Economic Action Plan 2014 – International Tax Planning Under Continued Assault
On Tuesday, February 11, 2014 (Budget Day), the Honourable Jim Flaherty, Minister of Finance, delivered the federal budget (Budget 2014).
As expected, Budget 2014 does not make any changes to personal or corporate tax rates. However, the theme from last year’s budget of closing perceived loopholes continues. We see again the refrain that, although the Government is challenging, or can challenge, certain arrangements, including under the general anti-avoidance rule (GAAR), the time and costs of such challenges — and the unstated possibility that they could be unsuccessful — dictate specific amendments to the Income Tax Act (Canada) (ITA).
Budget 2014 reiterates the Government’s commitment to continue to improve the integrity of Canada’s international tax rules. Canada and other members of the Organisation for Economic Co-operation and Development (OECD) and the G-20 are engaged in a project to address "base erosion and profit shifting" (BEPS) strategies used by multinational enterprises (MNEs) and are working to achieve goals set out in the BEPS Action Plan released by the OECD. The Government is seeking the views of stakeholders on a number of questions with a view to determining a policy that better protects the Canadian tax base while maintaining an internationally competitive system that is fair to the different categories of taxpayers (e.g., MNEs, small businesses and individuals). Budget 2014 also invites comments on a proposed rule to prevent treaty shopping. A number of specific measures are proposed to address planning undertaken to avoid the application of the foreign accrual property income (FAPI) rules.
A number of personal taxation measures are proposed, including eliminating tax benefits arising from taxing at graduated rates the income of testamentary trusts and certain "grandfathered" inter vivos trusts established before June 18, 1971. Further tightening up of the "non-resident trust" rules is proposed by eliminating so-called five-year immigration trusts.
Our summary of the Budget 2014 proposals follows.
Budget 2014 proposes to expand the circumstances in which a non-resident "captive" insurance company that is a controlled foreign affiliate (CFA) of a Canadian-resident taxpayer must include income from the insurance and reinsurance of risks in computing its FAPI.
The proposed new rules will expand the application of paragraph 95(2)(a.2), which, in general terms, deems income earned by a foreign affiliate from the insurance or reinsurance of a risk in respect of a person resident in Canada, property situated in Canada or a business carried on in Canada (a Canadian risk) to be income from a business other than an active business (subject to a specific exception where such income earned by the affiliate is de minimis). Any income subject to this deeming rule is included in the FAPI of the relevant affiliate. Further, where the rule applies, the insurance of Canadian risks is deemed to be a separate business, other than an active business, carried on by the affiliate, and any income of the affiliate that pertains to or is incident to that business is also included in FAPI.
Budget 2014 proposes new rules that will target "insurance swap" transactions in which a non-resident insurance company (the affiliate insurer) that is a CFA of a Canadian taxpayer enters into a transaction with a third party (the counterparty) in which the affiliate insurer transfers Canadian risks to the counterparty in exchange for foreign risks, and the affiliate insurer and counterparty enter into ancillary agreements to ensure that the economic return earned by the affiliate is equal to the return on the Canadian risks.
Although the CRA is challenging certain of these structures under GAAR, Budget 2014 introduces a specific anti-avoidance rule. Proposed paragraphs 95(2)(a.21) and (a.22), applicable to taxation years of a taxpayer that begin on or after Budget Day, will expand the application of paragraph 95(2)(a.2) to the income earned by an affiliate insurer from an insurance swap arrangement described above. Paragraph 95(2)(a.21) will deem foreign risks (referred to as the foreign policy pool) insured by a foreign affiliate to be Canadian risks – and, therefore, subject to paragraph 95(2)(a.2) – where the affiliate (or a person or partnership with which it does not deal at arm’s length) enters into an agreement or arrangement in respect of the foreign policy pool if (i) the affiliate’s risk of loss or opportunity for gain or profit from the foreign policy pool, in combination with the related agreements or arrangements, can reasonably be considered to be determined, in whole or in part, by reference to the fair market value, revenue, income, loss, cash flow or any other similar criterion in respect of one or more risks insured by another person or partnership (the tracked policy pool); and (ii) 10% or more of the tracked policy pool is comprised of Canadian risks. Further, under paragraph 95(2)(a.22), activities performed in connection with the agreements or arrangements in respect of the foreign policy pool are generally deemed to be a separate business other than an active business carried on by the affiliate, and any income of the affiliate from that business (including income that pertains to or is incident to the business) is deemed to be income from a business other than an active business.
Offshore Regulated Banks
In general, income earned by a foreign affiliate from an investment business must be included in computing the FAPI of the affiliate. For these purposes, the term "investment business" is defined in subsection 95(1) as a business the principal purpose of which is to derive income from property, subject to certain exceptions. One such exception, referred to as the regulated foreign financial institution exception, applies to certain businesses carried on principally with arm’s-length persons by a foreign affiliate of a taxpayer as a foreign bank or other financial institution where the activities of the business are regulated under the laws of the country in which the business is carried on or another relevant jurisdiction and the affiliate employs more than five full-time employees in the business. Where the exception applies, the relevant business is deemed not to be an investment business and, consequently, the income of the affiliate from the business is not included in FAPI.
Budget 2014 proposes to narrow the regulated financial institution exception applicable to taxation years of a taxpayer that begin after 2014. Under proposed subsection 95(2.11), a taxpayer or foreign affiliate of the taxpayer, as applicable, will be deemed not to satisfy the criteria for the regulated financial institution exception unless (i) the taxpayer is a corporation that is a Schedule I bank, trust company, credit union, insurance corporation or trader or dealer in securities or commodities resident in Canada and subject by law to the supervision of a regulatory authority (such as the Superintendent of Financial Institutions), a "subsidiary wholly-owned corporation" of such a corporation or parent corporation of such a taxpayer that is subject to the same regulatory regime as the corporation; and (ii) the taxpayer (or, in certain circumstances, a Canadian-resident corporation related to the taxpayer) satisfies certain minimum equity or capitalization thresholds.
Budget 2014 expands on the Government’s initiative, first detailed in Budget 2013, to introduce anti-treaty-shopping measures both in Canada’s tax treaties and in domestic law. Budget 2014 includes detailed guidance on the domestic anti-treaty-shopping approach that the Government intends to adopt and provides several examples of the scope of the new proposals.
On August 12, 2013, the Department of Finance published a consultation paper on treaty shopping. It invited stakeholders to submit comments, although doing so could be analogized to inviting foxes to comment on improvements to the design of a hen house. Following its review of the submissions, the Government has determined that it will implement a domestic general anti-treaty-shopping rule, which is expected to include the following elements:
- Main Purpose (Charging) Provision: The main purpose provision, which will be subject to a relieving provision, will deny treaty benefits in respect of an item of income, profit or gain (relevant treaty income) where it is reasonable to conclude that one of the main reasons for undertaking a transaction (or a transaction that is part of a series of transactions or events) was to obtain the benefit.
