On March 21, 2013, the Minister of Finance presented the federal government's 2013 federal budget (referred to in this bulletin as the "budget" or "Budget 2013"). As in recent years, the budget includes an extensive array of new specific anti-avoidance rules to be added to the Income Tax Act (Canada) (the Act). The stated purpose of these measures is to "enhance the integrity of the tax system".
The principal proposed legislative changes consist of new rules to prevent transfers of losses and other tax attributes between unrelated persons, targeted measures to deny existing tax benefits associated with certain asset monetization and character conversion structures (including mutual funds that effectively convert ordinary income into capital gains through the use of forward sale agreements or other derivatives) and the previously promised extension of the "thin capitalization" rules to trusts and non-residents.
The budget provides for a sharp increase in the tax rate paid by individuals on "non-eligible" dividends, including dividends paid by many private Canadian companies. This measure is coupled with a modest increase to the lifetime capital gains exemption. Both of these new measures take effect in 2014.
As well, numerous changes are proposed to administrative provisions, including a new requirement that the Canada Revenue Agency (CRA) provide notice when it seeks third-party information from banks and other entities, extended reassessment periods where foreign property reporting forms are not filed, and a new "whistleblower" program designed to reward certain persons that provide information regarding offshore tax evasion.
"Character Conversion" Transactions
Under existing rules, in some circumstances, a taxpayer can effectively convert ordinary income into capital gains, which are taxed at one-half the ordinary tax rate.
Many mutual funds offered to the public use forward sale transactions or other derivatives to provide investors with an economic return based on the performance of a reference portfolio that would otherwise generate ordinary income in such a way as results in the economic return being taxed as a capital gain. For example, instead of purchasing a bond portfolio which would pay periodic coupons that would be fully included in the fund's income for tax purposes, a mutual fund would acquire a basket of "Canadian securities". The mutual fund would make the special election to treat any gains and losses on the disposition of such securities as capital gains and losses, and would enter into an agreement with a financial institution to sell such Canadian securities for a price based on the performance of the bond portfolio. Thus the mutual fund would receive the same economic return as if it had invested in the bond portfolio, but in the form of capital gains realized on the disposition of the Canadian securities it held.
These structures are hardly new, and it is interesting that it is only now that the government decided to introduce rules aimed at eliminating the tax benefits of this type of structuring. This measure will significantly disrupt the market for a number of publicly traded funds that have employed this strategy.
The budget proposes a sweeping new provision targeted at these types of character conversion structures; the very breadth of the provision gives rise to a real danger it may capture other transactions, including transactions where derivatives are used for hedging purposes. As stated elsewhere in the budget, the government asserts that it may have been able to challenge these transactions under current law, but that the amendments are being made to avoid the time and expense of any challenge.
The basic rule proposed to be added to the Act would treat the gain (or loss) realized on close-out of any "derivative forward agreement" as ordinary income (or loss) rather than capital gain (or loss). The definition of "derivative forward agreement" is central to these provisions.
A derivative forward agreement is defined to include any agreement to sell a capital property where:
(a) the term of the agreement (or if it is part of a series of agreements, the term of the series) exceeds 180 days, and
(b) the sale price is determined by reference to an "underlying interest (including a value, price, rate, variable, index, event, probability or thing)" other than (i) the "value" of the property, (ii) income or capital gains in respect of the property, or (iii) in the case of shares of corporations or interests in other entities, capital distributions from such entities.
A parallel set of provisions applies to purchase agreements.
There is no doubt that a typical mutual fund forward sale structure, as described above, would fall within this definition. The forward sale agreement would stipulate a price that is determined by reference to, for example, an index that has nothing to do with the portfolio of Canadian securities sold forward.
The breadth of the proposed rules raises the possibility that they could potentially apply even to innocuous commercial sale agreements with "long" (i.e., more than 180 day) interim periods between signing and closing. This could arise, for example, where there are regulatory clearances that are needed. In a typical sale agreement, the agreement would stipulate a price, i.e., a dollar amount, perhaps with a working capital adjustment. Presumably, in an arm's-length context, such price could reasonably be regarded as the "value" of the property, but it would be preferable if the legislation more clearly stated that mere reference to a numerical amount (rather than a reference to the property's "value") is generally not considered to convert an ordinary sale agreement into a "derivative forward agreement" subject to the new rules. It is to be hoped that the definitive implementing legislation will more clearly exempt ordinary commercial sale transactions.
