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2014 Federal Budget Highlights 

Tax News Flash
Tax News Flash
Tax News Flash

2014 Federal Budget Highlights

 

February 11, 2014

 

No. 2014-08

Finance Minister Jim Flaherty delivered the government’s 2014 federal budget today. The budget expects a deficit of $16.6 billion for the current year, and forecasts a deficit of $2.9 billion for 2015. The budget projects a surplus of $6.4 billion for fiscal 2016.

 

While the budget is focused on job creation, innovation and infrastructure, there are still a number of tax measures this year aimed at “closing tax loopholes” in line with the government’s continued focus on tax fairness measures and tax transparency. Tax measures this year focused on all areas of taxation including immigrant trusts and tax rates on testamentary trusts, business and rental income of trusts and partnerships, taxation of certain financial institutions operating offshore, tax transparency and treaty shopping, thin capitalization rules, charities and non-profit organizations, farming, targeted GST measures and tobacco and certain other excise measures.

 

Additional funding for research and innovation are provided for in the budget, including the creation of the Canada First Research Excellence fund with $ 1.5 billion in funding over the next 10 years for certain post-secondary institutions.

 

The budget also proposes funding of approximately $229 million for apprenticeships and internships.

 

Details of tax highlights in the budget are as follows.

 

Personal Tax Changes

 

Business and rental income of trusts and partnerships

 

The budget proposes to apply the tax on split income where a minor is allocated income from a partnership or trust that is derived from business or rental activities conducted with third parties. Specifically, the budget proposes to amend the definition of “split income” to include income that is, directly or indirectly, paid or allocated to a minor from a trust or partnership where the income is derived from a business or a rental property, and a person related to the minor is either:

 

  • Actively engaged on a regular basis in the activities of the trust or partnership to earn income from any business or rental property, or
  • In the case of a partnership, has an interest in the partnership (whether held directly or through another partnership).

 

This measure will apply to the 2014 and subsequent taxation years.

 

Estates and trusts

 

Loss of graduated rates

 

The budget proposes to generally proceed with measures to eliminate the tax benefits that arise from taxing at graduated rates the taxable income of testamentary trusts and grandfathered inter vivos trusts (i.e., certain inter vivos trusts created before June 18, 1971). These measures, originally proposed in the 2013 budget and a subsequent consultation paper, apply flat top-rate taxation to estates and certain trusts for taxation years that end more than 36 months after the death of the individual and to all grandfathered inter vivos trusts and trusts created by will.

 

The graduated rates will be available for the first 36 months of an estate that arises on, and as a consequence of, an individual’s death and is a testamentary trust. If the estate remains in existence more than 36 months after the death, it will be subject to flat top-rate taxation at the end of that period. Finance notes that it will continue to provide graduated rates for trusts that have individuals eligible for the federal Disability Tax Credit as beneficiaries.

 

Under this proposal, estates (after the 36-month period) and grandfathered inter vivos trusts will not receive related tax benefits, including:

 

  • The exemption from the income tax instalment rules
  • The exemption from the requirement that trusts have a calendar year taxation year and fiscal periods that end in the calendar year in which the period began
  • The basic exemption in computing alternative minimum tax
  • Classification as a personal trust regardless of how beneficial interests in the trust were acquired
  • The ability to make investment tax credits available to a trust’s beneficiaries.

 

These measures will apply to the 2016 and subsequent taxation years.

 

Immigrant trusts

 

Generally, where a resident of Canada contributes funds to a non-resident trust, the trust is deemed to be resident in Canada and therefore subject to income tax on its worldwide income. An exception was provided where the contributor was resident in Canada for a period of not more than 60 months. These trusts were often referred to as immigrant trusts.

 

The budget proposes to eliminate this benefit for taxation years:

 

  • That end after 2014 if the 60-month exemption applied in 2014 and before February 11, 2014 and no additional contributions were made to the trust on or after February 11, 2014 and before 2015
  • That end on or after February 11, 2014 in any other case.

 

Amateur athlete trusts

 

The budget proposes to allow income contributed to an amateur athlete trust to qualify as earned income for purposes of determining the RRSP contribution limit of the trust’s beneficiary.

 

This measure will apply to contributions made to amateur athlete trusts after 2013. Individuals who contributed to an amateur athlete trust before 2014 may elect to have income contributed to the trust in 2011, 2012 and 2013 also qualify as earned income. The individual’s RRSP limit will be re-determined for these years and any additional RRSP room will be added to the individual’s RRSP contribution room for 2014. The election must be made in writing and submitted to the CRA on or before March 2, 2015.