- Conduit Presumption: The legislation will establish a rebuttable presumption that one of the main purposes for undertaking a transaction, or a transaction in a series, was to obtain a treaty benefit if the relevant treaty income was "primarily used" to pay, distribute or otherwise transfer an amount to a person who would not have been entitled to equivalent or more favourable treaty benefits if the person had received the income directly.
- Safe Harbour Presumption: Subject to the conduit presumption, there will be a rebuttable presumption that none of the main purposes for undertaking a transaction in which a person resident in a particular treaty country receives relevant treaty income was to obtain a treaty benefit if (i) the person or a related person carries on an active business (other than managing investments) in the particular treaty country and, where the relevant treaty income is derived from a related person in Canada, that business is substantial in relation to activity carried on in Canada giving rise to the relevant treaty income; (ii) the person is not controlled, directly or indirectly in any manner whatever (i.e., either de jure control or de facto control contemplated by subsection 256(5.1)) by another person or persons, who would not have been entitled to an equivalent (or more favourable) treaty benefit if the other person or persons received the relevant treaty income directly; or (iii) the person is a corporation or trust the shares or units of which are regularly traded on a recognized stock exchange. Many of these concepts are similar to concepts in the limitation of benefits article of the Canada-United States Tax Convention.
- Relieving Provision: Where the main purpose provision applies to a particular treaty benefit, the treaty benefit will nonetheless be permitted to the extent reasonable in the circumstances.
Five examples of the application of the new rules are provided, three of which would, in effect, overrule treaty shopping cases decided in favour of the taxpayer.
The facts of Example 1 are similar to those in Velcro Canada Inc., 2012 DTC 1100 (TCC). ACo, a company resident in a jurisdiction with which Canada has not entered into a tax treaty, is entitled to receive royalties from its wholly-owned Canadian subsidiary, Canco. Since royalties paid by Canco to ACo would be subject to withholding tax at a 25% rate, ACo assigns the right to receive the royalties to BCo, a newly formed company resident in Country B, a jurisdiction that has entered into a tax treaty with Canada providing for a zero rate of withholding on royalties. In consideration, BCo undertakes to remit 80% of the royalties received to ACo within 30 days. Country B does not impose a withholding tax on the payment of royalties to non-residents. The conduit presumption would apply to this structure since royalties paid by Canco to BCo are primarily used to fund payments to ACo, thus effectively overruling the result in Velcro. The example notes, however, that the presumption would not apply if only 45% of the royalties were paid by BCo to ACo, thus implying that the term "primarily" is intended to connote a threshold of more than 50%.
Example 2 describes the structure depicted in Figure A, which is similar to the facts in Prevost Car Inc., 2009 DTC 5053 (FCA). ACo, BCo and CCo are resident in Country A, Country B and Country C, respectively. Although Canada has entered into a tax treaty with each of Countries A, B and C, the treaty with Country B provides the lowest rate of withholding tax on dividends. Under the terms of a shareholders’ agreement, BCo is required to distribute the entire amount of a dividend received from Canco to ACo and CCo almost immediately. The conduit presumption would apply because a dividend paid to BCo would primarily be used to distribute an amount to ACo and CCo, neither of which would have been entitled to an equivalent treaty benefit if they received a dividend directly from Canco. Accordingly, the main purpose of establishing BCo would be presumed to be to obtain the benefit of reducing the rate of withholding tax applicable to dividends paid by Canco. Although treaty benefits would be prima facie denied under the main purpose provision, the relieving provision would permit benefits to the extent reasonable in the circumstances. On these facts, it may be reasonable for dividends paid by Canco to be subject to withholding tax at the reduced rates provided under the treaties between Canada and Country A and Country C. In Prevost Car, BCo was entitled to the benefits of the Country B treaty.
Example 3 relates to facts similar to those considered in MIL (Investments) SA, 2006 DTC 3307 (TCC), aff’d 2007 DTC 5437 (FCA). In the example, a non-resident corporation owns shares that are taxable Canadian property. The corporation is not resident in a treaty country. In anticipation of the disposition of the shares, the non-resident corporation is continued into Country B, a jurisdiction with which Canada has entered into a tax treaty exempting the gain from the disposition of the shares from Canadian tax. In this situation, as the sale proceeds are not distributed by the non-resident corporation, the conduit presumption does not apply. However, the Government states that the main purpose provision would apply because it is reasonable to consider that one of the main purposes of the continuance was to obtain the benefit of the tax treaty with Country B. The anti-treaty-shopping rule would apply to deny treaty benefits to the non-resident corporation. In MIL (Investments), the taxpayer was entitled to the benefits of the tax treaty with Country B.
Example 3 also posits a situation in which the non-resident corporation is resident in Country B when it acquires the shares of the Canadian corporation that are taxable Canadian property. In such a case it would need to be determined if it was reasonable to conclude that one of the main purposes for incorporating in Country B is to obtain the benefits of the tax treaty between Canada and Country B. The Government states that the lapse of time between the incorporation in Country B and disposition of the taxable Canadian property may be relevant. The Government is clearly putting taxpayers that elect to make investments through Luxembourg and Dutch holding companies on notice that treaty benefits may be in issue.
Example 4 illustrates circumstances in which the conduit presumption could be rebutted by facts establishing that a particular vehicle was not set up for treaty shopping purposes. B-trust is a widely held investment trust resident in Country B. It manages a diversified international portfolio, 10% of which consists of shares of Canadian corporations. Under the tax treaty between Canada and Country B, dividends paid by Canadian-resident corporations to B-trust are subject to withholding tax at the reduced rate of 15%. A majority of the investors in B-trust are resident in countries with which Canada does not have a tax treaty. Although the conduit presumption would apply, the presumption would be rebutted where the facts indicate that "[i]nvestors’ decisions to invest in B-trust are not driven by any particular investments made by B-trust, and B-trust’s investment strategy is not driven by the tax position of its investors." The example does not appear to be a blanket exemption for widely held collective investment vehicles established in a treaty jurisdiction since the example assumes that the investment mandate is a diversified international mandate. A different result may obtain if the mandate were to invest in Canadian equities.
