Canada: Highlights of Canada’s 2011 Federal Budget

The federal budget tabled on March 22, 2011 (the 2011 Budget) contains a number of proposed amendments to Canada's Income Tax Act (Tax Act). In this bulletin, we focus on (i) certain business income tax measures designed to limit tax deferrals and strengthen "stop-loss" rules; (ii) certain business income tax incentives relating primarily to capital cost allowance (CCA) claims; (iii) certain business income tax measures relating to oil sands properties; (iv) certain anti-avoidance personal income tax measures; and (v) certain personal income tax benefits primarily in the form of additional tax credits.

Proposed Business Income Tax Measures to Limit Deferrals and Losses

Partnership Tax Deferrals for Corporate Partners

The 2011 Budget contains proposals to limit partnership tax deferrals for corporate partners. These proposals are aimed at preserving $2.8 billion of forgone tax revenues over the next five years. Under the current rules, a corporate partner of a partnership is required to include in its income for a taxation year its share of the partnership's income for the fiscal period of the partnership that ends in the taxation year of the corporate partner. By "staggering" the corporate partner's taxation year-end in relation to the fiscal period of the partnership, income tax could be deferred. For example, a corporate partner may have a taxation year-end of December 31, whereas the partnership may have a fiscal period ending January 31. In that case, the corporate partner would include in its income for its year ending December 31, 2009, its share of the income of the partnership for the fiscal period ending January 31, 2009, which would essentially represent a deferral of income for an 11-month period. This deferral could be extended for a longer period by means of tiers of partnerships, with the corporate partner as a partner of the top partnership and the partnerships having different and conveniently staggered year-ends.

The proposed change contained in the 2011 Budget would require the corporate partner (i) to include in income its share of the partnership's income for the partnership's fiscal period that ends in the corporate partner's taxation year; and (ii) to accrue partnership income for the stub period of the partnership's subsequent fiscal period, which begins in that corporate partner's taxation year and ends in the following one. In the example given above, the corporate partner would report for its year ended December 31 not only its share of the partnership's income for the fiscal period ending the previous January 31, but also its share of the partnership's income for the stub period commencing February 1 and ending December 31. The stub period income would be reversed in the corporate partner's subsequent taxation year, and a new stub period income would then be calculated and included in income. This will affect partnership interests where the corporate partner, together with affiliated and related parties, is entitled to more than 10% of the partnership's income (or more than 10% of the assets in the case of a windup) at the end of the last fiscal period of the partnership that ended in the corporation's taxation year.

This change would likely result in the inclusion of a significant one-time amount of incremental income in the first year in which it would apply to the corporate partner (the corporation's first taxation year ending after March 22, 2011). A special transitional rule allows this one-time incremental amount to be gradually included in income over the five taxation years that follow the corporate partner's first taxation year ending after March 22, 2011. A special one-time written election is also available in certain cases in the event that a partnership wishes to change its fiscal period as a result of these proposals.

For tiered partnerships, the approach taken is somewhat different in that each partnership in a tiered partnership will be required to have the same fiscal period (whether or not it aligns with the fiscal period of any corporate partner). Tiered partnerships will be allowed a special one-time written election to choose a common fiscal period.

Stop-Loss Rules on Share Redemption

The Tax Act includes "stop-loss rules" that reduce, in certain cases, the amount of a loss otherwise realized by a corporation on a disposition (including a redemption) of shares by the amount of tax-free dividends received or deemed received on the shares on or before the disposition (including a redemption). According to the 2011 Budget, some corporations have been entering into tax avoidance arrangements to claim a double deduction on a redemption of shares by relying on certain exceptions to the existing stoploss rules; in such situations, the corporations claiming the double deduction may not have suffered a true economic loss. The 2011 Budget (i) proposes to broaden the application of the stop-loss rules to any deemed dividend received on a redemption of shares held by a corporation (whether the shares are held directly, or indirectly through a partnership or trust), regardless of level of ownership and period of ownership; but (ii) provides for a narrow exception for a redemption of shares of the capital stock of a private corporation that are held by another private corporation (other than a financial institution) whether directly, or indirectly through a partnership or trust (other than a partnership or trust that is a financial institution). The new provisions will apply to redemptions that occur on or after March 22, 2011.

Proposed Business Income Tax Incentives Relating to CCA

Accelerated Capital Cost Allowance for Manufacturing and Processing Equipment

In the 2007 Budget, the Department of Finance announced a temporary incentive for businesses engaged in manufacturing and processing activities in Canada, providing for an accelerated 50% straight-line CCA rate, subject to the "half-year rule," for qualifying machinery and equipment acquired after March 19, 2007 and before 2009. Subsequently, the 2008 and 2009 Budgets extended the accelerated CCA treatment to property acquired before 2012. The 2011 Budget proposes to extend the accelerated CCA treatment for two additional years in respect of qualifying machinery and equipment acquired before 2014. Qualifying machinery acquired by a manufacturer after 2013 will be eligible to be depreciated at a 30% declining balance CCA rate. For these purposes, qualifying machinery and equipment include property used by the manufacturer in Canada primarily in the manufacturing or processing of goods for sale or lease.

