Minister of Finance Joe Oliver today tabled the 2015 Federal Budget (the "Budget"), his first budget as Minister of Finance, entitled "Strong Leadership: A Balanced-Budget, Low-Tax Plan for Jobs, Growth and Security".
We are pleased to provide our summary of tax measures contained in the Budget.
The Budget proposed no changes to the general corporate income tax rates or to the Goods and Services Tax. Federal small business corporate tax rates will be reduced from 11% to 9% over the 2016 to 2019 taxation years, with corresponding changes to the dividend tax credit applicable to non-eligible dividends. The accelerated CCA write-off for manufacturing and processing equipment will be extended.
There are no individual tax rate or tax bracket changes in the Budget. Beneficial tax measures impacting individuals include an increase to the TFSA annual contribution limit to $10,000, increased flexibility for withdrawals from registered retirement income funds, revisions to the Family Tax Cut Credit and the introduction of a new Home Accessibility Tax Credit. The Budget also increases the Lifetime Capital Gains Deduction to $1 million of capital gains realized by an individual on the disposition of qualified farm or fishing property.
International tax changes include changes to the withholding tax regime for non-resident employers who send their non-resident employees to work in Canada for short periods of time, proposed streamlined reporting requirements for foreign assets owned by Canadian residents (i.e., changes to Form T1135) and anti-avoidance rules for captive insurance companies. The Budget also reinforces Canada's commitment to address base erosion and profit shifting through its participation in the OECD consultation process and to balance tax integrity with competitiveness.
There were some favourable proposals of importance to the charitable sector. The Budget proposes an exemption from income tax to individual and corporate donors on capital gains in respect of certain shares of private corporations and real estate. As well, the Budget addresses the investment of registered charities in limited partnerships and will allow a registered charity to hold certain investments in limited partnerships without the charity being considered to be carrying on the non-permitted activity of engaging in a business.
Budgets in recent years have focused on integrity and tax fairness measures, sometimes described as closing tax loopholes. The Budget continues this approach, but to a lesser extent, with the main proposed changes being modifications to the dividend rental arrangement rules and synthetic equity arrangements and a change relating to deemed capital gains.
Many of the proposed tax changes are scheduled to be implemented over a number of taxation years.
From a fiscal perspective, the Budget reports an improved budgetary balance in comparison to recent federal budgets and economic updates. The 2015 deficit is now forecasted to be $2 Billion (compared to a 2015 deficit of $2.9 Billion that was projected in the 2014 budget) and a budget surplus of $1.4 Billion is now forecast for 2016 to be followed by additional surpluses in subsequent years.
It was hoped that the Budget would propose changes to recently enacted legislation regarding estates and trusts as the impact of the recent changes on individuals, estates and trusts has caused concern among tax and estate practitioners. Unfortunately, the Budget did not propose any relieving changes or even comment on any review of these tax measures.
Our summary of tax highlights contained in the Budget follows.
INTERNATIONAL TAX MEASURES
Income Tax Withholding Requirements for Non-Resident Employers
Current Withholding Income Tax Requirements for Non-Resident Employers
Canada generally taxes the employment income of non-residents earned in Canada. However, an employee who is a resident of a country that has a tax treaty with Canada may be exempt from Canadian tax on employment income from a non-resident employer if certain conditions are met.
For example, a U.S.-resident employee will generally be exempt from Canadian taxation under the Canada-US Tax Treaty in respect of remuneration from employment in Canada if such remuneration does not exceed $10,000 (Canadian Dollars), or the employee is present in Canada for a period or periods not exceeding, in the aggregate, 183 days in any 12-month period commencing or ending in the fiscal year concerned and the remuneration is not paid by, or on behalf of, a person who is a resident of or has a permanent establishment in Canada.
An employer (including a non-resident employer) is generally required to withhold and remit to the Canada Revenue Agency (the "CRA") amounts on account of the income tax liability of an employee working in Canada, even if the employee is a non-resident who is expected to be exempt from Canadian tax because of a tax treaty.
Current Regulation 102 Waiver Regime
Under the current regime, it may be possible for a non-resident employee or his or her employer, on the employee's behalf, to obtain an employee-specific waiver (generally referred to as "Regulation 102 Waiver") from the CRA in order to be relieved from the obligation to withhold. The current waiver regime has been criticized as inefficient, because each waiver may be granted only in respect of a specific employee and for a specific time period.
