Canada: Federal Budget - 2013 Tax Highlights

Last Updated: March 22 2013
Article by Crowe Soberman LLP

Federal Finance Minister Jim Flaherty tabled his government's "Economic Action Plan 2013" on March 21st with the stated objective of balancing Canada's budget by 2015-16. This "no-frills" budget featured initiatives which included: assistance for those in the struggling manufacturing and mining sectors; adoption of rules to close tax loopholes; and the creation of a whistleblower hotline with rewards to combat international tax evasion and aggressive tax avoidance.

Below, we have provided an overview of the significant tax measures proposed in this year's budget (Budget 2013). Please contact us for additional information on any of these measures.

BUSINESS TAX MEASURES

There were no changes to the corporate tax rates.

Manufacturing and Processing Machinery and Equipment: Accelerated Capital Cost Allowance (CCA)

Budget 2013 proposes to extend, for an additional two years, the accelerated CCA rate currently available for eligible manufacturing and processing machinery and equipment. As a result, the cost of such machinery and equipment purchased prior to 2016 will continue to be eligible for CCA at a 50% straight-line CCA rate, subject to the half-year rule.

Clean Energy Generation Equipment: Accelerated CCA

Currently, the CCA regime provides accelerated CCA deductions (50% per year on a declining-balance basis) for investments in certain clean energy generation and conservation equipment. Budget 2013 proposes to extend the

accelerated CCA treatment for the following assets:

  • Biogas production equipment that uses more types of organic waste; and
  • All types of cleaning and upgrading equipment used to treat eligible gases from waste to obtain biomethane.

Leveraged Life Insurance Arrangements

Budget 2013 proposes rules to eliminate certain tax benefits related to two leveraged life insurance arrangements, commonly referred to as "leveraged insured annuities" LIAs) and "10/8 arrangements." Income accruing in an "LIA policy" will be subject to an annual accrual-based taxation, no deduction will be allowed for a premium paid on the policy, and the capital dividend account (CDA) of a private corporation will not be increased by the death benefit received from the policy. In addition, for the purposes of the deemed disposition on death, the fair market value of an annuity contract assigned to the lender in connection with an LIA policy will be deemed to be equal to the total of the premiums paid under the contract. These proposals will generally apply to taxation years that end after March 20, 2013, but will not apply to LIAs for which all borrowings were entered into before March 21, 2013.

Budget 2013 proposes that for 10/8 arrangements, no deduction will be allowed for interest on related borrowings or for insurance premiums either of which relate to a period after 2013, and there will be no increase in CDA for any death benefit that becomes payable after 2013 under the policy and that is associated with the borrowing.

Scientific Research and Experimental Development Program

Budget 2013 provides the Canada Revenue Agency (CRA) with new resources and administrative tools to administer the Scientific Research and Experimental Development (SR&ED) program. These measures are aimed specifically at identifying SR&ED claims with a higher risk of non-compliance.

The SR&ED claim forms will require more detailed information about SR&ED program tax preparers and billing arrangements. When one or more third parties have assisted in preparing a claim, the Business Number of each third party will be required, along with details about the billing arrangements (including whether contingency fees were used and the amount of the fees payable). If no third party was involved, the claimant will be required to certify this.

A new penalty of $1,000 will be imposed for each SR&ED claim for which the information about SR&ED program tax preparers and billing arrangements is missing, incomplete or inaccurate. When a third-party SR&ED program tax preparer has been engaged, the SR&ED claimant and tax preparer will be jointly and severally, or solidarily, liable for the penalty.

These measures will apply to SR&ED claims filed on or after the later of January 1, 2014, and the day of royal assent to the enacting legislation.

Restricted Farm Losses

Budget 2013 proposes amendments to ensure that a taxpayer's farming loss will be subject to the "restricted farm loss" rules where the taxpayer's chief source of income is neither farming alone, nor a combination of farming and some other non-farming source of income that is a subordinate source of income. The budget also proposes to increase the restricted farm loss limit to $17,500 of deductible farm losses annually ($2,500 plus ½ of the next $30,000). These measures will apply to taxation years that end after March 20, 2013.

Mining Expenses

Budget 2013 proposes that preproduction mine development expenses, as described in paragraph (g) of the definition Canadian exploration expense (CEE) in subsection 66.1(6) of the Income Tax Act, be treated as Canadian development expense (CDE). The transition from CEE to CDE treatment will be phased in over the three years, from 2015 to 2017 inclusive. This measure will generally apply to expenses incurred after March 20, 2013, but will not apply to expenses meeting certain conditions that are incurred before 2017.

Budget 2013 also proposes to phase out the additional allowance (that supplements the regular CCA deduction) available for mining (other than for bituminous sands and oil shale, for which the phase-out will be complete in 2015) over the 2017 to 2020 calendar years. This measure will generally apply to expenses incurred after March 20, 2013. However, it will not apply to expenses meeting certain conditions that are incurred before 2018.