The proposed legislation set out in the budget includes technical rules that are intended to permit deduction of losses from derivative forward agreements as ordinary losses. However, where an agreement is settled incrementally over time, the legislation would not permit a net loss to be recognized in respect of the agreement until final settlement.
There is some lack of clarity as to how the rules should apply where a taxpayer already owns a property (and has unrealized gain or loss), and then enters into a derivative forward agreement. One would have expected that it is only the gain or loss accruing after entry into the agreement that would be re-characterized, but this view does not appear to be supported by the text of the proposed legislation in the budget documents.
There is also an "all-or-nothing" aspect to the definition. If any part of the sale price is determined by reference to any "thing" other than value of the property sold, income or gains in respect of the property or capital distributions, then the entire agreement would seem to be caught by these provisions. Commercial agreements often provide for purchase price adjustments determined with reference to a panoply of different events or other "things"; it cannot possibly have been intended that such innocuous references would taint ordinary commercial agreements. It is suggested that the Department of Finance might consider some further wording to clarify that the provision does not apply unless it is reasonable to consider that one of the main purposes of the transaction is to convert income into capital gain.
The new rules for character conversion transactions will apply to transactions entered into on or after March 21, 2013, and also to existing agreements that are extended on or after March 21, 2013. As noted, this new measure could be very disruptive to existing publicly traded funds, and it is arguable that a more generous transition period (such as the one-year phase-in provided under the 2011 "stapled security" proposals) is appropriate.
Another proposal is aimed at transactions such as monetizations which enable a taxpayer to be put in the same economic position as if the taxpayer had sold a capital property with an accrued capital gain while retaining ownership until a later date. In this way, the taxpayer would defer the realization of the capital gain that would otherwise be immediately realized.
In one type of monetization transaction, a taxpayer that owns capital property (for example, a portfolio of shares, or real estate), might enter into a forward agreement to sell the property in 10 years at a fixed price. At the same time, the taxpayer would borrow money from the counterparty secured by the property for a term of 10 years. The amount borrowed would equal the agreed forward price (which itself would be based on current fair market value, adjusted by an implicit factor to recognize the time value of money). At close-out, the taxpayer's obligation to repay the loan would be set off against the counterparty's obligation to pay the forward price. Typically, the right to dividends would reside with the seller in order to support the view the seller remains the beneficial owner; however, the forward agreement might make adjustments for any extraordinary dividends.
Another type of monetization structure involves the issuance of a security such as an exchangeable debenture (though developments in the case law have made these instruments less attractive in recent years). The principal amount of the exchangeable debenture will be based on the current fair market value of a particular appreciated asset, and, at maturity, the issuer would extinguish its liability either by delivering the reference asset itself or by making a cash settlement payment equal to the then fair market value of the asset.
In these types of transactions, risk of loss and opportunity for gain are shifted to the counterparty, yet the owner of the property avoids a recognition event, by not "disposing" of the property. Similar to the character conversion transactions described above, asset monetizations are hardly new. It is interesting that the government decided only now to attack these arrangements through legislative amendments, particularly as some of these arrangements have been challenged by the CRA under existing law.
The budget proposes new measures that will deem the taxpayer to have disposed of the property at fair market value at the time it enters into a "synthetic disposition arrangement". Such an arrangement is defined, in respect of a property "owned by a taxpayer", as one or more agreements or other arrangements (other than a lease of tangible property) that:
(a) have the effect of eliminating all or substantially all the taxpayer's risk of loss or opportunity for gain or profit in respect of the property for more than one year; and
(b) do not result in a disposition of the property within one year.
Additional rules extend the concept to similar arrangements made by other non-arm's-length persons.
Although this rule appears designed to apply to monetization transactions, as drafted, it appears to have broader application, as there is no explicit requirement that the taxpayer receive a loan or other funding of any sort. This raises the question of whether a transaction that merely hedges price risk on an asset for over one year could be caught. Furthermore, it is interesting that the text of the provision also suggests that a person can "own" a property even when all of the risks and rewards of ownership have been divested.
The one-year safe harbour seems designed to carve out ordinary commercial agreements. While most commercial agreements will close within one year of signing, this is not always the case. It cannot possibly have been intended that ordinary commercial agreements would be caught by these rules, but it would have been preferable if this had been somewhat clearer.
The government states that the new rule might apply to a wide range of monetization structures, such as forward sales, put-call collars, exchangeable debt, total return swaps, and securities borrowing used to facilitate a short sale of property that is economically similar to other property of the taxpayer. The government states that the rule would not apply to ordinary loss-hedging transactions or ordinary-course securities lending arrangements.