Proposed Amendments to Requirement to Withhold Income Taxes by Non-Resident Employers
In order to reduce the administrative burden of businesses engaged in cross-border trade and commerce, the Budget proposes to provide an exception to the withholding requirements for payments by "qualifying non-resident employers" to "qualifying non-resident employees".
The Budget defines a "qualifying non-resident employee" as an employee who:
- is, at that time, resident in a country with which Canada has a tax treaty;
- is not liable to tax under Part I of the Income Tax Act (Canada) (the "Tax Act") in respect of such payment because of that treaty; and
- is not present in Canada for 90 or more days in any 12-month period that includes the time of the payment.
An employer (other than a partnership) will be a "qualifying non-resident employer" at any time if:
- it is, at that time, resident in a country with which Canada has a tax treaty;
- it does not, in its taxation year or fiscal period that includes the particular time, carry on business through a permanent establishment in Canada; and
- it is certified by the Minister of National Revenue at the time of the payment.
An employer that is a partnership will be considered a "qualifying non-resident employer" if it meets the second and third conditions applicable to an employer described above and not less than 90% of the income or loss of the particular partnership, for the fiscal period that includes the time of the payment, is allocated to members resident in a country with which Canada has a tax treaty. Where the income or loss of the partnership is nil for the period, the income of the partnership for the period will be deemed to be $1,000,000 for the purpose of determining a member's share of the partnership's income.
Certification may be issued upon the employer's application to the Minister of National Revenue in prescribed form. Certification may be denied or revoked if the employer fails to meet or maintain the conditions described above or to comply with its Canadian tax obligations.
The Budget proposals do not impact an employer's reporting obligations under the Tax Act.
The employer's certification will not affect the non-resident employee's Canadian tax liability. Employers will continue to be liable for any withholding and remitting in respect of non-resident employees found not to have met the conditions set out above.
However, no penalty will apply to a "qualifying non-resident employer" for failing to withhold in respect of a payment if, after reasonable inquiry, the employer had no reason to believe, at the time of payment, that the employee did not meet the "qualifying non-resident employee" conditions set out above.
This measure will apply in respect of payments made after 2015.
Streamlining Reporting Requirements for Foreign Assets (Form T1135)
Currently, taxpayers who own "specified foreign property" with a total cost of more than $100,000 must file a Foreign Income Verification Statement (Form T1135) with the CRA. Specified foreign property may include shares of non-resident corporations, interests in non-resident trusts that are acquired for consideration, debt owed by non-residents, funds or intangible property held outside of Canada, and tangible personal property situated outside of Canada.
The CRA introduced a revised Form T1135 in 2013 that required a significant increase in the amount of information disclosed by taxpayers. The increased disclosure requirements have created a compliance burden for some taxpayers. It appears the Federal Government has decided to reduce the compliance burden on taxpayers who hold a relatively small amount of specified foreign property. Under a revised form currently under development, a taxpayer will be able to use a new simplified foreign asset reporting system provided the total cost of the taxpayer's specified foreign property is less than $250,000 throughout the year. In all other cases, the current reporting requirements will continue to apply.
The Tax Act treats foreign accrual property income ("FAPI") earned from a controlled foreign affiliate of a taxpayer resident in Canada as taxable in the hands of the Canadian taxpayer on an accrual basis, whether or not actually distributed back to Canada.
Under the current provisions of the Tax Act, income of a foreign affiliate ("FA") from the insurance of risks in respect of persons resident in Canada, property situated in Canada or businesses carried on in Canada (defined in the Budget as "Specified Canadian Risks") is FAPI, unless certain conditions are met. This specific anti-avoidance rule was amended in 2014 to curtail certain tax-planning arrangements known as "insurance swaps". These arrangements were designed to circumvent the existing anti-avoidance rule while allowing the affiliate to retain its economic exposure to a pool of Canadian risks.
The Federal Government is proposing to modify this anti-avoidance rule further as it has become aware of alternate arrangements that are intended to achieve tax benefits similar to those that the 2014 amendment was intended to thwart. In the alternate arrangements, the affiliate receives consideration with an embedded profit component (based upon the expected return on the pool of Canadian risks) in exchange for ceding its Specified Canadian Risks.