 

Farming

 

Farming and fishing rollover

 

The budget proposes to extend the availability for the intergenerational rollover and the lifetime capital gains exemption (LCGE) to property of an individual used principally in a combination of farming and fishing. Under the current rules, property could only qualify if used principally in a farming or fishing business.

 

Similarly, the budget proposes to extend the eligibility for the intergenerational rollover and the LCGE to an individual’s shares in a corporation, or interest in a partnership, where the corporation or partnership property is used principally in a farming business and a fishing business. In particular, under the proposed rules, if a property of the corporation or partnership is used principally in either a farming business or a fishing business, or is used principally in a combination of farming and fishing, the property will count towards the all or substantially all test.

 

This measure will apply to dispositions and transfers that occur in the 2014 and subsequent taxation years.

 

Tax deferral

 

Farmers who dispose of breeding livestock due to drought, flood or excess moisture conditions existing in prescribed regions in a particular year are permitted to defer up to 90% of the sales proceeds from inclusion in taxable income, until the year following the sale, or in certain conditions, a later year. The budget proposes to extend this tax deferral to bees and to all types of horses over 12 months of age, that are kept for breeding. This measure will apply to the 2014 and subsequent taxation years.

 

Personal

 

Medical Expense Tax Credit

 

The budget proposes to make certain amounts paid for the design of an individualized therapy plan eligible for the Medical Expense Tax Credit. The amounts would be eligible where the cost of the therapy itself would be eligible for the medical credit and certain conditions are met, including that:

 

  • An individualized therapy plan is required to access public funding for specialized therapy, or a medical doctor or an occupational therapist prescribes an individualized therapy plan
  • The plan is designed for an individual with a severe and prolonged mental or physical impairment who is, because of the impairment, eligible for the Disability Tax Credit.

 

The budget also proposes to add expenses for service animals specially trained to assist an individual in managing their severe diabetes to the list of expenditures eligible under the medical credit.

 

Mineral Exploration Tax Credit

 

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, 2015.

 

Adoption Expense Tax Credit

 

The budget proposes to increase the maximum amount of eligible expenses for the 15% Adoption Expense Tax Credit to $15,000 per child for 2014 (up from $11,774). This amount will be indexed to inflation for taxation years after 2014.

 

Pension transfer limits

 

The amount of a lump-sum commutation payment from a defined benefit registered pension plan (RPP), received by a plan member who is leaving the RPP that may be transferred to a RRSP, RRIF, certain registered pension plans or a pooled registered pension plan on a tax-free basis is generally reduced if the RPP is underfunded, subject to certain exceptions. The portion of the commutation payment that exceeds the transferable amount must be included in the taxpayer’s income for the year in which it is received.

 

The budget proposes to extend the circumstances in which the maximum transferable amount, for a plan member leaving an underfunded defined benefit registered pension plan will be the same as if the plan were fully funded. In particular, the benefit reduction will be disregarded in the computation of the transferable amount if either:

 

  • Where the plan is an RPP other than an individual pension plan, the reduction in the estimated pension benefit that results in the reduced commutation payment is approved pursuant to the applicable pension benefits standards legislation, or
  • Where the plan is an individual pension plan, the commutation payment to the plan member is the last payment made from the plan (i.e., the plan is wound up).

 

The application of this rule must be approved by the CRA, and will apply in respect of commutation payments made after 2012.

 

GST/HST Credit

 

The budget proposes to allow the CRA to automatically determine if an individual is eligible to receive the GST/HST Credit. Each individual who is eligible for the GST/HST Credit will receive a notice of determination rather than having to apply for the credit. This measure will apply for 2014 income tax returns and for subsequent taxation years.

 

Search and Rescue Volunteers Tax Credit

 

The budget proposes a Search and Rescue Volunteers Tax Credit to allow eligible ground, air and marine search and rescue volunteers to claim a 15% non-refundable tax credit based on an amount of $3,000. This measure will apply to the 2014 and subsequent taxation years.

 

International Tax Changes

 

Thin capitalization — Back-to-back loans

 

Thin capitalization rules apply where the amount of debt owing to certain non-residents exceeds a 1.5:1 debt equity ratio. These rules apply in the case of a corporation where the debts are owing to a specified person. (A specified person is a person that, either alone or together with persons with which the person is not dealing at arm’s length, owns shares representing at least 25% of the votes or value of the corporation.)