Finally, Example 5 (see Figure B) illustrates the application of the substantial active business safe harbour presumption. ACo is a corporation resident in Country A, with which Canada does not have a tax treaty. ACo has several wholly-owned subsidiaries, including Canco, a Canadian-resident corporation, and Finco and BCo, each of which is resident in Country B. Each of ACo’s other subsidiaries is resident in a country under which it is entitled to treaty benefits at least as favourable as those available under the treaty between Canada and Country B. Finco acts as the financing vehicle for all of ACo’s subsidiaries, including Canco. BCo carries on an active business in Country B, and its business is substantial relative to the business carried on by Canco in Canada. Finco reinvests the interest income it receives in ACo’s other subsidiaries. In this example, the conduit presumption does not apply since interest income paid by Canco to Finco is paid to persons (i.e., reinvested in the other ACo subsidiaries) who are entitled to treaty benefits that are at least as favourable as those under Canada’s treaty with Country B. Further, the safe harbour presumption applies since BCo carries on a substantial active business in Country B and is related to Finco. The Budget 2014 materials state that, in the absence of other circumstances, the safe harbour presumption would not be rebutted and the anti-treaty-shopping rule would not apply. The Government reached this conclusion even though Canada does not have a tax treaty with Country A. In this regard, the assumption that Finco reinvests the interest income it receives, rather than paying dividends to ACo, is critical.
The Government has invited comments on the proposed anti-treaty-shopping rule to be submitted within 60 days following Budget Day.
Back-to-Back Loan Arrangements Involving Non-Residents
Budget 2014 includes measures intended to eliminate planning opportunities that, subject to GAAR, may previously have been available to avoid the imposition of withholding tax on interest paid by a resident of Canada to a non-resident person or the application of the thin capitalization rules that restrict the deductibility of interest paid to a non-resident person.
Withholding Tax – Current Provisions of the ITA
Part XIII of the ITA imposes a withholding tax of 25%, subject to reduction under a tax treaty, on certain interest paid or credited by a resident of Canada to a non-resident. Not subject to withholding tax is interest paid or credited to a person with whom the payer deals at arm’s length, provided that the interest is payable on a non-participating debt obligation.
Accordingly, under the existing provisions of the ITA, provided that arrangements could be structured so that interest on a non-participating debt obligation is payable to a person with whom the payer deals at arm’s length, there may be an opportunity to avoid withholding tax where such interest would otherwise have been payable to a person with whom the payer did not deal at arm’s length.
Thin Capitalization – Current Provisions of the ITA
The thin capitalization rules generally restrict the extent to which a corporation or trust may deduct interest paid or payable to certain non-residents (specified non-residents) who have or hold, or who do not deal at arm’s length with persons who have or hold, an interest in the corporation or trust. In general, the rules apply to limit the deductibility of interest expense to a corporation or trust where the amount of debt owing to specified non-residents exceeds a 1.5-to-1 debt-to-equity ratio.
Accordingly, under the existing provisions of the ITA, provided that arrangements can be structured so that loans are not made by specified non-residents, in the case of corporations, or specified beneficiaries, in the case of trusts, there may be an opportunity to avoid the thin capitalization restrictions on interest deductibility where such loans would otherwise have caused the thin capitalization rules to be engaged. Although the existing thin capitalization provisions include, in subsection 18(6), an anti-avoidance provision directed at back-to-back loans, that provision applies in relatively narrow circumstances.
Concerns with Present Provisions
The Government indicates in Budget 2014 that some taxpayers have sought to avoid the withholding tax and/or thin capitalization provisions through back-to-back arrangements that typically involve interposing an intermediary (e.g., a foreign bank) between two taxpayers (e.g., a non-resident parent corporation and its Canadian-resident subsidiary) where, if the loan were made directly between the two taxpayers, the thin capitalization rules would have applied or withholding tax would have been exigible in respect of interest paid on the loan.
Budget 2014 Back-to-Back Provisions
Budget 2014 proposes to add a specific anti-avoidance rule in respect of withholding tax on interest payments, and to amend the existing anti-avoidance provision in the thin capitalization rules.
Pursuant to the Budget 2014 proposals, a back-to-back loan arrangement will exist where, as a result of a transaction or series, the following conditions are met:
- a taxpayer has an outstanding interest-bearing obligation owing to a lender (the intermediary); and
- the intermediary or any person that does not deal at arm’s length with the intermediary
- is pledged a property by a non-resident person as security in respect of the obligation (although, Budget 2014 notes, a guarantee in and of itself will not be considered a pledge of property);
- is indebted to a non-resident person under a debt for which recourse is limited; or
- receives a loan from a non-resident person on condition that a loan be made to the taxpayer.
Where a back-to-back loan arrangement exists, amounts in respect of the obligation and interest paid or payable thereon, will be deemed to be owing by the taxpayer to the non-resident person for purposes of the thin capitalization rules. The taxpayer will generally be deemed to owe an amount to the non-resident person (the deemed amount owing) that is equal to the lesser of
- the outstanding amount of the obligation owing to the intermediary; and
- the fair market value of the pledged property or the outstanding amount of the debt for which recourse is limited or of the loan made on condition, as the case may be.
Generally, under these proposals, the taxpayer will also be deemed to have an amount of interest paid or payable to the non-resident person that is equal to the proportion of the interest paid or payable by the taxpayer on the obligation owing to the intermediary that the deemed amount owing is of that obligation.
Part XIII withholding tax will generally apply in respect of a back-to-back loan arrangement to the extent that it would otherwise be avoided by virtue of the arrangement. The non-resident person and the taxpayer will be jointly and severally (or solidarily) liable for the additional withholding tax.
These changes are to apply (i) in respect of the thin capitalization rules, to taxation years that begin after 2014, and (ii) in respect of withholding tax, to amounts paid or credited after 2014. Accordingly, although existing arrangements are not "grandfathered," taxpayers will have at least until the end of 2014 to consider the application of these rules to their particular circumstances and, if appropriate, to restructure their affairs. Further, in appropriate circumstances, taxpayers may want to ensure that interest that would be subject to the withholding tax is paid or credited prior to 2015.
Consultations as to Tax Planning by Multinational Enterprises and as to Sales Tax on E-Commerce Sales by Foreign-Based Vendors
Budget 2014 notes that the OECD has launched a project aimed at addressing BEPS strategies used by MNEs, reflecting growing concerns that governments are losing substantial corporate tax revenues because of international tax planning that exploits the interaction between domestic and international tax rules to shift profits away from the countries where the income-producing activities take place.
To help the Government set its priorities and to assist it in participating in international discussions, both at the OECD and with members of the G-20, the Government is inviting stakeholders to provide input on issues related to international tax planning.
The Government notes, in particular, that it is interested in obtaining views as to how to best balance the interests of:
- fairness among different categories of taxpayers (e.g., MNEs, small businesses and individuals);
- protecting Canada’s tax base; and
- maintaining an internationally competitive tax system that is attractive for investment.
