Canada: Eliminating Canada’s Debt, A Penny At A Time

Budget 2012 claims that it "sets out a comprehensive agenda to bolster Canada's fundamental strengths and address the important challenges confronting the economy over the long term". This is to be accomplished by supporting entrepreneurs and innovators, streamlining resource development, expanding international trade, promoting immigration that meets labour market demands, developing sustainable social and retirement programs and ensuring responsible expenditure management.

The deficit for 2010/11 was $33.4b. The predictions are for deficits in 2011/12 ($24.9b), 2012/13 ($21.1b), 2013/14 ($10.2b) and 2014/15 ($1.3b), followed by surpluses in 2015/16 ($3.4b) and 2016/17 ($7.8b).

Budget 2012 introduces direct expenditures of $800m over the next four or five years to encourage innovation, plus an additional $700m for research, education and training ($500m of which is for the Canadian Foundation for Innovation to support advanced research infrastructure). These expenditures will be funded by restrictions to the current Scientific Research and Experimental Development (SR&ED) program which are projected to save $500m annually once fully implemented. Budget 2012 reduces the credit rate from 20% to 15% and eliminates capital expenditures from the base, as well as reducing the amount of qualifying overhead expenses and eliminating the profit element from non-arm's length contract payments.

In 1970 the life expectancy for Canadians was 69 for men and 76 for women. Today the numbers are 79 and 83. The Old Age Security (OAS) program costs $38b today, growing to $108b in 2030. In 1990 there were 5 working Canadians for every senior. That number is 4 today and is projected to be 2 in 2030. Budget 2012 provides that, starting in 2023 (eleven years from now) the qualifying age for collecting OAS will gradually start moving from 65 until it reaches 67 in 2029.

With respect to expenditure management, there is a planned $5.2b reduction in annual departmental spending. After a phase-in period, the Canada Revenue Agency (CRA) budget will be reduced by 6.9% to $3.4b and the Department of Finance budget will suffer a 16.8% reduction to $191m. However, the Finance reduction may include the projected $11m annual savings from eliminating the physical penny from the Canadian currency. Budget 2012 promises that the CRA will "leverage the expertise of tax professionals to improve the effectiveness of its operations".

Other business taxation changes include changes to the thin-capitalization rules, the introduction of debt dumping rules, restrictions on tax planning through partnerships, extending the mineral exploration tax credit for flow-through shares for another year and introducing prohibited investment and advantage rules for retirement compensation arrangements.

The debt-to-equity ratio under the thin-capitalization rules will be changed from 2:1 to 1.5:1, the rules will be expanded to apply to partnerships of which a Canadian resident corporation is a member and disallowed interest will be treated as a dividend.

Dumping occurs where a foreign parent transfers a foreign subsidiary under its Canadian subsidiary in return for debt of the Canadian subsidiary with the intention that the interest will erode the Canadian tax liability of the Canadian subsidiary, while dividends will be received by the Canadian subsidiary free of any tax. In certain situations debt paid by the Canadian subsidiary on the acquisition will be treated as a dividend and shares issued by the Canadian subsidiary on the acquisition will not have any paid-up capital. A business purpose exemption is proposed and interested parties are invited to provide submissions to the Department of Finance by June 1, 2012.

The section 88 bump rules will be amended to exclude a partnership interest, where the accrued gain in respect of that interest is reasonably attributable to a gain in income assets. Section 100 currently applies to tax a partner on its proportionate share of any gain attributable to income assets in the partnership when the partner sells its partnership interest to a tax-exempt entity. Section 100 will now also apply where a partner sells to a non-resident in certain situations.

Did the Minister Earn his New Shoes?