The Federal Government is of the view that the 2014 amendment may not apply to these alternative arrangements if the affiliate does not enter into an insurance swap transaction that provides it with economic exposure to the Specified Canadian Risks. Therefore, specific legislative action is proposed to clarify that these arrangements give rise to FAPI.
Budget 2015 proposes to broaden the existing anti-avoidance rule in the FAPI regime to ensure that profits of a Canadian taxpayer from the ceding of Specified Canadian Risks remain taxable in Canada. More particularly, it will be amended so that:
- a FA's income from services in respect of the ceding of Specified Canadian Risks is included in computing the affiliate's FAPI; and
- for these purposes, when an affiliate cedes Specified Canadian Risks an amount equal to the difference between the fair market value of the consideration provided in respect of the ceding of the Specified Canadian Risks and the affiliate's cost in respect of these Specified Canadian Risks is included in computing the affiliate's FAPI.
The ceding of the Specified Canadian Risks is deemed to be a separate business, other than an active business, carried on by the affiliate and any income of the affiliate that pertains to or is incident to that business is deemed to be income from a business other than an active business, and as such, FAPI.
This measure will apply to taxation years of taxpayers that begin on or after Budget Day.
The Federal Government invites interested stakeholders to submit comments on this measure by June 30, 2015.
Update on Tax Planning by Multinational Enterprises
The Federal Government reiterated its support for the Organisation for Economic Co-operation and Development (the "OECD") Action Plan on Base Erosion and Profit Shifting ("BEPS"), released by the OECD in July 2013, together with various OECD reports related thereto. BEPS generally refers to tax planning undertaken by multinational enterprises to shift profits from high-tax jurisdictions to low-tax jurisdictions.
The Budget does not contain any unilateral measures in respect of the BEPS project, such as the anti-treaty shopping rules included in Budget 2014. In August 2014, the Federal Government announced that the anti-treaty shopping rules proposed in Budget 2014 would be put on the backburner pending completion of the OECD's work on the BEPS project.
At the hearing of the Australian Senate Economics References Committee in Canberra on April 9, 2015, Mr. Pascal Saint-Amans, Director, Centre for Tax Policy and Administration at the OECD, expressed the view that "unilateral actions are not exactly . . . what the [OECD] is trying to develop, which is, 'Let's wait for a comprehensive package and then countries will decide.'" Canada's position with respect to the BEPS project appears to be in line with the OECD. This can be contrasted with the UK's unilateral action in respect of BEPS, evidenced by the introduction of a diverted profits tax.
Update on the Automatic Exchange of Information for Tax Purposes
In November 2014, Canada and the other G-20 countries endorsed a new common reporting standard for automatic information exchange developed by the OECD, and committed to a first exchange of information by 2017 or 2018. The G-20 Finance Ministers committed in February 2015 to work towards completing the necessary legislative procedures within the agreed time frame.
Under the new standard, foreign tax authorities will provide information to the CRA relating to financial accounts held by Canadian residents in their jurisdictions. The CRA will, on a reciprocal basis, provide corresponding information to the foreign tax authorities on Canadian accounts held by residents of their jurisdictions.
In 2014, Canada and the United States signed an Intergovernmental Agreement (the "IGA"), ratified by Canada in June 2014, to implement the U.S. Foreign Account Tax Compliance Act. The IGA, specific Canadian legislation and the CRA's administrative guidelines apply to financial institutions resident in Canada, excluding branches in foreign jurisdictions and Canadian branches of non resident financial institutions ("Canadian Financial Institutions"). Canadian Financial Institutions are required to identify non-resident clients who hold accounts that must be reported to the IRS, and file information returns for those accounts by May 2nd of each year in respect of the prior calendar year.
In order for the CRA to obtain the information to be exchanged under the IGA, the common reporting standard will require Canadian Financial Institutions to implement due diligence procedures to identify accounts held by non-residents and to report certain information relating to these accounts to the CRA. It will not require reporting on accounts held by residents of Canada with foreign citizenship. The standard includes important safeguards to protect taxpayer confidentiality and ensure the exchanged information is used only by tax authorities and only for tax purposes.
The Budget includes a proposal to implement the common reporting standard commencing on July 1, 2017, allowing a first exchange of information in 2018. As of the implementation date, Canadian Financial Institutions will be expected to have procedures in place to identify accounts held by residents of any country other than Canada and to report the required information to the CRA.