Budget 2014 invites stakeholders to provide input on the following specific questions:
- What are the impacts of international tax planning by MNEs on other participants in the Canadian economy?
- Which of the international corporate income tax and sales tax issues identified in the OECD’s 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?
- Would concerns about maintaining Canada’s competitive tax system be alleviated by coordinated multilateral implementation of base protection measures?
In addition, the Government invites input on what actions it should take to ensure the effective collection of sales tax on e-commerce sales to residents of Canada by foreign-based vendors.
Comments from interested participants are requested within 120 days of Budget Day.
Update on the Automatic Exchange of Information for Tax Purposes
Budget 2014 contains an update on developments relating to the automatic exchange of taxpayer information between Canada and other countries in order to combat tax evasion.
In Budget 2007, the Government announced that all future tax treaties and updates to existing treaties would include the current OECD standard for information exchange and that the Government would be pursuing tax information exchange agreements (TIEAs) that include comprehensive exchange of information provisions.
Budget 2014 refers to the intergovernmental agreement (IGA) with the United States signed on February 5, 2014, under which Canadian financial institutions will comply with the provisions of US law referred to as the Foreign Account Tax Compliance Act (FATCA) by reporting certain information about financial accounts of "specified US persons" to the Canada Revenue Agency (CRA), which will provide such information to the Internal Revenue Service (IRS) pursuant to the exchange of information provisions of the Canada-United States Tax Convention. Under FATCA, a Canadian financial institution would otherwise have been required to enter into an agreement with the IRS to become a "participating foreign financial institution," agreeing to report information to the IRS on its account holders that were specified US persons (which includes US citizens living in Canada) and foreign entities with one or more "substantial US owners." If a Canadian financial institution did not enter into such an agreement, withholding agents paying it certain income and other amounts related to US sources would have been required to withhold a 30% tax. As a participating foreign financial institution, a Canadian financial institution would have been required to withhold a 30% tax on certain payments to account holders that did not provide information to establish whether they were specified US persons or to close such persons’ accounts.
Under the IGA, which will be implemented by the Canada-United States Enhanced Tax Information Exchange Agreement Implementation Act and amendments to the ITA, Canadian financial institutions (other than those that are treated as non-reporting Canadian financial institutions) will report information about US account holders to the CRA, which will exchange such information with the IRS. Withholding agents will not be required to withhold the 30% tax on payments to reporting Canadian financial institutions (and certain "exempt beneficial owners" such as registered pension plans). In addition a variety of registered accounts (including RRSPs, RRIFs, RESPs, RDSPs and TFSAs) will be excluded from the definition of "financial account" and do not have to be reported on. The rules relating to recalcitrant accounts are suspended.
Under the IGA, the CRA will receive information from the United States in respect of Canadian resident taxpayers that hold accounts at US financial institutions.
The new reporting regime is to come into effect starting in July 2014. Information will first be exchanged in 2015.
The IGA does not require Canada to collect US taxes from Canadian residents. The Canada-United States Tax Convention contains a provision (Article XXVI-A) that allows a country to collect the taxes imposed by the other country. However, Budget 2014 observes that, in the case of an individual, the CRA will not collect the US tax liability of a Canadian citizen if the individual was a Canadian citizen at the time the liability arose (whether or not the individual was also a US citizen at that time).
Budget 2014 observes that the IGA is consistent with Canada’s support for recent G-8 and G-20 commitments to multilateral automatic exchange of information. In their September 2013 meeting in St. Petersburg, G-20 leaders committed to the automatic exchange of information as the new global standard. The OECD is currently working on a model Standard for Automatic Exchange of Financial Account Information that is heavily influenced by FATCA and a model IGA substantially in the form signed by Canada.
Remittance Thresholds for Employer Source Deductions
Employers are required to remit source deductions in respect of employees’ income tax, Canada Pension Plan contributions and Employment Insurance premiums. To reduce the tax compliance burden for certain large employers, Budget 2014 proposes to reduce the required frequency of employers’ source deduction remittances in respect of amounts to be withheld after 2014.
The frequency with respect to which remittances of source deductions must be made in a calendar year by an employer is generally determined on the basis of the employer’s "total average monthly withholding amount" for the second calendar year preceding the relevant year in respect of these source deductions.
Budget 2014 proposes to reduce the frequency of remittance of source deductions for employers by increasing 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) and increasing 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).
Accelerated Capital Cost Allowance for Clean Energy Generation
Budget 2014 proposes to expand Class 43.2 of Schedule II to the Income Tax Regulations, which provides an accelerated capital cost allowance rate (50% per year on a declining-balance basis) for investment in specified clean energy generation and energy conservation equipment.
Class 43.2 currently includes property used to generate electricity using wave or tidal energy equipment. Budget 2014 proposes to expand eligibility under Class 43.2 to include water-current energy equipment, which uses similar technology to convert the kinetic energy of flowing water into electricity without the use of physical barriers such as a dam or flow diversion. 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 is used to convert organic or fossil-based materials into "producer gas." Class 43.2 currently includes gasification equipment as "fuel upgrading equipment" when used in an eligible cogeneration facility (producing electricity and heat) or in an eligible waste-fuelled thermal energy facility (producing heat). Budget 2014 proposes to expand Class 43.2 to include property used to gasify eligible waste fuel for other applications, including for sale. 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, but will not include buildings or other structures or heat-rejection equipment.
Water current energy equipment and gasification equipment will be included in Class 43.2 only if, at the time it first becomes available for use, all requirements of Canadian environmental laws, by-laws and regulations applicable in respect of the property are met. Budget 2014 will also extend this requirement to wave and tidal energy equipment.
These proposals apply to property acquired on or after Budget Day that has not been used or acquired for use before that date.
Consultation on Eligible Capital Property
Budget 2014 announces a very welcome public consultation on a proposal to repeal the "eligible capital property" (ECP) regime, replace it with a new capital cost allowance (CCA) class and transfer taxpayers’ existing "cumulative eligible capital" (CEC) pools to the new CCA class. The proposal is not intended to affect the application of the GST/HST. Detailed draft legislative proposals are to be released for consultation. The timing of the implementation of the proposal will be determined following the consultation.
The ECP rules apply to certain expenditures of a capital nature (eligible capital expenditures, or ECE) and receipts (eligible capital receipts).
An ECE is generally a capital expenditure incurred to acquire a right or benefit of an intangible nature for the purpose of earning income from a business, other than an expenditure that is deductible as a current expense or that is incurred to acquire an intangible property that is treated as depreciable property for CCA purposes. Eligible capital expenditures include the cost of purchased goodwill, certain intangible property such as customer lists and licences, and franchise rights of indefinite duration.