Supporting rules will deem the taxpayer not to own the property for purposes of certain ownership period rules (e.g., holding periods to claim foreign tax credits and to avoid certain stop-loss rules) if the taxpayer, or a non-arm's-length person or partnership, enters into a synthetic disposition. However, for this purpose, arrangements that do not result in a disposition within 30 days (as opposed to one year for the rule described above) will be considered to be synthetic dispositions.
The new rules for monetization transactions will apply to transactions entered into on or after March 21, 2013, and to existing agreements extended on or after March 21, 2013.
Prevention of Corporate "Loss Trading"
Existing rules in the Act generally seek to prevent the transfer of tax losses or other attributes between unrelated persons where there is an "acquisition of control" of a corporation by a person or "group of persons". This longstanding bright-line test focuses on de jure control – essentially voting control of the corporation. Changes in the identity of shareholders having an economic interest in a corporation – even significant changes – do not generally engage these rules. This well-understood test – supplemented by interpretive rules and a body of jurisprudence – has resulted in a degree of certainty as to when restrictions on loss carry-forwards or resource exploration and development expenditures will arise, or when write-downs of asset basis will be required. Having said that, under existing law, particularly "abusive" transactions which do not technically result in an acquisition of control but which are considered to circumvent the loss trading rules could always run the risk of being vulnerable to potential attack under the general anti-avoidance rule (GAAR).
It is now clear that the government considers the prospect of a GAAR assessment to be a somewhat ineffective deterrent, and this has led to the introduction in the budget of a specific new set of rules aimed at certain types of transactions not involving an "acquisition of control" but which are nonetheless thought to involve circumstances under which loss transfers should be disallowed.
One type of transaction targeted by the new measure involves a profitable company (Profitco) which transfers its assets to an unrelated company (Lossco) with significant loss pools. Profitco acquires shares of Lossco representing over 75% of the fair market value of Lossco, but voting control remains with the historical owners. Lossco uses its losses to shelter future taxable income, and pays tax-free dividends to Profitco.
Many transactions of this nature are currently being scrutinized by the CRA, and the government – in an apparent attempt to avoid undermining its litigating position on these cases – asserts in the budget that "these loss-trading transactions constitute aggressive tax avoidance and undermine the integrity" of existing loss trading provisions. The government goes on to state that these transactions "can be challenged", but because these challenges are "time consuming and costly" – and, though not acknowledged by the government, uncertain, in the sense that a court may agree that these transactions are allowed by existing rules – the decision was taken to enact specific legislative measures. It will be interesting to see how much weight, if any, a court puts on these assertions when adjudicating a case under current law.
The budget proposes to amend the Act to deem a person (or group of persons) to have acquired control of a corporation for purposes of several provisions of the Act which restrict utilization of tax attributes, and related provisions. The deemed acquisition of control of a corporation will arise at the moment when a person or "group" crosses a 75% ownership threshold (measured by fair market value of all issued shares) if:
the person or group "does not control" the corporation; and
it is reasonable to conclude that one of the main reasons the person or group does not control the corporation is to avoid the application of a "specified provision" of the Act (being generally a provision that restricts utilization of losses or other tax attributes).
A series of further anti-avoidance and supporting rules is also proposed, including a rule that deems a corporation to have net equity value and income of C$100,000 in any case where its shares have nil value.
It seems this new rule will not only shut down so-called "profit trading" transactions (the stated goal), but that it will also potentially affect a wide range of seemingly benign transactions. The rule seems to impose a bright-line 75% threshold, but considerable uncertainty may arise in ascertaining when it is reasonable to conclude that "one of the main reasons" the person does not control is to avoid loss trading rules. One can imagine circumstances where a shareholder that crosses the 75% of value threshold may have a host of reasons for not controlling the corporation (including perhaps regulatory, financial reporting or other reasons); yet the "one of the main reasons" threshold is sufficiently uncertain that this test will inevitably give rise to circumstances involving ambiguity as to whether or not loss trading restrictions have been engaged.
The rule could also apply solely due to market price fluctuations or redemptions of shares held by persons other than the person or group that has crossed the 75% threshold.
In future, all changes in economic ownership by a non-controlling person or group will have to be analyzed to determine whether the 75% threshold has been crossed, and if so, whether the new deemed acquisition of control rule applies.