It is expected that as the CRA formalizes exchange arrangements with other jurisdictions and is satisfied that each jurisdiction has appropriate capacity and safeguards in place, the information will begin to be exchanged on a reciprocal, bilateral basis.
The Federal Government announced that draft legislative proposals will be released for comments in the coming months.
BUSINESS INCOME TAX MEASURES
Small Business Tax Rate
Currently, as a result of the small business deduction, the first $500,000 per year of qualifying active business income of a Canadian-controlled private corporation ("CCPC") is subject to a federal income tax rate of 11%.
Consistent with speculation in the media ahead of Budget Day, to further assist small businesses in Canada, the Budget proposes to reduce the taxes paid by small businesses by 2%, with the 2% decrease being made gradually over the next 4 years and ultimately taking full effect on January 1, 2019, as follows:
- effective January 1, 2016, the rate will be reduced to 10.5%;
- effective January 1, 2017, the rate will be reduced to 10%;
- effective January 1, 2018, the rate will be reduced to 9.5%; and
- effective January 1, 2019, the rate will be reduced to 9%.
The gradual reduction in the small business tax rate will be pro-rated for corporations with non-calendar year-ends.
As a result of the proposed 2% reduction in the small business tax rate, the Budget also proposes to adjust the gross-up factor and the dividend tax credit ("DTC") rate that apply to non-eligible dividends. Non-eligible dividends are, in general, dividends that are paid by a corporation in respect of income which was taxed at the small business tax rate. In percentage terms, the effective rate of the DTC and the gross-up factor in respect of non-eligible dividends will be as follows:
|Year||Gross-up (%)||DTC (%)|
Small Business Deduction: Consultation on Active versus Investment Business
The small business deduction is available on up to $500,000 of active business income of a Canadian-controlled private corporation. If it applies, the small business deduction has the affect of lowering the effective rate of taxation on a corporation's income for a year.
Active business income does not include income from a "specified investment business". A specified investment business is generally a business with a principal purpose of deriving income from property and the business does not have more than five full-time employees.
The Federal Government reports that certain stakeholders have voiced concerns regarding the rules used to determine whether income qualifies as active business income. The Federal Government is willing to listen to these concerns and appears willing to consider extending the small business deduction to businesses that may not currently qualify as it is unclear whether such businesses earn active business income. Such businesses appear to include storage facilities and campgrounds which may be considered specified investment businesses. The Federal Government plans to conduct a consultation and review of the active business income rules for purposes of the small business deduction.
Quarterly Remitter Category for New Employers
The Budget proposes to decrease the required frequency of source deduction remittances for the smallest new employers by allowing eligible new employers to remit on a quarterly, as opposed to a monthly, basis. The new measure will apply to source deduction obligations that arise after 2015 and will be available to new employers with source deductions of less than $1,000 in respect of each month (which generally corresponds to one employee at an annual salary of up to $43,500, depending on the province of residence).
Presently, the Tax Act, the Employment Insurance Act and the Canada Pension Plan require employers to remit source deductions to the Federal Government in respect of employees' income taxes payable, as well as the employer and employee portions of Canada Pension Plan contributions and Employment Insurance premiums on either a weekly, twice-monthly, monthly or quarterly basis. Under the current rules, new employers are required to remit source deductions on a monthly basis for at least one year. After the one-year period, new employers may apply to remit on a quarterly basis, provided they have an average monthly withholding amount of less than $3,000 and have demonstrated a perfect compliance record over the preceding 12-month period.
Only employers with a perfect compliance record in respect of their Canadian tax obligations will be eligible for the new quarterly remittance measure. In addition, employers whose source deductions rise above the $1,000 monthly level will be classified by the Canada Revenue Agency (the "CRA") as a weekly, twice-monthly, monthly or quarterly remitter, in keeping with the existing remittance rules.
Synthetic Equity Arrangements
Inter-Corporate Dividend Deduction
Under subsection 112(1) of the Tax Act, a corporation is generally entitled to deduct dividends received from taxable Canadian corporations, subject to certain exceptions. The purpose of the inter-corporate dividend deduction is to prevent multiple levels of corporate tax on earnings distributed from one corporation to another.
