty delivered the government’s 2013 federal budget today. The budget expects a deficit of $25.9 billion for 2013, falling to $18.7 billion for 2014 and to $6.6 billion for 2015 and essentially calls for a balanced budget in 2016.
While the budget’s main focus is on jobs and the economy, the budget includes many targeted tax measures aimed at addressing what the government considers tax “loopholes” in the Canadian tax system. Areas as diverse as tax loss trading, life insurance products, labour sponsored venture capital corporations, trusts, thin capitalization rules, targeted GST provisions, the mining industry and farm losses are all affected.
A major job-related initiative in the budget is the Canada Job Grant Program. This program could provide up to $15,000 per person or more for training. To be eligible, businesses must have a plan to train unemployed and under-employed Canadians for an existing or better job. The budget also expands and extends the temporary hiring tax credit for small businesses.
The budget also creates a new Building Canada plan which will provide $53.5 billion over the next 10 years for provincial, territorial and municipal infrastructure.
Details of tax highlights in the budget are as follows.
The budget proposes to adjust the gross-up factor that applies to non-eligible dividends to 18% (from 25%) and the corresponding dividend tax credit rate to 13/18 (from 2/3). As a result, the federal dividend tax credit rate on non-eligible dividends will be 11% (down from 13.33%). The net result is that the federal effective tax rate on non-eligible dividends will be 21.22% (from 19.58%).
This measure applies to non-eligible dividends paid after 2013.
Until we know what changes the provinces will make to their dividend tax credits, we won’t know the combined federal and provincial tax rate on non-eligible dividends in 2014 and the impact on the integration mechanism.
The lifetime capital gains exemption is increased to $800,000 (from $750,000) on dispositions of qualified property (e.g., qualified small business corporation shares and qualified farm and qualified fishing property) by individuals effective for the 2014 taxation year. The new limit applies to all individuals, even those who previously used the capital gains exemption.
The amount is indexed for inflation for tax years after 2014.
The government wants to discourage taxpayers from participating in certain charitable donation tax shelters. As a result, the budget will modify the prohibition on the CRA from taking action to collect taxes when a taxpayer has objected to an assessment related to a charitable donation tax shelter.
If a taxpayer has objected to an assessment of tax, interest or penalties that results from the disallowance of a deduction or tax credit claimed in respect of a tax shelter that involves a charitable donation, the CRA will be permitted, pending the ultimate determination of the taxpayer’s liability, to collect 50% of the disputed tax, interest or penalties.
This measure will apply to amounts assessed for the 2013 and subsequent taxation years.
Finance notes in the budget that the normal reassessment period (generally three years) of a participant in a tax shelter is not extended even if the information return is not filed or is filed late. Thus, a delay in filing effectively reduces the time available to the CRA to obtain the information necessary for a proper audit of the tax shelter.
As a result, the budget will extend the normal reassessment period for a participant in a tax shelter or reportable transaction where the required information return is not filed on time, to three years after the date that the relevant information return is filed.
This proposal applies to taxation years that end on or after March 21, 2013.
The budget announces the government’s intention to consult on possible measures to eliminate the tax benefits that arise from taxing at graduated rates grandfathered inter vivos trusts and trusts created by wills and estates (after a reasonable period of administration). A consultation paper will be publicly released to provide stakeholders with an opportunity to comment on these possible measures.
The budget will phase out the federal tax credit for investments in labour-sponsored venture capital corporations (LSVCC). The credit will remain at 15% for taxation years that end before 2015 and will be reduced to 10% for the 2015 taxation year and 5% for the 2016 taxation year. The credit will be eliminated for 2017 and subsequent taxation years.
New federal LSVCC registrations will end, as well as the prescription of new provincially registered LSVCCs in the Income Tax Act. An LSVCC will not be federally registered if the application for registration is received on or after March 21, 2013.
The government is seeking stakeholder input on potential changes to the tax rules governing LSVCCs. Stakeholders are asked to submit comments on potential changes to the Department of Finance by May 31, 2013.
Finance proposes to amend the restricted farm loss rules in response to the Supreme Court of Canada case The Queen v. Craig (2012 SCC 43), where the court found that a full deduction of farming losses is allowed where a taxpayer places significant emphasis on both farming and non-farming sources of income, even if farming is subordinate to the other source of income.
In particular, Finance proposes to amend the rules to “clarify” that a taxpayer’s other sources of income must be subordinate to farming for farming losses to be fully deductible against income from those other sources.
