The federal government released Budget 2017 on March 22, 2017 ("Budget Day"). Despite much speculation in the months leading up to the release of Budget 2017, it is noteworthy that the budget did not include a change to the lifetime capital gains exemption, an increase to the tax levied on capital gains, or establish a limit on the deduction available in relation to employee stock options. Below is a brief summary of the key business tax consequences contained in Budget 2017:
New limitation to Canadian Exploration Expense ("CEE") – expenditures associated with drilling or completing successful discovery wells will be treated as Canadian Development Expense ("CDE") rather than CEE. Accordingly, expenditures related to drilling or completing successful discovery wells will no longer be fully deductible in the year incurred; instead, the deduction will be limited to 30% per year.
Expenses related to early stage geophysical and geochemical surveying (i.e. seismic expenditures) will continue to qualify as CEE, as well as expenses related to abandoned and non-producing wells. The treatment of these expenditures will not change.
Elimination of CDE as CEE classification – Small oil and gas corporations will no longer be able to treat up to $1 million dollars of CDE as CEE when renounced to shareholders under a flow-through share agreement.
Both of the above measures are expected to apply to expenses incurred after 2018 (including expenses in 2019 that could have been deemed to have been incurred in 2018 because of the "look-back" rule).
Tax-deferred mergers of switch corporations and segregated funds – Budget 2017 proposes to allow switch corporations to undergo tax-deferred reorganizations into multiple mutual fund trusts, rather than only into one mutual fund trust.
Timing of gains and losses on derivatives – Budget 2017 proposes to introduce an elective mark-to-market accounting method for derivatives held on income account. The election is expected remain effective for all subsequent tax years that begin after Budget Day unless revoked with the consent of the Minister of National Revenue.
Targeting straddle transactions – For any gains on losses realized on or after Budget Day, Budget 2017 proposes to introduce specific anti-avoidance rules to target "straddle transactions". An example of a straddle transaction is where a taxpayer concurrently enters into offsetting positions in order to generate equal and offsetting gains and losses. Prior to the tax year-end, the taxpayer disposes of the loss position and recognizes a loss for the year. Following the tax year-end, the taxpayer then disposes of the gain position and is therefore able to defer the gain until the following tax year-end.
Elimination of billed-basis accounting for professionals – For tax years beginning on or after Budget Day, Budget 2017 proposes to eliminate the use of billed-basis accounting by designated professionals to defer tax. Subject to transitional rules, the proposed change will take account of the full amount of the cost or fair market value (whichever is less) of unbilled work in progress.
Meaning of "factual control" – Budget 2017 responds to a recent Federal Court of Appeal decision which held that in order for a factor to be considered in determining whether factual control exists, it must include "a legally enforceable right and ability to effect a change to the board of directors or its powers, or to exercise influence over the shareholder or shareholders who have that right and ability". The amended meaning of factual control is a policy response to remove the requirement for a legally enforceable right as a prerequisite—among other factors—for factual control.
Extension of anti-avoidance rules to Registered Education Savings Plans ("RESPs") and Registered Disability Savings Plans ("RDSPs") – Budget 2017 proposes to extend anti-avoidance rules—i.e. advantage rules, prohibited investment rules, and non-qualified investment rules—which already apply to Tax-Free Savings Accounts, Registered Retirement Savings Plans and Registered Retirement Income Funds to RESPs and RDSPs. These changes will generally apply to transactions occurring after Budget Day, subject to certain transitional rules.
Extension of mineral exploration tax credit period – Budget 2017 proposes to continue incentivizing investment in mining activity by extending eligibility for the mineral exploration tax credit for an additional year. Under this proposal, flow-through share agreements may be entered into on or before March 31, 2018 to enable deductions of 15% of eligible exploration expenditures made in Canada until the end of 2019.
Clean energy equipment: geothermal energy – Budget 2017 proposes to expand eligible geothermal energy equipment under Class 43.1 assets and Class 43.2 assets to include equipment that is primarily used to produce heat or a combination of heat and electricity as opposed to only equipment used to primarily produce electricity. Class 43.1 assets and Class 43.2 assets are subject to accelerated CCA rates of 30% and 50%, respectively. Expenditures incurred for the purposes of determining the extent and quality of a geothermal resource and the costs of all geothermal drilling, for both heating and electricity projects, will qualify as Canadian renewable and conservation expense.
Re-affirmed commitment to combatting international tax avoidance and evasion – While Budget 2017 contains little in the way of new concrete proposals to address international tax avoidance, it re-affirms that Canada is committed to the Base Erosion and Profit Shifting ("BEPS") initiatives of the Organisation for Economic Co-operation and Development. Previously announced BEPS measures, such as enhanced information sharing with foreign tax authorities and revised transfer pricing guidelines for multinational enterprises, continue to be implemented.
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