This... budget plan is a low-tax plan to promote jobs and economic growth and support Canadian families... [T]axes help fund programs and services Canadians rely on... [W]e will keep closing tax loopholes so every Canadian pays their fair share.
The Honourable Jim Flaherty
The Honourable Jim Flaherty, Minister of Finance, tabled Canada's federal budget for 2014 on February 11, 2014 (Budget 2014). In his budget speech, the Minister reinforced the government's commitment to balancing the budget and returning Canada to a position of fiscal strength. Budget 2014 pairs restrained spending along with targeted initiatives designed to create jobs and opportunities. Key announced measures include:
- approximately $850 million over two years for infrastructure and transportation including the building of the Windsor-Detroit international bridge crossing, a new bridge for the St. Lawrence and the rehabilitation of Montréal bridges;
- $833 million over two years for advanced research and innovation including $500 million for an Automotive Innovation Fund dedicated to research and development; and
- targeted savings of $7.4 billion over six years by managing government compensation costs
The government projects a deficit of $3.9 billion for 2014-2015, followed by modest surpluses starting in 2015-2016. Budget 2014 does not propose to increase tax rates and does not include corporate income tax rate changes. The corporate tax changes largely focus on perceived tax "loopholes" that the government says need to be closed in the interests of tax fairness. Budget 2014 also announces a number of consultations that could portend significant tax changes for multinational enterprises and the applicability of Canada's treaties, as well as the potential replacement of the current eligible capital property regime.
In this Budget Briefing 2014, we summarize the more significant tax proposals included in Budget 2014.
Business Income Tax Measures
Corporate Tax Rates
Budget 2014 does not propose to change the general corporate income tax rate, which remains at 15% at the federal level for 2014.
Consultation on Overhaul of Eligible Capital Property Regime
Budget 2014 introduces a public consultation on a proposal to revise the current regime governing the tax treatment of certain property referred to as eligible capital property (ECP). Generally, ECP means intangible capital property (including notably, goodwill) and excludes depreciable capital property already subject to the capital cost allowance (CCA) rules under the Income Tax Act (Canada) (the ITA).
Generally under the current ECP rules in the ITA, 75% of an expenditure to acquire ECP (an eligible capital expenditure) is added to a notional cumulative eligible capital (CEC) pool in respect of the business and up to 7% of the CEC pool balance is deductible on a declining-balance basis.
In an effort to simplify the tax treatment of ECP under the ITA, Budget 2014 proposes to replace the existing ECP rules with the introduction of a new CCA class available to businesses. Under the proposed regime, eligible capital expenditures and eligible capital receipts would result in an adjustment to the new CCA pool balance (with 100% of an eligible capital expenditure included in the new CCA class with a 5% depreciation rate). The existing CCA rules would generally apply to this new class, including rules relating to recapture, capital gains and depreciation. Additionally, special rules are proposed that will apply to goodwill and in respect of expenditures and receipts that do not relate to a specific property of the business and that would be eligible capital expenditures and eligible capital receipts under the current ECP rules. Under the special new CCA rules, such expenditures and receipts would be accounted for by adjusting the capital cost of the goodwill of the business and, consequently, the balance of the new CCA class. Every business would be considered to have goodwill associated with it even if there had not been an expenditure to acquire goodwill.
The proposals also include certain transitional rules to address issues related to the transition away from the existing ECP rules to the new CCA class structure. Budget 2014 provides that detailed draft legislative proposals will be released for comment at an early opportunity and the timing of the implementation of this proposal will be determined following the consultation.
Tax Incentives for Clean Energy Generation
Investments in specified clean energy generation and energy conservation equipment currently benefit from accelerated CCA under Class 43.2 at a rate of 50% on a declining balance basis. Budget 2014 proposes to expand Class 43.2 to include water-current energy equipment and equipment used to gasify eligible waste fuel for other applications. Accelerated CCA will be available in respect of eligible property only if, at the time the property becomes available for use, the requirements of all Canadian environmental laws, by-laws and regulations applicable in respect of the property have been met. This measure will apply to property acquired on or after Budget Day that has not been used or acquired for use before that date.
Thresholds for Employer Source Deduction Remittances
Currently, the frequency of employer remittances of employee source deductions is based on an employer's total average monthly withholdings in preceding calendar years. Budget 2014 proposes to reduce the remittance frequency for some employers in order to reduce the compliance burden. The threshold level of average monthly withholdings at which employers will be required to remit source deductions up to twice per month (depending on their pay period) will increase from $15,000 to $25,000 and the threshold level at which employers will be required to remit four times a month will increase from $50,000 to $100,000. This measure will apply in respect of amounts to be withheld after 2014.