Finance proposes to increase the restricted farm loss deduction limit to $17,500 (from $8,750) annually.
These measures will apply to taxation years that end on or after March 21, 2013.
Finance proposes in the budget to amend the non-resident trusts rules in response to the Federal Court of Appeal (FCA) case The Queen v. Sommerer (2012 FCA 207). In this case, the FCA found that a trust attribution rule did not apply to property received by a non-resident trust in exchange for fair market value consideration. In particular, where a Canadian resident taxpayer maintains effective ownership over property held by a non-resident trust, Finance proposes to amend the deemed residence rules such that they will apply if a trust holds property on conditions that grant effective ownership of the property (i.e., the property can revert to the taxpayer or the taxpayer has influence over the trust’s dealings regarding the property) to the taxpayer.
In these circumstances, any transfer or loan of the property, regardless of the consideration exchanged, made directly or indirectly by the Canadian resident taxpayer will be treated as a transfer or loan of restricted property by the taxpayer. The result is that the Canadian resident taxpayer will generally be treated as having made a contribution to the trust and the deemed residence rules will apply to the trust. This proposal will also affect trust distributions.
Finance also states that to clarify the application of the tax rules that apply to non-resident trusts, it will restrict the application of the trust attribution rule so that it applies only to property held by a trust that is resident in Canada (i.e., it will not apply to trusts deemed resident).
This measure applies to taxation years that end on or after March 21, 2013.
The budget makes the cost to a taxpayer of renting a safety deposit box from a financial institution non-deductible for income tax purposes. This change applies to taxation years that begin after March 21, 2013.
The budget introduces a temporary first-time charitable donor’s super credit. This credit will supplement the existing charitable donation tax credit with an additional 25% tax credit for a first-time donor on up to $1,000 in donations. As such, a first-time donor will be entitled to a 40% federal credit for donations of $200 or less, and a 54% federal credit for the portion of donations over $200 but not exceeding $1,000. Only donations of money will qualify for this credit.
An individual will be considered a first-time donor if neither the individual nor the individual’s spouse or common-law partner has claimed the charitable donations tax credit or first-time donor’s super credit in any taxation year after 2007.
The first-time donor’s super credit will be available for donations made on or after March 21, 2013 and may be claimed only once in 2013 or subsequent taxation years before 2018.
The adoption expense tax credit applies to eligible adoption expenses incurred between the time a child is matched with his or her adoptive family and the time the child begins to permanently reside with the family, up to a maximum of $11,669 per child in expenses for 2013.
The budget will extend this adoption period in certain circumstances. This measure will apply to adoptions finalized after 2012.
The budget proposes to allow registered pension plan (RPP) administrators to make refunds of contributions to correct reasonable errors without first obtaining approval from the CRA, if the refund is made no later than December 31 of the year following the year the inadvertent contribution was made. If an RPP administrator wants to correct a contribution error after the deadline, the existing procedure of getting authorization from the CRA will continue to apply.
This proposal will apply to RPP contributions made on or after the later of January 1, 2014 and the day the enacting legislation received Royal Assent.
A leverage insured annuity involves the use of borrowed funds, a life annuity and a life insurance policy. Generally, an amount equal to the borrowed funds would be invested in the life annuity and the death benefit from the insurance policy would equal the amount invested in the life annuity. The life insurance policy and the annuity would be held by the bank as collateral for the loan. These arrangements were normally sold to closely held private corporations.
These structures allow part of the income earned on the capital to be invested tax-free as the life insurance policy is an exempt policy, while the interest on the borrowed funds is generally tax deductible. A deduction would also be allowed for a portion of the capital invested in the life insurance policy (for the policy premium) as the life insurance policy is assigned as collateral for the loan. In addition, these structures potentially have the effect of reducing the gain on the shares of the private company as a result of the addition to the capital dividend account after the death of the owner.
The budget proposes to eliminate these benefits by introducing rules for “LIA policies”. A policy is an LIA policy if:
- a person or partnership becomes obligated on or after March 21, 2013 to repay an amount to another person or partnership (the lender) at a time determined by reference to the death of the individual, and
- an annuity contract, the terms of which provide that payments are to continue for the life of the individual, and the policy is assigned to the lender.
Where a policy is an LIA policy, income accruing will be subject to annual accrual-based taxation, no deduction will be allowed for any portion of the premium paid and the capital dividend account of a private corporation will not be increased by the death benefit received in respect of the policy.
In addition, for the purposes of a deemed disposition on death, the fair market value of an annuity contract assigned to the lender will be deemed to be equal to the total premiums paid under the contract.
