PLEASE NOTE: THIS INFORMATION WAS ORIGINALLY SUBMITTED BY COOPERS & LYBRAND, CANADA
Earlier this week, the federal Minister of Finance tabled an extensive package of tax legislation in the House of Commons. This package received first reading and is now formally Bill C-28. It should eventually be passed, with some minor modifications, by the House and Senate before March 31, 1998. A small segment of the Bill arises from the February 1997 federal budget proposals, but most of the 460-plus pages of legislation comprise technical amendments to numerous sections of the Income Tax Act. Many of these changes will have retroactive effect - some significant ones as far back as 1994!
The following gives a brief description of some of the items of greater consequence. This list is not exhaustive, so readers are advised to refer to the actual legislation where transactions of any significance are contemplated.
The amendments introduce capital gains relief for gifts of certain listed securities, increase the general charitable donations income limit, deny charitable donation treatment for loan-back arrangements, and modify the rules for donations of private company shares to public charities. (In a separate announcement, the government also extended to January 31, 1998 the deadline for making most charitable donations that may be claimed for 1997 tax years.)
These amendments, which were proposed in the February 1997 budget and released in draft form on September 11, 1997, implement, in conformity with the revised transfer pricing guidelines of the Organization for Economic Co-operation and Development, a transfer pricing regime for transactions between non-arm's-length parties. The legislation includes new contemporaneous documentation requirements and imposes a significant penalty for those who do not determine and use arm's-length transfer prices.
The proposed amendments address the utilization of losses by what are termed "affiliated" parties where property is transferred between them. The amendments, which generally apply to transfers of property that take place after April 26, 1995, curtail the transferability of such losses.
Matchable Expenditure Rules
These amendments affect the income tax treatment of transactions under which investors achieve tax shelter benefits by financing the business expenses of other taxpayers in exchange for a right to receive future income. These amendments were originally announced in a news release issued by the Minister of Finance on November 18, 1996 (with extended transitional relief for certain transactions announced December 19, 1996 and July 30, 1997).
Bill C-28 includes measures to prevent perceived abuses through tax shelter promotions by affecting limited-recourse financing, extending the income base on which the alternative minimum tax is calculated and modifying the tax shelter identification rules. Many of these changes apply retroactively back to December 1, 1994!
Shares of Non-Resident Corporations
These amendments treat certain shares of non-resident corporations, even when held by another non-resident corporation, as taxable Canadian property and thereby subject to tax in Canada on their disposition after April 26, 1995. (The fourth Protocol to the Canada-United States Tax Treaty would exempt the shares of U.S. corporations. It is expected that the exchange of instruments of ratification will occur the week of December 15.)
Adventures in the Nature of Trade
These amendments implement the measures requiring that, for income tax purposes, inventory held as an adventure or concern in the nature of trade must be valued at its historical cost, rather than at the lower of cost or fair market value. Generally, this means that accrued losses on such property may be recognized only on disposition. These amendments also include anti-avoidance rules deferring the recognition of a loss where such property is transferred to a non-arm's-length person. These changes generally apply for tax years ending after December 20, 1995.
Foreign Property Limits for Deferred Income Plans
Bill C-28 measures address uncertainties with respect to the existing rules on investments in foreign property by deferred income plans and seek to ensure that shares and indebtedness issued by Canadian companies will not be "foreign property" only if the issuer has a substantial presence in Canada. These amendments apply to property acquired after 1995.
Unremitted Source Deductions
This legislation incorporates amendments first announced by press release April 7, 1997 relating to the deemed trust provisions securing priority for the Crown in relation to certain statutory withholdings.
Film or Video Production Services Tax Credit
The new Film or Video Production Services Tax Credit ("FVPSTC"), which was announced on October 28, 1997, is a refundable income tax credit available to corporations involved in film or video production services provided in Canada. The credit is equal to 11% of salary and wages paid to Canadian residents in respect of their services in Canada. The FVPSTC involves a certification process through the Canadian Audio-Visual Certification Office, and includes measures to prevent taxpayers from claiming the FVPSTC and the Canadian Film Tax Credit in respect of the same production.
Bill C-28 incorporates proposals released in draft form on November 14, 1997, which harmonize the tax treatment of impaired loans (doubtful debts) with the new accounting standards established by the Canadian Institute of Chartered Accountants with respect to impaired loans.
The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a Coopers & Lybrand professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your local office.
David W. Steele PricewaterhouseCoopers 145 King Street West Toronto, Ontario M5H 1V8 Canada Fax: 1-416-941-8415 E-mail: Click Contact Link
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