Canada Revenue Agency (CRA) Consultation with Small Businesses
Budget 2014 also states that the Canada Revenue Agency (CRA) has committed to national consultations every two years with small businesses on improving services and reducing red tape. The next consultations will be in the fall of 2014.
International Tax Measures
Regulated Foreign Financial Institutions and FAPI
The foreign accrual property income (FAPI) rules in the ITA are aimed at preventing the inappropriate deferral of Canadian taxation on certain income earned in a controlled foreign affiliate.
Income from an "investment business" – being a business the principal purpose of which is to earn income from property – is included in FAPI. Most businesses carried on by a financial institution would be captured by this definition. Exceptions from the investment business definition are meant to exclude income from certain genuine active business activities.
One such exception is for income from a business carried on by a foreign affiliate of a Canadian taxpayer as a regulated foreign financial institution. Under current law, the availability of this exception does not depend upon the status of the Canadian taxpayer as a regulated financial institution.
In Budget 2014, the government expresses its concern that Canadian taxpayers that are not financial institutions are inappropriately taking advantage of the regulated foreign financial institution exception in order to earn active business income from "proprietary" trading activities. Consequently, Budget 2014 proposes to limit the availability of the regulated foreign financial institution exception to situations where the Canadian taxpayer is a regulated financial institution (or part of a wholly-owned regulated financial institution group).
Generally speaking, the exception will only apply where the taxpayer is a Schedule I bank, a trust company, a credit union, an insurance corporation or a trader or dealer in securities or commodities resident in Canada, whose activities are regulated by the Office of the Superintendent of Financial Institutions (OSFI) or a similar provincial regulatory authority. A wholly-owned subsidiary of such a taxpayer would also qualify, as would a parent that wholly-owns such a taxpayer and that is subject to the supervision of the same regulatory authority. Certain minimum capitalization requirements are also provided. These requirements are satisfied where either:
- the taxpayer is a bank, trust company or insurance corporation that has or is deemed (under relevant federal legislation) to have $2 billion more of equity, or
- more than 50% of the taxable capital employed in Canada (as determined under Part I.3 of the ITA) of the taxpayer or a related Canadian-resident corporation is attributable to a business carried on in Canada whose activities are subject to the supervision of the regulatory authority.
Budget 2014 notes that in addition to satisfying the foregoing conditions relating to regulation of the Canadian taxpayer and to its financial capital, in order for income of a foreign affiliate of the taxpayer from proprietary activities to be considered income from an active business, the affiliate must carry on a regulated foreign financial services business, as required under existing law, and the proprietary activities must be part of that business.
Budget 2014 notes that the government intends to monitor this area to determine whether further action is required to prevent unintended tax consequences.
These measures will be effective for taxation years starting after 2014. The government is accepting comments concerning the scope of the proposals until April 12, 2014.
Generally, the income of a controlled foreign affiliate of a Canadian taxpayer from the insurance or reinsurance of Canadian risks is included in the FAPI of the affiliate and, hence, in the Canadian taxpayer's income for Canadian tax purposes. This "base erosion" rule is intended to prevent the transfer of income from the insurance or reinsurance of Canadian risks to a foreign affiliate (which is not taxable in Canada). However, to permit a foreign affiliate to carry on a foreign insurance business, the base erosion rule is subject to an exception that applies if more than 90% of the affiliate's gross premium revenue (net of reinsurance ceded) is derived from the insurance or reinsurance of non-Canadian, arm's length risks.
Budget 2014 proposes to include, in FAPI, income of a foreign affiliate from the insurance or reinsurance of certain non-Canadian risks (referred to in the proposal as the "foreign policy pool") if the foreign affiliate (or a non-arm's length person or partnership) has entered into arrangements or agreements designed to circumvent the base erosion rule. In particular, the proposed measure would apply if, as a result of the agreements or arrangements entered into by the affiliate (or non-arm's length person or partnership) in respect of the foreign policy pool, the affiliate's risk of loss or opportunity for gain or profit in respect of the foreign policy pool (in combination with its risk of loss or opportunity for gain in respect of the agreements or arrangements) can reasonably be considered to be determined, in whole or in part, by reference to the fair market value, revenue, income, loss or cash flow (or other similar criterion) in respect of a "tracked policy pool" that is insured by other parties, and at least 10% of the tracked policy pool is comprised of Canadian risks.
