Economic Action Plan 2013 – Closing More Tax Planning Opportunities
On Thursday, March 21, 2013 (Budget Day), the Honourable Jim Flaherty, Minister of Finance, delivered his eighth federal budget (Budget 2013), wearing a pair of new Canadian-made shoes from Roots.
Minister Flaherty acknowledged the challenges facing the Canadian economy, including that too many Canadians remain unemployed, while noting Canada’s steady economic progress in outperforming all of its G-7 peers in GDP growth and job creation since the depths of the global economic recession. In this context, Budget 2013 maintains the Government’s priorities of jobs and the economy, emphasizing initiatives that connect Canadians with available jobs, help Canadian manufacturers and businesses, invest in public infrastructure, foster research and innovation, and support families and communities.
On the taxation front, no changes to income tax rates are proposed. Some modest incentives in the form of enhanced capital cost allowances are proposed. However, much of Budget 2013 is directed at closing down what the Government regards as loopholes. Indeed, a familiar refrain in Budget 2013 is that, while certain transactions, depending on their particular facts, can be challenged by the Government based on existing rules in the Income Tax Act (ITA), such challenges could be both time-consuming and costly (and quite possibly unsuccessful). Consequently, the Government is introducing specific legislative measures to ensure that "appropriate" tax consequences apply to these transactions. Transactions that are targeted include character conversion trades, synthetic monetizations, 10/8 life insurance arrangements, transactions that avoid the application of the loss streaming rules on the acquisition of control of a corporation and transactions designed to utilize losses of trusts.
Accelerated CCA: Manufacturing and Processing Machinery and Equipment
Budget 2013 proposes to extend the temporary accelerated capital cost allowance (CCA) for manufacturing and processing machinery by two more years. Eligible assets that would otherwise be included in Class 43 (CCA rate of 30% calculated on a declining-balance basis) that are acquired in 2014 or 2015 will qualify for the 50% straight-line CCA rate under Class 29. The "half-year" rule will apply.
Accelerated CCA: Clean Energy Generation Equipment
Class 43.2 provides an accelerated 50% declining-balance CCA rate for investment in specified clean energy generation and conservation equipment.
Budget 2013 proposes to expand the eligibility for inclusion in Class 43.2 by:
- providing that more types of eligible organic waste can be used in qualifying biogas production equipment and, specifically, to include pulp and paper waste and wastewater, beverage industry waste and wastewater (for example, winery and distillery wastes) and separated organics from municipal waste; and
- allowing all types of cleaning and upgrading equipment used to treat eligible gases from waste to be included in Class 43.2.
This proposal will apply in respect of property acquired on or after Budget Day that has not been used or acquired for use before Budget Day.
Loss Trading Transactions
The ITA contains extensive provisions that determine when losses incurred by a taxpayer may be used for income tax purposes including, when the taxpayer is unable to use the losses in the taxation year in which they are recognized, the ability of the taxpayer to carry the losses forward or backward for use in other taxation years.
The Government has long been concerned about the ability of taxpayers to engage in arm’s length loss trading transactions whereby one taxpayer in effect makes use of the unused losses of another. As explained in Budget 2013:
Under a typical loss trading transaction a taxpayer acquires an ownership interest in an arm’s length entity (trust or corporation) that has unused losses and transfers income-producing assets to the entity or merges the entity with a profitable entity with the intention that, for income tax purposes, any income produced would be offset by the unused losses.
Consequently, in the case of corporate taxpayers, the ITA has for many years included comprehensive provisions denying or restricting the use of losses following an acquisition of control of a corporation. Similar provisions apply in respect of other corporate tax attributes, such as investment tax credits and scientific research and experimental development (SR&ED) expenditure balances.
However, the ITA does not contain provisions applicable to trusts that are comparable to the provisions applicable to corporations restricting the use of losses and other tax attributes. In addition, subject to the possible application of anti-avoidance rules and principles in respect of some transactions, the ITA does not contain rules constraining the trading of losses and other tax attributes in respect of certain corporate transactions that do not result in an acquisition of control.
Accordingly, Budget 2013 proposes measures to:
- ensure that the loss pools of trusts cannot be inappropriately traded among arm’s length persons; and
- extend the application of the corporate loss trading provisions in respect of certain tax planning that circumvents the acquisition of control restrictions on corporate loss trading.
New Trust Loss Trading Rules
Budget 2013 proposes, for transactions occurring on or after Budget Day (subject to some grandfathering relief), to extend to trusts the restricted loss and related rules applicable pursuant to the ITA on an acquisition of control of a corporation. Given the difference between trusts and corporations, however, rather than an acquisition of control being the event that triggers the rules as in the case of a corporation, Budget 2013 proposes that the restricted loss and related rules be triggered by 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. Pursuant to these majority-interest provisions, which Budget 2013 indicates will generally apply as they do currently in respect of affiliated persons, a majority-interest beneficiary of a trust will be 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.
Budget 2013 confirms that existing rules that deem certain transactions or events (e.g., the death of a shareholder or certain transactions between shareholders) to involve or not to involve an acquisition of control of a corporation will be extended to apply, with appropriate modifications, in determining whether a trust is subject to a loss restriction event. As a consequence, the Government expects that many of the typical transactions involving changes in beneficiaries of a "personal (i.e., family) trust" will not give rise to a loss restriction event. The Government also invites stakeholders to submit comments within 180 days of Budget Day as to any additional transactions or events for such personal trusts that should not give rise to a loss restriction event.
Extension of Corporate Loss Trading Rules
The Government notes in Budget 2013 that despite the restrictions on corporate loss trading and the related provisions in the ITA, transactions continue to be undertaken that are intended to circumvent these restrictions.
Budget 2013 provides an example of the kind of transaction of concern to the Government:
A profitable corporation (Profitco) transfers, directly or indirectly, income producing property to an unrelated corporation with loss pools (Lossco) in return for shares of Lossco. Profitco seeks to avoid acquiring control of Lossco because that would result in restrictions being imposed on the subsequent use of those loss pools. Profitco acquires shares of Lossco that represent more than 75 per cent (often greater than 90 per cent) of the fair market value of all Lossco’s shares, but that – in order to avoid an acquisition of control and the attendant tax consequences – do not give Profitco voting control of Lossco. Lossco uses its loss pools to shelter from tax all or part of the income derived from the property. Lossco then pays Profitco tax-free inter-corporate dividends.
Budget 2013 proposes that specific provisions be introduced in respect of such transactions.
The proposed new provisions, applicable to acquisitions of shares on or after Budget Day (subject to some grandfathering relief), will deem there to have been an acquisition of control of a corporation for purposes of the corporate loss trading and related provisions in the ITA when a person (or group of persons) holds shares of the corporation that have a fair market value greater than 75% of the fair market value of all the shares of the corporation (and did not previously hold 75%) without otherwise acquiring control of the corporation, 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 on the use of losses and similar tax attributes. Budget 2013 also proposes related rules to ensure that this anti-avoidance rule is not circumvented.