 

Part XIII levies a 25% withholding tax on interest paid or credited by a Canadian resident person to a non-arm’s length non-resident person. The withholding tax rate is subject to reduction under a tax treaty.

 

Some taxpayers have attempted to use third parties such as foreign banks to avoid the application of these rules.

 

The budget proposes to expand the existing anti-avoidance rules in the thin capitalization provisions and to add a back-to-back loan provision to Part XIII.

 

This budget proposal applies to the thin capitalization rules for years beginning after 2014 and to Part XIII withholding tax, to amounts paid or credited after 2014.

 

Insurance companies and financial institutions

 

Captive insurance

 

Generally, the foreign accrual property income (FAPI) rules tax the shareholder of a Canadian corporation on certain types of income on an accrual basis. A specific rule is aimed at preventing Canadian taxpayers from shifting income from the insurance of Canadian risks offshore. This provision applies where 10% or more of the gross premium income of a foreign affiliate of the taxpayer is from the insurance of Canadian risks. Certain taxpayers have entered into sophisticated swap arrangements where the Canadian risks are first transferred to a foreign affiliate and then swapped with a third party which insures risks outside Canada. The risk and return of the foreign affiliate are essentially the same as if the exchange had not been entered into.

 

The budget proposes to amend the existing provision to apply where:

 

  • The affiliate, or a person who does not deal at arm’s length with the affiliate, has entered into one or more arrangements and the affiliate’s risk of loss or opportunity for gain or profit in respect of one or more foreign risks may reasonably be considered to be determined by reference to the returns from one or more other risks (tracked risks) that are insured by other parties, and
  • At least 10% of the tracked risks are Canadian risks.

 

This provision applies to taxation years beginning on or after February 11, 2014.

 

Offshore regulated banks

 

Income from an investment business carried on by a foreign affiliate is included in FAPI and must be included in FAPI where the foreign affiliate is a controlled foreign affiliate. Most financial service businesses would be FAPI but for certain exceptions in the definition.

 

One of the exceptions applies to foreign banks and similar institutions. The budget indicates that certain Canadian taxpayers that are not financial institutions purport to qualify for the exception by establishing foreign affiliates and electing to subject the foreign affiliate to regulation under foreign banking and financial laws. However, the main purpose of the foreign affiliate is to invest or trade in securities on their own account.

 

The budget proposes to limit the availability of this exception based on the status of the Canadian taxpayer and related companies. For example, where the shareholder of the foreign affiliate is a Canadian financial institution, the exception will continue to be available.

 

This provision applies to taxation years that begin after 2014. Comments may be submitted within 60 days after February 11, 2014.

 

Tax transparency and BEPS consultations

 

In July 2013, the OECD released a 15-point Action Plan on Base Erosion and Profit Shifting (BEPS) aimed at international tax planning carried on by global corporate groups. The Action Plan focuses on key areas such as aggressive tax planning using preferential tax regimes and treaty shopping, hybrid instrument mismatches, transfer pricing methodologies, and other potential areas for abuse under taxation systems around the world. With some significant deadlines imposed in the Action Plan occurring in September 2014, the next seven months should see the release of a number of local country initiatives aimed at curtailing some of the perceived abuses in these tax systems.

 

As part of Canada’s response to the OECD’s BEPS Action Plan, the budget is requesting comments from stakeholders on a number of broad questions intended to provide the government with a framework for Canada’s own BEPS action plan.

 

  • What are the impacts of international tax planning by multinational enterprises on other participants in the Canadian economy?
  • Which of the international corporate income tax and sales tax issues identified in the BEPS Action Plan should be considered the highest priorities for examination and potential action by the government?
  • Are there other corporate income tax or sales tax issues related to improving international tax integrity that should be of concern to the government?
  • What considerations should guide the government in determining the appropriate approach to take in responding to the issues identified – either in general or with respect to particular issues?
  • Would concerns about maintaining Canada’s competitive tax system be alleviated by coordinated multilateral implementation of base protection measures?
  • What actions should the government take to ensure the effective collection of sales tax on e-commerce sales to residents of Canada by foreign-based vendors?

 

The consultation period for responses to these questions ends in early June 2014.