This measure applies to taxation years that end on or after March 21, 2013. Under a grandfathering rule, this measure does not apply in respect of leveraged insured annuities where all borrowings were entered into before March 21, 2013.
Generally, under a 10/8 arrangement a taxpayer would invest in a life insurance policy earning income at a rate of 8%. The taxpayer would take the position that the income earned on the life insurance policy is not taxable as the life insurance policy is an exempt policy. At the same time, the taxpayer would borrow an amount from a bank bearing interest at a rate of 10% and, a deduction would be claimed for the interest expense. A deduction would also be claimed for a portion of the insurance premium paid. Although the interest rate on the loan exceeds the rate of income earned in the life insurance policy, on an after-tax basis the taxpayer would achieve a benefit. The CRA is challenging these 10/8 arrangements.
The budget proposes that where a life insurance policy, or an investment account under the policy, is assigned as security on a borrowing, and either the interest rate payable on an investment account under the policy is determined by reference to the interest rate payable on the borrowing or the maximum value of an investment account under the policy is determined by reference to the amount of the borrowing, then the following benefits will be denied:
- the deductibility of the interest paid or payable on the borrowings that relates to a period after 2013
- the deductibility of a premium that is paid or payable under the policy that relates to a period after 2013, and
- the increase in the capital dividend account by the amount of the death benefit that becomes payable after 2013 under the policy and that is associated with the borrowing.
The budget proposes to introduce measures to alleviate the income tax consequences on a withdrawal, from a policy under a 10/8 arrangement, made to repay a borrowing under the arrangement if the withdrawal is made on or after March 21, 2013 and before January 1, 2014.
Finance states that it will monitor developments in this area such that if structures or transactions emerge that undermine these new rules it will evaluate whether further action is required, with possible retroactive application.
The Income Tax Act contains rules for determining when losses may be recognized and used for income tax purposes. A number of provisions are meant to constrain the trading of tax attributes among arm’s length persons. Specific provisions restrict the use of non-capital losses, net capital losses, investment tax credits and scientific research and experimental development balances in these situations.
Loss streaming rules apply to limit a corporation’s use of certain tax attributes where a person or group of persons acquires control of the corporation. In particular, the corporation’s pre- acquisition unused losses are restricted from being carried forward for use by the corporation after the acquisition of control. Any post-acquisition losses are restricted from being carried back for use before the acquisition of control. Other tax attributes, such as investment tax credits and SR&ED expenses, are similarly restricted. In certain circumstances, these restrictions do not apply where the business in which the losses were incurred continues to be carried on.
The Act does not contain similar loss-streaming and related rules for trusts.
The budget proposes to extend the loss-streaming and related acquisition of control rules to trusts if the trust becomes subject to a “loss restriction event”.
A “loss restriction event” will occur when a person or partnership becomes a majority-interest beneficiary of the trust or a group becomes a majority-interest group of beneficiaries of the trust. The concepts of majority interest beneficiary and majority interest group of beneficiaries will be similar to those used under the affiliated person provisions currently in the Act. In general, under those provisions, a majority–interest beneficiary of a trust is a beneficiary who, together with persons and partnerships with which the beneficiary is affiliated, has a beneficial interest in the trust’s income or capital with a fair market value that exceeds 50% of the fair market value of all the beneficial interests in income or capital, respectively, in the trust.
The existing rules provide for certain transactions or events to trigger or not trigger an acquisition of control and these rules will be extended to apply with appropriate modifications to the loss restriction event rules for a trust.
The budget specifically highlights that it is intended that from a tax policy perspective many of the transactions or events involving changes in beneficiaries of a personal or family trust will not, because of continuity of ownership rules, result in trusts being subject to a loss restriction event. The government has also invited submissions within 180 days after March 21, 2013 as to whether there are any additional transactions or events that should also not be subject to the loss restriction event rules.
This measure, including any relieving changes from the public consultation, will apply to transactions that occur on or after March 21, 2013, other than transactions that the parties are obligated to complete pursuant to a written agreement entered into before March 21, 2013. An obligation to complete a transaction will not include a transaction if one or more of the parties may be excused from completing the transaction as a result of changes to the Act.
As mentioned above, the Act contains a number of tax provisions intended to constrain the trading of tax attributes among arm’s length persons. However, the government has concluded that a number of transactions have occurred to circumvent these provisions and accordingly has introduced specific legislative measures to ensure that the appropriate tax consequences apply to these transactions.