Illustrating its concern with such loss-trading generally, Budget 2013 confirms 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."
Budget 2013 introduces measures aimed at curtailing long-term arrangements, referred to in the budget papers as synthetic disposition transactions, whereby a taxpayer transfers economic entitlement with respect to a property owned by the taxpayer without giving rise to a disposition of the property for income tax purposes.
Central to these measures is a proposed new definition in the ITA termed a "synthetic disposition arrangement" (SDA). An SDA, in respect of a property owned by a taxpayer, means one or more agreements or other arrangements (other than a lease of tangible or corporeal property) that:
- are entered into by the taxpayer or by a person or partnership that does not deal at arm’s length with the taxpayer;
- have the effect, or would have the effect if entered into by the taxpayer instead of the person or partnership, of eliminating all or substantially all the taxpayer’s risk of loss and opportunity for gain or profit in respect of the property for a period of more than one year;
- can, in respect of any agreement or arrangement entered into by a person or partnership that does not deal at arm’s length with the taxpayer, reasonably be considered to have been entered into, in whole or in part, with the purpose of obtaining the effect described paragraph (b); and
- do not (other than as a consequence of [new] subsection 80.6(1)) result in a disposition of the property within one year of the time that they are entered into.
If an SDA in respect of a property owned by a taxpayer is entered into at any time, the taxpayer is deemed to have disposed of the property immediately before that time for fair market value proceeds and to have reacquired the property at that time for a cost equal to the fair market value of the property. As a result, for income tax purposes, the taxpayer will realize any accrued gains or losses in respect of the property at the time of entering into the SDA. The deemed disposition and reacquisition rule and the SDA definition will apply to agreements and arrangements entered into on or after Budget Day, as well as an agreement or arrangement entered into before Budget Day, the term of which is extended on or after Budget Day, as if the agreement or arrangement were entered into at the time of the extension.
Further, if the taxpayer is deemed to have disposed of a property at a particular time as a result of having entered into an SDA (or would be deemed to have disposed of the property if the reference to "one year" in the SDA definition were "30 days" and the taxpayer did not own the property throughout the 365-day period that ended immediately before that time), the taxpayer will be deemed not to own the property (for the duration of the SDA) for purposes of the holding period tests in the dividend stop-loss rules and foreign tax credit rules. Subsequently, if the taxpayer regains the risk of loss and opportunity for gain or profit with respect to the property, the taxpayer will be considered to own the property from that point onward for the purpose of such rules. These amendments are deemed to come into force on Budget Day.
The budget papers suggest that the SDA definition is intended to encompass a wide range of financial instruments by which a taxpayer may eliminate all or substantially all of the taxpayer’s risk of loss and opportunity for gain or profit with respect to underlying property, that is, not only long-term equity hedge and monetization transactions involving a forward sale agreement (combined with a secured loan), but also put-call collars, exchangeable debt, total return swaps and short sales of property that is identical (or economically similar) to the underlying property.
Notwithstanding the potential broad reach, the budget papers comment that the SDA rules will generally not apply to "ordinary hedging transactions," described as those which "typically only involve managing the risk of loss" (presumably because they do not affect the taxpayer’s opportunity for gain or profit). The rules are also not intended to affect the tax consequences of ordinary-course securities lending arrangements or apply to ordinary commercial leasing transactions.
The budget papers suggest that these synthetic disposition transactions are entered into solely or primarily to defer taxable gains (or obtain other tax benefits) that would otherwise be realized (or not otherwise obtained) on a disposition of the property, making no mention of legitimate non-tax commercial reasons for taxpayers to enter into these types of transactions. For example, securities law or other commercial or contractual constraints may restrict an outright sale by a taxpayer of a large block of shares. It may also be important to an individual taxpayer to maintain voting rights over the shares, for example, in the case of a founder of a public company (or the family successors of the founder). An equity hedge transaction allows the taxpayer to reduce his or her exposure to a concentrated equity position, while at the same time retaining the rights associated with the beneficial ownership of the stock. The fact that the SDA definition implements an "effects" test (as opposed to a "purpose" test) may leave little room for transactions of this type to remain in effect for one year or more without triggering the application of the rules.
Character Conversion Transactions
Budget 2013 introduces measures that will tax on income account the amount of gains and losses that would otherwise be treated as capital gains and capital losses realized by a taxpayer on the sale or purchase of Canadian securities under certain types of forward transactions referred to in the budget papers as "character conversion transactions."
As the scope of direct investors in these types of forward transactions is almost solely limited to Canadian mutual funds, these measures will have a profound impact on the Canadian mutual fund industry and, in turn, individual Canadian retail investors who hold units in such funds.
By way of example, these transactions typically contemplate the establishment of a Canadian-resident mutual fund that acquires a basket of "Canadian securities" as defined in subsection 39(6) of the ITA (e.g., common shares of Canadian public corporations). The fund enters into a forward sale agreement pursuant to which the fund agrees to sell the basket of Canadian securities at some point in the future to a counterparty for a purchase price based on the value of a reference fund that holds an underlying portfolio of securities. The fund makes an election under subsection 39(4) of the ITA which deems all Canadian securities owned by the fund to be capital property and every disposition of such securities by the fund to be a disposition of capital property. In this way, the forward provides the fund, and thus investors in the fund, with exposure to the underlying reference fund or portfolio, and, through such exposure, the opportunity for capital appreciation. In some instances, under the forward, the fund may be the purchaser of a basket of Canadian securities that has a value equal to the value of the reference fund on a future date for a specified purchase price.
Budget 2013 will introduce a provision generally requiring a taxpayer to include in computing income for a taxation year the total of all amounts each of which is: (i) if the taxpayer acquires a property under a derivative forward agreement (DFA) in the year, the amount by which the fair market value of the property at the time it is acquired by the taxpayer exceeds the cost to the taxpayer of the property, or (ii) if the taxpayer disposes of a property under a DFA in the year, the amount by which the sale price of the property exceeds the adjusted cost base to the taxpayer of the property at the time it is disposed of (determined without reference to the amendment to the addition to the adjusted cost base computation discussed below).
In turn, Budget 2013 will also introduce a provision generally permitting a taxpayer to deduct in computing income for a taxation year (i) if the taxpayer acquires a property under a DFA in the year, the amount by which the cost to the taxpayer of the property exceeds the fair market value of the property at the time it is acquired, or (ii) if the taxpayer disposes of a property under a DFA in the year, the amount by which the adjusted cost base to the taxpayer of the property at the time it is disposed of (determined without reference to the amendment to the deduction to the adjusted cost base computation discussed below) exceeds the sale price of the property.