Budget 2014 indicates that this proposal is intended to challenge "sophisticated tax-planning arrangements" referred to as "insurance swaps" that involve transferring Canadian risks (the tracked policy pool), originally insured in Canada, to a foreign affiliate, which then exchanges such risks with a third party for foreign risks (the foreign policy pool) in a manner that ensures the overall risk profile and economic returns of the affiliate remain essentially unchanged.
The proposal would apply to taxation years of a taxpayer beginning on or after Budget Day.
Back-to-Back Loan Rules
Modifications are proposed for two different areas of the ITA, the non-resident withholding tax and thin capitalization rules, to address certain tri-party financing arrangements.
Under existing law, interest paid by a Canadian taxpayer to a non-resident that does not deal at arm's length with the taxpayer is subject to non-resident withholding tax, subject to tax treaty relief. The "thin capital" rules of the ITA limit the deduction in computing income otherwise available in respect of interest paid by a corporation (extended to partnerships and trusts) on outstanding debts to a specified non-resident, where the amount of such debts exceeds a debt to equity ratio of 1.5:1. A specified non-resident would include the non-resident parent of a Canadian corporation or other non-resident person not dealing at arm's length with a specified shareholder of the Canadian corporation. The payment of such non-deductible interest is recharacterized as a payment of dividends for withholding tax purposes. The thin capital rule is subject to an existing anti-avoidance provision in respect of back-to-back loans. Very generally, this provision applies where loans are advanced by a non-resident to an intermediary, on condition that the amount be on-loaned to the Canadian taxpayer. In that case the loan is treated as having been made by the specified non-resident to the Canadian taxpayer.
Budget 2014 indicates that some taxpayers have sought to avoid either or both the application of the thin capital rules and withholding tax on non-arm's length interest by the use of arrangements that generally interpose a third party (such as a foreign bank), between related taxpayers (such as a foreign parent and its Canadian subsidiary), in an attempt to avoid the application of rules that would otherwise apply on a loan made directly between the two taxpayers. Budget 2014 therefore introduces what is referred to as specific anti-avoidance measures to address such arrangements. It proposes to expand the application of the thin capital back-to-back loans rule effective after the 2014 taxation year, and to introduce a statutory anti-avoidance rule to impose withholding tax on interest on back-to-back loans effective for interest paid or credited after 2014.
In addition to loans advanced on condition that the amount be on-loaned, and subject to the more detailed rules of the Budget 2014 proposals, the expanded back-to-back loan rules will apply to arrangements where, as part of a transaction of series of transactions, a Canadian taxpayer becomes obligated to pay an amount to an intermediary, and (i) a non-resident person has directly or indirectly provided to the intermediary an interest in property as security for the Canadian taxpayer's obligation, or (ii) the intermediary has outstanding a debt or other obligation to pay an amount to a non-resident person for which recourse is limited to the Canadian taxpayer's obligation. In any such case, for purposes of applying the thin capital rules and withholding tax rules of the ITA, the Canadian taxpayer would generally be deemed to owe an amount directly to the non-resident person. The determination of the amount deemed so owing is made having regard to the fair market value of the property in which the security is provided, or the amount of the loan or limited recourse obligation, as applicable. For withholding tax purposes, interest would be deemed to be payable on such amount owing by the Canadian taxpayer to the non-resident at the same rate and at the same times as is payable to the intermediary.
Budget 2014 confirms that the provision of an unsecured guarantee will not be treated as a provision of a security interest in property for purposes of the new rules. On this basis, a foreign parent's unsecured guarantee of a Canadian subsidiary's debt obligations would not be subject to these new rules.
Consultation on Tax Planning by Multinational Enterprises
On July 19, 2013, the Organization of Economic Co-operation and Development (OECD) released its Action Plan on Base Erosion and Profit Shifting (the BEPS Plan) aimed at curtailing perceived abuses of national tax systems by multinational enterprises. The BEPS Plan focuses on tax-planning strategies that exploit differences in domestic tax rules and international standards that shift profits to jurisdictions with favourable tax treatment where there may be little or no economic activity and addresses such key areas as the digital economy, coherence of corporate income tax, treaty shopping, transfer pricing as well as transparency, certainty and predictability of taxation.