The budget describes one such transaction, in which a Profitco corporation transfers, directly or indirectly, income producing property to an unrelated corporation (Lossco) with loss pools in return for shares of Lossco. Profitco seeks to avoid acquiring control of Lossco by acquiring non-voting shares of Lossco. The shares represent more than 75% of the fair market value of all Lossco’s shares. Lossco uses its tax pools to shelter from tax all or part of the income derived from the property. Lossco then pays Profitco tax-free inter-corporate dividends.
While these transactions can be challenged by the government under existing rules of the Act, specific legislative measures are being introduced to deal with these transactions.
An “attribute trading restriction” is introduced as an anti-avoidance rule to support the existing loss restriction rules that apply on the acquisition of control of a corporation. The rule will deem there to have been an acquisition of control of a corporation that has tax loss pools at a particular time when:
- at the particular time a person or group of persons holds shares of the corporation that have more than 75% of the fair market value of all the shares of the corporation at that time
- immediately before the particular time, shares, if any, of the corporation held by the person or group of persons have a fair market value equal to or less than 75% of the fair market value of all the shares of the corporation
- the person or group does not control the corporation at that particular time, and
- if it is reasonable to conclude that one of the main reasons that control was not acquired is to avoid the restrictions that would have been imposed under the loss streaming rules.
Rules to ensure that this anti-avoidance rule is not circumvented are also proposed.
These rules will apply to a corporation the shares of the capital stock of which are acquired on or after March 21, 2013 unless the shares are acquired as part of a transaction that the parties are obligated to complete pursuant to a written agreement entered into before March 21, 2013. Parties will not be considered to have entered into an obligation to complete a transaction if one or more of the parties may be excused from completing the transaction as a result of changes in the Act.
The budget also states that the government will continue to monitor the effectiveness of the constraints on the trading of loss pools and determine whether further action is warranted.
The budget proposes to extend for one year the temporary Hiring Credit for Small Business. In particular, the temporary credit will provide up to $1,000 against a small company’s increase in its 2013 Employment Insurance (EI) premiums over those paid in 2012 to employers with total EI premiums of $15,000 or less in 2012.
Currently, machinery and equipment acquired by a taxpayer after March 18, 2007 and before 2014 is eligible for a temporary capital cost allowance (CCA) rate of 50% on a straight-line basis, subject to the half-year rule, under Class 29. These eligible assets would otherwise be included in Class 43 and qualify for a CCA rate of 30%, calculated on a declining-balance basis.
This temporary CCA is extended for two years, and will now apply to equipment acquired before 2016.
Eligible assets acquired in 2016 and subsequent years will qualify for the regular 30% declining balance rate and be included in Class 43.
Class 43.2 provides accelerated CCA (50% per year on a declining balance basis) for investment in specified clean energy generation and conservation equipment. The class includes eligible equipment that generates or conserves energy by using a renewable energy source, using a fuel from waste or making efficient use of fossil fuels.
Biogas production equipment — Eligible organic waste
Certain equipment used to produce biogas through anaerobic digestion of eligible organic waste is included in Class 43.2. The budget proposes to expand Class 43.2 to include more types of eligible organic waste and specifically, to include pulp and paper waste and wastewater, beverage industry waste and wastewater and separated organics from municipal waste.
Cleaning and upgrading equipment currently included in Class 43.2 is limited to equipment that is ancillary to landfill gas and digester gas collection equipment and biogas scrubbing equipment. The budget proposes to expand the eligibility under Class 43.2 to include all types of cleaning and upgrading equipment that can be used to treat eligible gases from waste.
These measures apply to property acquired on or after March 21, 2013 that has not been used or acquired for use before this date.
The budget introduces a measure to require additional information on third party preparers involved in the preparation of a SR&ED claim and a penalty for incomplete or non-disclosure.
More detailed information will be required to be provided on SR&ED program claim forms about SR&ED program tax preparers and billing arrangements. In instances where one or more third parties have assisted with the preparation of a claim, the Business Number of each third party will be required, along with details about the billing arrangements including whether contingency fees were used and the amount of fees payable. If no third party was involved in the preparation of the SR&ED claim, the claimant will be required to certify that no third party assisted in the preparation of the claim.
The budget proposes a new penalty of $ 1,000 be imposed on each SR&ED program claim for which the information about the SR&ED program tax preparers and billing arrangements is missing, incomplete or inaccurate. Where a preparer has participated in the preparation of the claim, the preparer will be jointly and severally, or solidarily, liable with the taxpayer for the penalty.