Corporate Loss Trading

Budget 2013 proposes to introduce an anti-avoidance rule in support of the currently existing loss-restriction rules that apply on the acquisition of control of a corporation. The rule will deem there to have been an acquisition of control of a corporation that has losses, or certain other tax benefits, when a person (or group of persons) acquires shares of the corporation that have more than 75% of the fair market value of all the shares of the corporation without otherwise acquiring control of the corporation. These proposals will apply if it is reasonable to conclude that one of main reasons that control was not acquired is to avoid the existing loss restriction rules.

These proposals will generally apply for shares acquired after March 20, 2013.

Taxation of Corporate Groups

The Government has completed its examination of the taxation of corporate groups and determined that the introduction of a formal system of corporate group taxation is not a priority at this time.

These proposals will apply to property acquired after March 20, 2013 that had not been used or acquired for use before March 21, 2013.

INTERNATIONAL TAXATION

Foreign Reporting Requirements: Form T1135

Budget 2013 proposes to extend the normal reassessment period for a taxation year of a taxpayer by three years if the taxpayer fails to report income from a specified foreign property on their annual income tax return, and if Form T1135 – Foreign Income Verification Statement was not filed on time, was filed incorrectly, or was filed incompletely. The CRA will also revise Form T1135 to require that more detailed information be reported on the Form regarding each specified foreign property. In addition, the filing instructions on Form T1135 will be clarified, and the CRA will remind taxpayers on their Notices of Assessment of their obligation to file this Form if they have previously "checked the box" on their income tax return indicating that they own specified foreign property with a total cost of more than $100,000. The CRA is in the process of developing a system that will allow Form T1135 to be filed electronically.

Stop International Tax Evasion Program

The CRA will launch the Stop International Tax Evasion Program under which it will pay rewards to certain individuals with knowledge of major international tax non-compliance when the individual provides the information to the CRA. The information must lead to the additional assessment or reassessment of more than $100,000 in federal tax. The reward payments will be up to 15% of the federal tax collected (excluding penalties, interest and provincial taxes) and will be subject to income tax.

International Electronic Fund Transfers

Budget 2013 proposes that, beginning in 2015, certain financial intermediaries must report international electronic fund transfers of $10,000 or more to the CRA.

Thin Capitalization Rules

Thin capitalization rules limit the tax deductibility of a Canadian-resident corporation's interest expense where the amount of the debt owing by the corporation to specified non-residents exceeds a 1.5 to 1 debt to equity ratio. The thin capitalization rules operate to protect the Canadian tax base from erosion through excessive interest deductions in respect of debt owing to these specified non-residents. Budget 2013 proposes to extend the scope of the thin capitalization rules to:

  • Canadian-resident trusts; and
  • Non-resident corporations and non-resident trust that operate in Canada.

Non-Resident Trusts

The budget proposes to amend the rules that deem a trust to be resident in Canada where the trust would otherwise not be resident in Canada. Specifically, if an otherwise non-resident trust holds property on conditions that grant effective ownership of the property to a Canadian resident taxpayer and a Canadian resident taxpayer also transfers or loans property to the trust, regardless of the consideration exchanged, then the trust will be deemed to be resident in Canada.

Information Requirements Regarding Unnamed Persons

Presently, the CRA is not legally required to notify a third party of an application made to the court to require the third party to provide information to the CRA for the purpose of verifying the compliance of unnamed persons. Budget 2013 proposes that the CRA will have to give notice to the third party at the time when the CRA initially seeks a court order from a judge of the Federal Court. The third party will be required to make any representations it chooses to make at the hearing of the application for the order.

Treaty Shopping

Budget 2013 announces the Government's intention to consult with the public on possible measures to protect the integrity of Canada's tax treaties while preserving a business tax environment that is attractive to foreign investment.

PERSONAL TAX MEASURES

There were no changes to individual tax rates with the exception of dividends as discussed below.

Dividend Tax Credit (DTC): Non-eligible

When income is earned in a corporation, the corporation is liable for corporate income tax. An additional level of income tax is levied on the individual when the corporation pays a dividend to the individual. In effect, the dividend that is received by the individual will have been subject to corporate and personal income tax. The DTC is intended to compensate an individual for corporate income tax that has presumed to have been paid. Currently, individuals are overcompensated through the DTC available on a noneligible dividend for income tax that is presumed to have been paid by the corporation on active business income. Budget 2013 proposes to adjust the effective rate of the DTC for taxation years beginning after 2013 to reduce the overcompensation enjoyed by individuals. The gross-up factor applicable to non-eligible dividends will be adjusted from 25% to 18%. The corresponding DTC will be adjusted from 2/3 of the grossed-up amount to 13/18 of the grossed-up amount. The effect is to increase the federal personal income tax rate on non-eligible dividends by as much as 1.6%.

Lifetime Capital Gains Exemption (LCGE)

Budget 2013 proposes to increase the LCGE to $800,000 (up from the current amount of $750,000) on capital gains realized by an individual on qualified property effective for 2014. The LCGE will be indexed to inflation after 2014.

First-Time Donor's Super Credit (FDSC)

Budget 2013 proposes a temporary FDSC to supplement the existing Charitable Donations Tax Credit (CDTC) for individuals who are first-time donors. The credit will entitle a first-time donor to an additional 25% tax credit (on top of the CDTC) on up to $1,000 of donations.