Central to the applicability of the above measures is the proposed new definition of DFA. A DFA of a taxpayer means an agreement entered into by the taxpayer to purchase or sell a capital property where:
a. the term of the agreement exceeds 180 days or the agreement is part of a series of agreements with a term that exceeds 180 days;
b. in the case of a purchase agreement, the amount of the property to be delivered to the taxpayer on settlement, including partial settlement, of the agreement is determined, in whole or in part, by reference to an underlying interest (including a value, price, rate, variable, index, event, probability or thing) other than:
- the value of the property;
- income or capital gains in respect of the property; or
- if the property is an interest in a partnership, trust or corporation, a return or distribution of capital in respect of the interest in the partnership, trust or corporation; and
c. in the case of a sale agreement, the sale price of the property is determined, in whole or in part, by reference to an underlying interest (including a value, price, rate, variable, index, event, probability or thing) other than:
- the value of the property;
- income or capital gains in respect of the property; or
- if the property is an interest in a partnership, trust or corporation, a return or distribution of capital in respect of the interest in the partnership, trust or corporation.
The income inclusion and deduction provisions and the DFA definition apply to agreements entered into on or after Budget Day, as well as to an agreement entered into before Budget Day, the term of which is extended on or after Budget Day, as if the agreement were entered into at the time of the extension.
In order to prevent double tax, Budget 2013 also proposes that the income (or loss) described above be added (or deducted) in computing the adjusted cost base of the capital property. These provisions will be deemed to have come into force on Budget Day.
Scientific Research and Experimental Development (SR&ED) Programs – Additional Information Requirement and New Penalty
In order to identify SR&ED claims with higher risk of non-compliance, Budget 2013 proposes to require taxpayers and tax preparers who participate in SR&ED claims to provide more detailed information in respect of SR&ED program tax preparers and billing arrangements, including whether contingency fees were used and the amount of fees payable. In addition, a penalty of $1,000 will be introduced in respect of each SR&ED program claim made by a taxpayer for which prescribed information about tax preparers and billing information is missing, incomplete or inaccurate. Tax preparers who participate in the preparation of the claim will also be jointly and severally, or solidarily, liable for the penalty. These new measures will apply in respect of SR&ED program claims filed on or after the later of January 1, 2014 and the day on which the enacting legislation receives Royal Assent.
Very generally, a taxpayer is permitted to deduct all of its Canadian exploration expenses (CEE) in full in the year they are incurred or carry such deductions forward indefinitely for use in future years. A taxpayer’s Canadian development expenses (CDE), on the other hand, are only deductible at a rate of 30% on a declining balance basis.
A taxpayer’s CEE includes all amounts incurred by the taxpayer for the purpose of bringing a new mine in a mineral resource situated in Canada (other than a bituminous sands deposit or oil shale deposit) into production in reasonable commercial quantities (Pre-Production Mine Development Expenses). Budget 2013 proposes to reclassify Pre-Production Mine Development Expenses as CDE. This reclassification will be phased in gradually, with 100% of Pre-Production Mine Development Expenses incurred in 2013 and 2014 retaining their status as CEE. Thereafter, the proportion of such expenses deemed to constitute CEE will be decreased to 80% in 2015, 60% in 2016, 30% in 2017 and 0% in 2018. One hundred per cent of any Pre-Production Mine Development Expenses incurred before Budget Day, or incurred after Budget Day but prior to 2017 under the terms of a written agreement entered into before Budget Day or as part of the development of a new mine the construction, engineering or design work for which was commenced before Budget Day will continue to be treated as CEE.
Budget 2013 also proposes to phase out the additional CCA provided in relation to certain properties acquired for use in a new mine or as part of an eligible mine expansion. Currently, such properties fall within Class 41, and are eligible for CCA at a rate of 25% on a declining balance basis, plus an additional amount equal to 100% of the undeducted portion of the capital cost of the properties, provided that such additional amount does not exceed the taxpayer’s income for the year from the relevant mine. Starting in 2017, only 90% of this additional amount will be deductible, and the percentage will decrease to 80% in 2018, 60% in 2019, 30% in 2020 and 0% for 2021 and subsequent years. One hundred per cent of the additional amount will continue to be available in respect of the cost of property acquired before Budget Day, or incurred after Budget Day but before 2018 under the terms of a written agreement entered into before Budget Day, or as part of the development of a new mine the construction, engineering or design work for which was commenced before Budget Day.
For the purposes of the above rules, construction, engineering and design work will not include obtaining permits or regulatory approvals, conducting environmental assessments, community consultations or impact benefit studies, or similar activities.
Taxation of Corporate Groups
The Government previously indicated an interest in considering whether new rules for the taxation of corporate groups could improve the corporate tax system in Canada. The Government has concluded its public consultations and decided that it will not adopt a formal system of corporate group taxation at this time.
Reserve for Future Services
Paragraph 20(1)(m) of the ITA allows a taxpayer to claim a reserve in a taxation year for amounts that have been included in the taxpayer’s income from business in the year or a previous year in respect of, among other things, services that may reasonably be expected to be rendered after the end of the taxation year.
Budget 2013 clarifies that the reserve in paragraph 20(1)(m) is not intended to apply to amounts received by a taxpayer to fund future reclamation obligations.
The amendment applies to an amount received on or after Budget Day, unless the amount is directly attributable to a reclamation obligation that was authorized by a government or regulatory authority before Budget Day and that is received before 2018 or pursuant to a written agreement entered into before Budget Day.
Credit unions are financial institutions that accept deposits from and provide loan and other services to their members who own and control them. Unlike other financial institutions that transact with customers generally, credit unions do so with customers who are their members. Further, provincial central credit unions provide financial and other support to the credit unions within their jurisdiction. Given their difference from other financial institutions, credit unions have long been subject to special, and generally favourable, rules in the ITA.
Although credit unions are expressly deemed not to be private corporations for the purposes of the ITA, like Canadian-controlled private corporations (CCPCs), they generally qualify for the small business tax rate on up to $500,000 of qualifying business income, provided that they have taxable capital employed in Canada of less than $15 million.
In addition to the small business deduction, the ITA has for many years provided that credit unions may be entitled to the preferential tax rate applicable to small businesses on income that is not eligible for the small business deduction. The amount of taxable income eligible for the additional deduction is subject to a limit based on the credit union’s cumulative taxable income that has been taxed at the preferential rate (including as a result of the additional deduction) and the amount of its deposits and member shares.
Budget 2013 proposes to phase out the low rate applicable on income of a credit union that is not eligible for the small business deduction over a five-year period. Subject to pro-ration for taxation years that include the Budget Day and/or that do not coincide with the calendar year, the deduction otherwise available will be limited to 80% for 2013, 60% for 2014, 40% for 2015 and 20% for 2016, with no such deduction available for 2017 and subsequent years.