The penalty applies in respect of claims filed on or after the later of January 1, 2014 and the day of Royal Assent.
The budget proposes additional federal support for business innovation, continuing to respond to the Expert Review Panel on Research and Development, the Jenkins Panel, in October 2011.
The follow investments are proposed:
- Providing $121 million over two years to invest in the National Research Council to help the growth of innovative businesses in Canada
- Providing $20 million over three years to a pilot project delivered through the National Research Council Industrial Research Assistance Program to help small and medium–sized enterprises access research and business development services at universities, colleges and other non-profit research institutions
- Providing funding of $5 million over two years to the Canada Revenue Agency to conduct more direct outreach with first-time SR&ED program claimants
- Providing funding of $15 million over two years to focus more resources on reviews of SR&ED claims where the risk of non-compliance is perceived to be high and the eligibility for the SR&ED claim unlikely.
Credit unions currently have access to the small business deduction and an additional deduction that provides for a preferential income tax rate that is not eligible for the small business deduction. The additional deduction for credit unions will be phased out over five years, beginning in 2013. In 2013, only 80% of the additional deduction otherwise claimed will be permitted. The percentage will be reduced to 60% in 2014, 40% in 2015, 20% in 2016 and will be eliminated for 2017 and subsequent years.
This measure will apply to taxation years that end on or after March 21, 2013. For a taxation year that includes March 21, 2013, the measure will apply only to the portion of the year that is on or after March 21, 2013. The rate will also be prorated, based on the number of days in each calendar year.
In previous budgets the government announced that it would explore whether new rules for the taxation of corporate groups, such as the introduction of a formal system of loss transfer or consolidated reporting, could improve the functioning of the corporate tax system in Canada.
The budget announces that the examination of the taxation of corporate groups is now complete and the government has determined that moving to a formal system of corporate group taxation is not a priority at this time. The government said that going forward it will continue to work with the provinces and territories regarding the current approach to loss utilization.
The budget proposes measures to better align the deductions available for expenses in the mining sector with those available in the oil and gas sector.
Pre-production mine development expenses are treated as Canadian Exploration expense (CEE) and may be deducted in full in the year incurred or carried forward indefinitely for use in future years. Intangible mine development expenses are treated as Canadian development expense (CDE) and are deductible at a rate of 30% on a declining –balance basis. In the oil and gas sector, intangible pre- and post production development expenses are both treated as CDE.
The budget proposes that pre-production mine development expenses described in paragraph (g) of the definition of CEE in subsection 66.1(6) of the Income Tax Act, be treated as CDE. The transition from CEE to CDE will be phased in with pre-production mining expenses being allocated proportionately to CEE and CDE based on the calendar year in which the expense is incurred. The phase-in period starts in 2015, with 20% being allocated to CDE in 2015, 40% in 2016, 70% in 2017 and 100% after 2017.
This measure will generally apply to expenses incurred on or after March 21, 2013. The existing CEE treatment for pre-production mine development expenses will be maintained for expenses incurred before March 21, 2013. Transitional provisions will permit the existing CEE treatment to apply for pre-production mine expenses incurred before 2017 either under a written agreement entered before March 21, 2013 or as part of the development of a new mine where construction was started by, or on behalf of the taxpayer before March 21, 2013 or the engineering and design work for the construction was started by or on behalf of the taxpayer and this is evidenced in writing.
In general, machinery, equipment and structures used in mining for an oil and gas project are currently eligible for CCA of 25% on a declining balance basis. In addition, accelerated CCA is provided for certain assets acquired for new mines or eligible mine expansions. This is an additional allowance of up to 100% of the remaining cost of eligible assets acquired for use in a new mine or an eligible mine expansion (not exceeding the taxpayer’s income for the year from the mining project).
The budget proposes to phase out the additional allowance available for mining (other than for bituminous sands and oil shale, for which the phase out will be complete in 2015) over the 2017 to 2020 calendar years. The transition will result in 100% of the allowance being permitted in 2013-2016, 90% in 2017, 80% in 2018, 60% in 2019, 30% in 2020 and nil after 2020. Where the taxation year includes more than one calendar year the additional allowance will be prorated, based on the number of days in each calendar year.
This measure will generally apply to assets acquired on or after March 21, 2013. Transitional provisions will permit the existing additional allowance to be maintained for eligible assets acquired before March 21, 2013 and for such assets acquired before 2018 for a new mine or a mine expansion either under a written agreement entered before March 21, 2013 or as part of the development of a new mine or mine expansion where construction was started by, or on behalf of the taxpayer before March 21, 2013 or the engineering and design work for the construction was started by or on behalf of the taxpayer and this is evidenced in writing.