An eligible capital receipt is generally a capital receipt for rights or benefits of an intangible nature that is received in respect of a business, other than a receipt that is included in income or in the proceeds of disposition of a capital property.
Three-quarters of an eligible capital expenditure is added to the CEC pool in respect of the business and is amortized at a rate of 7% per year on a declining-balance basis. Similarly, three-quarters of an eligible capital receipt is deducted first from the CEC pool and any excess results in the recapture of any CEC previously deducted. Once all of the previously deducted CEC has been recaptured, 50% of any excess is included in income from the business (and in the case of an active business carried on by a Canadian-controlled private corporation (CCPC), is eligible for the small-business deduction).
Budget 2014 contemplates that a new class of depreciable property would be introduced. Expenditures that are currently added to CEC at a 75% inclusion rate would be included in the new class at a 100% rate and the new class would have a 5% annual capital cost allowance rate (rather than the 7% rate applicable to CEC). For the stated purpose of simplification, the existing CCA rules would generally apply, including rules relating to recapture, capital gains and depreciation (e.g., the "half-year rule"). One consequence appears to be that, on disposition of a relevant property for more than its original cost, the excess will be treated as a capital gain, and therefore could not be included in the active business income of a CCPC eligible for the small-business deduction.
It is proposed that every business will be considered to have goodwill associated with it, even if there is no purchased goodwill. Expenditures and receipts that would be ECE or eligible capital receipts but which do not relate to a specific property of the business (e.g., goodwill) will be accounted for by adjusting the capital cost of the goodwill of the business. An expenditure that does not relate to a property will increase the capital cost of the goodwill of the business and therefore the balance of the class. Conversely, a receipt that does not relate to a specific property will reduce the balance of the class by the lesser of the capital cost of the goodwill (which could be nil) and the amount of the receipt. Previously deducted CCA would be recaptured to the extent that the amount of the receipt exceeds the balance of the new CCA class. If the amount of the receipt exceeded the capital cost of the goodwill, the excess would be a capital gain.
Under the proposal, CEC pool balances would be calculated and transferred to the new CCA class as of the implementation date. The opening balance of the new class would be equal to the balance of the CEC pool.
For the first 10 years, the depreciation rate for the new CCA class would be 7% in respect of expenditures incurred before the implementation of the new rules.
Receipts received after the implementation date could relate to property acquired, or expenditures otherwise made, before that date. Such receipts will reduce the balance of the new CCA class at a 75% rate. It is proposed that receipts qualifying for the reduced rate would generally be 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. The cumulative amount of qualifying receipts for which only 75% of the receipt will reduce the new class will generally be the amount that would have been received under the ECP regime before triggering an ECP gain. The stated purpose of this rule is to ensure that receipts do not result in excess recapture when applied to reduce the balance of the new class.
Simplified transitional rules for small businesses will be considered.
Non-Resident Trusts – 60-Month Exemption Removed
The ITA has for many years included provisions that prevent taxpayers from using non-resident trusts to avoid Canadian tax. The provisions were recently expanded substantially, effective generally for taxation years ending after 2006, to deem a non-resident trust to be resident in Canada where, very generally, the trust has either:
- a "resident contributor" (generally, a person that is resident in Canada that has or is deemed to have contributed property to the trust); or
- a "resident beneficiary" (generally, a person that is resident in Canada that is beneficially interested in the trust, provided that the trust also has or had a "connected contributor": (i.e., a person that has or had certain defined connections to Canada and that has or is deemed to have contributed property to the trust)).
One of the constants in the provisions, both in their current form and previously, has been an exemption applicable where the contributors to the trust are individuals who have not been resident in Canada for more than 60 months. This exemption generally provides a "tax holiday" for such trusts on foreign-source income. The exemption, which represented a deliberate policy choice of the Government, permitted new immigrants to Canada to set up trusts in which foreign-source income could be earned for up to five years without being subject to Canadian tax.
Budget 2014 notes that the benefits arising from such trusts are not available to Canadian-resident persons who earn similar income directly or through a Canadian-resident trust, thereby raising concerns of "tax fairness, tax integrity and tax neutrality."
Accordingly, Budget 2014 proposes to eliminate this exemption – including for both non-resident trusts governed by section 94 and non-resident commercial trusts governed by section 94.2 – effective for trust taxation years ending after Budget Day, subject to very limited grandfathering for pre-existing trusts. Pursuant to the grandfathering proposals, the exemption is to be eliminated for trust taxation years ending after 2014 (rather than after Budget Day) provided that:
- the exemption applied to the trust at a time in 2014 prior to Budget Day; and
- no contributions are made to the trust on or after Budget Day and prior to 2015. Presumably, the very broad deeming rules in subsection 94(2) applicable in determining whether there has been a contribution to a trust will apply in determining whether any such contributions have been made.
Tax on Split Income
The "kiddie tax" is a special tax that generally applies to tax "split income" paid or payable to a minor child (and certain other individuals such as grandchildren and siblings who are under 18 years of age at the end of the relevant calendar year) at the highest marginal rate. The purpose of the tax is to limit planning techniques designed to shift income from an individual subject to tax at a high rate to a minor who is subject to tax at a lower rate.
Budget 2014 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 if (a) that income can reasonably be considered to be derived from a source that is a business or a rental property, and (b) a person related to the minor is actively engaged on a regular basis in the activities of the trust or partnership to earn income from a business or rental property or has, in the case of a partnership, an interest in the partnership (whether held directly or through another partnership). This measure is stated to apply to the 2014 and subsequent taxation years.
Graduated Rate Taxation of Trusts and Estates
In Budget 2013, the Government announced fairness and neutrality concerns with the use of testamentary trusts in tax planning and indicated that it intended to consult on possible measures to eliminate the tax benefits associated with the taxation at graduated rates of such trusts and certain grandfathered inter vivos trusts (i.e., certain inter vivos trusts created before June 18, 1971).
Budget 2014 proposes to generally proceed with the measures described in the consultation paper released by the Government on June 3, 2013, and to apply flat top-rate taxation to estates (other than "graduated rate estates," which are defined to be estates in their first 36 months that have not ceased to be testamentary trusts), trusts created by will and grandfathered inter vivos trusts. In response to comments received during the consultation period, Budget 2014 does propose to provide a limited exception for trusts having as their beneficiaries individuals who are eligible for the federal Disability Tax Credit and notes that details of this exception will be released in the coming months.
