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Tax Accounting Round-up — 2012 Canadian Tax Changes 



Tax Accounting Round-up — 2012 Canadian Tax Changes

January 10, 2013
No. 2013-01

 

If you are involved in preparing financial reports for corporations or other organizations, certain 2012 Canadian tax changes may need to be reflected in your year-end financial statements under International Financial Reporting Standards (IFRS), Accounting Standards for Private Enterprise (ASPE) or U.S. generally accepted accounting principles (U.S. GAAP).

 

Corporate Tax Rates for 2012


The following general federal and provincial corporate rates are in effect as of December 31, 2012:

 

  2010 2011 2012 and Beyond
Federal 18.0% 16.5% 15.0%
Provincial      
British Columbia 10.5% 10.0% 10.0%
Alberta 10.0% 10.0% 10.0%
Saskatchewan 12.0% 12.0% 12.0%
Manitoba 12.0% 12.0% 12.0%
Ontario 13.0% 11.75% 11.5%
Quebec 11.9% 11.9% 11.9%
New Brunswick 11.5% 10.5% 10.0%
Nova Scotia 16.0% 16.0% 16.0%
Prince Edward Island 16.0% 16.0% 16.0%
Newfoundland 14.0% 14.0% 14.0%

 

Ontario is the only province that proposed changes to the general corporate tax rate in its 2012 budget. Ontario cancelled its scheduled decreases to 11% and 10% (from 11.5%) for 2012 and 2013, respectively.


In its 2012 budget, British Columbia proposed to temporarily increase the general corporate tax rate to 11% (from 10%) effective April 1, 2014, if the province’s fiscal situation worsens. This proposed increase, however, was not included in the bill implementing British Columbia’s 2012 budget. As a result, British Columbia’s corporate rate remains at 10%.


The latest general corporate tax rates, as well as rates for Canadian-controlled private companies, are always available on our Canadian Corporate Tax Tables page.


When do new tax measures have to be taken into account?
Under IFRS and ASPE, the tax effect of changes in tax law and rates is recognized in the period that includes the date that the changes were substantively enacted. Under U.S. GAAP, tax law and rate changes are recognized in the period that includes the date that the changes were enacted.

 

The tables below provide more information on 2012 federal and provincial corporate tax measures that you may need to reflect in your year-end financial statements. The tables include:

 

  • Table A — Bill C-48 Catch-Up Tax Technical Amendments
  • Table B — 2012 Federal Budget Measures —Bills C-45 and C-38
  • Table C — Outstanding Federal Tax Legislation — December 31, 2012
  • Table D — Provincial Tax Legislation —2012.

 

For more information about these changes, contact your KPMG adviser or see the editions of TaxNewsFlash-Canada noted below.


We can help
KPMG’s tax accounting and audit support professionals can help you assess the impact these changes in tax law will have on your organization’s financial statements. We can also help your organization understand and manage your obligations under the Canadian, U.S. and international financial reporting standards for income tax accounts and disclosures. For details, contact your KPMG adviser.


Table A — Bill C-48 Catch-Up Tax Technical Amendments

 

Enabling legislation Date “substantively enacted” under ASPE/IFRS Date “enacted” under U.S. GAAP
Federal Bill C-48 November 21, 2012 N/A

 

Bill C-48 consolidates almost all outstanding tax measures that Finance released beginning in 2002 related to foreign affiliates, non-resident trusts, real estate investment trusts (REITs) and many more general technical amendments to hundreds of sections of the Income tax Act (the Act), including two mini-technical bills.

 

Some of the measures related to foreign affiliates included in the Bill introduce new rules for:

 

  • Upstream loans
  • Hybrid surplus
  • Foreign tax credit generator rules
  • Foreign affiliate distributions
  • Extending the deadline to revoke many foreign affiliate elections, including the recharacterization rule for acquisition financing election (“Cap D election”).

