Canada: Budget Briefing 2013 - Other Income Tax Measures

Synthetic Disposition Arrangements

Appreciation on many properties, including capital properties, is recognized for tax purposes on a realization basis upon disposition of the property.  If a taxpayer chooses to enter into arrangements to hedge its risk of loss or opportunity for gain in respect of the appreciated property without disposing of the property, generally speaking, no immediate disposition of the property results and the recognition for tax purposes of the appreciation on the property will continue to be deferred until disposition.

Budget 2013 proposes to change this treatment where a taxpayer enters into an arrangement that has the effect of eliminating all or substantially all the taxpayer’s risk of loss and opportunity for gain or profit in respect of the property (a synthetic disposition arrangement) for a period of more than one year.  Budget 2013 proposes to deem such arrangements to result in a disposition and reacquisition of the property at fair market value.

Similar treatment applies where the arrangement is entered into by a person or partnership with whom the taxpayer does not deal at arm’s length and such arrangement can reasonably be considered to have been entered into, in whole or in part, with the purpose of obtaining the effect outlined above.  Tax deferred conversions of property and leases of tangible property are not subject to this 2013 Budget proposal.

Such proposal would apply to so-called “monetization” transactions, but a deemed gain could arise as a result of the application of this proposal even if the taxpayer has not obtained funds, whether by loan or otherwise, against the hedged appreciated property.

Under parallel proposals, if a taxpayer has entered into a synthetic disposition arrangement for a period of more than 30 days, the taxpayer will be deemed to have disposed of and to have reacquired the property, interrupting the statutory one-year holding period applicable to dividend stop-loss rules and limitations on foreign tax credits.

These proposals apply to agreements and arrangements entered into or extended on or after Budget Day.

Character Conversion Transactions

Budget 2013 includes proposals that would affect the characterization of gains and losses in respect of capital property sold or received under certain forward sale agreements, deeming such gains and losses to arise on income, rather than capital, account.

The proposals apply to an agreement (a derivative forward agreement) for the sale or purchase of capital property, where the term of the agreement is greater than 180 days (or shorter where the agreement is part of a series of agreements having a collective term greater than 180 days) and the sale price of the capital property sold, or value of the capital property received, under the agreement is determined by reference to a measure other than the value of the capital property, capital gains in respect of the capital property, or income or certain other distributions in respect of the capital property.

Forward contracts of this type have long been employed by investment funds to obtain investment returns that are otherwise difficult to achieve.  For example, in the late 1990’s, the CRA issued numerous advance tax rulings permitting Canadian mutual funds to use similar forward agreements to mimic the return on foreign investments that, if held directly, could give rise to penalty taxes under the now-repealed “foreign property” regime.

Under the proposals in Budget 2013, the amount of any capital gain or loss in respect of a derivative forward agreement that is recharacterized on income account would be added to or subtracted from the cost of the affected capital property.  In this way, the gain or loss would not be treated as both a deemed income gain or loss and an actual capital gain or loss.

These proposals apply to agreements entered into or extended on or after Budget Day.

Leveraged Life Insurance Arrangements

Budget 2013 will eliminate what the Government refers to as “multiple and unintended tax benefits” arising from two life insurance arrangements involving the use of borrowed funds.  The two arrangements targeted by the Government are referred to as the “leveraged insured annuity” and the “10/8 arrangement”.

Although specific rules have been proposed to deny the “multiple and unintended tax benefits”, the Government warns that it will be monitoring developments and, if structures or transactions emerge that undermine the effectiveness of the proposals, it may take further action with possible retroactive application.

Leveraged Insured Annuities

Generally, a “leveraged insured annuity” involves the use by a taxpayer of borrowed funds to pay a single premium to acquire an annuity under which annuity payments will be made for the lifetime of the annuitant.  The taxpayer may then buy a life insurance policy that has an insurance amount on the life of the annuitant (the life insured) equal to the single premium paid to acquire the annuity and pay annual premiums on that policy.  To secure the borrowing, the taxpayer may assign both the annuity and the life insurance policy to the lender.  If the arrangement remains in place until the death of the annuitant, the life insurance proceeds may be applied to repay the borrowed funds.

From an income tax perspective, if the annuity is one to which section 12.2 of the ITA applies, an amount in respect of such an annuity is required to be included in the taxpayer’s income annually.  Interest paid by the taxpayer on the borrowed funds is deductible under the ITA to the extent of such income.  A portion of the premiums paid on the life insurance policy may also be deductible under the ITA as a cost of borrowing.  Provided that the life insurance policy qualifies as an “exempt policy” for the purposes of the ITA, there is no income from the life insurance policy while it remains in force and, on the death of the annuitant, the death benefit proceeds of the life insurance policy are received free of any income taxes and may be applied to repay the borrowed funds.  In effect, the taxpayer may receive a portion of the annuity payments free of any income tax while the annuitant is alive and, thereafter, repay the borrowed funds from the tax free death benefit proceeds of the life insurance policy.

Where such an arrangement is entered into by a private corporation with the shareholder as the annuitant, there may be a reduction in the fair market value of the shares for tax purposes immediately before the death of the shareholder (with a consequent reduction in the capital gain deemed to have been realized on death).  Moreover, any death benefit proceeds in excess of the tax cost of the policy will be added to the corporation’s capital dividend account and may be distributed tax free to a shareholder as a capital dividend.

Budget 2013 describes these tax consequences as being unintended and introduces rules that will apply to such arrangements to deny the perceived tax benefits.