As part of Canada's response to the BEPS Plan, the government is requesting input from stakeholders on a number of questions intended to inform Canada's approach to developing anti-BEPS measures. These questions relate to:
- the impact of international tax planning by multinational enterprises on other participants in the Canadian economy;
- the international corporate income tax and sales tax issues identified in the BEPS Plan that should be considered the highest priorities for examination and potential action by the government;
- other corporate income tax or sales tax issues related to improving international tax integrity that should be of concern to the government;
- considerations that should guide the government in determining the appropriate approach to take in responding to the issues identified;
- whether concerns about maintaining Canada's competitive tax system would be alleviated by coordinated multilateral implementation of base protection measures; and
- actions that the government should take to ensure effective collection of sales tax on e-commerce sales to residents of Canada by foreign-based vendors.
The consultation period on these questions ends on June 12, 2014.
Consultation on Treaty Shopping
In Budget 2014 the government signals its intention to proceed with the anti-treaty shopping initiative first announced in Budget 2013. While no draft legislation is included in Budget 2014, a lengthy exposition of the government's proposal in this regard is included, along with five detailed examples explaining when and how such a rule would apply.
The new anti-treaty shopping rule would be enacted as part of domestic law and apply to Canada's tax treaties generally. It will apply a general "avoidance transaction" approach and will be based on a test that examines the main purposes of the transaction and applies certain positive and negative presumptions to determine whether "one of the main purposes" for undertaking the transaction was to obtain a benefit under a tax treaty.
Comments on the proposed new rule may be submitted to the Department of Finance Canada (Finance) for consideration until April 12, 2014.
The proposed new rule follows in the wake of the discussion paper released by Finance in August 2013, and the ensuing consultation process which ended in December 2013. Budget 2014 also indicates that the new Canadian rule is being developed in light of the OECD's BEPS initiative, which, as one of its objectives, seeks to counter the abuse of tax treaties. Consequently, the OECD's recommendations in this regard, to be released in September 2014, will factor into the new Canadian rule.
It is suggested that the new rule could be added to the Income Tax Conventions Interpretation Act. No mention is made of the existing general anti-avoidance rule, and its current application to tax benefits arising under Canada's tax treaties.
The new rule will only apply to taxation years commencing after enactment. The government also requests comments as to whether transitional relief would be appropriate (which may indicate that it has not yet decided that any such relief should be provided).
What is Treaty Shopping?
In Budget 2014 the government again seeks to circumscribe the ambit of the proposed new rule by defining treaty shopping in the following way, "arrangements under which a person not entitled to the benefits of a particular tax treaty with Canada uses an entity that is a resident of a state with which Canada has concluded a tax treaty to obtain Canadian treaty benefits."
Rationale for Domestic, Purpose-Based Rule
Budget 2014 indicates that the government has decided that the new rule will take the form of a general domestic rule based on a "one of the main purposes" test. In doing so, the government rejects the alternative approaches which it was considering, namely a more specific rule (such as a US-style "limitations of benefits" rule) or renegotiation of some or all of Canada's tax treaties. In doing so, the government suggests that a general, domestic law-based approach "may serve to prevent a wider range of treaty shopping arrangements".
The government believes that, in opting for a "one of the main purposes" approach, it is hewing to a standard that is "relatively familiar to Canadian taxpayers, tax professionals and Canada's tax treaty partners". It grounds this belief in the existing provisions of certain of Canada's existing tax treaties.
It also rejects the contention that enactment of a domestic rule will implicitly alter the balance of compromises reached in the negotiation of Canada's tax treaties, noting that it does not believe that it is obliged under existing tax treaties to grant Canadian treaty benefits in respect of abusive arrangements.
Features of the New Rule
Budget 2014 states that the new rule will (i) focus on avoidance transactions and (ii) contain specific provisions setting out the ambit of its application. Very importantly, the new rule will not deny treaty benefits that arise in the course of ordinary commercial transactions, and in cases where it does apply, it will operate to allow such treaty benefits as would be reasonable in the circumstances.
The new rule will be formulated taking into account the following specifics:
Main purpose provision: subject to the relieving provision detailed below, a tax treaty benefit resulting from a transaction, or series of transactions, having as one of its main purposes obtaining the treaty benefit will be denied in respect of the relevant treaty income. It should be noted that domestically "one of the main purposes" tests have not been interpreted as imposing a very high threshold. Budget 2014 very significantly states, however, with respect to ordinary commercial transactions, that the proposed new rule will not operate to deny a treaty benefit "solely because obtaining [the] benefit was one of the considerations for making the investment." The main purpose provision is considered in the examples, notably examples #3 and #4.