Dividend Rental Arrangements
Subsection 112(2.3) of the Tax Act denies the inter-corporate dividend deduction where the dividend is received as part of a dividend rental arrangement – an arrangement where it can reasonably be considered that the main reason for entering into the arrangement was to enable the shareholder to receive a dividend on a particular share (with some exceptions) and some other person bears the risk of loss or enjoys the opportunity for the gain or profit with respect to that share. Typically the shareholder in a dividend rental arrangement must make a payment to that other person to provide the other person with the economic benefit of the dividend. This is referred to as the "dividend-equivalent payment".
While the recipient of a dividend in a dividend rental arrangement cannot take an inter-corporate dividend deduction under subsection 112(1) for the dividend received, the dividend recipient will generally be entitled to a deduction for the dividend-equivalent payment.
Proposed Amendments to Dividend Rental Arrangement Rules
The Federal Government is concerned with transactions where a shareholder retains legal ownership of the shares, but transfers substantially all of the risk of loss and opportunity for gain to a counterparty using an equity derivative. As with a dividend rental arrangement, these so-called "synthetic equity arrangements" involve the receipt of dividends by a person who does not have substantially all of the economic risk/benefit of ownership and dividend-equivalent payments by the legal owner of the share to a counterparty.
Some taxpayers believe these synthetic equity arrangements are not subject to the dividend rental arrangement rules described above, with the result that the dividend recipient is entitled to an inter-corporate dividend deduction under subsection 112(1) for the dividend received and a deduction for the dividend-equivalent payment. There is an erosion of the Canadian tax base if the counterparty in the synthetic equity arrangement is not subject to Canadian tax on the dividend-equivalent payment, e.g., a tax-exempt entity (like a pension plan) or a non-resident person who is not carrying on business in Canada.
Although the Federal Government believes that these arrangements could be challenged using existing rules in the Tax Act, it has chosen to introduce specific legislative measures to target these arrangements. The Budget proposes to amend the definition of dividend rental arrangement to specifically include "synthetic equity arrangements". The result will be that the dividend recipient in a synthetic equity arrangement will be entitled to a deduction for the dividend-equivalent payment, but will not be entitled to an inter-corporate dividend deduction.
Synthetic Equity Arrangement
A "synthetic equity arrangement" exists where the taxpayer (or a person or partnership that does not deal at arm's length with the taxpayer) enters into agreements or arrangements with one or more persons or partnerships (the counterparty) that have the effect, or would have the effect, if entered into by the taxpayer instead of the non-arm's length person, of providing all or substantially all of the risk of loss and opportunity for gain or profit (includes rights to, benefits from and distributions on a share) in respect of a share to the counterparty or to a group of affiliated counterparties.
If the agreements or arrangements are entered into by a person or partnership that does not deal at arm's length with the taxpayer, a synthetic equity arrangement exists if it can reasonably be considered that the agreements or arrangements were entered into with the knowledge, or where there ought to have been knowledge, that the transfer of all or substantially all of the risk of loss and opportunity for gain or profit as described above would result.
There is also an anti-avoidance provision which includes as a dividend rental arrangement agreements or arrangements that have the effect of eliminating all or substantially all of the taxpayer's risk of loss and opportunity for gain or profit in respect of a share if one of the purposes of the series of transactions that includes these agreements is to avoid the proposed measure.
No Tax-Indifferent Investor Exception
The proposed amendments define a "tax-indifferent investor" generally as:
- a tax exempt entity under section 149 of the Tax Act (e.g., a charity or pension plan),
- a non-resident person unless the dividend-equivalent payments to the non-resident may reasonably be attributed to a business carried on in Canada by the non-resident through a permanent establishment,
- a Canadian resident discretionary trust (other than a specified mutual fund trust), or
- a partnership or Canadian resident trust (other than a discretionary trust or a specified mutual fund trust) if more than 10% of the fair market value of all interests in the partnership or trust are held directly or indirectly by tax-indifferent persons.
The inter-corporate dividend deduction will not be denied for dividends received under a synthetic equity arrangement if the taxpayer can establish that, throughout the relevant period, no tax-indifferent investor or group of affiliated tax-indifferent investors has all or substantially all of the risk of loss and opportunity for gain or profit in respect of the share because of a synthetic equity arrangement or certain specified synthetic equity derivatives. Note that the burden of proof is clearly on the taxpayer.
The taxpayer is presumed to qualify for this above-noted exception if the taxpayer, or the non-arm's length person involved in the transaction, obtains certain accurate written representations from the relevant counterparty or counterparties. The proposed rules on what are satisfactory representations are lengthy and detailed. The required representations are generally designed to provide assurance that the counterparty is not a tax-indifferent investor and won't pass on the economic risk/benefit and consequential Canadian tax burden to a tax-indifferent investor.
