Finance Minister Jim Flaherty delivered the federal budget on March 22, 2011. The budget leaves untouched previously enacted reductions in corporate income tax rates through 2012. The budget proposes a number of narrowly targeted measures including, among other things, a number of personal tax measures (including extending the "kiddie tax" to certain capital gains realized by a minor and a number of changes to the rules governing registered savings plans), changes to rules governing charities and charitable donations, changes to the taxation of payments from an insolvent employer in lieu of certain employee health benefits, changes to the classification of expenditures for the acquisition of oil sands leases and other oil sands resource property and certain other business income tax measures. The measures discussed below are of particular interest.
Partnerships - Elimination of Tax Deferral
Income of a partnership is allocated for income tax purposes to its partners at the fiscal year-end of the partnership. A partnership of corporations can have a fiscal year-end for tax purposes that differs from the taxation year-end of its partners, which can provide a tax deferral where the partnership has a fiscal year-end that is after the taxation year-end of its corporate partners. For example, where a partnership has a fiscal year-end of December 31 and its corporate partners have taxation year-ends of December 30, the income of the partnership for the 2011 fiscal year would be included in the income of the corporate partners for their taxation year ending on December 30, 2012.
The budget proposes to eliminate this deferral for a corporate partner that, together with related and affiliated persons, has more than a 10 percent interest in the partnership by requiring the corporate partner to accrue income from the partnership for the portion of the partnership's fiscal period that falls within the corporation's taxation year. Using the example above, an affected corporate partner would have to accrue partnership income in its taxation year ending on December 30, 2011 for 364 days out of the partnership's 2011 fiscal period.
To avoid the inclusion of income from two or more years entirely in a corporate partner's first taxation year as a result of the introduction of the new rules, transitional rules will allow the inclusion of the incremental amount over a five-year period.
The proposals will allow a partnership in certain circumstances to change its fiscal year-end to correspond to the taxation year-end of its corporate partners to eliminate the need to undertake the income accrual calculations otherwise required by these changes.
Some taxpayers may have sought to maximize the deferral under current rules through the use of multiple tiers of partnerships with differing fiscal year-ends. To eliminate such extended deferrals, the proposals provide that, if a partnership has one or more partnerships as its members, all of those partnerships must adopt a common fiscal period. If the partnerships do not choose a common fiscal period by filing an election with the Minister of National Revenue, the common fiscal period of the partnerships will end on December 31, 2011 and subsequent fiscal periods will end on December 31.
The budget also proposes to expand the application of existing "stop-loss" rules that deny losses on the disposition of shares by a corporation to the extent that it has received tax-free intercorporate dividends on the shares in the past. These rules contain exceptions, generally excluding dividends where the corporation held the shares for 365 days or more and held less than 5 percent of the shares of the class when the dividend was paid. It has long been recognized that where these exceptions apply, a redemption of shares held by a corporation that have a tax cost in excess of their "paid-up capital" can result in the combination of a tax-free deemed dividend and a corresponding tax loss on the disposition of the shares that does not reflect an economic loss. In response to transactions that have capitalized on this, the stop-loss rules will now apply to deny losses in respect of all deemed dividends received on a redemption of shares held by a corporation (directly or through partnerships or trusts), other than on shares of a private corporation held by a private corporation (other than a financial institution).
Donations of Publicly Listed Flow-Through Shares
The budget proposes to restrict the exemption from capital gains tax generally available in respect of the donation of publicly listed securities to registered charities where the securities donated are flow-through shares. Flow-through shares generally allow corporations to renounce certain eligible exploration and development expenses to investors, who can deduct these expenses for tax purposes. The cost base of flow-through shares is reduced by the amount of the renounced expenses for the purposes of calculating any gain on their subsequent disposition. As a result of measures introduced in the 2006 and 2007 budgets eliminating capital gains tax on donations of publicly listed securities to registered charities, donations of flow-through shares could generally be made on a highly tax-efficient basis, as the donor was entitled to claim resource deductions for expenses renounced by the issuer of the shares (and applicable mining exploration tax credits) as well as a charitable donation tax credit or deduction, while still benefiting from the capital gains exemption in respect of the flow-through shares donated. The budget proposes to restrict the exemption from capital gains tax on donations of flow-through shares to a registered charity in respect of shares issued pursuant to a flow-through share agreement entered into on or after March 22, 2011, such that the exemption will be available only to the extent that capital gains realized on dispositions of shares of that class exceed the original cost of all flow-through shares of the class issued to the donor.
The budget also contains a number of other measures affecting the regulatory regime for charities and other qualified donees, including: the introduction of a requirement that, as is currently the case for registered charities, other qualified donees be included on a publicly available list maintained by the CRA; the extension of provisions authorizing the suspension of receipting privileges or revocation of status to qualified donees, and of certain regulatory requirements currently applicable to registered charities to registered Canadian amateur athletic associations; proposals granting the CRA discretion to refuse or revoke the registration of a charity, or to suspend its ability to issue tax receipts, based on certain past activities of its board members, trustees or officers; proposals that would permit the CRA to reassess a donor where donated property for which a tax receipt has been issued is subsequently returned; and rules providing that a charitable donation tax credit or deduction will not generally be available in respect of the grant of an option by the taxpayer to a registered charity until the charity acquires the optioned property.
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