While this provision has previously been explained as one enabling credit unions to accumulate reserves in respect of their members' deposits and share contributions (e.g., in the 1984 and 1988 Technical Notes prepared by the Department of Finance), interestingly, Budget 2013 states that:
The additional deduction for credit unions was implemented in the early 1970s to provide credit unions with access to the small business deduction similar to that for CCPCs. Since that time, the design of the small business deduction has changed significantly. As a result of those changes, the additional deduction for credit unions now provides access to the preferential income tax rate to credit unions that is not available to CCPCs.
Restricted Farm Losses (RFL) – Amendments to the Chief Source of Income Test
The ITA contains rules (RFL Rules) that limit the deduction of farm losses by taxpayers unless their chief source of income for a taxation year is farming or a combination of farming and some other source of income (Chief Source of Income Test). Budget 2013 proposes to modify the Chief Source of Income Test so that the RFL Rules will apply unless the taxpayer’s chief source of income for a taxation year is farming or a combination of farming and some other source of income that is a subordinate source of income for the taxpayer. These proposals essentially codify the test that was established by the Supreme Court of Canada in Moldowan v. The Queen and respond to the 2012 decision of that Court in The Queen v. Craig. In The Queen v. Craig, the Court established a test that permits the full deduction of farming losses 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.
These new measures will apply to taxation years that end on or after Budget Day.
Amendments to Thin Capitalization Rules – Trusts Residents of Canada and Canadian Branches
Generally, the thin capitalization rules limit the deductibility of interest expense of a corporation resident in Canada where the amount owing to specified non-residents exceeds a 1.5-to-1 debt-to-equity ratio. Budget 2012 extended the application of the thin capitalization rules to partnerships with a Canadian-resident corporation as a member. Budget 2013 proposes to extend the application of the thin capitalization rules to (i) trusts that are resident in Canada and (ii) non-resident corporations and trusts that carry on business in Canada. These new measures will apply to taxation years that begin after 2013, and will apply with respect to both existing and new borrowings.
Trusts Resident in Canada
In extending the thin capitalization rules to apply to Canadian-resident trusts, Budget 2013 proposes to modify the existing thin capitalization rules applicable to corporations to reflect the legal nature of a trust. In particular, trust beneficiaries will be considered in determining whether a person is a specified non-resident in respect of the trust. Subsection 18(5) of the ITA will be amended to add new definitions of "specified non-resident beneficiary" and "specified beneficiary" of a trust, which are similar in concept to the definitions of "specified non-resident shareholder" and "specified shareholder" in respect of a corporation. The trust’s "equity amount" for the purposes of the thin capitalization rules will generally consist of contributions to the trust from specified non-residents plus the "tax-paid earnings" (i.e., taxable income of the trust net of any federal and provincial tax payable by the trust) of the trust, less any capital distributions from the trust to specified non-residents of the trust. The same 1.5-to-1 debt-to-equity ratio applicable currently to corporations resident in Canada will apply.
The ITA will also be amended to provide that the trust will be entitled to designate any interest that is not deductible as a result of the application of the thin capitalization rules as a payment of income of the trust to the non-resident beneficiary that received the interest. The designated payment will be deductible in computing the income of the trust, but it will be subject to non-resident withholding tax under Part XIII of the ITA and may give rise Part XII.2 tax (which applies in general terms to certain types of income earned by certain resident trusts which have non-resident beneficiaries) payable by the trust.
The new proposals will also extend the application of the thin capitalization rules to partnerships in which a trust resident in Canada is a member.
Special transitional rules will be available to resident trusts existing on Budget Day to permit equity to be determined for thin capitalization purposes as at Budget Day, based on the fair market value of the trust assets less the amount of its liabilities.
Non-Resident Corporations and Trusts
Budget 2013 also proposes to extend the thin capitalization rules to non-resident corporations and trusts that carry on business in Canada so that the rules would apply in a manner similar to that applicable to wholly-owned Canadian subsidiaries of non-resident corporations, with necessary adjustments to take into account the fact that a Canadian branch is not a separate person and does not have shareholders or equity. In particular, indebtedness attributed to a Canadian branch of a non-resident corporation or trust will be considered to be an outstanding debt to a specified non-resident for purposes of the thin capitalization rules under modified subsection 18(5) of the ITA, if the indebtedness is owed to a specified non-resident shareholder, a specified non-resident beneficiary or a non-resident who does not deal at arm’s length with a specified shareholder of the corporation or a specified beneficiary of the trust where interest paid or payable on such loan is (or would be but for the thin capitalization rules) deductible by the corporation or trust. For these purposes, new subsection 18(5.2) of the ITA will provide that a non-resident corporation is deemed to be a specified shareholder of itself and a non-resident trust is deemed to be a specified beneficiary of itself.
In addition, the "equity amount" in respect of non-resident corporations and trusts will, in general terms, be 40% of the excess of the corporation’s or the trust’s cost of its property, less indebtedness payable by the corporation or the trust (other than outstanding debts to specified non-residents). Although it is not self-evident and appears to be unduly onerous in many situations, this computation is apparently intended to measure the amount of equity that should reasonably be taken into account for purposes of the thin capitalization provisions having regard to the rules applicable to residents of Canada (e.g., $100 of debt from a specified non-resident shareholder or specified non-resident beneficiary together with $150 of equity used by a non-resident corporation or trust to purchase an asset for $250 would give rise an "equity amount" of 40% of $250 or $100).
For non-resident corporations, the application of the thin capitalization rules could result in an increased liability for branch tax under Part XIV of the ITA.
Where a non-resident corporation or trust has elected to file a return under Part I of the ITA in accordance with subsection 216(1) of the ITA in respect of net rental income earned from certain Canadian properties, the thin capitalization rules for non-resident corporations or trusts, rather than those for residents in Canada, will apply in computing the non-resident’s Part I tax liability. Given the special computation of equity applicable to non-resident corporations and trusts, i.e., based on the cost of their assets, this may be a very significant adverse change for non-resident corporations that have elected pursuant to subsection 216(1) of the ITA.
These proposals will also extend the application of the thin capitalization rules to partnerships in which a non-resident corporation or trust is a member.
Budget 2013 announces the Government’s intention to consult on possible measures to combat treaty shopping. A consultation paper will be publicly released for comment.
Stop International Tax Evasion Program
Budget 2013 announces the launch by the Canada Revenue Agency (CRA) of the Stop International Tax Evasion Program (SITEP), a "whistleblower" program, pursuant to which rewards will be paid to individuals who provide information to the CRA that leads to the collection of outstanding taxes due in situations of international tax non-compliance.