Interestingly, these new provisions will be "deemed to have come into force on Budget Day". It is understood from discussions with senior Finance officials that, despite this somewhat unusual phase-in language (which could be read as implying possible application to completed transactions – normal phase-in language refers to transactions occurring on or after Budget Day), the government intends the provision to apply only to transactions or events occurring on or after Budget Day (except where there was a binding agreement in place prior to Budget Day).
Prevention of Trust "Loss Trading"
The existing "loss trading" rules in the Act generally do not apply to losses incurred by trusts. In particular, there is no existing concept of an "acquisition of control" of a trust, nor are there generally any restrictions on using loss carry-forwards of a trust following a substantial change in the identity of the beneficiaries.
Consistent with the corporate "loss trading" changes, the budget proposes to amend the Act to add a new set of detailed rules that will extend the existing loss-streaming and related rules to trusts. This involves the new concept of a "loss restriction event", which will generally occur where a person or partnership becomes a "majority-interest beneficiary" of the trust or a "group" becomes a "majority-interest group of beneficiaries" of the trust (generally meaning a person or group that has a beneficial interest in the trust's income or capital with a fair market value that exceeds 50% of the fair market value of all the beneficial interests in income or capital, respectively, in the trust.)
A host of technical rules will be added to extend existing concepts relevant in the corporate context to this new rule. Exceptions are proposed for certain types of within-the-group transfers (such as a transfer to a corporation in exchange solely for shares), but it is not clear whether these exceptions will properly cover all situations that ought to be carved out. As with the new corporate loss trading rules, the focus of these rules is on economic ownership rather than voting control. It is inevitable that this new sweeping rule will give rise to anomalous results in some cases. The government recognizes that the rule will not generally work well in the context of family trusts, and submissions are invited by the government in this regard. Notably, there is no exception for mutual fund trusts, including real estate investment trusts and many other types of investment entities. Ownership levels by any significant investors in these types of entities will have to be carefully monitored to ensure that any potential "loss restriction event" can be identified, and, if possible, prevented, or at least managed.
The new trust loss trading provisions apply to transactions that occur on or after March 21, 2013, with an exception for transactions for which a binding agreement existed as of that date.
Extension of Thin Capitalization Rules to Trusts and Branches
The thin capitalization rules limit the ability of a corporation resident in Canada to deduct interest on debt outstanding to significant non-resident shareholders. This is done by denying a deduction for otherwise deductible interest to the extent the ratio of debt outstanding to such holders to the "equity" of the corporation, as defined for this purpose, exceeds a bright-line 1.5-to-1 ratio. This longstanding rule is a key factor in limiting the ability of non-resident investors to erode the Canadian taxable income base of their subsidiaries through internal debt. As recommended by the 2008 Advisory Panel Report, the rule was tightened in Budget 2012 by reducing the ratio, from 2:1 to 1.5:1, and by extending the rule to debt of any partnership of which a Canadian corporation is a member. The Advisory Panel also recommended the rule be extended to trusts and Canadian branches of non-residents, and Budget 2013 implements this unfinished business. Notably, the new rule does not apply to authorized foreign banks carrying on a Canadian banking business through a branch in Canada.
In an ambitious set of technical rules, the budget proposes to extend the thin capitalization rule to trusts resident in Canada and also to non-resident trusts and corporations. The partnership rule is also amended so that the thin capitalization rule will effectively apply where a trust or non-resident is a member of a partnership.
The new concept of "equity amount" is to be introduced. It will generally be defined to include the existing components currently included for corporations resident in Canada. In the case of trusts resident in Canada, the "equity amount" will generally include the total amount of equity contributions to the trust by significant non-resident beneficiaries (for this purpose, the same 25% threshold as currently applies to corporations will apply to determine whether a beneficiary is significant). The equity amount will also include "tax-paid earnings" (a new concept apparently intended to measure the retained after-tax income of the trust - which amount will in many cases be nil, as many trusts distribute all of their income through deductible distributions), and will be reduced by capital distributions, but only those paid to significant non-resident beneficiaries.
Of course, trusts will not necessarily have been tracking these amounts, as the thin capitalization rules have not to date applied to them. In recognition of this, the budget includes a "fresh-start" rule whereby trusts resident in Canada can elect (generally in the 2014 tax return) to treat its Budget Day "equity amount" as the fair market value of all of its assets less its total liabilities.
To the extent the debt-equity ratio of a trust resident in Canada exceeds 1.5:1, interest on affected debt will not be deductible. Instead of paying trust-level income tax on the denied interest, the trust has the option to treat the denied interest as income paid to the non-resident creditor by making a designation in its tax return; this would then generally result in withholding tax being payable by the non-resident, instead of creating a tax liability that impacts all beneficiaries (though, in some cases, the trust could still be subject to the special tax imposed under Part XII.2 of the Act).