Conduit presumption: there will be a rebuttable presumption that a transaction or series of transactions fails the "main purposes" test if the "relevant treaty income is primarily used to pay, distribute or otherwise transfer, directly or indirectly, at any time or in any form, an amount to another person or persons that would not have been entitled to an equivalent or more favourable benefit had the other person or persons received the relevant treaty income directly". This conduit presumption is open-ended as to the timing and manner of the flow-through, and is not restricted to transactions involving related or non-arm's length persons. The operation of the conduit presumption is considered in examples #1, #2, #4 and #5.
Safe harbour presumption: there would be a rebuttable presumption that the main purpose provision is not satisfied in any of the following three circumstances:
- the person (or a related person) carries on an active business (other than managing investments) in the treaty jurisdiction. Where the relevant treaty income is derived from a related person in Canada, it will be required that the active business in the treaty jurisdiction be substantial when compared with the activity in Canada giving rise to the relevant treaty income;
- the person is not controlled, legally or factually, by another person or persons that would not have been entitled to an equivalent or more favourable benefit had the other person or persons received the relevant treaty income directly; or
- the person is a corporation or trust whose shares or units are regularly traded on a recognized stock exchange.
The safe harbour presumption will, however, remain subject to the conduit presumption. The first safe harbour presumption (the active business exclusion) is considered in example #5.
Relieving provision: With respect to a tax treaty benefit which is subject to the main purpose provision, the benefit is still to be provided, "to the extent that it is reasonable having regard to all the circumstances."
Example 1 – Assignment of Income: The first example, which is loosely based on the Canadian tax case Velcro (2012 TCC 57), involves ACo, a resident of a country that has no tax treaty with Canada, assigning to BCo, a resident of a country that has such a treaty, the right to receive royalties payable by a Canadian subsidiary of ACo (Canco). In exchange for the assigned royalty, BCo remits to ACo 80% of the royalties received from Canco within 30 days of receipt. The example indicates that such a structure under the proposed new rule would be caught by the conduit presumption, and treaty benefits on the royalty flows would be denied, at least to the extent of the remittances of Canco royalties from the treaty resident entity to the non-treaty entity. If, moreover, a majority of the royalty flows were retained by the treaty resident entity, and not flowed through to the non-treaty entity, it might be argued that the "primarily" requirement needed to trigger the conduit presumption was not satisfied.
Example 2 – Payment of Dividends: The second example is inspired by the Canadian tax case Prévost Car (2008 TCC 231, aff'd 2009 FCA 57), which addressed the issue of beneficial ownership of dividends paid by a Canadian-resident corporation under the Canada-Netherlands Income Tax Convention. An investment made by an UK company and a Swedish company was structured using a holding company resident in the Netherlands. The rate of Canadian withholding tax on dividends paid to the Netherlands holding company was 5%, which was less than the rate that would have applied had the investment been held directly from the UK (10%) and Sweden (15%). The example indicates that such a structure under the proposed new rule would also be caught by the conduit presumption, and the 5% rate of withholding tax would be denied. In this case, the relieving provision may apply, "to the extent ... reasonable having regard to all the circumstances," so as to prevent an increase in the withholding rate to the full 25% non-treaty rate. In determining what would be reasonable in the circumstances, a relevant consideration would be whether the shareholders would be taxable on the dividend paid by the holding company in their respective tax jurisdictions.
Example 3 – Change of Residence: The third example is inspired by the Canadian tax case MIL Investments (2006 TCC 460, aff'd 2007 FCA 236), which addressed a non-resident taxpayer's eligibility for a capital gains exemption under the Canada-Luxembourg Income Tax Convention. The taxpayer was originally resident in the Cayman Islands, but shifted its residence to Luxembourg shortly before disposing of taxable Canadian property. The example assumes that the taxpayer retains the sale proceeds, and consequently the conduit presumption does not apply. The example concludes however that the treaty benefit would be denied on the basis of the main purpose provision. If however there was no migration and the Canadian investment was made at a time when the taxpayer was resident in the treaty jurisdiction, the example indicates that the taxpayer's eligibility for treaty benefit would require a consideration of all the relevant circumstances, including the lapse of time between the making of the Canadian investment and its realization.
Example 4 – Bona Fide Investments (of a Collective Investment Vehicle): The fourth example considers the application of the proposed new rule to Canadian investments made by a portfolio manager on behalf of a collective investment vehicle (CIV) resident in a jurisdiction with which Canada has a tax treaty. Because the CIV distributes all of its income annually and a majority of its investors are non-treaty residents, the conduit presumption is said to apply. The conduit presumption, however, is rebuttable and the example concludes that there are sufficient facts outlined (taking into account the factors underlying investors' decisions to invest in the CIV and the lack of influence of the investors' tax position on the CIV's decision to invest in Canada) to rebut the presumption. The conclusion is that the main purpose provision would not deny treaty benefits.