 

The bill also contains a number of general technical amendments to hundreds of sections of the Act, including:

 

  • Restrictive covenant provisions
  • Expenditure limitations for the issuance of certain non-monetary compensation
  • Amendments consequential to the general corporate rate reductions, including amendments to the factor in the paragraph 110(1)(k) deduction for Part VI.I tax
  • Aggressive tax planning
  • Loss utilization regarding income trust conversions

 

 

Table B — 2012 Federal Budget Measures — Bills C-45 and C-38

 

Enabling legislation Date “substantively enacted” under ASPE/IFRS Date “enacted” under U.S. GAAP
Federal Bill C-45 October 18, 2012 December 14, 2012

 

Bill C-45 enacts certain tax measures announced in the 2012 federal budget. The bill includes:

 

  • Changes to the scientific research and experimental development (SR&ED) program, including, among other changes:
    • Reducing the general SR&ED investment tax credit rate to 15% (from 20%), effective January 1, 2014
    • Reducing the prescribed proxy amount to 55% (from 65%) of direct labour costs, effective January 1, 2014
    • Removing the profit element from arm’s-length third-party contracts for the purpose of the calculation of SR&ED tax credits
    • Removing capital from the base of eligible expenditures for the purpose of the calculation of SR&ED tax incentives.
  • Limitations to the application of the section 88 “bump” in the wind-up involving a partnership interest where all the fair market value of the partnership interest is derived from income assets
  • Accelerated capital cost allowance for certain equipment
  • Changes to the thin capitalization rules including:
    • Reducing the debt-to-equity ratio to 1.5:1 (from 2:1)
    • Including partnership debt in the debt-to-equity ratio, and
    • Treating disallowed interest as dividends
  • “Foreign affiliate dumping” rules whereby a dividend will be deemed to be paid by a Canadian subsidiary to its foreign parent where certain conditions are met
  • Treatment of secondary transfer pricing adjustments as a dividend for purposes of non-resident withholding tax in Part XIII of the Act.
  • Phasing out of the Corporate Mineral Exploration and Development Tax Credit
  • Changes to eligibility for the Atlantic Investment Tax Credit.

 

For details, see TaxNewsFlash-Canada 2012-31, TaxNewsFlash-Canada 2012-33, TaxNewsFlash-Canada 2012-39 and TaxNewsFlash-Canada 2012-42.

 

Federal Bill C-38 April 26, 2012 June 29, 2012

 

Bill C-38 enacts certain tax measures announced in the 2012 federal budget. The bill:

 

  • Allows taxpayers to make split or late eligible dividend designations
  • Introduces a mandatory e-filing requirement for returns prepared by a “tax preparer” and a related penalty
  • Implements the GST/HST measures included in the 2012 federal budget.

 

 

Table C — Outstanding Federal Tax Legislation — December 31, 2012

 

Enabling legislation Date “substantively enacted” under ASPE/IFRS Date “enacted” under U.S. GAAP
Federal Not substantively enacted Not enacted

Federal tax legislation that has been announced or released in draft form but has not yet reached the bill stage is not considered substantively enacted or enacted for accounting purposes. Pending federal legislation includes:

 

2012 federal budget proposals

The only remaining key corporate tax measure included in the 2012 federal budget that has not yet been included in a bill are the amendments to the “base erosion test” for Canadian banks. Draft legislation was released for comment on November 27, 2012, but has not yet been included in a bill.

 

December 2012 Draft Technical Amendments

On December 21, 2012, Finance released a 21-page package of draft legislative proposals for comment that include a number of technical changes to the Act and Income Tax Regulations. According to Finance, the proposals include technical changes related to:

 

  • A number of amendments to sections 55 and 88 of the Act related to comfort letters issued to taxpayers by the Department of Finance, along with a change to section 88 to ensure that a parent corporation cannot benefit from an inappropriate step-up in cost base on the winding-up of a subsidiary corporation.

 

Specified investment flow-through (SIFT) proposals

Finance introduced proposals on July 20, 2011 in a press release and three-page backgrounder to amend the rules that apply to SIFT entities. The proposals tighten the SIFT rules by restricting the deductibility of payments related to publicly traded stapled securities and by requiring SIFTs to pay instalments monthly instead of quarterly. However, the proposals also provide some relief by expanding the definition of qualifying investor for certain SIFTs and clarifying the meaning of "non-portfolio property". Draft legislation was released for comment on July 25, 2012, but has not yet been included in a bill.