For non-residents (trusts and corporations), the "equity amount" will generally be based on the premise that 40% of the cost of any property used by the non-resident in its Canadian branch business was equity financed. Thus, the equity amount for a non-resident will generally be 40% of the cost of property used in a business carried on in Canada, less debt owing to persons other than significant non-resident shareholders or beneficiaries.
These rules are likely to have significant effects for some trusts and non-residents operating through branches in Canada. Trusts that issue debt – including in public offerings – will now need to consider whether steps can be taken so that such debt does not become owned by significant non-resident beneficiaries (or non-resident persons who do not deal at arm's length with such persons). In the case of non-residents, there does not appear to be any attempt to track the non-resident's debt to the Canadian business. The non-resident may have significant debt that is completely unrelated to the Canadian business, but all debt appears to count in computing the mechanical debt/equity ratio.
The new rules apply to taxation years that begin after 2013 (generally, the 2014 and later years). Notably, there is no grandfathering of existing debt of trusts or non-residents that could – potentially without the knowledge of the trust – become owned by significant non-resident beneficiaries or persons not dealing at arm's length with such persons. Trusts that may have issued cross-border debt should consider whether these new rules could potentially apply to them.
Treaty shopping is the somewhat pejorative term used to describe structures which seek to benefit from bilateral treaty provisions by investing through an entity resident in a particular jurisdiction with which Canada has a favourable treaty. The government's strategy at one point was to attempt to challenge these types of structures under either GAAR (as in the MIL Investments case) or to assert the recipient of an item of income was not the beneficial owner (as in the Velcro case). In an unusual comment, the government acknowledges in Budget 2013 that it has been "largely unsuccessful" in challenging perceived "treaty shopping" in the courts. The addition of a codified "limitation on benefits" rule in the Canada-U.S. treaty, as well as more focused rules in recent bilateral treaties such as the treaty with Hong Kong represents a different approach to this issue.
In Budget 2013, the government has announced an "intention to consult on possible measures" to "protect the integrity of Canada's tax treaties while preserving a business tax environment that is conducive to foreign investment". While one can convincingly argue that the right approach is to include specific rules, such as those found in the treaties referred to above, the government is nonetheless to be commended for proceeding cautiously, and recognizing the need for consultation.
Corporate Group Taxation
The government announced in the budget that its recent consultation regarding the development of a corporate group consolidation rule has not produced a consensus, due in part to concerns expressed by the provinces. The government stated that group taxation is now "not a priority". This will result in the continued need to implement loss-consolidation transactions using the types of structures approved in numerous rulings.
The budget proposes new statutory rules to reverse the results in two specific tax cases decided in 2012.
R v. Sommerer – In Sommerer, the Federal Court of Appeal concluded that the income attribution rules applicable to property transferred to a revocable trust, or to a trust that holds the property on conditions that grant effective ownership of the property to the transferor, did not apply where property was sold to the trust for fair market value consideration. The budget proposes to extend the currently proposed non-resident trust rules so that they would apply to trusts that receive any transfer or loan of property (regardless of the consideration paid in exchange) directly or indirectly from a Canadian-resident taxpayer that maintains effective control of the property, deeming the Canadian resident to have made a contribution to the trust and deeming the trust to be resident in Canada. The trust attribution rule will be revised to no longer apply to non-resident trusts. These changes will apply to taxation years that end on or after Budget Day.
R v. Craig – In Craig, the Supreme Court of Canada reversed its 1977 decision in R. v Moldowan, and held that a taxpayer could deduct an unlimited amount of losses from a farming business, even where the taxpayer would not reasonably have expected to earn the bulk of its income from farming. The budget proposes to restore the rule that had applied since Moldowan and to restrict allowable deductions unless all of the taxpayer's other sources of income are subordinate to farming. At the same time, the budget proposes to double the maximum allowable deductions where farm losses are restricted to C$17,500.
The budget also proposes a number of changes in the administration of the Act:
Foreign reporting requirements/Form T1135 – The budget proposes to extend the normal reassessment period by three years for taxpayers who fail to report income from a specified foreign property on their annual income tax return and fail to properly file the Foreign Income Verification Statement (Form T1135). Form T1135 will be revised to provide more detailed information including the names of specific foreign institutions and countries where offshore assets are located and the foreign income earned on those assets.