Example 5 – Safe Harbour (Active Business): The fifth example considers the interaction between the conduit presumption and the safe harbour presumption with respect to interest payments made by a Canadian corporation to a related financing company which is resident in and carries on an active business in a country with which Canada has concluded a tax treaty. The activities of the financing company are substantial in comparison with the activities of the Canadian corporation. The example concludes that the new rule would not apply taking into account all the circumstances.
The Next Step: In Budget 2014, the government has provided a clearer indication of its intentions with respect to treaty shopping than in the August 2013 discussion paper. Taxpayers and their advisors must begin to adjust to a new reality. The consultation period beginning today does offer taxpayers an opportunity to express their views as to how the government's apparent determination to legislate in this area can be implemented most appropriately, especially with respect to transitional relief.
Charities and Non-Profit Organizations (NPOs)
Donations of Certified Cultural Property
The government is concerned that charitable donations of certified cultural property could be abused by tax shelter promoters given the inherent uncertainties in appraising the value of art and artifacts. Consequently, Budget 2014 proposes to generally limit the charitable donation deduction for such donations to the cost to the donor of such property. Currently, all donations of certified cultural property are exempt from the general rule for charitable donations that deems the value of a gift of property to be no greater than its cost to the donor if, generally, the donor acquired the property as part of a tax shelter gifting arrangement or held the property for a short period. Budget 2014 narrows the exemption to exclude certified cultural property acquired under a gifting arrangement that is a tax shelter. Other donations of certified cultural property will not be affected by this measure. This measure will apply to donations made on or after Budget Day.
Donations by an Estate
Budget 2014 proposes to provide more flexibility to donors and estate trustees with respect to the tax treatment of charitable donations made in the context of a death occurring after 2015. Donations made by will or by designation under a registered retirement savings plan, registered retirement income fund, tax-free savings account or life insurance policy are currently deemed to have been made by an individual immediately before his or her death. Budget 2014 proposes that such donations will be deemed to have been made by the individual's estate at the time the donated property is actually transferred to a qualified donee, provided the transfer is made within 36 months following the individual's death. Estate trustees will also be able to allocate the available donation among any of (1) the taxation year of the estate in which the donation is made, (2) an earlier taxation year of the estate, or (3) the last two taxation years of the individual. The current rules for determining the annual donation credit limits for a taxation year as well as for determining eligible property for designation donations will continue to apply.
Donations of Ecologically Sensitive Land
Budget 2014 proposes to extend the carry-forward period for qualifying donations of ecologically sensitive land (or of easements, covenants and servitudes thereon) made on or after Budget Day from five to 10 years.
Budget 2014 announces the government's intention to review whether the exemption from income tax for non-profit organizations remains properly targeted and whether sufficient transparency and accountability provisions are in place. The government plans to release a consultation paper and consult with stakeholders on this issue.
Personal Income Tax Measures
Tax on Split Income
The ITA currently includes provisions that are intended to limit income splitting between parents and their minor children. (These provisions are often referred to as the "kiddie tax" provisions.) Under these provisions, certain types of income of a minor child will be taxed at the highest marginal tax rate applicable to individuals. One such type of income is income allocated to the minor child by a partnership or trust that can reasonably be considered to be derived from the provision of property or services to, or in support of, a business carried on by certain persons related to the minor child. Budget 2014 proposes to expand the kiddie tax provisions to also apply to income allocated to a minor child by a partnership or trust that can reasonably be considered to be derived from a source that is a business or from the rental of property if a person related to the minor child is actively engaged in the activity of the partnership or trust that gave rise to the business income or income from the rental of property or, in the case of a partnership, the related person is a member of the partnership. In essence, the kiddie tax provisions are expanded to apply not only to income of a minor child from a partnership or trust that provides services or property to the business of the parent, but also to apply to income of a minor child from a partnership or trust that directly engages in the business carried on by the parent.
Mineral Exploration Tax Credit
Individuals (other than trusts) who invest in flow-through shares may be entitled to additional tax benefits in addition to the renounced exploration expenses available on all flow-through shares. Where certain qualifying expenditures (essentially expenses incurred in mining exploration above or at ground level) are incurred and renounced to a holder of flow-through shares who is an individual (other than a trust), that holder is entitled to an investment tax credit equal to 15% of the renounced qualifying expenditures. This tax credit on "grass-roots" surface exploration expenditures is called the "mineral exploration tax credit". As has been the case over the last several budgets, Budget 2014 proposes to extend the 15% mineral exploration tax credit for another year.