 

 

Table D — Provincial Tax Legislation — 2012

 

Enabling Legislation Date "substantively enacted" under ASPE/IFRS Date "enacted" under U.S.GAAP
Ontario Bill 114 June 20, 2012 June 20, 2012

 

Bill 114 contains tax measures in ontario's 2012 budget. The bill:

 

  • Freezes the general corporate income tax rate at 11.5%, cancelling the previously enacted rate reductions for 2012 and 2013 to 11.0% and 10.0%, respectively

 

Quebec Bill 5 December 7, 2012 December 7, 2012

 

Bill 5 amends the Act respecting the Quebec sales tax (QST) to introduce certain harmonization measures with the federal tax system. Among other changes, the bill:

 

  • Increases the QST Rate to 9.975% (from 9.5%)
  • removes the GST from QST base


Quebec Bill 63 April 18.2012 May 9, 2012

 

Bill 63 contains measures announced in the 2011 Quebec budget and various harmonization measures. The bill:

 

  • Extends the stop-loss rules on the redemption of shares held by a corporation
  • Extends the regulatory regime that currently applies to registered charities to registered Canadian amateur athletic associations and the rules regarding the granting of options to qualified donees.
Quebec Not substantively enacted Not enacted

 

2013-2014 Budget
The new Quebec PQ minority government tabled its 2013-2014 provincial budget on November 20, 2012. None of the corporate tax measures proposed in the budget have been included in a bill yet. The proposed measures:

 

  • Introduce a refundable tax credit for biopharmaceutical research and development
  • Amend the tax credit for manufacturing and processing equipment
  • Extend the "temporary compensation tax on financial institutions and increase the rates that apply to this temporary tax.
  • Treat seven refundable tax credits as government assistance, including the credits for SR&ED and on-the-job training
  • Introduce a new tax holiday for large tax investment projects


 

2012-2013 Budget
Tax measures in the 2012-2013 budget tabled by the former Liberal government have not been included in a bill. These amendments:

 

  • Extend the refundable tax credit for labour training in the manufacturing, forestry and mining sectors to December 31, 2015
  • Improve the eligibility for the investment tax credit relating to manufacturing and processing equipment for purchases between March 20, 2012 and January 1, 2018
  • Introduce a refundable tax credit for Quebec manufacturing companies expanding markets outside of Quebec
  • Simplify refundable tax credits for multimedia titles
  • Introduce a new refundable tax credit for the production of multimedia environments or events staged outside of Quebec generally equal to 35% of labour expenditures incurred to carry out a production certified by the Société de développement des enterprises culturelles (up to 50% of production expenses to a maximum of $350,000)
  • Introduce fiscal measures to encourage the creation of new financial service corporations


  • For details, see TaxNewsFlash-Canada 2012-11. It is unclear whether the new government will adopt all, some or none of these tax measures.

 

Quebec Information Bulletins — December 2012
Quebec has also introduced a number of harmonization measures through various information bulletins. However, none of these measures have been included in a bill yet. These measures include harmonization of most measures included in the 2012 federal budget, as well as other recently introduced federal legislation, such as:

 

  • Allowing taxpayers to make split or late eligible dividend designations
  • Changes concerning the accelerated capital cost allowance for certain equipment
  • Changes to the thin capitalization rules (although Quebec will not adopt the treatment of non-deductible interest expense as a dividend)
  • Certain changes concerning “foreign affiliate dumping”
  • Changes concerning tax avoidance through the use of partnerships that hold income assets
  • Changes to the R&D program concerning the percentage at which the proxy amount is calculated, to apply on the same dates as the federal measures
  • Treatment of specified investment flow-through entities (SIFT) and real estate investment trusts (REIT) (even though Quebec has a separate tax system for SIFTs), including support for the federal government's objectives related to publicly-traded stapled securities
  • Certain measures contained in Bill C-48
    • Non-resident trusts and foreign investment entities
    • Foreign affiliate proposed amendments, including upstream loans and hybrid surplus once Bill C-48 receives Royal Assent
    • Other general tax measures included in Bill C-48, although some measures will not be adopted, such as the aggressive tax planning rules (as Quebec has its own).