 

Canada’s treaty shopping consultations — Domestic rule approach

 

The Department of Finance’s consultation paper on treaty shopping was released in August 2013, with the comment period ending in December 2013. One of the main questions in the paper was whether changes in this area should be instituted through domestic law amendments, through treaty re-negotiations, or through a combination of the two.

 

Based on the submissions received, the government now believes that a treaty-based approach would not be as effective as a domestic law rule. The budget outlines the general terms of what such a domestic rule should encompass, and invites comments on this rule within the next 60 days.

 

General rule focused on avoidance transactions

 

Finance has opted to take a more general “main purpose” approach to its treaty shopping rule, rather than a specific “limitation on benefits” approach such as that used by the U.S. in its treaties.

 

Main purpose provision

 

A benefit would not be provided under a tax treaty to a person in respect of an amount of income, profit or gain (relevant treaty income) if it is reasonable to conclude that one of the main purposes for undertaking a transaction, or a transaction that is part of a series of transactions or events, that results in the benefit was for the person to obtain the benefit.

 

Conduit presumption

 

It would be presumed, in the absence of proof to the contrary, that one of the main purposes for undertaking a transaction was to obtain a benefit under a tax treaty if the relevant treaty income is primarily used to pay, distribute or otherwise transfer an amount to another person that would not have been entitled to an equivalent or more favourable benefit had the other person received the relevant treaty income directly.

 

Safe harbour presumption

 

Subject to the conduit presumption, it would be presumed, in the absence of proof to the contrary, that none of the main purposes for undertaking a transaction was for a person to obtain a benefit under a tax treaty in respect of relevant treaty income if one of the following conditions is met:

 

  • The person carries on an active business in the state with which Canada has concluded the tax treaty and, where the relevant treaty income is derived from a related person in Canada, the active business is substantial compared to the activity carried on in Canada giving rise to the relevant treaty income;
  • The person is not controlled, directly or indirectly in any manner whatever, by another person that would not have been entitled to an equivalent or more favourable benefit had the other person received the relevant treaty income directly; or
  • The person is a corporation or a trust the shares or units of which are regularly traded on a recognized stock exchange.

KPMG observations

 

The budget documents lay out three examples of situations where Finance illustrates the application of the main purpose test, including sub-licensing of royalty income through a favourable treaty jurisdiction, payment of dividends through a holding company located in a favourable treaty jurisdiction, and the continuation of a company into a more favourable treaty jurisdiction prior to the realization of a capital gain. It is interesting to note that these three examples specifically deal with recent court cases that were won by the taxpayer in question – the Velcro case and royalty income, the Prevost Car case and dividend income, the MIL case and capital gains.

 

The proposed treaty shopping rule would be included in Canada’s Income Tax Convention Interpretation Act, and as such would apply to all of Canada’s treaties. It would apply to taxation years that start once the rule is enacted into law. Finance is also requesting input on transitional relief and how coming-into-force measures could apply.

 

Charities and NPOs

 

Consultation on non-profit status

 

A non-profit organization (NPO) that is a club, society or association organized and operated exclusively for social welfare, civic improvement, pleasure or for any other purpose except profit qualifies for an exemption from income tax if it meets certain conditions.

 

The budget indicates that concerns have been raised that some organizations claiming NPO status may be earning profits that are not incidental to the non-profit purposes, making income available for the personal benefit of members or maintaining large reserves. There is also a concern that, because of the reporting requirements, it is difficult to assess whether an organization qualifies as an NPO.

 

The budget indicates that a review will be carried out to determine whether the income tax exemption for NPOs is properly targeted and whether there is sufficient transparency and accountability. The review will include a consultation paper.

 

This budget announcement follows on the completion of a three-year review by CRA of NPOs. The information gathered in the review was to be used to provide insights on how NPOs were operating under the provisions of the Act.

 

Donations by an estate

 

Donations made by an individual qualify for a charitable donation tax credit. Normally, the eligible amount of the donation is the fair market value of the property at the time that the donation is made. Subject to certain limitations the credit is applied against the individual’s income tax otherwise payable in the year that the donation is made or in the following five years.

 

Where a donation is made in an individual’s will the donation is considered to have been made by the individual immediately before death. Similar rules apply where a qualified donee is designated under an RRSP, RRIF, TFSA or a life insurance policy. Under the current provisions, the donation credit may only be claimed by the individual in the year of death or the preceding year.