Taxpayers with future reclamation obligations are generally eligible to use the Qualifying Environmental Trust Rules to claim a deduction for amounts contributed to a Qualifying Environmental Trust established for the purpose of funding the future reclamation of a qualifying site.
The budget proposes an amendment to subsection 20(7) to ensu
re that the reserve for future services under paragraph 20(1)(m) cannot be used by taxpayers with respect to amounts received for the purpose of funding future reclamation obligations.
This measure will apply to amounts received on or after March 21, 2013, other than amounts received that are directly attributable to future reclamation costs, that were authorized by a government or regulatory authority before March 21, 2013 and received pursuant to an existing written agreement entered into before March 21, 2013 or received before 2018.
The budget extends the eligibility for the mineral exploration tax credit for flow-through share investors for one year to flow-through share agreements entered into on or before March 31, 2014.
The 2012 budget proposed an extension of the thin capitalization rules to debts owed by partnerships of which a Canadian corporation is a partner. The 2013 budget proposes a series of measures to extend the thin capitalization rules to alternative investment structures for investing in Canada.
Canadian resident trusts
The thin capitalization rules will be applied to beneficiaries of a trust in place of shareholders in determining whether a person is a specified non-resident in respect of a trust. A trust’s equity for the purpose of the thin capitalization rules will generally include contributions to the trust from specified non-residents plus tax paid earnings of the trust. The debt-equity ratio will be 1.5:1.
Where interest is not deductible, the trust will be entitled to designate the non-deductible interest as a payment of income of the trust to a non-resident beneficiary (the recipient of the non-deductible interest). The designated payment will be subject to non-resident withholding tax under Part XIII and potentially Part XII.2.
The proposal will also apply to partnerships of which a Canadian-resident trust is a partner.
Non-resident corporations and trusts
The budget proposes to extend the thin capitalization rules to non-resident corporations and trusts that carry on business in Canada (branch structures). In many ways a branch is comparable to a wholly owned subsidiary of a non-resident corporation or trust and the intent of the budget proposal is that the application and effect of the rules should be similar to those in respect of a wholly owned Canadian subsidiary of a non-resident.
A loan that is used in a Canadian branch of a non-resident corporation or trust will be an outstanding debt to a specified non-resident if it is a loan from a person who does not deal at arm’s length with the non-resident corporation or trust. A debt to asset ratio of 3 to 5 will be used, which parallels the 1.5 debt-equity ratio for Canadian corporations.
Where the non-resident is a corporation, the application of the thin capitalization rules will increase the liability for branch tax.
Where a non-resident corporation or trust earns rental income an election may be filed to be taxed on the net income under Part I of the Income Tax Act rather than being subject to tax under Part XIII of the Act. Where the election is made the thin capitalization rules for non-resident corporations will apply.
The thin capitalization rules for non-resident corporations and trusts will apply to partnerships in which a non-resident corporation or trust is a partner.
The thin capitalization measures apply to taxation years that begin after 2013.
Finance notes in the budget that Canada has not been successful in challenging treaty shopping in courts. Other countries are also concerned about treaty shopping and have introduced provisions or their courts have challenged these arrangements.
The budget announces the government’s intention to consult with the public on possible measures which would protect the integrity of Canada’s tax treaties and preserve an environment that is conducive to foreign investment.
The International Banking Centre rules exempt certain financial institutions from tax on certain income earned through a branch or office in Montreal and Vancouver.
The budget proposes to repeal these rules. Eliminating the rules is partially in response to the international community having identified these rules as resembling preferential regimes in some tax havens.
This measure applies to taxation years that begin after March 21, 2013.
The budget proposes that certain financial intermediaries report to the CRA international electronic fund transfers of $10,000 or more.
The current rules provide that CRA can request information or documents from any person for the purposes of tax administration or enforcement. The CRA must first obtain judicial authorization (i.e., a court order) before issuing a requirement to a third party. Currently, the CRA is not required to inform the third party of the court application, although in practice, the CRA normally informs the third party. The process to obtain the court order and then the rights of the third party to seek a review of the court order and rights of review can result in significant delays.
The budget proposes to change the process such that third party will be informed when the CRA is seeking a court order and the third party will be required to make its representations at the time of the hearing of the application for the order. This change will eliminate the need for a review.