 

The proposed measure also address:

 

  • The refundable tax credit for the development of e-business.
British Columbia Bill 21 February 21, 2012 May 14, 2012

 

Bill 21 contains measures included in British Columbia's 2012 budget. The bill:

 

  • Extends the B.C. Training Tax Credits, which provide employers with refundable tax credits for salary and wages paid to eligible apprentices, for an additional three years, to the end of 2014.
  • Introduces a new refundable tax credit for eligible shipbuilding and ship repair industry employers of 20% of wages per year, up to $5,250 per eligible apprentice in the first 24 months of an eligible apprenticeship program

 

British Columbia Bill 54 May 14, 2012 May 31, 2012

 

Bill 54 contains:

 

  • Legislation to transition from the harmonized sales tax (HST) and re-implement the provincial sales tax (PST)

 

Alberta Bill 9 October 23, 2012 December 10, 2012

 

Bill 9 contains measures included in Alberta's 2012 budget. The bill:

 

  • Eliminates the “grind” to the Alberta Scientific Research and Experimental Development tax credit, effective for tax years ending after March 31, 2012

 

Saskatchewan Bill 43 April 23, 2012 May 16, 2012

 

Bill 43 contains measures included in Saskatchewan's 2012 budget. The bill:

 

  • Includes a tax rebate that will reduce the general corporation income tax rate on income earned from the rental of newly constructed qualifying multi-unit residential projects by 10%
  • Limits “refundable” research and development tax credits to qualifying expenditures incurred on or after April 1, 2012, to Canadian controlled private corporations, subject to an annual qualifying expenditure limit of $3 million; amounts in excess of this limit, as well as all qualifying expenditures incurred by other corporations, will instead be eligible for a new 15% non-refundable research and development tax credit
  • Eliminates the Film Employment Tax Credit for productions after April 1, 2012

 

Manitoba Bill 39 June 6, 2012 June 14, 2012

 

Bill 39 contains measures included in Manitoba’s 2012 budget. The bill:

 

  • Increases the Corporation Capital Tax on Financial Institutions to 4% (from 3%), beginning with taxation years ending after April 17, 2012
  • Introduces or enhances various tax credits, including:
    • Co-op Educatgion and Apprenticeship Tax Credit
    • Data processing Investment Tax Credit
    • Film and Video Production Tax Credit
    • Nutrient Management Tax Credit
    • Neighbourhoods Alive! Tax Credit
  • For details, see the TaxNewsFlash-Canada 2012-19.
Nova Scotia Bill 17 April 12, 2012 May 17, 2012

 

Bill 17 contains measures included in Nova Scotia’s 2012 budget. The bill:

 

  • Reduces the small business corporate income tax rate to 3.5% (from 4%) on the first $400,000 of taxable income, effective January 1, 2013
  • Lowers the province’s Harmonized Sales Tax to 14% (from 15%) in 2014 and to 13% (from 14%) in 2015 by providing that Nova Scotia will take the necessary steps under the Comprehensive Integrated Tax Co-ordination Agreement to reduce the provincial component of Harmonized Sales Tax rate to 9% (from 10%) effective July 1, 2014 and to 8% (from 9%) effective July 1, 2015 (or earlier dates in 2014 and 2015 as determined by the Governor in Council)

 

New Brunswick Bill 42 May 11, 2012 June 13, 2012

 

Bill 42 contains measures included in New Brunswick’s 2012 budget. The bill:

 

  • Increases the Financial Corporation Capital Tax Rate to 4% (from 3%), effective April 1, 2012
  • Lowers the province’s Harmonized Sales Tax to 14% (from 15%) in 2014 and to 13% (from 14%) in 2015 by providing that Nova Scotia will take the necessary steps under the Comprehensive Integrated Tax Co-ordination Agreement to reduce the provincial component of Harmonized Sales Tax rate to 9% (from 10%) effective July 1, 2014 and to 8% (from 9%) effective July 1, 2015 (or earlier dates in 2014 and 2015 as determined by the Governor in Council)

 

Prince Edward Island Bill 24 November 27, 2012 December 7, 2012

 

Bill 24 contains corporate tax measures included in Prince Edward Island's 2012 budget. The bill:

 

  • Ratifies the Comprehensive Integrated Tax Coordination Agreement entered into on November 26, 2012 between the Minister on behalf of the Government of Prince Edward Island and the Minister of Finance for Canada on behalf of the Government of Canada, implementing the province’s consolidation of its provincial sales tax and the goods and services tax to introduce a 14% harmonized sales tax effective April 1, 2013

 

 

 

 

 

 

 

 

 

 

 

 


 

Information is current to December 31, 2012. 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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