 

Where the donation is made by the individual’s estate (and not by the terms of the will), the donation credit may only be claimed against the income of the estate.

 

Effective for 2016 and subsequent years, the budget proposes that donations made by will (and designated amounts) will no longer be considered to have been made by the individual, but rather will be considered to have been made by the estate at the time that the property is transferred to the qualified donee.

 

The trustee will have the flexibility to claim the donation in the year the donation is made, in an earlier year of the estate or the last two years of the individual. The donation must be made in the first 36 months following the individual’s death.

 

An estate will continue to be able to claim a donation credit for other donations in the year that the donation is made or in any of the five following years.

 

Donations of ecologically sensitive land

 

The budget proposes to extend the carry-forward period for claiming a donation credit for individuals or a charitable donation deduction for corporations in respect of ecologically sensitive land to 10 years (from five). This proposal applies for donations made on or after February 11, 2014.

 

Donations of certified cultural property

 

Where a taxpayer donates a property that is part of a tax shelter gifting arrangement or that is held for a short period of time the value of the gift is deemed to be no greater than its cost. Gifts of certified cultural property are not subject to this rule and the related gain is not subject to income tax.

 

There is a concern that the donation of certified cultural property could be subject to abuse by tax shelter promoters because of the favourable tax treatment and uncertainty surrounding the valuation of the property. The budget extends the tax shelter arrangement provisions to certified cultural property. This proposal applies to donations made on or after February 11, 2014.

 

Charities e-filing

 

To reduce the administrative burden on charities, the government will provide funding to the CRA to modernize its information technology. This will enable charities to apply for registration and file their annual information returns electronically for the first time.

 

Charities and terrorism

 

The budget proposes that, where a charity accepts a donation from a foreign state listed as a supporter of terrorism for the purposes of the State Immunity Act, the CRA may refuse to register the charity or revoke its registration.

 

The CRA will provide information about best practices for exercising due diligence when accepting gifts and for preventing abuse of the charitable status.

 

Business Income Measures

 

Eligible capital property consultations

 

Under the current eligible capital property (ECP) regime, 75% of an eligible capital expenditure is added to the cumulative eligible capital (CEC) pool in respect of the business and is deductible at a rate of 7% per year on a declining-balance basis. The current regime also provides that 75% of an eligible capital receipt is first applied to reduce the CEC pool and then results in recapture of any CEC previously deducted. Any excess receipt is then included in income from the business at a 50% inclusion rate.

 

The budget announces a public consultation on a proposal to repeal the ECP regime, replace it with a new CCA class and transfer taxpayers’ existing CEC pools to the new CCA class.

 

The proposed rules would introduce a new class of depreciable property for CCA purposes. Expenditures that are currently added to CEC (at a 75% inclusion rate) would be added to the new CCA class at 100%. The depreciation rate of the new class would be 5% (instead of 7% under the ECP regime). The existing CCA rules would generally apply to the new CCA class, including rules related to recapture, capital gains and depreciation. The half-year rule would also apply.

 

The proposals also include special rules for goodwill and expenditures and receipts that do not relate to a specific property. Such expenditures and receipts would be accounted for by adjusting the capital cost of the goodwill of the business, and consequently the balance of the new CCA class. An expenditure that did not relate to property would increase the capital cost (and the balance of the new CCA class) of the goodwill. A receipt that did not relate to a specific property would reduce the capital cost of the goodwill, and consequently the balance of the new CCA class by the lesser of the capital cost of the goodwill and the receipt. The excess of the receipt over the capital cost of the goodwill would be a capital gain. Previously deducted CCA would be included in recapture to the extent that the amount of the receipts exceeds the balance of the new CCA class. Every business would be considered to have goodwill, even if there had been no expenditure to acquire goodwill.

 

The proposals also include transitional rules to transfer existing CEC pool balances to the new CCA class as of an implementation date. The opening balance of the new CCA class for a particular business would be equal to the balance at that time of the existing CEC pool for that business. For the first 10 years, the depreciation rate for the new CCA class would be 7% for expenditures incurred before the implementation of the new rules. Subsequent qualifying 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 would reduce the balance of the new CCA class at a 75% rate.

 

The budget documents note that the proposal is not intended to affect the application of the GST/HST in this area. The budget also notes that special rules to simplify the transition for small businesses will be considered as part of the consultation process. The timing of the implementation of the proposal will be determined following the consultation.