Graduated Rate Taxation of Trusts and Estates
Under current law, certain trusts are taxed on their undistributed income at the top marginal tax rate for individuals while other trusts are able to access graduated tax rates and therefore subject to a lower overall average rate of tax.
Budget 2014 proposes to generally proceed with measures announced in Budget 2013 and described in a consultation paper released by the Department of Finance on June 3, 2013 by imposing the top marginal tax rate of 29% on the taxable income of testamentary trusts and grandfathered inter vivos trusts (i.e. certain trusts created before June 18, 1971), subject to two exceptions. Graduated rates will continue to apply during the first 36 months of a testamentary trust's existence, measured from the date of the testator's death. Graduated rates will also continue to apply to trusts with beneficiaries who are eligible for the federal Disability Tax Credit. Details of the parameters of this second exception will be released at a later date.
The ITA currently provides beneficial treatment to testamentary trusts and grandfathered inter vivos trusts under certain provisions which include:
- an exemption from the income tax instalment rules;
- an exemption from the requirement that trusts have a calendar year taxation year and fiscal periods that end in the calendar year in which the period began;
- the basic exemption in computing alternative minimum tax;
- preferential treatment under Part XII.2 of the ITA;
- classification as a personal trust without regard to the circumstances in which beneficial interests in the trust have been acquired;
- the ability to make investment tax credits available to a trust's beneficiaries; and
- more flexible timing with respect to the issuance of reassessments and refunds and the filing of objections to reassessments.
Budget 2014 proposes to amend these rules by providing that they do not apply to testamentary trusts after the 36-month period or to grandfathered inter vivos trusts.
Testamentary trusts that do not already have a calendar year taxation year will be deemed to have a taxation year-end on December 31, 2015 (or in the case of an estate, at the end of its 36-month period, if such period ends after 2015).
These measures will apply to the 2016 and subsequent taxation years.
Non-Resident Immigrant Trusts
The non-resident trust rules of the ITA provide that where property is contributed by a Canadian resident taxpayer to a non-resident trust, the trust may be deemed to be a resident of Canada for most purposes of the ITA. An exemption from these rules is provided for a contributor who is an individual immigrant resident in Canada for a total period of not more than 60 months. The exemption is proposed to be eliminated. This measure will apply to a trust for taxation years that end after 2014, provided that (a) at any time after 2013 and before Budget Day the exemption applies in respect of the trust (assuming for these purposes that the trust had a taxation year ending in that period), and (b) no contributions are made to the trust on or after Budget Day and before 2015. Otherwise, the measure will apply to a trust for taxation years that end on or after Budget Day.
Goods and Services Tax/Harmonized Sales Tax Measures
Health Care Sector
Budget 2014 proposes the following changes to the application of GST/HST in the health care sector, applicable to supplies made after Budget Day:
- the exemption for training that is specially designed to assist individuals with a disorder or disability in coping with the effects of the disorder or disability, or to alleviate or eliminate those effects, will be expanded to include, in specified circumstances, the services of designing such training;
- professional services rendered by acupuncturists and naturopathic doctors to individuals will become exempt from GST/HST; and
- specified eyewear, specially designed to treat or correct a defect of vision by electronic means, will become zero-rated.
Election for Closely Related Parties
Under the existing GST/HST provisions, an election can be made to not account for tax on certain transactions between registrants that are resident in Canada, engaged exclusively in commercial activities, and members of the same closely related group. However, the election may not be available to a newly-established member of a closely related group at the time of the new member's initial acquisition of assets from another member of that group if the new member does not have any other property before making the election.
Budget 2014 proposes amendments to the conditions for making this group relief election in circumstances such as those described above, effective January 1, 2015. At first blush, the amendments would appear to make the election more accessible to newly-established members of a closely related group. The amendments provide that such member will be eligible to make the election where it has no property or where its only property is financial instruments or "property having a nominal value." However, in that case, there is a new condition that the member must reasonably expect to make taxable supplies throughout the twelve-month period after the election is made. That new condition may be problematic in many circumstances. Further, the new reference to "property having a nominal value" could give rise to issues of interpretation surrounding the meaning of "nominal" in this context.