Budget 2014 also proposes that estates (other than graduated rate estates), trusts created by will and grandfathered inter vivos will no longer benefit from special treatment under a number of rules. In particular, such trusts will no longer (i) benefit from the exemption from the income tax instalment rules, (ii) be permitted to have an off-calendar year-end, (iii) benefit from the basic exemption in computing alternative minimum tax, (iv) be exempt from tax under Part XII.2 of the ITA, (v) be automatically classified as personal trusts, or (vi) be able to make investment tax credits available to their beneficiaries.
Testamentary trusts (other than graduated rate estates) that do not already have a calendar taxation year will be deemed to have a taxation year-end on December 31, 2015. A graduated rate estate will continue to be permitted to have an off-calendar year-end; however, it will be deemed to have a year-end on the day on which the 36-month period ends (i.e., when the estate ceases to be a graduated rate estate), following which the estate will be required to have a calendar year-end.
These measures will apply to the 2016 and subsequent taxation years, including for trusts created prior to Budget Day.
Adoption Expense Tax Credit
Section 118.01 provides a 15% non-refundable tax credit for the benefit of parents who may claim certain eligible adoption expenses relating to the completed adoption of a child under the age of 18. Eligible adoption expenses include fees paid to a licensed adoption agency and mandatory immigration expenses in respect of the child. The credit may be claimed in the taxation year in which the adoption is completed.
Budget 2014 proposes to increase the maximum amount of eligible expenses to $15,000 per child for 2014. This maximum amount will be indexed to inflation for taxation years after 2014.
Medical Expense Tax Credit
The Medical Expense Tax Credit (METC) provides federal income tax relief in respect of above-average medical and disability-related expenses equal to 15% of the amount by which such eligible expenses exceed the lesser of 3% of the taxpayer’s net income and an indexed dollar amount ($2,171 in 2014).
Budget 2014 proposes to extend eligibility to amounts paid for the design of an individualized therapy plan where the therapy itself would be eligible for the METC and the following conditions are met:
- an individualized therapy plan is required to access public funding for specialized therapy or is prescribed by a medical doctor, occupational therapist or psychologist;
- 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; and
- the amounts are paid to persons who are ordinarily engaged in the business of providing such services to unrelated individuals.
In addition, Budget 2014 proposes to extend eligibility under the METC to certain expenses incurred for or in respect of service animals specially trained to assist individuals with severe diabetes.
These measures will apply to expenses incurred after 2013.
Search and Rescue Volunteers Tax Credit
Budget 2014 proposes a Search and Rescue Volunteers Tax Credit (SRVTC) for eligible ground, air and marine search and rescue volunteers.
To be eligible for the SRVTC, which is a non-refundable tax credit of $450, an individual must perform a minimum of 200 hours of volunteer search and rescue services in a year. Hours performed for an organization will be ineligible if the individual also provides non-volunteer search and rescue services to the same organization. A taxpayer who otherwise qualifies for both the Volunteer Firefighters Tax Credit (VFTC) and the SRVTC may only claim one. In addition, a taxpayer who claims the VFTC or the SRVTC will be ineligible for the $1,000 tax exemption for honoraria paid by a government, municipality or public authority to an emergency services volunteer.
This measure will apply to the 2014 and subsequent taxation years.
Extension of the Mineral Exploration Tax Credit for Flow-Through Share Investors
Budget 2014 proposes a further one-year extension of the tax credit for individuals who invest in flow-through shares, through amendments to the definition of "flow-through mining expenditure" in subsection 127(9). 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 2014 and before 2016 pursuant to a flow-through share agreement entered into on or before March 31, 2015. The one-year look-back rule in subsection 66(12.66) will apply so that if the conditions for the application of the rule are met, expenses incurred on or before December 31, 2016, and renounced effective December 31, 2015, will qualify.
Farming and Fishing Businesses
Budget 2014 proposes to simplify the rules relating to the tax-deferred "rollover" on intergenerational transfers of farming and fishing property and the $800,000 Lifetime Capital Gains Exemption (LCGE) on the disposition of such property.
Property Held Directly or Through a Partnership
In order to be eligible for the intergenerational rollover and the LCGE, qualifying property must be used principally in a farming business or a fishing business. Property used in a combination of farming and fishing businesses will qualify only if it is used principally (generally interpreted as 50% or more) in one or the other.
Budget 2014 proposes to extend eligibility for the intergenerational rollover and the LCGE to property used principally in a combination of farming and fishing.
Shares or Partnership Interests
In order for shares in a family corporation or an interest in a family partnership to qualify for the intergenerational rollover and the LCGE, all or substantially all (generally interpreted as 90% or more) of the fair market value of the underlying property of the corporation or the partnership, as applicable, must be property used principally in a farming business or a fishing business, rather than a combination of farming and fishing.
Budget 2014 proposes to extend eligibility for the intergenerational rollover and the LCGE by providing that property will also count toward the "all or substantially all" test if it is used principally in a combination of farming and fishing.
The farming and fishing measures will apply to dispositions and transfers that occur in the 2014 and subsequent taxation years.
Tax Deferral for Farmers
The ITA permits farmers who carry on business in prescribed drought or flood regions to defer from inclusion in taxable income a portion of sale proceeds from the disposition of breeding livestock. The deferral allows farmers to use the sale proceeds to acquire replacement livestock.
Budget 2014 proposes to extend this deferral to bees and to all types of horses that are over 12 months of age that are kept for breeding.
This measure will apply to the 2014 and subsequent taxation years.
Amateur Athlete Trusts and RRSP Contributions
Under section 143.1 of the ITA, a trust (Amateur Athlete Trust) is deemed to be created (i) where a national sports organization that is a registered Canadian amateur athletic association receives an amount for the benefit of an athlete under an arrangement made under rules of an international sport federation that require the amount to be held, controlled and administered by the organization in order to preserve the eligibility of the athlete to compete in sporting events sanctioned by the organization, or (ii) subject to certain conditions, where an individual who has "qualifying performance income" deposits the income into a special account.
Amounts contributed to an Amateur Athlete Trust are excluded from the income of the athlete for the year in which the contribution is made and do not qualify as earned income in determining an athlete’s annual RRSP contribution limit.
Budget 2014 proposes to allow income contributed to an Amateur Athlete Trust to qualify as earned income for the purpose of determining an athlete’s annual RRSP contribution limit. The measure will apply in respect of contributions made to Amateur Athlete Trusts after 2013, and an election will be available in respect of contributions made in 2011, 2012 and 2013.
Pension Transfer Limits
Subsection 147.3(4) of the ITA permits a direct "tax free" transfer on behalf of an individual of a lump sum amount from a defined benefit provision of an RPP to a money purchase provision of another RPP, a pooled RPP, an RRSP and a RRIF, subject to a prescribed limit on the amount that may be so transferred. Regulation 8517 contains the rules for determining the prescribed amount.