Adoption Expense Tax Credit (AETC)

AETC is a 15% non-refundable tax credit that allows adoptive parents to claim eligible expenses, to a specified maximum amount, relating to the completed adoption of a child under the age of 18. For adoptions finalized after 2012, Budget 2013 proposes to extend the adoption period for which eligible adoption expenses can be claimed to begin at the earlier of:

  • the time an adoptive parent makes an application to register with a ministry responsible for adoption or with an adoption agency licensed by a provincial government; or
  • the time an adoption-related application is made to a Canadian court, if such an application is made.

Deduction for Safety Deposit Boxes

Budget 2013 proposes to make the cost of renting a safety deposit box from a financial institution non-deductible for income tax purposes.

Labour-Sponsored Venture Capital Corporations (LSVCC) Tax Credit

Budget 2013 proposes to phase out the federal LSVCC Tax Credit, decreasing the 15% tax credit by 5% in each of 2015 and 2016, as well as eliminating the tax credit for 2017 and subsequent taxation years. Budget 2013 also proposes to end new federal LSVCC registrations, as well as the prescription of new provincially registered LSVCCs in the Income Tax Act.

Mineral Exploration Tax Credit

Budget 2013 proposes to extend the eligibility for the Mineral Exploration Tax Credit for one year, to flow-through share agreements entered into on or before March 31, 2014. The Mineral Exploration Tax Credit is a benefit, available to individuals who invest in flow-through shares, equal to 15% of the specified mineral exploration expenses incurred in Canada and renounced to flow-through share investors.

Synthetic Dispositions

A synthetic disposition transaction aims to defer tax or obtain other tax benefits by allowing a taxpayer to economically dispose of a property while continuing to own the property for income tax purposes. Budget 2013 proposes to introduce specific legislative measures to ensure that appropriate tax consequences apply to these transactions.

Character Conversion Transactions

A character conversion transaction aims to reduce tax by converting, through the use of derivative contracts, the returns on an investment that would have the character of ordinary income (100% taxable) to capital gains (50% taxable). Budget 2013 proposes to introduce specific legislative measures to ensure that the appropriate tax consequences apply to these transactions.

Trusts Loss Trading

Budget 2013 proposes to extend to trusts, with appropriate modifications, the loss-streaming and related rules that currently apply on the acquisition of control of a corporation, including the limited exception allowing the ongoing use of non-capital losses from a business.

Charitable Donation Tax Shelters

Where a taxpayer objects to an assessment of tax, interest or penalties resulting from the disallowance of a deduction or tax credit claimed in respect of a Charitable Donation Tax Shelter, Budget 2013 proposes to permit the CRA, pending the ultimate determination of the taxpayer's liability, to collect 50% of the disputed tax, interest, or penalties.

Extended Reassessment Period: Tax Shelters and Reportable Transactions

Budget 2013 proposes to extend the normal reassessment period in respect of a participant in a tax shelter or a reportable transaction where an information return that is required for the tax shelter or reportable transaction is not filed on time. The normal reassessment period in respect of the tax shelter or reportable transaction will be extended to three years after the date that the relevant information return is filed.

Consultations on Graduated Taxation Rates of Trusts and Estates

Budget 2013 announced the Government's intention to consult the public on possible measures to eliminate the tax benefits that arise from graduated tax rates that are currently applied to trusts created by will, estates (within a reasonable period of estate administration), and grandfathered inter vivos trusts.

Goods and Services Tax / Harmonized Sales Tax (GST/HST)

GST/HST and Health Care Services Budget 2013 proposes for supplies made after March 21, 2013 to:

  • Expand the GST/HST exemption for homemaker services to exempt publicly subsidized or funded personal care services, such as bathing, feeding, and assistance with dressing and taking medication, rendered to an individuals who, due to age, infirmity or disability, requires assistance in his or her home; and
  • Clarify that GST/HST applies to reports, examinations and other services that are not performed for the purpose of the protection, maintenance or restoration of the health of a person or for palliative care.

GST/HST Business Information Requirement

Budget 2013 proposes that the Minister of National Revenue be given authority to withhold GST/HST refunds claimed by a business until all the prescribed business identification information is provided. The measure will apply on Royal Assent to the enacting legislation.

GST/HST on Paid Parking

The budget proposes two measures to clarify that special exemptions for public sector bodies (PSBs) do not apply to supplies of paid parking that are made:

  • by way of lease, licence or similar arrangement in the course of a business carried on by a PSB. For example, parking facilities operated by a municipality or hospital. This measure will be effective the date the GST legislation was enacted.
  • by way of lease, licence or similar arrangement in the course of a business carried on by a charity set up or used by a municipality, university, public college, school or hospital. This measure will apply to supplies made after March 21, 2013.

GST/HST Treatment of the Governor General

Formerly, no GST/HST was payable on purchases for the use of the Governor General (except on personal purchases). Such supplies made after June 30, 2013 will now be subject to GST/HST.

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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