In very general terms, the representations must confirm that:
- the counterparty is not a tax-indifferent investor and does not expect to become a tax-indifferent investor during the period during which the synthetic equity arrangement is in place, and
- the counterparty has not and does not expect to eliminate all or substantially all of its risk of loss and opportunity for gain or profit in respect of the relevant share during which the synthetic equity arrangement is in place, or
- the counterparty has transferred all or substantially all of its risk of loss and opportunity for gain or profit in respect of the share to another counterparty and has obtained the similar representations from that other counterparty.
Interestingly, the representations must be "accurate". If the representations are later determined to be inaccurate, the arrangement will, the Budget says, be treated as a dividend rental arrangement, presumably retroactively to the beginning of the arrangement. This means that obtaining the required representations does not protect the taxpayer from the adverse tax consequences of having a dividend rental arrangement (although they would presumably provide recourse against the counterparty). And, there is no due diligence defence. This seems rather harsh and impractical because the taxpayer initiating a synthetic equity arrangement is unlikely to be able to control what the counterparty does later.
There are a number of other exceptions. The following are not synthetic equity arrangements:
- Recognized Derivatives Exchange – An agreement trade on a recognized derivatives exchange recognized or registered under the securities laws of a Canadian province, unless, at the time the agreement is executed, the taxpayer or the non-arm's length person involved in the transaction, knows or ought to know the identity of the counterparty.
- Certain long/short arrangements.
- Certain stock index based contracts – The index must, among other things, reference only long positions, be maintained by arm's length persons and the value of the Canadian stocks reflected in the index cannot be more than 5% of the value of all stocks reflected in the index.
This proposed measures will apply to dividends that are paid or become payable after October 2015.
The Federal Government is launching a public consultation on whether these proposed measures should be further broadened. From a tax policy perspective, the Federal Government suggests that a shareholder should always be required to bear the risk of loss and enjoy the opportunity for gain or profit on a Canadian share in order to take advantage of the inter-corporate dividend deduction. Accordingly, the Budget includes an alternative proposal that would deny the inter-corporate dividend deduction on dividends received by a taxpayer on a Canadian share in respect of which there is a synthetic equity arrangement, regardless of the tax status of the counterparty.
According to the Federal Government, this broader proposal would eliminate some of the complexities of the measure described above.
The Federal Government invites stakeholders to submit comments by August 31, 2015 regarding this alternative broader measure. Such a proposal, if adopted after the consultation, would not apply before the results of the consultation process are announced.
Tax Avoidance of Corporate Capital Gains
Anti-avoidance Rule under subsection 55(2) of the Tax Act
Subsection 55(2) of the Tax Act contains an anti-avoidance rule whose effect is to convert inter-corporate dividends, otherwise deductible under subsections 112(1) or 112(2), into taxable capital gains. The provision is designed to address the stripping of capital gains through a conversion of taxable capital gains into tax-free inter-corporate dividends. It is generally applicable where a corporation receives inter-corporate dividends as part of a transaction or series of transactions that includes a disposition of shares by the dividend recipient and such dividends reduce the capital gain that would otherwise have been realized on the disposition of the shares.
Existing subsection 55(2) generally applies where a corporation resident in Canada receives a taxable dividend in respect of which it is entitled to a deduction pursuant to subsections 112(1) or 112(2), one of the purposes of which (or in the case of a dividend under subsection 84(3) of the Tax Act, one of the results of which) is to effect a significant reduction in the portion of the capital gain that, but for the dividend, would have been realized on a disposition at fair market value of any share immediately before the dividend and that could reasonably be considered to be attributable to anything other than income earned or realized by a corporation after 1971 (referred to as "safe income") and before the safe-income determination time for the particular transaction, event or series. Where it applies, the dividend is deemed not to be a dividend and is re-characterized as proceeds of disposition of the share or a gain from the disposition of capital property. Section 55 contains rules that provide for exceptions to the application of the anti-avoidance rule in subsection 55(2), including where the inter-corporate dividend can reasonably be attributed to safe income (i.e., after-tax earnings) of a corporation.