Where an RRP is underfunded and an RPP member elects to transfer the commuted value of the reduced annual pension, the transfer limit is generally prorated to reflect the proportion that the reduced pension is of the original full pension amount. As a consequence, members of an underfunded RPP are generally subject to a lower transfer limit than are persons whose pension benefits are unimpaired. The portion of a plan member’s transfer payment in excess of the transferable amount is includable in the member’s income in the year in which it is received.
In 2011, the Government introduced relieving changes to these limits for plan members leaving an underfunded plan that was being wound up due to an employer’s insolvency. Budget 2014 proposes to extend these changes to cases where a transfer payment in respect of an RPP member is reduced due to plan underfunding and either (i) where the plan is not an individual pension plan, the reduction in the estimated pension benefit that results in the reduced transfer payment is approved pursuant to the applicable pension benefits standards legislation; or (ii) where the plan is an individual pension plan, the commutation payment to the plan member is the last payment from the plan.
The measure will apply in respect of commutation payments made after 2012.
CHARITIES AND NON-PROFIT ORGANIZATIONS
Budget 2014 proposes certain amendments to the rules applicable to donations made in the context of a death that occurs after 2015.
Where an individual makes an inter vivos gift to a registered charity or other qualified donee, the individual is generally entitled to a charitable donation tax credit that can be applied against the individual’s income tax payable in the year the gift is made or in any of the five following years.
Where the gift is made as a consequence of death, the tax treatment of the gift can be uncertain and may depend, among other things, on slight nuances in the drafting of the testamentary instrument. In some circumstances, the individual is deemed to have made the gift immediately before the individual’s death and the charitable donation tax credit may be claimed in the individual’s year of death or, in some circumstances, the immediately preceding year. Where the gift is deemed to have been made by the individual immediately prior to death, the charitable donation tax credit cannot be carried forward for use by the estate. In other circumstances, the gift is treated as having been made by the estate and can be claimed by the estate in the taxation year in which payment is made to the qualified donee or in any of the five following years. Where the gift is treated as having been made by the estate, the charitable donation tax credit cannot be carried back for use by the estate in a prior year or by the individual. In yet other circumstances, neither the individual nor the estate may be entitled to claim a charitable donation tax credit, notwithstanding that amounts are paid to qualified donees out of the individual’s estate.
To provide additional flexibility in the tax treatment of charitable donations made in the context of death, Budget 2014 proposes to amend the ITA so that individuals will no longer be deemed to have made the gift immediately prior to death. Instead, donations will be deemed to have been made by the estate at the time at which the property that is the subject of the gift is transferred to a qualified donee, and the individual’s estate will have the option to allocate the charitable donation among any of (i) the taxation year of the estate in which the gift is made, (ii) an earlier taxation year of the estate, and (iii) the last two taxation years of the deceased. The current limits that apply in determining the total donations that are creditable in the year will continue to apply. Similar treatment is also proposed for donations that are effective upon the death of an individual pursuant to a designation by the individual under an RRSP, RRIF, TFSA or life insurance policy.
Notably, Budget 2014 provides that a "qualifying donation" for purposes of the amended rules will be a donation effected by a transfer, within the first 36 months after the individual’s death, of property to a qualified donee. As a practical matter, it may not always be possible or practical for the estate to effect the transfer within the first 36 months (e.g., because entitlements have not been ascertained or because a section 159 clearance certificate has not been issued). Budget 2014 provides in respect of estate donations not subject to these new rules that the estate will continue to be able to claim a tax credit in the year in which the donation is made or in any of the five following years.
The measures are stated to apply to 2016 and subsequent taxation years.
Donations of Ecologically Sensitive Land
Budget 2014 proposes to extend from five years to ten years the period in which charitable donation tax credits (for individuals) and charitable donation tax deductions (for corporations) in respect of certain donations of ecologically sensitive land (as well as easements, covenants and servitudes on such land) may be carried forward. This measure will apply to donations made on or after Budget Day.
Donations of Certified Cultural Property
The ITA contains special provisions to encourage gifts of culturally significant property to designated institutions and public authorities. Such gifts are currently exempt from a set of rules that, for purposes of calculating a charitable donation tax credit (for individuals) and charitable donation tax deduction (for corporations), deem the value of a gift of property to be no greater than its cost to the donor if, generally, the donor acquired the property as part of a "tax shelter gifting arrangement" or held the property for less than three (in some cases, ten) years prior to the donation. To address potential for abuse by tax shelter promoters, Budget 2014 proposes to remove from the exemption to this deeming rule certified cultural property acquired as part of a tax shelter gifting arrangement. This measure will apply to donations made on or after Budget Day.
State Supporters of Terrorism
Budget 2014 proposes to amend the ITA to provide that the Minister of National Revenue may revoke the status of a registered charity or amateur athletic association (or refuse to register such an organization, if not yet registered) if the organization accepts, on or after Budget Day, a donation from a foreign state listed as a supporter of terrorism for purposes of the State Immunity Act.
Consultation on Non-Profit Organizations
Paragraph 149(1)(l) of the ITA exempts from Canadian federal income tax a range of clubs, societies and associations commonly referred to as non-profit organizations (NPOs). To qualify for the paragraph 149(1)(l) exemption:
- the organization must be a club, society or association;
- the organization must not be a charity in the opinion of the Minister of National Revenue;
- the organization must be organized and operated exclusively for purposes other than profit; and
- no part of the organization’s income may be payable to or otherwise available for the personal benefit of any member or shareholder of the organization.
As noted in Budget 2014, organizations that benefit from the exemption include such varied groups as professional associations, recreational clubs, civic improvement organizations, cultural groups, housing corporations, advocacy groups and trade associations.
In Budget 2014, the Government noted that the exemption has changed little since its introduction in 1917 and announced its intention to "review whether the income tax exemption for NPOs remains properly targeted and whether sufficient transparency and accountability provisions are in place." The Government will release a consultation paper and will consult with stakeholders as appropriate.
GST, CUSTOMS AND OTHER MEASURES
GST/HST Credit Administration
Budget 2014 proposes to eliminate the need for an individual to apply for the GST/HST Credit and to allow the CRA to automatically determine if an individual is eligible to receive the credit.
Health Care Sector
To reflect the evolving nature of the health care sector, Budget 2014 proposes three changes to improve the application of GST/HST to certain health-related services and medical assistive devices.