 

Apprenticeships and internships

 

The budget proposes new support for various internship and mentor programs. The budget proposes to provide, among other programs:

 

  • $40 million over four years to the Canada Accelerator and Incubator Program to help entrepreneurs create new companies and provide mentoring and other resources
  • $40 million towards supporting up to 3,000 internships in high-demand fields
  • $15 million annually towards supporting up to 1,000 internships in small and medium-sized enterprises
  • $150,000 to increase mentorship among women entrepreneurs.

 

Research and innovation funding

 

The budget proposes new support for research and innovation totaling more than $1.6 billion over the next five years. The budget proposes to provide, amongst other items:

 

  • $1.5 billion in funding over the next 10 years for research by Canadian post-secondary institutions, through the creation of the Canada First Research Excellence Fund
  • $500 million over two years to the Automotive Innovation Fund
  • $46 million per year to the granting councils in support of advanced research and scientific discoveries, including the indirect costs of research
  • $222 million over five years, beginning in 2015-16, to the TRIUMF physics laboratory
  • $117 million over two years for Atomic Energy of Canada Limited.

 

Accelerated CCA for clean energy generation equipment

 

Class 43.2 provides accelerated CCA (50% per year on a declining balance basis) for investment in specified clean energy generation and energy 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.

 

Water-current energy equipment

 

The budget proposes to expand Class 43.2 to include water-current energy equipment. Eligible property will include equipment used primarily for the purpose of generating electricity using the kinetic energy from flowing water. Eligible property will include support structures, submerged cables, transmission equipment, and control, conditioning and battery storage equipment, but will not include buildings, distribution equipment or auxiliary electricity generating equipment.

 

Gasification equipment

 

Gasification equipment is currently eligible for inclusion in Class 43.2 when used in an eligible cogeneration facility or in an eligible waste-fuelled thermal energy facility. The budget proposes to expand Class 43.2 to include property used to gasify eligible waste for other applications. Eligible property will include equipment used primarily to produce producer gas, including related piping, storage equipment, feeding equipment, ash-handling equipment and equipment to remove non-combustibles and contaminants from the producer gas. Eligible equipment will not include buildings or other structures or heat rejection equipment.

 

Accelerated CCA will be available only if, at the time the property becomes first available for use, the requirements of all Canadian environmental laws, by-laws and regulations have been met. This requirement will also be extended to wave and tidal equipment, already eligible for inclusion in Class 43.1 and 43.2.

 

These measures apply to property acquired on or after February 11, 2014 that has not been used or acquired for use before that date.

 

Employer source deduction remittances

 

Employers are required to remit source deductions for employees’ income tax, Canada Pension Plan contributions and Employment Insurance premiums. The frequency of remittance of source deductions depends on the employer’s total average monthly withholding amount in preceding calendar years in respect of these source deductions. The budget proposes to reduce the frequency of remittance of source deductions for certain employers. The budget proposes to:

 

  • Increase the threshold level of average monthly withholdings at which employers are required to remit up to two times per month to $25,000 (from $15,000)
  • Increase the threshold level of average monthly withholdings at which employers are required to remit up to four times per month to $100,000 (from $50,000).

 

This measure will apply to amounts to be withheld after 2014.

 

Indirect Tax Changes

 

Group relief election

 

The budget proposes to extend the availability of the group relief election (generally referred to as the “nil consideration election”) to new group members that have not yet acquired any property, effective January 1, 2015. This extension only applies where the new members continue as going concerns engaged exclusively in commercial activities.

 

Effective January 1, 2015, parties to a new election must file the group relief election with the CRA. Generally, the election is due by the first date on which any of the parties to the election is required to file a return for the period in which the election becomes effective. Parties to an election made before January 1, 2015 that is in effect on that date will have until January 1, 2016 to comply with this filing requirement.

 

Further, the budget proposes to subject parties of an existing or new group relief election to a joint and several liability provision for the GST/HST liability that may arise for supplies made between them on or after January 1, 2015.

 

Joint ventures

 

Finance intends to propose new joint venture election measures to simplify the GST/HST accounting obligations for joint venture activities. The new measures, as well as associated anti-avoidance measures, will allow joint venture participants to make the joint venture election as long as the joint venture’s activities are exclusively commercial and the participants are engaged exclusively in commercial activities. Finance notes that it will release related draft legislative proposals later in the year for comments.