The combination of a world-wide recession and a first term majority government have presented Mr. Flaherty with an enormous, perhaps once in a political lifetime, opportunity to reset the Canadian tax agenda. Unfortunately, this is an opportunity that he has chosen not to seize. There does not seem to be an economist anywhere who would suggest that the previous reduction of the GST rate from 7% to 5% was a step forward in tax policy. There is a strong consensus amongst economists that to have the most efficient, least distortive and (arguably) most equitable tax system, our system should have a higher commodity tax component, together with generous tax credits for low income earners. The federal government currently collects $31b a year with a 5% GST (or just over $6b for each 1%). Yet, we have one of the worst GST-like taxes in the world, from an efficiency perspective.1 The broader the tax base is, the more efficient the tax is. Our GST applies to 48% of goods and services. This puts Canada in 20th spot amongst OECD countries, well below the OECD average. New Zealand, in contrast, taxes over 90% of consumption, coupled with large tax credits for those with low incomes. Some of the major items that are excluded from the Canadian GST base include basic groceries (at a cost of $3.5b with a 5% rate), some new and rental housing ($2.1b) and the input tax rebates to municipalities, academic institutions, schools and hospitals ($3.7b). If the GST base was expanded to include basic groceries and the 7% rate was restored, the feds would take in an extra $16b a year. They could then introduce an additional $1b in tax credits for low income earners, while allocating $5b to personal income tax cuts, primarily targeted at the overburdened middle-income earners. This would leave $10b for health, education and deficit reduction. Provinces with harmonized systems could get a free ride on these changes. And all of this could have been justified on the basis that we need to get our fiscal house in order to compete in the new world before us. And to tie such changes into the elimination of the physical penny, the government could have decided to include the GST in the price of goods.

Instead, we have the annual tinkering amendments to expenditures qualifying for exemptions. The list of exempt services will be expanded to include non-dispensing health services provided by pharmacists, corrective eyewear prescribed by opticians, the inclusion of blood coagulation devices in the list of exempt medical devices, adding isosorbide-5-mononitrate to the list of eligible drugs, medical and assistive devices prescribed by nurses, therapists and physiotherapists, and foreign-based rental vehicles temporarily imported into Canada. Rebates will now be given with respect to books given away by prescribed literary organizations. Does this improve the system and / or illustrate its shortcomings?


Tax Avoidance Through the Use of Partnerships

The "88(1)(d) bump" is one of the more important tools in the arsenal of the Canadian corporate tax planner. The bump allows an acquiring corporation to remove assets from a target corporation following the acquisition of the target on a tax-free basis. It can be used to effectively break up a target corporation following an acquisition by allowing the target to sell unwanted assets on a tax-free or tax reduced basis. It can also be used to distribute foreign subsidiaries held by a target corporation to avoid "sandwich" structures in which a foreign acquisition company acquires a Canadian target corporation with foreign subsidiaries.

The rules in paragraph 88(1)(d) allow the cost of the shares of a target corporation to be pushed down onto certain assets of the target corporation where the target corporation is amalgamated with or wound up into its parent corporation following the acquisition of the target by the parent. The assets whose cost may be increased or "bumped" in this manner are limited to non-depreciable capital property such as shares of corporations, land and partnership interests. Assets the cost of which produce deductions from income, such as depreciable property or eligible capital property, or is used in computing a gain that is taxed as ordinary income such as inventory or resource property, are not eligible for the bump. The reason for this limitation was to ensure that the effect of the bump would be to reduce capital gains on a subsequent disposition of the bumped assets, but not to allow reductions in income through, for example, increased capital cost allowance or increased inventory cost.

In some cases, the target corporation transfers assets that are not eligible for the bump to a subsidiary corporation or partnership immediately before the acquisition of the target. The "packaging" of these assets in this manner allows for an indirect sale of the assets following the acquisition on a tax-free or tax reduced basis through a sale of the bumped shares of the subsidiary or interests in the partnership.

Budget 2012 states that in recent years corporate partnership structures have been used with increasing frequency to attempt to circumvent the denial of the 88(1)(d) bump in respect of a target corporation's assets that are not eligible for the bump. Accordingly, Budget 2012 proposes to deny the 88(1)(d) bump in respect of a partnership interest to the extent that the accrued gain on the partnership interest is reasonably attributable to the amount by which the fair market value of such ineligible assets (depreciable property, resource property, inventory and eligible capital property) held directly by the partnership or indirectly through one or more other partnerships exceed their cost amount.

This measure will generally apply to amalgamations that occur or windings up that begin on or after Budget Day, subject to certain grandfathering relief for transactions in progress on Budget Day.

A related proposal deals with the sale of a partnership interest to a non-resident. Under current law, only one-half of a capital gain is included in income. However, the full amount of a capital gain realized on the sale of a partnership interest to a person that is exempt from tax is included in income to the extent that the gain is attributable to increases in the value of property of the partnership other than non-depreciable capital property. This rule will be extended to the sale of a partnership interest to a non-resident unless, immediately before and immediately after the sale, the partnership uses all of its property in carrying on business through a permanent establishment in Canada. This rule will also be amended to clarify that it also applies to indirect transfers of a partnership interest to tax-exempts and non-residents.

This measure will generally apply to transfers of partnership interests on or after Budget Day, subject to certain grandfathering for transfers completed before 2013 pursuant to a written agreement entered into prior to the Budget Day.