First, Budget 2014 proposes to expand the exemption for training that is specially designed to assist individuals with a disorder or disability to also exempt the services of designing such training. Second, Budget 2014 proposes that acupuncturists and naturopathic doctors be added to the list of health care practitioners whose professional services rendered to individuals are exempt from the GST/HST. Third, Budget 2014 proposes to zero-rate eyewear specially designed to treat or correct a defect of vision by electronic means, if supplied on the written order of a physician or optometrist for use by a consumer named in the order.
GST/HST Election for Closely Related Persons
For GST/HST purposes, a group relief election, generally referred to as the "nil consideration election," is available to allow registrants that are resident in Canada, engaged exclusively in commercial activities and members of a closely related group to not account for GST/HST on certain transactions within the closely related group.
Budget 2014 proposes the following amendments effective January 1, 2015:
- to extend the election to new members of a closely related group that have not yet acquired any property provided that the new member continues as a going concern engaged exclusively in commercial activities;
- parties to a new group relief or "nil consideration" election will be required to file that election in a prescribed manner with the CRA. Parties to elections made before January 1, 2015, that are in effect on January 1, 2015, will also be required to comply with the filing requirement, but will have until January 1, 2016, to file; and
- parties to an existing or new group relief election will be subject to a joint and several (or solidary) liability provision with respect to the GST/HST liability that may arise in relation to supplies made between them on or after January 1, 2015.
Under existing rules, participants in certain joint ventures are allowed to make an election that simplifies the GST/HST accounting obligations in respect of their joint venture activities, provided that they are involved in certain prescribed activities. In order to allow more commercial joint venture activities and participants access to the benefits of the joint venture election, Budget 2014 indicates that the Government intends to propose new joint venture election measures (as well as related anti-avoidance measures) that will allow the participants in a joint venture to make the joint venture election so long as the activities of the joint venture are exclusively commercial and the participants are engaged exclusively in commercial activities. Budget 2014 indicates that draft legislative proposals will be released later in 2014 to ensure that businesses and other stakeholders have an opportunity to provide their views prior to the tabling of the legislation.
Strengthening Compliance with GST/HST Registration
Generally, a business that makes over $30,000 in taxable supplies annually is required to register for GST/HST purposes and to collect and remit the GST/HST on its taxable supplies. With the stated purpose of strengthening GST/HST compliance and assisting the CRA in combating the underground economy, Budget 2014 proposes that the CRA be given the discretionary authority to register and assign a GST/HST registration number where a person fails to comply with the requirement to register after having been notified of the requirement to register.
Rate of Excise Duty on Tobacco Products
Budget 2014 proposes various increases to the excise duty rates applicable to tobacco products in order to account for inflation. The rate changes will be effective after Budget Day.
Excise Duty Treatment of Tobacco Products in Duty Free Markets
An excise duty is imposed on all Canadian-made cigarettes, tobacco sticks and manufactured tobacco for sale in domestic and foreign duty-free shops, as well as on imports of these tobacco products for sale in Canadian duty-free shops or brought into Canada by returning travellers (referred to as the "duty free" rate on tobacco products). Budget 2014 proposes to increase the duty-free rate on tobacco products. In future years, changes to these duty-free rates will be legislatively linked to changes in the excise duty.
Indexing Tobacco Taxes to the Consumer Price Index
Budget 2014 proposes that the excise duty rates on tobacco products, including the duty-free rates, 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.
Inventory Tax on Cigarettes
Excise duty is imposed on tobacco products manufactured in Canada at the time manufacturers package them and on imported tobacco products at the time of importation. With the intention of ensuring that the above rate changes are applied in a consistent manner to all cigarettes, Budget 2014 proposes that inventories of cigarettes held by manufacturers, importers, wholesalers and retailers at the end of Budget Day, be subject to a per cigarette tax of 2.015 cents (referred to as an "inventory tax"). The tax will be due April 30, 2014.
An inventory tax on cigarettes will also apply at the time of each inflationary excise duty adjustment mentioned above.
Customs Duties – Offshore Oil and Gas Development
Budget 2014 proposes to eliminate the 20% Most-Favoured-Nation rate of duty on imported mobile offshore drilling units in order to "permanently eliminate a disincentive to exploration leading to oil and gas discoveries in offshore Atlantic and Arctic regions and create a level playing field with other major oil and gas countries competing for offshore petroleum industry investment." This proposal will be effective in respect of goods imported into Canada on or after May 5, 2014.
Standardizing Sanctions Related to False Statements in Excise Tax Returns
Budget 2014 proposes to add a new administrative monetary penalty, and to amend the existing criminal offence, for the making of false statements or omissions in an excise tax return and related offences under the non-GST/HST portion of the Excise Tax Act. The administrative monetary penalty will be the greater of $250 and 25% of the tax avoided. In respect of the revised criminal offence, the fine will range from 50% to 200% of the tax evaded, along with a potential maximum two-year term of imprisonment, on summary conviction. Furthermore, the fine will range from 100% to 200% of the tax evaded, along with a potential maximum five-year term of imprisonment, on conviction on an indictment. When the amount of tax evaded is not ascertainable, the fine will range from $1,000 to $25,000 on summary conviction, and $2,000 to $25,000 on conviction on an indictment. These measures will apply to excise tax returns filed after the day of Royal Assent to the enacting legislation.
PREVIOUSLY ANNOUNCED MEASURES
Budget 2014 confirms the Government’s intention to proceed with technical amendments to improve the certainty of the tax system as well as the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release:
- Proposed changes to automobile expense deduction limits and the prescribed rates for the automobile operating expense benefit for 2012 announced on December 29, 2011, and for 2013 announced on December 28, 2012;
- Legislative proposals released on November 27, 2012, relating to income tax rules applicable to Canadian banks with foreign affiliates;
- Legislative proposals released on July 12, 2013, relating to income tax and excise duties and sales tax technical amendments;
- Legislative proposals released on August 16, 2013, relating to the foreign affiliate dumping rules;
- Legislative proposals released on August 23, 2013, relating to changes to the life insurance policyholder exemption test;
- Modifications to the Customs Tariff to implement the Notice of Ways and Means Motion tabled by the Government in Parliament on November 22, 2013, which clarified the tariff classification of certain imported food products;
- Legislative proposals released on November 27, 2013 relating to the tax rules governing Labour-Sponsored Venture Capital Corporations;
- Legislative proposals released on January 9, 2014, to require that international electronic funds transfers of $10,000 or more be reported to the CRA;
- Legislative proposals released on January 17, 2014, clarifying GST/HST rules to prevent input tax credit claims that exceed tax actually paid; and
- Legislative proposals released on January 24, 2014, relating to the provision of a GST/HST exemption for hospital parking for patients and visitors.