 

Health-related goods and services

 

The budget proposes to expand the GST/HST exemption for training designed to assist individuals with a disorder or disability to include the services of designing the training. This exemption will apply to the initial development and design of the plan and any subsequent adjustments. To qualify, the design service must be either:

 

  • Supplied by a government or fully or partially subsidized under a government program, or
  • Certified in writing by a recognized health care professional whose services are GST/HST exempt in the course of a professional-client relationship with an individual with a disorder or disability.

 

The budget exempts from GST/HST professional services rendered to individuals by acupuncturists and naturopathic doctors.

 

The budget also adds eyewear (not eyeglasses or contact lenses) specially designed to electronically treat or correct a defect of vision (i.e., macular degeneration) to the list of GST/HST zero-rated medical and assistive devices. To qualify, the eyewear must be supplied on a physician’s or optometrist’s written order for use by a consumer named in the order.

 

These measures apply to supplies made after February 11, 2014.

 

Failing to register for GST/HST

 

The budget gives the CRA the discretionary authority to register and assign a GST/HST registration number to a person who fails to comply with the requirement to register, even after having been notified of the requirement. This measure will apply when the enacting legislation receives Royal Assent.

 

Excise and Other Changes

 

Tobacco

 

The budget proposes to increase the rate of excise duty on tobacco as follows:

 

  • Cigarettes — To $0.52575 (from $0.425) for five cigarettes or a fraction thereof
  • Tobacco sticks — To $0.10515 (from $0.085) on each tobacco stick
  • Manufactured tobacco (e.g., chewing tobacco or fine-cut tobacco) — To $6.57188 (from $5.3125) per 50 grams manufactured tobacco or a fraction thereof
  • Cigars — To $22.88559 (from $18.50) per 1,000 cigars, with additional duty from the greater of $0.067 per cigar and 67% of the sale price or duty-paid value to the greater of $0.08226 per cigar and 82% of the sale price or duty-paid value.

 

The budget also proposes to increase the “duty free” rate on tobacco as follows:

 

  • Canadian-manufactured cigarettes — To $0.52575 for five cigarettes or a fraction thereof
  • Imported cigarettes — To $0.10515 per cigarette
  • Tobacco sticks — To $0.10515 on each tobacco stick
  • Manufactured tobacco (e.g., chewing tobacco or fine-cut tobacco) — To $6.57188 per 50 grams manufactured tobacco or a fraction thereof.

 

These rate changes will be effective after February 11, 2014. To ensure that the excise duty rate changes are applied, the budget proposes that inventories of cigarettes held by manufacturers, importers, wholesalers and retailers at the end of February 11, 2014 be subject to a per cigarette tax of 2.015 cents. Finance says that taxpayers may use any reasonable method for establishing their inventories of these products, including a physical count. The tax will not apply to cigarettes held in vending machines.

 

Finance notes that the future excise duty rates on tobacco products, including the “duty free” rates, will be indexed to the Consumer Price Index and automatically adjusted accordingly every five years. The first inflationary rate adjustment will be effective December 1, 2019.

 

Tariffs

 

The budget proposes to eliminate the 20% Most-Favoured-Nation rate of duty on imported Mobile Offshore Drilling Units. This measure will permanently eliminate a disincentive to exploration leading to oil and gas discoveries in offshore Atlantic and Arctic regions. This tariff elimination will be given effect by amendments to the Customs Tariff and will be effective for goods imported into Canada on or after May 5, 2014.

 

New non-compliance penalty

 

The budget proposes to add a new administrative monetary penalty, and to amend the existing criminal offence, for making false statements or omissions in an excise tax return and related offences under the non-GST/HST portion of the Excise Tax Act (e.g., for fuels, fuel-inefficient vehicles and automobile air-conditioners). These provisions will be consistent with the GST/HST portion of the Excise Tax Act and will apply to excise tax returns filed after the day these measures receive Royal Assent.

 

Aboriginal tax policy

 

The government reiterates its willingness to discuss and put into effect direct taxation arrangements with interested Aboriginal governments. The government also supports direct taxation arrangements between interested provinces or territories and Aboriginal governments and has enacted legislation to facilitate such arrangements.

 

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We can help

 

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.

 

For more information on FATCA and the Canadian intergovernmental agreement (IGA) with the U.S., join KPMG tax professionals for a live webcast on February 13, 2014 for a discussion on how FATCA may affect your business.


 

Information is current to February 11, 2014. 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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