This measure is effective on Royal Assent of the enacting legislation.
The budget introduces a program under which rewards will be paid to individuals with knowledge of international tax non-compliance when the knowledge they provide to the CRA results in the collection of outstanding taxes. The federal tax collected must result in assessments or reassessments of federal tax exceeding $100,000. The payments to the individual will be up to 15% of the federal income tax collected.
The budget proposes to extend the normal reassessment period by three years if the taxpayer has failed to file form T1135 when required or has failed to report the information required on the form and the taxpayer has failed to report the income from the specified foreign property as required.
Form T1135 will be revised to require more detailed information, including the name of the foreign institution or entity holding the funds outside Canada, the specific country to which the property relates,and the foreign income generated from the property.
These measures apply for the 2013 and subsequent taxation years.
A character conversion transaction seeks to reduce tax by converting, through derivative contracts, the returns on an investment that would normally be considered to be ordinary income to capital gains which are only 50% taxable.
A character conversion transaction generally involves a forward agreement to buy or sell a capital property at a specified future date. The purchase or sale price of the capital property under the forward agreement is not based on the performance of the capital property between the date of the agreement and the future date, but rather is often based on the performance of a portfolio of investments which would generally produce fully taxable ordinary income. If the derivative investment were made separately from the purchase or sale of the capital property (i.e., as a cash settled derivative financial instrument), any income from the derivative investment would be taxed as ordinary income.
The budget proposes to treat the return as being distinct from the disposition of a capital property that is purchased or sold under the derivative forward agreement. This measure will apply to derivative forward agreements that have a duration of more than 180 days.
Any return arising under a derivative forward agreement that is not determined by reference to the performance of the capital property being purchased or sold will be treated as being on income account.
The income (or loss) will be included (or deductible) in computing income at the time of disposition if the capital property is subject to a derivative forward sale agreement and at the time of acquisition if the capital property is subject to a derivative forward purchase agreement.
The adjusted cost base of the capital property will be increased/decreased to the extent of any income/loss recognized as described above in order to avoid double tax.
This measure applies to derivative forward agreements entered into on or after March 21, 2013. This measure will also apply to derivative forward agreements entered into before March 21, 2013 if the term of the agreement is extended on or after March 21, 2013.
Finance proposes in the budget to treat certain transactions as dispositions for income tax purposes. In particular, where a taxpayer (or a person who does not deal at arm’s length with the taxpayer) enters into one or more agreements that have the effect of eliminating all or substantially all the taxpayer’s risk of loss and opportunity for gain or profit on a property a taxpayer will not be allowed to avoid the tax consequences of disposing of a property by entering into a “synthetic disposition transaction”, i.e., there will be a deemed disposition.
Finance notes that this measure could apply to:
- A forward sale of property (whether or not combined with a secured loan)
- A put-call collar on an underlying property
- The issuance of certain indebtedness that is exchangeable for property
- A total return swap on property
- A securities borrowing to facilitate a short sale of property that is identical or economically similar to a property belonging to the taxpayer ( or a non-arm’s length person)
Finance also notes that this measure will not generally apply to ordinary hedging transactions, which typically only involve managing the risk of loss. Also, it will not generally affect the tax treatment of ordinary course securities lending arrangements nor apply to ordinary commercial leasing transactions. A Finance official confirmed that this measure will not apply to what is otherwise a disposition under the Act, tax-deferred or otherwise.
To ensure that taxpayers can’t obtain tax benefits associated with continued ownership of a property after entering into a synthetic disposition transaction Finance also proposes that if a taxpayer is deemed to have disposed of and reacquired a property, the taxpayer will be considered to not own the property for purposes of determining whether the taxpayer meets the holding-period tests for purposes of rules such as the stop-loss rules in section 112 and foreign tax credit rules in subsection 126(4.2).
This measure applies to agreements and arrangements entered into on or after March 21, 2013. However, it will also apply to agreements and arrangements entered into before March 21, 2013 if their term is extended on or after March 21, 2013.
The budget proposes two measures to simplify employer compliance with the GST/HST rules affecting employers that participate in a registered pension plan.
Election not to account for GST/HST on taxable supplies
An employer participating in a registered pension plan will be permitted to jointly elect with a pension entity of that pension plan to treat an actual taxable supply by the employer to the pension entity as being for no consideration where the employer accounts for and remits tax on the deemed taxable supply.
This measure will apply to supplies made after March 21, 2013.