The new rules will apply to an “LIA policy”, which will be a life insurance policy (other than an annuity) where (i) a person becomes obligated on or after Budget Day to repay an amount to another person or partnership (the “lender”) at a time determined by reference to the death of a particular individual whose life is insured under the life insurance policy, and (ii) the lender is assigned an interest in the life insurance policy and in an annuity contract that provides for payments at least until the death of the particular individual whose life is insured under the life insurance policy.

For taxation years that end on or after Budget Day, where a life insurance policy is an LIA policy and any amounts are borrowed on or after Budget Day from the lender:

  • the policy will not be an “exempt policy” for the purposes of the ITA and the income accrual rules will apply to the LIA policy,

  • deductions for borrowing costs will be denied in respect of premiums paid under the LIA policy,

  • for purposes of certain deemed disposition rules that apply on the death of the taxpayer, the fair market value of any property deemed to have been disposed of as a consequence of the death of the annuitant under an annuity contract in respect of the LIA policy will be determined as though the fair market value of the annuity contract were equal to the total premium paid under the contract on or before death,

  • no portion of the life insurance proceeds will be added to the capital dividend account of a private corporation, and

  • the insurer will be required to file an information return in respect of the LIA policy for a calendar year if the insurer was notified by, or on behalf of, the policyholder that the life insurance policy is a LIA policy or if it is reasonable to conclude that the insurer knew, or ought to have known, before the end of the calendar year that the policy is a LIA policy.

10/8 Arrangements

The second arrangement targeted by the Government also involves the use of borrowed funds and a life insurance policy.

It is not uncommon for a taxpayer who has paid premiums under a life insurance policy to borrow an amount from the insurer by way of a policy loan under the terms of the life insurance policy or from any lender as a loan secured by the life insurance policy as collateral.  The borrowed funds are then used by the taxpayer to invest in other income producing property or a business.  By itself, that does not appear to trouble the Government.

However, in some arrangements, the interest rate credited under the life insurance policy may be determined, under the terms of the life insurance policy, by reference to the interest rate paid on the borrowed funds.  The “10/8 arrangement” derives its name from the interest rates commonly used under such arrangements: a 10% interest rate on the borrowed funds and an 8% interest credit under the policy.

Under a 10/8 arrangement, the 10% interest paid by the taxpayer on the borrowed funds is deductible under the ITA to the extent the borrowed funds are used for an income producing purpose.  A portion of the premiums paid on the life insurance policy may also be deductible under the ITA as a cost of borrowing.  Provided that the life insurance policy qualifies as an “exempt policy” for the purposes of the ITA, there is no income from the life insurance policy while it remains in force and, on the death of the life insured, the death benefit proceeds are received free of any income taxes and may be applied to repay the borrowed funds.  Consequently, the taxpayer may deduct the 10% interest paid on the borrowed funds against any income produced by the use of those funds, receive the 8% credits under the life insurance policy on death of the life insured as part of the death benefit proceeds free of any income tax and, thereafter, repay the borrowed funds from the tax free death benefit proceeds of the life insurance policy.

Where such an arrangement is entered into by a private corporation, any death benefit proceeds in excess of the tax cost of the policy will be added to the corporation’s capital dividend account and may be distributed tax free to a shareholder as a capital dividend.

It appears that the Government believes that, but for the tax benefits of such an arrangement, the payment of premiums and the borrowing of funds would not have been undertaken.  Although the Government is challenging 10/8 arrangements under existing provisions of the ITA, Budget 2013 proposes new rules to prevent the use of such arrangements in the future.

The new rules will apply for taxation years ending on or after Budget Day to 10/8 arrangements and will deny interest deductions, premium deductions and additions to the capital dividend account arising for periods after 2013.  The Government will also encourage taxpayers to terminate existing 10/8 arrangements before 2014 by providing relief from certain income tax consequences that would otherwise arise on a withdrawal from a life insurance policy that is part of such an arrangement if the withdrawal is made, after Budget Day and before January 1, 2014, to repay funds borrowed under the 10/8 arrangement.

Reassessment and Collection Proposals

Reportable Transactions

Budget 2013 proposes to give the CRA additional time to reassess a taxpayer that has participated in a tax shelter or a “reportable transaction”, in each case where the required filing of an information return was not made on time.   To combat what the Government describes as reduced time for the CRA to obtain the information necessary for a proper audit when the required information return is filed late, the CRA will be able to reassess a taxpayer in these situations beyond the normal statutory reassessment period, provided such reassessment is made within three years after the date on which the required information return is filed.  An effect of the 2013 Budget proposal is to extend the reassessment period for a GAAR reassessment based upon an abuse of the ITA in respect of a “reportable transaction” which is not timely reported to CRA.

This proposal applies to reassessments of taxation years that end on or after Budget Day.

Tax Collection for Disputed Tax Shelters

Budget 2013 proposes to give the CRA the power to collect 50% of disputed tax, interest and penalties resulting from the disallowance of a charitable donation deduction or tax credit in respect of a tax shelter.  Although the CRA is generally prohibited from taking collection action where a taxpayer that is not a large corporation has objected to a reassessment, the Government has expressed concern that prolonged tax shelter litigation could delay final collection of the taxes.  As a result, this proposal allows the CRA to collect 50% of the disputed amount in these circumstances.  Budget 2013 does not make any changes with respect to the collection provisions that apply to large corporations or amounts in dispute other than those related to charitable donation tax shelters.

This proposal will apply in respect of amounts assessed for the 2013 and subsequent taxation years.

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.

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

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

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

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

Use of

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


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

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


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

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

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

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

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

Information Collection and Use

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

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

Mondaq News Alerts

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


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

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

Log Files

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


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

Surveys & Contests

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


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


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

Correcting/Updating Personal Information

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

Notification of Changes

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

How to contact Mondaq

You can contact us with comments or queries at

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