Budget 2014 also proposes to introduce a filing requirement in respect of this group relief election. Under the existing provision, the election form that is executed by the parties must be kept by the parties for audit purposes, but is not required to be filed with the CRA. Budget 2014 proposes that, effective January 1, 2015, parties to a new election will be required to file their executed election form in prescribed manner with the CRA. Parties to an election that was made before January 1, 2015 and that remains in effect on that date will also have to comply with this filing requirement, but will have until January 1, 2016 to do so.
In addition, Budget 2014 proposes that parties to this group relief election (or persons that conduct themselves as if such election were in effect) be subject to a joint and several (or solidary) liability provision with respect to the GST/HST liability that may arise in relation to supplies made between the parties on or after January 1, 2015.
Budget 2014 announces that the government intends to introduce draft legislative proposals later in the year to extend the application of an existing GST/HST election relating to joint ventures. The election simplifies compliance for joint venture participants by allowing them to elect to have one person (the "operator") be responsible for all of the GST/HST accounting and filing in connection with the joint venture. Currently, the election is available only in respect of a limited number of prescribed joint venture activities. Budget 2014 proposes to extend the election to any joint venture where the activities of the joint venture, and the activities of each of the participants outside the joint venture, are exclusively commercial activities that do not involve the making of any tax-exempt supplies.
Enforcement of GST/HST Registration Requirement
Budget 2014 proposes to strengthen the CRA's power to enforce the requirement for a person to be registered for GST/HST purposes if the person makes over $30,000 in taxable supplies annually. The proposal is to give the Minister of National Revenue explicit discretionary authority to register, and assign a GST/HST registration number to, a person who has failed to comply with the requirement to register, even after having been notified of that requirement by the Minister. The CRA will continue to first contact non-compliant persons to have them register as required. If, after such contact the person does not register, the CRA will issue a formal notification indicating that the business will be registered for GST/HST purposes effective 60 days from the date of the notice. This measure will come into force upon Royal Assent.
Other Commodity Tax and Customs Tariff Measures
Budget 2014 proposes to increase the rates of excise duty on various tobacco products. These changes will take effect after Budget Day.
Standardizing Sanctions Related to False Statements in Excise Tax Returns
Budget 2014 proposes to add a new administrative monetary penalty, and to amend the existing criminal offence, for the making of false statements or omissions in an excise tax return and related offences under the non-GST/HST portion of the Excise Tax Act (ETA). These provisions will be consistent with the GST/HST portion of the ETA. These measures will apply to excise tax returns filed the day after this proposal comes into force upon Royal Assent.
Customs Tariff Measures: Offshore Oil and Gas Development
Budget 2014 proposes to eliminate the 20% most favoured nation rate of duty on imported mobile offshore drilling units. This tariff elimination will be given effect by amendments to the Customs Tariff and will be effective in respect of goods imported into Canada on or after May 5, 2014.
Outstanding Tax Measures
It has been customary for recent budgets to list previously announced, but not yet enacted tax measures; however, the government is under no legal obligation to do so in the budget or elsewhere. Budget 2014 announces that the government will introduce legislation to require the Minister of Finance to table in Parliament annually a list of the government's outstanding tax measures. The first report of any new government would be tabled in the second year of its mandate. This measure is intended to promote transparency regarding the status of proposed tax measures.
Budget 2014, in accordance with the government's customary disclosure of previously announced measures, confirms the government's intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release:
- proposed changes to automobile expense deduction limits and the prescribed rates for the automobile operating expense benefit for 2012 announced on December 29, 2011 and for 2013 (and 2014) announced on December 28, 2012;
- legislative proposals released on November 27, 2012 relating to income tax rules applicable to Canadian banks with foreign affiliates;
- legislative proposals released on July 12, 2013 relating to income tax and excise duties and sales tax technical amendments;
- legislative proposals released on August 16, 2013 relating to the foreign affiliate dumping rules;
- legislative proposals released on August 23, 2013 relating to changes to the life insurance policyholder exemption test;
- modifications to the Customs Tariff to implement the Notice of Ways and Means Motion tabled by the government in Parliament on November 22, 2013, which clarified the tariff classification of certain imported food products;
- legislative proposals released on November 27, 2013 relating to the tax rules governing labour-sponsored venture capital corporations;
- legislative proposals released on January 9, 2014 to require that international electronic funds transfers of $10,000 or more be reported to the CRA;
- legislative proposals released on January 17, 2014 clarifying GST/HST rules to prevent input tax credit claims that exceed tax actually paid; and
- legislative proposals released on January 24, 2014 relating to the provision of a GST/HST exemption for hospital parking for patients and visitors.
To access the 2014 budget, click here.
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