Relief from accounting for tax on deemed taxable supplies
Currently, under the GST/HST rules, an employer that participates in a registered pension plan is required to account for and remit GST/HST under the deemed taxable supply rules in respect of every acquisition, use or consumption of the employer’s resources in pension activities, even where the employer’s involvement in the pension plan is minimal.
To simplify employer compliance with these rules, the budget proposes that an employer participating in a registered pension plan be permitted to be fully or partially relieved from accounting for tax on deemed taxable supplies where the employer’s pension plan-related activities fall below certain thresholds.
An employer is not permitted to benefit from the full relief proposed under this measure for deemed taxable supplies made in a fiscal year of the employer where the employer has a joint election in effect not to account for tax on actual taxable supplies made in that fiscal year.
This measure will apply for any fiscal year of an employer that begins after March 21, 2013.
Paid parking has been excluded from the general exempting provisions for supplies made by a public sector body (PSB) since the introduction of the GST. The budget proposes two measures to clarify that certain special exempting provisions for PSBs do not apply to supplies of paid parking.
Supplies of paid parking by PSBs
A special provision exempts from GST/HST all of a PSB’s supplies of a property or service if all or substantially all of the supplies of the property or service are made for free.
The budget clarifies that this special exempting provision does not apply to supplies of paid parking that are made by way of lease, licence or similar arrangements in the course of a business carried on by a PSB. Taxable parking would include paid parking provided on a regular basis by a PSB, such as facilities operated by a municipality or hospital.
This measure clarifies that GST/HST applies to commercial paid parking operated by a PSB, even where the PSB supplies a significant amount of parking at no charge.
This measure will be effective the date the GST legislation was enacted.
Supplies of paid parking through charities
A special exemption applies to parking provided by charities that are not a municipality, university, public college, school or hospital.
The budget clarifies that the special GST/HST exemption for parking supplied by charities does not apply to supplies of paid parking that are made by way of lease, licence or similar arrangement in the course of a business carried on by a charity set up or used by a municipality, university, public college or a hospital to operate a parking facility.
This measure will apply to supplies made after March 21, 2013.
A business is generally required to provide the CRA with basic business identification information at the time of its GST/HST registration. Currently, a penalty of $100 applies for failure to provide this information.
The budget proposes to give the CRA authority to withhold GST/HST refunds claimed by a business until all the prescribed business identification information is provided.
This measure will apply on Royal Assent to the enacting legislation.
Home care and personal services
The budget proposes to expand the GST/HST exemption for homemaker services to exempt certain publicly subsidized or funded personal care services delivered to persons in their homes. This measure will apply to supplies made after March 21, 2013.
Reports and services for non-health care purposes
The budget proposes to clarify that GST/HST applies to reports, examinations and other services not performed for protection, maintenance or restoration of the health of a person or palliative care, for example, services performed solely for the purpose of determining liability in a court proceeding or under an insurance policy. This measure will apply to supplies made after March 21, 2013.
The budget proposes to increase the rate of excise duty on manufactured tobacco (e.g., chewing tobacco or fine-cut tobacco used in roll-your-own cigarettes) to $5.3125 per 50 grams or fraction thereof (e.g., $21.25 per 200 grams). This change will be effective after March 21, 2013.
The current GST/HST exemption for the Governor General will end and GST/HST will be payable on purchases for the use of the Governor General. This measure will apply to supplies made after June 30, 2013.
The budget states that electronic suppression of sales software has been used by some businesses to hide their sales to evade payment of GST/HST and income taxes. The budget proposes new administrative monetary penalties and criminal offenses under the Excise Tax Act and the Income Tax Act to combat this type of tax evasion. These measures will apply on the later of January 1, 2014 and Royal Assent to the enacting legislation.
Tariff relief measures
The budget proposes to permanently eliminate all tariffs on baby clothes and sports and athletic equipment (excluding bicycles). These tariffs reductions will be effective for goods imported into Canada on or after April 1, 2013.
Canada’s general preferential tariff regime for developing countries
The government will withdraw eligibility for the General Preferential Tariff (GTP) regime from 72 higher-income and export-competitive countries, including all G-20 countries. These changes are effective for goods imported into Canada on or after January 1, 2015 and will be extended for 10 years until December 31, 2024.
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Your KPMG adviser can help you assess the effect of the tax changes in this year’s federal budget on your personal finances or business affairs, and point out ways to take advantage of their benefits or ease their impact. We can also keep you abreast of the progress of these proposals as they make their way into law and help you bring any concerns you may have to the attention of the Ministry of Finance.
Information is current to March 21, 2013. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
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