Further details regarding SITEP will be announced by the CRA in the coming months, but the essential features are as follows:
- the CRA will enter into a contract that will pay an individual only if the information results in total additional assessments or reassessments exceeding $100,000 in federal tax;
- the contract will provide for payment of up to 15% of the federal tax collected (i.e., not including penalties, interest and provincial tax);
- payments will be made only after the taxes have been collected; and
- rewards will be paid only where the non-compliant activities involve foreign property or property located or transferred outside Canada, or transactions conducted partially or entirely outside Canada.
In addition, certain eligibility criteria will have to be met by individuals seeking rewards under SITEP. Individuals convicted of tax evasion about which they have information will not be eligible.
Reward payments will be subject to income tax.
International Electronic Funds Transfers
Budget 2013 proposes to amend the ITA, the Excise Tax Act (ETA) and the Excise Act, 2001 (EA) to require that certain financial intermediaries report international electronic funds transfers (EFT) of $10,000 or more to the CRA. The new reporting requirements and the financial intermediaries that will be subject to these new requirements will be the same as under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. In particular, the targeted financial intermediaries will include banks, credit unions, caisses populaires, trust and loan companies, money services businesses and casinos. The EFT reports must be made to the CRA no later than five working days after the day of the transfer and contain information on the person concluding the transaction, the recipient of the funds, the transaction itself and the financial intermediaries facilitating the transaction.
These new reporting requirements will apply beginning in 2015.
Information Requirements Regarding Unnamed Persons
Currently, the ITA, the ETA and the EA contain rules allowing the CRA to require third parties to provide information or documents for the purposes of verifying tax compliance by unnamed persons, subject to obtaining prior judicial authorization on ex parte application (i.e., without the CRA being legally required to notify the third party of the application). Budget 2013 proposes to eliminate the ex parte aspect of these applications and to require the CRA to give notice to the third party when it seeks judicial authorization. As a result, the third party will need to make submissions at the hearing of the application, rather than seeking a subsequent review of the original ex parte order. This new measure will apply on Royal Assent to the enacting legislation.
Foreign Reporting Requirements: Form T1135
A Canadian-resident individual, corporation or trust that owns, and certain partnerships that own, at any time in a taxation year, specified foreign property (including foreign deposits, shares of foreign corporations, etc.) with an aggregate cost in excess of $100,000 must file a Foreign Income Verification Statement (Form T1135) with the CRA. The purpose of this requirement is to enable the CRA to determine whether the taxpayer’s foreign income has been reported correctly.
Effective for 2013 and subsequent taxation years, Budget 2013 proposes to extend the normal reassessment period for a taxation year of a taxpayer by three years if the taxpayer has failed to report income from a specified foreign property on the taxpayer’s annual income tax return, and the taxpayer has not filed Form T1135 on time, has not identified a specified foreign property on Form T1135 or has improperly identified a specified foreign property on Form T1135. Budget 2013 also proposes to revise the version of Form T1135 to be used in the 2013 and subsequent taxation years so that it requires taxpayers to include the name of the institution holding funds on the taxpayer’s behalf outside of Canada, the country to which the property relates and the foreign income generated from the property. Budget 2013 indicates that starting in 2013, the CRA will remind taxpayers on their Notices of Assessment of the obligation to file Form T1135 if they have indicated on their income tax returns that they have specified foreign property in the taxation year with a total cost of more than $100,000. Finally, the filing instructions on Form T1135 will be clarified, and CRA will develop a system that will allow Form T1135 to be filed electronically.
International Banking Centres
The International Banking Centre (IBC) rules of the ITA currently exempt prescribed financial institutions from tax on certain income and losses from the making of loans to and the accepting of deposits from non-residents of Canada through an IBC-designated branch or office in the metropolitan areas of Montréal and Vancouver. Budget 2013 proposes to repeal the IBC rules, effective for taxation years that begin on or after Budget Day.
Dividend Gross-Up and Tax Credit
Budget 2013 will increase the effective tax rate on dividends other than "eligible dividends" received by individuals. Budget 2013 proposes to reduce the gross-up factor applicable to non-eligible dividends from 25% to 18% and the corresponding dividend tax credit from 2/3 of the gross-up amount to 13/18.
This measure will apply to non-eligible dividends paid after 2013.
Increase of Lifetime Capital Gains Exemption (LCGE)
The ITA provides for a lifetime exemption of up to $750,000 on capital gains realized by individuals on the disposition of certain qualified property, including "qualified small business corporation shares." Budget 2013 proposes to increase the LCGE to $800,000, effective for the 2014 taxation year. For taxation years after 2014, the LCGE will be indexed to inflation. The new LCGE limit will benefit all individuals, including those who have previously used the LCGE.
Leveraged Life Insurance Arrangements
Budget 2013 targets two leveraged life insurance arrangements commonly referred to as "10/8 arrangements" and "leveraged insured annuities." The budget papers state that developments in these areas will be monitored and that if structures or transactions emerge that undermine the effectiveness of the proposed measures, further changes with possible retrospective application will be considered. The budget papers also confirm the Government’s intention to proceed with previously announced changes to the life insurance policyholder exemption test announced in the 2012 budget.
So-called "10/8" (or, in today’s lower interest rate environment, "9/7") insurance plans are carefully structured arrangements that take advantage of a number of provisions of the ITA while carefully avoiding the application of others.
In brief, an individual or corporation would acquire an insurance policy to fund liquidity needs on death. The policy is structured so that it qualifies as an "exempt policy" with the result that accumulation within the policy is not subject to current accrual taxation. The policyholder makes deposits into the insurance policy in addition to the cost of insurance, which can be allocated to a special investment account within the policy. The insurance company makes a loan to the policyholder and accepts the insurance policy as collateral security. The insurance company advances funds under the loan based on the amount in the special investment account. The current interest rate on such loans is 9% (formerly 10%). Certain unique features of the loans are said to justify the premium over rates charged on typical collateralized loans. The loan proceeds are used by the policyholder to make an investment (e.g., in a portfolio of dividend-paying common shares). Interest at a rate equal to the loan interest rate less 2% is credited to the special investment account within the policy resulting in a credited interest rate of 7% (formerly 8%) to the cash value of the policy supporting the loan.
The policyholder is content to pay 9% interest in order to earn 7% within the policy because the interest on the loan meets the requirements for interest deductibility under the ITA and, assuming a 45% tax rate, has an after-tax cost of only 4.95%. On the other hand, the funds allocated to the special investment account earn 7% and that return will not be taxed at all if paid as a death benefit under the policy on the policyholder’s death. In the case of a policyholder that is a private corporation, an amount equal to the death benefit less the adjusted cost basis of the policy would be added to the capital dividend account. A portion of the premiums paid under the policy may be deductible by the policyholder.