Accelerated Capital Cost Allowance for Clean Energy-Generation Equipment

The 2011 Budget provides an incentive for investment in waste heat energy-generation equipment by providing an accelerated CCA depreciation deduction in respect of such equipment. Currently, class 43.2 provides an accelerated CCA for specified clean energy-generation and conservation equipment at a rate of 50% per year on a declining balance basis, subject to the half-year rule. The 2011 Budget proposes to expand class 43.2 to include equipment that is used by the taxpayer or a lessee of the taxpayer to generate electrical energy in a process in which all or substantially all of the energy input is from waste heat. The proposal would apply only to eligible equipment that is acquired on or after March 22, 2011.

Proposed Business Income Tax Measures Relating to Oil Sands Properties

In the conventional oil and gas sector, the cost to a taxpayer of acquiring the following in Canada is treated as "Canadian oil and gas property expense" (COGPE): (i) rights to explore for, drill for or take petroleum, natural gas or related hydrocarbons, and (ii) an oil or a gas well. By contrast, the cost of acquiring oil sands and oil shale properties is generally treated as "Canadian development expense" (CDE). COGPE is deductible at a rate of 10% per year on a declining balance basis, whereas CDE is deductible at a rate of 30% per year on a declining balance basis.

The 2011 Budget proposes to align the treatment of the cost of oil sands and oil shale properties (and leases in such properties) with the treatment of the cost of acquiring conventional oil and gas properties. In particular, the cost of oil sands and oil shale properties acquired on or after March 22, 2011 will be treated as COGPE and eligible for deduction at 10% per year on a declining balance basis.

Proceeds from the disposition on or after March 22, 2011 of a taxpayer's oil sands and oil shale properties will be credited to reduce the taxpayer's cumulative CDE or cumulative COGPE, consistent with the original treatment of the acquisition.

In addition, the cost of clearing land or removing overburden for oil sands and oil shale properties will be treated as CDE rather than "Canadian exploration expense" (CEE), which would have been fully deductible. However, under the transitional relief provisions, the current CEE treatment will generally be maintained for expenses incurred before 2015 for new mines on which major construction began before March 22, 2011.

Proposed Anti-Avoidance Personal Income Tax Measures

Anti-Avoidance Measures Aimed at RRSPs and RRIFs

In October 2009, the Department of Finance announced several measures aimed at addressing abusive transactions involving tax-free savings accounts (TFSAs). In general, these measures targeted overcontributions, ineligible investments and asset transfers. To prevent a loss of an estimated $500 million in forgone tax revenues over the next five years, the 2011 Budget proposes to introduce comparable antiavoidance measures aimed at transactions involving registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs). In particular, the 2011 Budget proposes to introduce TFSAlike advantage rules, prohibited investment rules and non-qualified investment rules for RRSPs and RRIFs. Subject to two exceptions, these new provisions are to be effective for transactions occurring and investments acquired after March 22, 2011. Notably, until the end of 2012, swap transactions can be undertaken to ensure that an RRSP or a RRIF complies with the new rules by removing an investment that would otherwise be considered a prohibited investment or an investment that gives rise to an advantage under the new proposals.

Donation of Publicly Listed Flow-Through Shares

Under the Tax Act, flow-through shares are deemed to have a nil cost to their investors. As a result, a significant capital gain normally occurs when the shares are ultimately sold or disposed of. When the 2006 Budget eliminated the tax on capital gains accruing on donations of publicly traded securities to registered charities, some purchasers of publicly listed flow-through shares saw an opportunity to avoid one of the downsides of their investment. In addition, donation tax shelters were set up specifically to take advantage of this opportunity. The 2011 Budget aims to preserve $185 million of forgone tax revenues over the next five years by introducing measures that allow the exemption from capital gains tax on donations of publicly listed flow-through shares only to the extent that the capital gain on the donation exceeds the amount originally paid for the shares (determined without regard for the deemed nil adjusted cost base). These new provisions will apply where a taxpayer acquires shares issued pursuant to a flowthrough share agreement entered into on or after March 22, 2011.

Proposed New Personal Income Tax Benefits

The Budget also introduces a number of new personal income tax benefits primarily in the form of additional tax credits aimed at various different constituencies. From a monetary perspective, the most significant tax credit proposals include the Children's Arts Tax Credit and the Family Caregiver Tax Credit.

Based on similar parameters to the Children's Fitness Tax Credit, the Children's Arts Tax Credit will allow parents to claim a 15% non-refundable tax credit based on an amount of up to $500 in eligible expenses for a child who is under 16 years of age at the beginning of the year, in a eligible program of artistic, cultural, recreational or developmental activity. This new proposal will apply to eligible expenses paid in the 2011 and subsequent taxation years.

Beginning in 2012, the Family Caregiver Tax Credit will allow caregivers of dependants with a mental or physical infirmity, including spouses, common-law partners and minor children, to claim a 15% nonrefundable tax credit based on an amount of $2,000. Caregivers will benefit from the Family Caregiver Tax Credit by claiming an enhanced amount for an infirm dependant under one of the existing dependency-related credits. The $2,000 Family Caregiver Tax Credit amount is proposed to be indexed to account for inflation for 2013 and subsequent taxation years.

Torys has offices in Toronto, New York and Calgary*
*For general inquiries, contact Oriana Cheung at

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.