Foreign Affiliate Dumping

Many years ago, the Canadian Department of Finance reviewed the deductibility of interest paid by a Canadian corporation to invest in the shares of a foreign affiliate and decided to maintain the ability to deduct such interest subject to the existing requirements in the Income Tax Act (the "Act") relating to the deduction of interest. This decision was made notwithstanding the fact that in many cases dividends received by a Canadian corporation from a foreign affiliate are not taxable in Canada. In 2008, the Advisory Panel on Canada's System of International Taxation ("Advisory Panel") identified certain types of foreign affiliate dumping transactions as being abusive in that they reduce the Canadian tax base without providing any significant economic benefit to Canadians. Generally, a foreign affiliate dumping transaction refers to a transaction in which a Canadian corporation uses borrowed or internal funds to acquire the shares of a foreign affiliate from its non-resident parent corporation. Such transactions have two potential tax benefits to the Canadian corporation. First, the transaction increases the amount of interest-bearing debt owed by the corporation and thus the amount of deductible interest payable by the corporation, subject to the thin capitalization limitations in the Act. Second, the transaction allows the non-resident parent to extract funds from the Canadian corporation without the payment of Canadian withholding tax.

Budget 2012 proposes a measure to curtail such foreign affiliate dumping transactions while at the same time preserving the ability of Canadian subsidiaries of foreign parents to expand their Canadian based businesses. There are two aspects to the measure that will apply to an investment in a non-resident corporation (the "subject corporation") by a corporation resident in Canada ("CRIC") if, after the investment, the non-resident corporation is a foreign affiliate of the CRIC and the CRIC is controlled by another non-resident corporation (the "parent"). First, the CRIC will be deemed to have paid a dividend to the parent equal to the fair market value of any property (other than shares of the CRIC) transferred, or obligation assumed or incurred, by the CRIC in respect of the investment. Second, no amount is to be added to the paid-up capital of the shares of the CRIC in respect of the investment and no amount is to be added to the contributed surplus of the CRIC for purposes of determining its capital under the thin capitalization rules. As a result, assuming that the CRIC had a debt to equity ratio prior to the investment equal to the maximum allowed under the thin capitalization rules in the Act, those rules would prohibit the deduction of any interest payable by the CRIC on any debt issued by it in respect of the investment.

For purposes of this measure, an investment made in a subject corporation by a CRIC generally includes: an acquisition of shares of the subject corporation (or an option in respect thereof) by the CRIC, a contribution of capital to the subject corporation by the CRIC, a transaction in which an amount became owing by the subject corporation to the CRIC and an acquisition of a debt obligation of the subject corporation by the CRIC.

The measure will not apply to an investment made by the CRIC in the subject corporation if the investment may not reasonably be considered to have been made by the CRIC, instead of being made or retained by the parent, primarily for bona fide purposes other than to obtain a tax benefit (as such term is defined for the purposes of the general anti-avoidance rule). The measure lists seven factors in determining whether the investment may reasonably be considered to have been made for bona fide purposes other than to obtain a tax benefit.

For example, suppose a Canadian corporation (Canco) acquires 100% of the shares of a non-resident corporation from its non-resident parent corporation (Parent) for consideration that includes shares and interest bearing debt of Canco. Under the proposal, Canco will be deemed to have paid a dividend to Parent in an amount equal to the fair market value of the debt. In addition, no amount will be added to the paid up capital of the shares of Canco in respect of the issuance of the shares. As a result, if Canco had no other equity or it currently had a debt to equity ratio equal to the maximum amount allowed under the thin capitalization rules in the Act, none of the interest on the debt would be deductible under such thin capitalization rules.

Thin Capitalization Rules

In its report that was released on December 20, 2008, the Advisory Panel on Canada's System of International Taxation ("Advisory Panel") made several recommendations to bring Canada's thin capitalization rules more in line with international norms. In response to this recommendation by the Advisory Panel, Budget 2012 includes the following proposals to amend the thin capitalization rules:

  • Lowering the current debt-to-equity ratio "cap" from 2:1 to 1.5:1. This proposal will apply to CRICs in their taxation years that begin after 2012.
  • Extending the application of the thin capitalization rules to partnerships that have a CRIC as a member. Under this proposal, a CRIC will be required to include its pro rata share of the debts of partnerships of which it is a member in computing the amount of its outstanding debt in determining its debt to equity ratio. If this results in the above-mentioned debt-to-equity ratio for the CRIC being exceeded, the proportion of the excess that is related to its share of a partnership debt will be included in the corporation's income, but the partnership's ability to deduct the related interest expense will not be affected. These proposals will generally apply to partnership debts that are outstanding during taxation years of corporations that begin on or after March 29, 2012.
  • Re-characterizing interest expense that is denied under the thin capitalization rules as a dividend for Canadian withholding tax purposes. In general terms, any interest expense of a CRIC that is disallowed under the thin-capitalization rules for a taxation year will be allocated pro rata to all of the corporation's debts that are outstanding to specified non-residents. However, the CRIC will be able to allocate the disallowed interest expense to payments made to specified non-residents at the end of its taxation year. Disallowed interest expense that relate to accrued but unpaid interest at the end of the CRIC's taxation year will be deemed to have been paid by it as a dividend at the end of that taxation year. This proposal will generally apply to taxation years of a corporation that end on or after March 29, 2012, subject to transitional rules for taxation years that include March 29, 2012.

As a relieving measure, Budget 2012 also includes measures which will exclude from the scope of the thin capitalization rules, money borrowed by a CRIC from one of its controlled foreign affiliates in cases where the related interest is effectively included in the income of the Canadian parent through the application of the foreign accrual property income (i.e., "FAPI") rules. This proposal will apply to the taxation years of a Canadian resident corporation that end on or after March 29, 2012.

Scientific Research and Experimental Development Program

In an attempt to make the SR&ED program simpler, and more cost effective and predictable, Budget 2012 proposes to reduce the tax incentives available under the Program. Generally, certain expenses that are not fully deductible in the year can be added to a qualified expenditure pool, and the balance of the pool at the end of the tax year is eligible for investment tax credits ("ITCs"). The current ITC rate is 20% generally, or 35% in the case of a Canadian Controlled Private Corporation ("CCPC"). Budget 2012 would lower the ITC rate for non- CCPCs to 15%, effective after 2013. The eligible portion of salaries and wages that can be added to the qualified expenditure pool will also be reduced from the current rate of 65%, to 60% in 2013, and 55% thereafter.

Budget 2012 would eliminate the favourable tax-treatment currently afforded to capital expenditures under the SR&ED Program. Capital expenditures would no longer be fully deductible on a current basis, nor would they qualify for ITCs. In addition, the amount of any payment made under contracts eligible for SR&ED credits would be reduced by any amounts paid in respect of capital expenditures incurred by the performer in the fulfillment of the contact. These expenditures would become subject to the same treatment that would otherwise apply under the Act.

In addition, Budget 2012 would limit the ITCs that can be claimed by the payers of arm's length SR&ED contracts to 80% of the contract's cost. The 80% limit would be introduced as a "proxy" amount, intended to disallow the payer from claiming ITCs on the profit element of contracts.

Tax Shelters

Under the current rules, the promoters of tax shelters are subject to registration and reporting requirements. These requirements are intended to facilitate the CRA's ability to identify, investigate and challenge abusive arrangements. Budget 2012 proposes to strengthen these measures, largely through increased penalties. Currently, the penalty for selling or accepting consideration for an unregistered tax shelter, or for filing false information in an application to register a tax shelter, is the greater of $500 dollars and 25% of the consideration received or receivable in respect of the tax shelter. Budget 2012 would increase the penalty to the greater of the amount determined under the existing rules, and 25% of the amount asserted by the promoter to be the value of the property that participants in the tax shelter can transfer to a donee. Budget 2012 also would implement an additional penalty on promoters who fail to file the required annual information return. In addition to the current late-filing penalty, a penalty would apply where a promoter fails to file an annual information return in response to a CRA demand, or fails to include an amount paid by a participant in respect of the tax shelter in the information return. The penalty would be 25% of the consideration received or receivable by the promoter in respect of the interests that should have been, but were not, reported. For charitable donation tax shelters, the penalty would be the greater of 25% of the consideration received or receivable by the promoter, and the amount asserted by the promoter to be the value of the property that participants can transfer to a donee.

Currently, the registration number that tax shelters must obtain does not expire. Under Budget 2012, registration numbers would only be valid for the calendar year identified in the registration application. Applications issued before the Budget 2012 announcement would be valid until the end of 2013.