It is clear from public statements made by the CRA, including at annual conferences of the Canadian Tax Foundation, and from the Minister of National Revenue v. RBC Life Insurance Company case in which the CRA sought judicial authorizations requiring certain insurance companies to produce information and documents relating to customers that had purchased 10/8 insurance plans, that the CRA does not like 10/8 arrangements and is challenging them.
Budget 2013 proposes that the ITA define a "10/8 policy" to be an insurance policy (other than an annuity) where (1) an amount is or may become payable, under the terms of a borrowing, to a person that has been assigned an interest in the policy or an investment account in respect of the policy or payable under a "policy loan" made in accordance with the policy, and (2) either the rate of interest payable on an obligation held in an investment account in respect of the policy is determined by reference to the rate of interest payable on the borrowing or policy loan or the maximum amount of an investment account in respect of the policy is determined by reference to the amount of the borrowing or policy loan.
If a policy is a 10/8 policy:
- interest paid or payable on or after the Budget Day in respect of a period after 2013 on the borrowing or policy loan will not be deductible under paragraph 20(1)(c) or (d);
- in the case of a corporate-owned policy where the death of the life insured occurs after 2013, the amount added to the capital dividend account will be reduced by the amount of the outstanding borrowing or policy loan; and
- no deduction for premiums paid will be allowed under paragraph 20(1)(e.2) in respect of a period after 2013.
Budget 2013 proposes certain alleviating rules in order to facilitate the termination of existing 10/8 arrangements.
Leveraged Insured Annuities
Budget 2013 states that, in a typical leveraged insured annuity arrangement, an individual will acquire with borrowed funds a life annuity and a life insurance policy that is structured to be an exempt policy. (More likely, the individual will dispose of income-producing property and use the proceeds from the sale to purchase the annuity and borrow to replace the income-producing property so that interest on the loan is deductible.) During the individual’s lifetime, the annuity provides a fixed and guaranteed income. As the life insurance policy is an exempt policy, accumulation within the policy is not subject to current accrual taxation and is received on death as a tax-free death benefit.
Budget 2013 proposes to eliminate the benefits of such arrangements by introducing rules for LIA policies. An "LIA policy" is a life insurance contract (other than an annuity) where (1) a person or partnership becomes obligated on or after Budget Day to repay an amount to a "lender" at a time determined by reference to the death of the particular individual whose life is insured, and (2) the lender is assigned an interest in the contract and an annuity contract the terms of which provide that payments are to continue for a period that ends no earlier than the death of the particular individual.
If a life insurance contract is a LIA policy:
- the definition of "exempt policy" in the Regulations under the ITA will exclude an LIA policy so that accumulation within the policy is subject to current accrual taxation;
- no deduction will be allowed for premiums paid under the LIA policy under paragraph 20(1)(e.2);
- for the purposes of the deemed disposition of property immediately before the death of the particular individual, in computing the value of any property deemed to be disposed of (e.g., shares of a corporation owned by the individual), the fair market value of an annuity contract assigned to the lender in connection with an LIA policy will be deemed to be equal to the premiums paid under the contract; and
- in the case of a corporate owned policy, no amount will be added to the capital dividend account in respect of the proceeds received as a result of the death of the particular individual.
The budget papers state that that these measures will apply to taxation years that end on or after Budget Day but not "in respect of leveraged insured annuities for which all borrowings were entered into before Budget Day".
The Demise of the Labour-Sponsored Venture Capital Corporation (LSVCC)
An LSVCC is a type of mutual fund corporation, sponsored by a labour union or other labour organization, that makes investments in small- and medium-sized businesses.
A 15% federal tax credit is provided to individuals for the acquisition of shares of LSVCCs on investments of up to $5,000 each year, providing up to $750 in federal tax relief. Some provinces provide a similar tax credit. In addition, LSVCC shares may be acquired by an Registered Retirement Savings Plan (RRSP). Historically, LSVCC shares have been promoted as investments for RRSPs so that investors can benefit from both the LSVCC tax credit and the deduction for contributions to an RRSP.
The LSVCC tax credit has been widely criticized as being an ineffective means of stimulating a healthy venture capital sector. Investors have typically experienced dismal returns both before and after taking into account tax benefits.
Budget 2013 proposes to eliminate the federal LSVCC tax credit for the 2017 and subsequent taxation years. In the meantime, it will remain at 15% until the end of the 2014 taxation year, and will be reduced to 10% for the 2015 taxation year and to 5% for the 2016 taxation year.
An LSVCC will not be federally registered if the application for registration is received on or after Budget Day. A provincially registered LSVCC will not be prescribed for purposes of the federal LSVCC tax credit unless the application was submitted before Budget Day.
The Government will seek stakeholder input on potential additional changes to the tax rules governing LSVCCs, including the rules related to investment requirements, wind-ups and redemptions.
Extension of the Mineral Exploration Tax Credit for Flow-Through Share Investors
Budget 2013 proposes a further one-year extension of the tax credit for individuals who invest in flow-through shares. The credit is equal to 15% of specified mineral exploration expenses (generally grass roots exploration) incurred in Canada and renounced to individual flow-through share investors.
The extension will apply to specified mineral exploration expenses incurred by a corporation after March 2013 and before 2015 pursuant to a flow-through share agreement entered into after March 2013. The one year look-back rule will apply so that if the conditions for the application of the rule are met, expenses incurred on or before December 31, 2015 and renounced effective December 31, 2014 will qualify.
The ITA contains an attribution rule in subsection 75(2) that may apply if property is held by a trust on condition (1) that it or property substituted therefor may revert to the person from whom the property or property for which it was substituted was received, or pass to persons to be determined by that person after the creation of the trust, or (2) that during the existence of that person, the property shall not be disposed of by the trust except with that person’s consent or in accordance with that person’s direction. If the particular person is resident in Canada, income or loss from the property or substituted property, and taxable capital gains and allowable capital losses from the disposition of the property or substituted property, will be treated as (i.e., "attributed to") income, loss, taxable capital gain or allowable capital loss of the person. A related rule, subsection 107(4.1), prevents a tax-deferred distribution of property from a trust where property of the trust is, or has been, subject to the attribution rule.
Subsection 75(2) currently applies to trusts that are resident in Canada and to trusts that are non-resident.
In a recent decision, The Queen v. Sommerer, the Federal Court of Appeal held that subsection 75(2) did not apply, in that case, to property received by a non-resident trust in exchange for fair market value consideration. The Government asserts that this decision is not in accordance with intended tax policy.
Budget 2013 proposes to limit the application of subsection 75(2) to Canadian resident trusts applicable to taxation years ending after Budget Day.