Tax Whistleblowers – The CRA will launch a new program under which it will pay rewards to individuals with knowledge of major international tax non-compliance when they provide information to the CRA that leads to the collection of outstanding taxes due. The program will provide for awards of up to 15% of the federal tax actually collected (not including penalties, interest and provincial taxes), which will be paid only after the taxes have been collected. This program is similar to a program which is operated by the IRS in the U.S. The CRA will announce further details on the program in the coming months.
Unnamed Person Information Requirements – The budget proposes to replace the current ex parte procedure for the CRA to obtain information from third parties about unnamed persons, with a procedure under which the third parties would be given notice of the application and would have the opportunity to make representations at the initial hearing. It is intended that this change will improve the efficiency of the process by avoiding the need for subsequent judicial review due to third parties challenging ex parte orders.
50% Initial Collections for Charity Tax Shelters – The budget proposes to allow the CRA to collect up to 50% of the disputed amount (including interest and penalties) in the case of assessments related to charitable donation tax shelters. The change effectively extends to these tax shelters the same collection regime as currently applies to large corporations. This change will apply to assessments for taxation years ending after 2012.
The budget will extend one of the stimulus measures introduced in 2007, and scheduled to expire in 2014. Specifically, the accelerated straight-line 50% capital cost allowance rate for manufacturing and processing equipment will be extended through 2015.
A series of changes is proposed to extend the 50% declining balance depreciation rate available for certain "clean energy" equipment to a broader range of equipment related to biogas production.
Leveraged Life Insurance Arrangements
The budget proposes specific anti-avoidance rules that target certain so-called "leveraged insurance" arrangements, namely "10/8 arrangements", and leveraged annuities entailing the combined use of exempt life insurance policies and lifetime (or longer) annuities as collateral for borrowed funds used to establish such arrangements.
Registered Pension Plans - Correcting Contribution Errors
The budget proposes that with respect to contributions after January 1, 2014 where there are "reasonable" contribution errors, the pension plan administrators may make refunds to correct the errors up to the end of the year after the error was made, without seeking the approval of CRA. The refund will be reported as income in that year and no adjustment will be made to the employee's prioryear.
Miscellaneous New Measures
The budget includes a number of other tax changes, including the following:
personal tax rates on non-eligible dividends will be significantly increased, effective from 2014, through a change to the dividend tax credit – this measure, which is very significant for some Canadian private businesses, is expected to raise over C$2.3 billion over five years;
the lifetime capital gains exemption for gains from sales of shares of certain small businesses will be increased from C$750,000 to C$800,000 for 2014, and thereafter it will be indexed to inflation;
the mineral exploration tax credit will be extended to flow-through share arrangements entered into on or before March 31, 2014;
the treatment of the mining sector will be aligned with the oil and gas sector by phasing out accelerated depreciation for new mines and major mine expansions and reducing the deductions available for pre-production expenses;
the federal "labour-sponsored venture capital corporations" tax credit will be phased out over the next four years;
a reserve for prepaid amounts relating to future reclamation obligations will no longer be allowed;
the government confirmed its intention to proceed with several previously announced measures, including "stapled security" and other SIFT-related proposals announced in July 2012 and the technical amendments announced December 21, 2012; and
the exemption from tax on income earned by a prescribed financial institution from a branch in Montréal or Vancouver that qualifies as an "international banking centre" will be repealed for taxation years beginning on or after Budget Day.
GST Simplification Measures
The budget proposals take some small steps toward simplifying employer compliance with the GST/HST rules, but they do little to reduce the complexity of the rules. Under the current system, employers are faced with a potential double tax. Namely, they are required to account for GST/HST on "actual" taxable supplies as well as accounting for tax on "deemed" taxable supplies. The CRA considers there to be an "actual" supply from an employer to a pension plan where the employer is reimbursed by a pension plan (or draws directly from pension plan funds) for employer in-house and external resources. The employer is expected to issue a "tax adjustment note" to the pension plan, to reduce the liability for double tax. Since the regime was introduced the Department of Finance has received complaints that it is too complex to expect compliance.
Following conversations with Finance and representatives of the legal community, the budget proposes to address the complexity by adding a simplifying election. Namely, employers can elect not to account for GST/HST on "actual" taxable supplies. Whether the addition of a new election to the complex regime will simplify or complicate matters will remain to be seen. The budget also proposes to allow some limited relief from accounting for tax on "deemed" supplies where the deemed supplies fall below certain thresholds.
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