Registered Disability Savings Plans

Budget 2012 would make a number of changes to the rules governing Registered Disability Savings Plans ("RDSP"). In order to address perceived inadequacies in provincial law, temporary changes to the federal law would be implemented to make it easier for spouses, common-law partners and parents to open RDSPs for individuals whose capacity to enter into contracts is uncertain. Currently, contributions into RDSPs made by the government in the form of Canada Disability Saving Grants and Canada Disability Savings Bonds must be repaid on the happening of certain events, including if any withdrawal is made within 10 years of the contribution. Under Budget 2012 the withdrawal rule would become less stringent, requiring a repayment of three times the amount withdrawn (in contrast to requiring all contributions made in the past ten years to be repaid). The maximum annual limit for withdrawals from primarily-government assisted plans ("PGAPs") would be increased, and the minimum annual withdrawal requirements that currently apply to PGAPs would be extended to all RDSPs. Budget 2012 would also introduce provisions that would allow investment income earned in a Registered Education Savings Plan to be rolled over, tax-free, into an RDSP where certain conditions are met.

Currently, if the beneficiary of an RDSP becomes non-eligible for Disability Tax Credits ("DTCs") (and by extension is no longer qualified to be a beneficiary under an RDSP) the RDSP must be terminated by the end of the following year. Budget 2012 would introduce new provisions whereby a beneficiary who becomes non- DTC eligible can elect to leave the RDSP open until the end of the fourth calendar year following the first full calendar year in which the beneficiary becomes non-eligible. Should the beneficiary become DTC eligible again while the election is valid, the usual RDSP rules would begin to apply once again.

Eligible Dividends

Budget 2012 also includes measures to simplify the process for a corporation to designate a dividend as an "eligible dividend" (i.e., a dividend that benefits from the enhanced gross-up and dividend tax credit regime in the Act). In general terms, these proposals will permit a corporation to designate a portion of a dividend that it pays to its shareholders as an eligible dividend (currently such a designation can be made only on the entire amount of a dividend). The proposals will also allow a corporation to designate all or a portion of a dividend as an eligible dividend after it has been paid provided that: (i) the Minister considers it "just and equitable" to permit such a late designation, and (ii) such designation is made before the day that is three years after the day on which the designation was originally required to have been made. These measures will apply to dividends paid by a corporation on or after March 29, 2012.

Transfer Pricing Secondary Adjustments

In cases where a Canadian resident taxpayer has been required to make a "primary adjustment" pursuant the transfer pricing rules in section 247 of the Act, there has been some uncertainty as to how a "secondary adjustment" should be characterized in cross-border contexts. Budget 2012 includes proposed amendments to section 247 of the Tax Act which are designed to remove this uncertainty. In general terms under these proposals, any such secondary adjustment will be deemed to be a dividend for Canadian withholding tax purposes unless the non-resident is, at all relevant times, a controlled foreign affiliate (as such term is defined in subsection 17(15) of the Tax Act) of the Canadian resident taxpayer. Budget 2012 also includes relieving measures that will apply in certain cases where the non-resident repatriates to the Canadian resident taxpayer, an amount equal to the portion of the Canadian resident taxpayer's primary adjustment that relates to the non-resident. These proposals will apply to transactions (including those which are part of a series of transactions) that occur on or after Budget Day.

Base Erosion Rules – Canadian Banks

In response to certain perceived flaws in the current legislation, Budget 2012 also includes a proposal to amend the "base erosion" rules in the Act's FAPI regime. While the specific legislative amendments were not announced, Budget 2012 does include a commitment to draft legislative amendments to alleviate the tax cost to Canadian banks of using excess liquidity of their foreign affiliates in their Canadian operations. In addition, proposed legislative amendments will be drafted to ensure that certain securities transactions undertaken as part of a bank's business of facilitating trades for arm's length customers are not inappropriately caught by the base erosion rules.

These amendments will be developed in conjunction with industry representatives and will include appropriate safeguards to ensure the Canadian tax base is adequately protected.

Natural Resources Incentives

The Canadian energy and mining sectors accounted for nearly 10% of Canada's GDP and 580,000 jobs in 2010. Yet, Budget 2012 sends mixed signals regarding the federal government's commitment to support the industry through tax incentives.

First, "given ongoing global uncertainty and in support of the exploration efforts of junior exploration companies", Budget 2012 proposes to extend the Mineral Exploration Tax Credit, set to expire on March 31, 2012, for an additional year. The credit, which equals 15% of "specified mineral exploration expenses" incurred in Canada and renounced to such individual investors, is an incentive for individuals to invest in flow-through shares issued by companies to fund mineral exploration. First introduced in the early 2000s, the credit is generally set to last for only one year, but has usually been renewed annually. The measure is expected to cost $100 million over the over next two-year period.