In addition, the proposed rules applicable to non-resident trusts in Bill C-48 will be further amended. Under the proposed rules in Bill C-48, if a person resident in Canada contributes property to a non-resident trust, the trust may be deemed to be resident in Canada. In general, Budget 2013 proposes to amend the deemed residence rules to apply if a particular person is resident in Canada and the non-resident trust holds particular property on condition that the particular property or property substituted for the particular property (1) may revert to the particular person, or pass to one or more persons or partnerships to be determined by the particular person, or (2) shall not be disposed of by the trust during the existence of the particular person, except with the person’s consent or in accordance with the person’s direction. If those conditions are met, any transfer or loan of the property (regardless of the consideration provided) made directly or indirectly by the Canadian resident taxpayer will be treated as a transfer or loan of "restricted property" by the taxpayer to the trust. As a result, 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.
Budget 2013 also proposes that subsection 107(4.1) apply to prevent a tax-deferred distribution of property from a trust where the new rule has applied.
These changes are applicable to taxation years ending after Budget Day.
First-Time Donor’s Super Credit
The Charitable Donations Tax Credit (CDTC) provides an individual with a non-refundable tax credit of 15% for the first $200 of annual charitable donations and 29% for the portion of donations that exceed $200.
Budget 2013 proposes a temporary First-time Donor’s Super Credit (FDSC) to supplement the CDTC with an additional 25% tax credit for a first-time donor on up to $1,000 of donations of money (but not other property) made in the year or in any of the four preceding taxation years. Paired with the CDTC, first-time donors will be entitled to a 40% federal credit for the first $200 of donations and a 54% credit for donations over $200 but not exceeding $1,000.
The FDSC is a one-time credit that is available to individuals in any taxation year after 2012 and before 2018 if neither the individual nor the spouse or common-law partner of the individual (as determined on December 31 of the taxation year for which the FDSC is claimed) has claimed the CDTC in any taxation year after 2007. The FDSC must be shared between first-time donor couples.
Extended Reassessment Period: Tax Shelters and Reportable Transactions
The promoter of a tax shelter must file an information return with the CRA. In addition, pursuant to proposed subsection 237.3(2), taxpayers who participate in certain avoidance transactions (reportable transactions) are required to file information returns in respect of such transactions. Budget 2013 proposes to extend the normal reassessment period in respect of any taxation year in which a taxpayer claims a deduction in relation to a tax shelter, or in which a taxpayer realizes a tax benefit in connection with a reportable transaction, if the required information return has not been filed on time. The normal reassessment period in respect of such a tax shelter or reportable transaction will be extended to three years after the date that the relevant information return is filed.
This measure will apply to taxation years that end on or after Budget Day.
Taxes in Dispute and Charitable Donation Tax Shelters
Pursuant to subsections 164(1.1) and 225.1(1), the CRA is generally prohibited from collecting (and is obligated to refund) any tax, interest or penalties owing under an assessment that has been objected to or appealed by a taxpayer, subject to special rules applicable to "large corporations." To discourage participation in charitable donation tax shelters, Budget 2013 proposes to permit the CRA to collect 50% of the disputed tax, interest and penalties owing under an assessment under sections 110.1 or 118.1, where the amount claimed was in respect of a tax shelter, notwithstanding the fact that it is being challenged.
This measure will apply in respect of amounts assessed for the 2013 and subsequent taxation years.
Consultation on Graduated Rate Taxation of Trusts and Estates
The Government announced its concerns with tax fairness and neutrality of the taxation at graduated rates of testamentary trusts and grandfathered inter vivos trusts and their increased use in tax-motivated planning. The Government will consult on possible measures to eliminate the tax benefits that arise from the taxation of various trusts and estates at graduated rates.
Registered Pension Plan Contributions – Correction of Errors
Currently, the ITA allows RPP over-contributions to be refunded to plan members or employers only if the refund is made to avoid the revocation of the registration of the RPP (e.g., in situations where the RPP contribution limits have been exceeded). In other situations, refunds of over-contributions are allowed at the discretion of the CRA on a case-by-case basis. Budget 2013 proposes to amend the ITA to allow administrators of RPPs to refund amounts from the plan to reverse contributions that were made as a result of a reasonable error without having to obtain prior approval of the CRA, provided that the refund is made no later than December 31 of the year following the year of the over-contribution and is reported to the Minister in prescribed form. This proposed amendment will apply in respect of RPP over-contributions made on or after the later of January 1, 2014 and the day of Royal Assent to the enacting legislation.
Adoption Expense Tax Credit
Currently, adoptive parents may claim a 15% non-refundable tax credit on eligible adoption expenses incurred between the time a child is matched with his or her adoptive family and the time that the child begins to permanently reside with the family. To recognize the significant expenses that adoptive parents may incur prior to being matched with a child, Budget 2013 proposes to permit the claim of eligible expenses beginning from the earlier of:
- the time that an adoptive parent makes an application to register with a provincial ministry responsible for adoption or with an adoption agency licensed by a provincial government; and
- the time, if any, that an adoption-related application is made to a Canadian court.
This measure will apply to adoptions finalized after 2012.
Elimination of Deduction for Safety Deposit Boxes
Budget 2013 proposes to eliminate the deduction for expenses incurred in respect of the use of a safety deposit box of a financial institution, effective for taxation years that begin on or after Budget Day.
PREVIOUSLY ANNOUNCED MEASURES
The Government will proceed with the following previously announced measures:
- proposed changes to certain GST/HST rules relating to financial institutions;
- automobile expense amounts for 2012 and 2013;
- legislative proposals implementing the proposed changes to the life insurance policyholder exemption test;
- legislative proposals relating to improving the caseload management of the Tax Court of Canada;
- legislative proposals relating to specified investment flow-through entities, real estate investment trusts and publicly-traded corporations;
- legislative proposals relating to income tax rules applicable to Canadian banks with foreign affiliates; and
- legislative proposals released December 21, 2012 relating to income tax technical amendments.
The Government will also move forward with technical amendments to improve the certainty of the tax system.
GST, CUSTOMS AND OTHER MEASURES
GST/HST on Home and Personal Care Services
Budget 2013 proposes to expand the exemption for publicly subsidized or funded homemaker services to also exempt provincial and territorial government-subsidized or funded personal care services, such as bathing, feeding, and assistance with dressing and taking medication, rendered to an individual who, due to age, infirmity or disability, requires assistance in his or her home. This measure is proposed to apply to supplies made after Budget Day.
GST/HST on Reports and Services for Non-Health Care Purposes
Budget 2013 proposes to clarify that GST/HST applies to reports, examinations and other services that are performed for a non-health-care related purpose (e.g., where performed solely for the purpose of determining liability in a court proceeding or under an insurance policy) as well as supplies of property and services in respect of same (e.g., x-rays or lab tests). This measure is proposed to apply to supplies made after Budget Day.
GST/HST Pension Plan Rules
Under the current GST/HST pension plan rules, employers that participate in a registered pension plan are required to account for GST/HST on actual taxable supplies made to the registered pension plan as well as on "deemed" taxable supplies. Under the current rules, where employer accounts for tax twice (i.e., on both the actual taxable supply and the deemed taxable supply), the employer is then required to make a "tax adjustment" in respect of its net tax to ensure that tax is only remitted on one supply.
Budget 2013 proposes two measures to simplify employer compliance with the GST/HST pension plan rules, in certain circumstances.
Election to Not Account for GST/HST on Actual Taxable Supplies
Budget 2013 proposes a joint election between an employer participating in a registered pension plan and the 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 supplies; thereby requiring the employer to account for the tax only once. Where, however, an employer fails to remit tax on the deemed taxable supplies, Budget 2013 proposes to grant the Minister of National Revenue discretion to cancel the joint election. It is also proposed that the Minister could, in such a situation, assess the employer for both the tax on deemed taxable supplies and on all actual taxable supplies made since the effective date of the election’s cancellation. While it is proposed that the "tax adjustments" that otherwise would be available under the GST/HST legislation in respect of those tax amounts continue to be available, the employer could be subject to interest.
This measure is proposed to apply to supplies made after Budget Day.
Relief From Accounting for Tax on Deemed Taxable Supplies
Budget 2013 proposes that an employer participating in a registered pension plan 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.
Specifically, it is proposed that employers be relieved from applying the deemed taxable supply rules, for a fiscal year of the employer, where the amount of the 5% GST or the 5% federal component of the HST that the employer was (or would have been, but for this proposed measure) required to account and remit under the deemed taxable supply rules, is less than each of: $5,000; and 10% of the total net GST (or the federal component of the HST) paid by all pension entities of the pension plan in that preceding fiscal year. This proposed full relief will not be available for deemed taxable supplies where the employer has entered into the joint election not account for tax on actual taxable supplies made in that fiscal year.
Partial relief is also proposed, to be available for employers not satisfying the above $5,000 and 10% thresholds, in respect of an employer’s "internal pension activities," for inputs acquired for consumption or use in activities of the employer that relate to the pension plan other than in making supplies to a pension entity (e.g., time spent by a payroll employee determining an employer’s pension contribution deductions). Budget 2013 proposes to relieve an employer from applying the deemed taxable supply rules with respect to its internal pension activities if the amount of the 5% GST or the 5% federal component of the HST that the employer was (or would have been, but for this measure) required to account for and remit under the deemed taxable supply rules in respect of those activities only, was below the $5,000 and 10% thresholds, in the preceding fiscal year. This proposed limited relief rule would be available even where an employer has a joint election in effect not to account for tax on actual taxable supplies in that fiscal year.
Specific rules would apply with respect to the application of the $5,000 and 10% thresholds in cases of related employers participating in the pension plans, and mergers, amalgamations or wind-ups of participating employers.
This measure is proposed to apply in respect of any fiscal year of an employer that begins after Budget Day.
GST/HST Business Information Requirement
In order to ensure that businesses provide the required business identification information (including the business’s operating name and legal name, ownership details, business activity and contact information), Budget 2013 proposes to give the Minister of National Revenue authority to withhold GST/HST refunds claimed by a business until all of the prescribed business identification information is provided. This measure is proposed to apply on Royal Assent to the enacting legislation.
GST/HST on Paid Parking Supplied by PSBs and Charities
Budget 2013 proposes to clarify that commercial paid parking supplied in the course of a business carried on by a public service body (PSB) (i.e., a non-profit organization, charity, municipality, school authority, hospital authority, a public college or a university) is taxable. Occasional supplies of paid parking by a PSB, such as those made as part of a special fundraising event, would continue to be exempt. This proposed measure will be effective the date the GST legislation was enacted.
Budget 2013 also proposes to clarify that the special GST/HST exemption for parking supplied by charities does not apply to supplies of paid parking made in the course of a business carried on by a charity that has been established by a municipality, university, public college, school or a hospital to operate a parking facility. This measure is proposed to apply to supplies made after Budget Day.
Excise Duty Rate on Manufactured Tobacco
Budget 2013 proposes to eliminate the preferential excise duty treatment of manufactured tobacco by proposing to increase the rate of excise duty on manufactured tobacco to $5.3125 per 50 grams or fraction thereof (e.g., $21.25 per 200 grams). This proposed change will be effective after Budget Day.
Electronic Suppression of Sales Software Sanctions
Budget 2013 proposes new administrative monetary penalties and criminal offences under the ETA (i.e., in respect of GST/HST) and the ITA to address the use of electronic suppression of sales (ESS) software (also commonly known as "zapper" software) which has been used by some businesses to hide their sales to evade the payment of GST/HST and income taxes.
The CRA will undertake a communications program concerning the new monetary penalties and criminal offences alerting businesses to the need to take steps to ensure that they do not possess ESS software. To provide businesses with time to detect and remove ESS software, these measures will apply on the later of January 1, 2014 and Royal Assent to the enacting legislation.
Aboriginal Tax Policy
Budget 2013 reiterates the Government’s willingness to discuss and put into effect direct taxation arrangements with interested Aboriginal governments and support of direct taxation arrangements between interested provinces or territories and Aboriginal governments.
Tariff Relief for Canadian Consumers
Budget 2013 proposes to permanently eliminate all tariffs under the Customs Tariff on baby clothes and sports and athletic equipment (excluding bicycles). For these items, the Most-Favoured-Nation (MFN) rates of duty will be reduced to "Free" as outlined in the Notice of Ways and Means Motion to Amend the Customs Tariff.
The tariff reductions will be implemented by amendments to the Customs Tariff and are proposed to be effective in respect of goods imported into Canada on or after April 1, 2013.
Modernizing Canada’s General Preferential Tariff Regime for Developing Countries
Budget 2013 proposes changes to Canada’s General Preferential Tariff (GPT) regime as announced in a notice in the Canada Gazette on December 22, 2012.
As announced in the notice, the Government proposes to withdraw GPT eligibility from 72 higher-income and export-competitive countries, including all G-20 countries. The economic criteria used to determine country eligibility for the GPT will be applied every two years on a forward basis to determine beneficiary country eligibility, similar to the process that exists in many major industrialized nations.
The Government also proposes to ensure that graduating countries from the GPT regime does not reduce the benefits of the Least Developed County Tariff (LDCT) regime. The General Preferential Tariff and Least Developed Country Tariff Rules of Origin Regulations will be amended in order to continue allowing the duty-free importation of textiles and apparel from least developed countries that are produced using textile inputs from current GPT beneficiaries.
The changes to the GPT, to be given effect by amendments to the Customs Tariff and related regulations, are proposed to be effective in respect of goods imported into Canada on or after January 1, 2015, and will be extended for 10 years, until December 31, 2024.