On the other hand, Budget 2012 announces a phase-out of the Corporate Mineral Exploration and Development Tax Credit. This 10% tax credit targets certain exploration and development activities related to "qualifying minerals", which include diamonds, base or precious metals and industrial minerals that become base or previous metals through refining. The credit calculated on pre-production mining expenses will be reduced to 5% for expenses incurred in 2013 and cancelled thereafter, while the credit based on preproduction development expenses will remain untouched until it is reduced to 7% for expenses incurred in 2014, to 4% for 2015 expenses and to nil thereafter. Budget 2012 provides for additional transitional relief for certain ongoing mining project. Exploration and pre-production development expenses will continue to qualify as Canadian exploration expenses and allow for a full deduction in the year they are incurred. This federal government estimates at $90m over five years the value of the savings associated with this measure.

Furthermore, to "improve the neutrality of the tax system for Canada's resource sector" and in line with Canada's commitment to "rationalize and phase out [...] inefficient fossil fuel subsidies", Budget 2012 proposes to phase-out part of the Atlantic Investment Tax Credit over a four-year period so that the credit eventually no longer applies to certain natural resource activities. Currently, qualifying acquisitions of new buildings, machinery and equipment used primarily in farming, fishing, logging, mining, oil and gas, and manufacturing and processing in the Atlantic provinces, the Gaspé Peninsula and their associated offshore regions give rise to a 10% credit. This rate will be reduced to 5% for assets acquired in 2014 and 2015 and to nil thereafter, but only for particular assets acquired for use in oil and gas and mining activities. The credit rate remains unchanged for qualifying assets acquired for use in other activities. Ongoing projects may benefit from transitional relief.

Retirement Compensation Arrangements ("RCAs")

Budget 2012 proposes to tighten the rules applicable to RCAs by introducing anti-avoidance rules that are similar to those already applicable to Tax-Free Savings Accounts ("TSFAs") and Registered Retirement Savings Plans ("RRSPs") as well as by introducing new restrictions on RCA tax refunds rules. An RCA is a type of employer-sponsored retirement savings arrangement that is usually used to fund higher-income employee's pension benefit. RCAs are generally tax-exempted, but a refundable 50% tax is imposed on contributions to RCAs. The tax refund usually occurs as taxable distributions are made by an RCA, but it can also be obtained in certain circumstances where the RCA has suffered investment losses.

Tackling what the CRA has depicted as abusive arrangements, the Budget 2012 suggests extending the RRSP and TSFA anti-avoidance rules to RCAs. More specifically, the "prohibited investment" concept is introduced to target certain investments made by RCAs that have a "specified beneficiary", i.e. a beneficiary entitled to benefits under the RCA who has a significant interest in the employer. Should an RCA with a specified beneficiary invest in a prohibited investment, the custodian of the RCA would generally be liable to pay a 50% tax on the fair market value of the prohibited investment, while the specified beneficiary that participates in the acquisition or holding of the investment would possibly be jointly and severally, or solidarily, liable for the tax.

Also, an "RCA strip" definition similar to the already existing "RRSP strip" will be introduced to address abusive tax planning that gives rise to an undue "advantage". Transactions involving an RCA buying a high-value property that is later intentionally eroded or transferred without adequate consideration, as well as transactions involving a promissory notes issued by non-arm's length debtor where the debtor fails to make commercially reasonable payments of principal and interest to the RCA, may gave rise to a RCA "advantage" that will be subject to a special tax. Again, a specified beneficiary that participates in extending such advantage would possibly be jointly and severally, or solidarily, liable for the tax.

Inasmuch as a decline in value of the RCA property could be attributed to prohibited investments or advantages, no RCA tax refund would be available. Budget 2012 provides for detailed transitional rules.

Life Insurance Policy Exemption Test

Budget 2012 proposes to update the exemption tests that are used to determine if a life insurance policy is an "exempt policy", in which case the income earned on the savings component of the policy is not subject to accrual taxation in the hands of the policyholder. These test criteria were almost 30 years old. The changes include: measuring the savings in an actual policy and the benchmark policy using the Canadian Institute of Actuaries 1986-1992 mortality tables and an interest rate of 3.5%, increasing the endowment time of the benchmark policy from age 85 years to age 90 years, measuring the savings in an actual policy using the greater of the cash surrender of the policy (before the application of surrender charges) and the net premium reserve in respect of the policy, and reducing the pay period of the benchmark policy from 20 years to 8 years. More changes can be expected following announced consultations with key stakeholders.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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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.