Proposed Broadening of Scope of Subsection 55(2) of the Tax Act
The Budget includes a proposal to broaden the scope of subsection 55(2) of the Tax Act in order to prevent a double counting of safe income arising from the notion that the language of the provision allows a corporation to pay a stock dividend that is partially attributable to its subsidiary's safe income without a corresponding reduction of such subsidiary's safe income (the dividend payor's safe income would be reduced by the amount of the dividend).
The Federal Government is of the view that the policy rationale underlying the anti-avoidance rule in subsection 55(2) is equally applicable where dividends are paid on a share to cause the fair market value of the share to fall below its cost or a significant increase in the total cost of properties. The articulated concern is that the particular shareholder could attempt to use the unrealized loss created by the payment of the dividend to shelter an accrued capital gain in respect of other property.
The following example of the transactions targeted by this proposed measure is included in the Budget:
Corporation A owns all of the shares of Corporation B, which has only one class of shares issued and outstanding. These shares have a fair market value of $1 million and an adjusted cost base of $1 million. Corporation A contributes $1 million of cash to Corporation B in return for additional shares of the same class, with the result that Corporation A's shares of Corporation B have a fair market value of $2 million and an adjusted cost base of $2 million.
If Corporation B uses its $1 million of cash to pay a tax-deductible dividend of $1 million to Corporation A, the fair market value of Corporation A's shares of Corporation B is reduced to $1 million although their adjusted cost base remains at $2 million.
At this point, Corporation A has an unrealized capital loss of $1 million on Corporation B's shares. If Corporation A transfers an asset having a fair market value and unrealized capital gain of $1 million to Corporation B on a tax-deferred basis, Corporation A could then sell its shares of Corporation B for $2 million and take the position that there is no gain because the adjusted cost base of those shares is also $2 million.
In the Budget, the Federal Government is proposing to target situations similar to those in D & D Livestock Ltd. v. R., 2013 DRC 1251 (TCC), where the Tax Court of Canada held that subsection 55(2) did not apply to a taxable dividend in kind (consisting of shares of another corporation) that gave rise to an unrealized capital loss on shares which was then used to reduce taxes otherwise payable on capital gains realized on the sale of another property.
The Budget proposes to amend subsection 55(2) to ensure that it applies where one of the purposes of a dividend is to effect a significant reduction in the fair market value of any share or a significant increase in the total cost of properties of the recipient of the dividend (such that the total cost amount of all properties of the dividend recipient immediately after the dividend is significantly greater than the total cost amount of all properties immediately before the dividend). The provision is also amended to ensure its application to stock dividends where the fair market value of such dividend exceeds the amount by which the paid-up capital of the corporation that paid the dividend is increased because of the dividend (even if the amount of the dividend does not exceed safe income).
Any dividends caught by these proposed amendments will be treated as a gain from the disposition of capital property.
Consequential changes are also proposed to address the cost amount of a stock dividend when received by a shareholder that is not an individual and additions to the adjusted cost base of a share.
The measures above will apply to dividends received by a corporation on or after Budget Day (April 21, 2015).
Proposed Narrowing of the Scope of Paragraph 55(3)(a) of the Tax Act
The Budget also includes a proposal to narrow the scope of paragraph 55(3)(a) of the Tax Act. This paragraph previously applied in certain circumstances where a dividend was received, with the effect that subsection 55(2) of the Tax Act did not apply. The proposed changes will make paragraph 55(3)(a) available only in situations where the previous requirements are met and the dividend is received by virtue of a redemption of shares.
Manufacturing and Processing Machinery and Equipment: Accelerated Capital Cost Allowance
Currently, machinery and equipment acquired by a taxpayer after March 18, 2007 and before 2016 primarily for use in Canada for the manufacturing or processing of goods for sale or lease qualifies for a temporary accelerated capital cost allowance ("CCA") rate of 50%, calculated on a straight-line basis under Class 29 of Schedule II to the Regulations under the Tax Act. Were it not for this temporary accelerated CCA rate, the machinery and equipment in question would otherwise fall under CCA Class 43 and be subject to a CCA rate of 30%, calculated on a declining-balance basis.
The Budget proposes to create a new CCA Class 53, which would provide an accelerated CCA rate of 50% on a declining-balance basis for machinery and equipment acquired by a taxpayer after 2015 and before 2026 primarily for use in Canada for the manufacturing and processing of goods for sale or lease. As such, assets that would currently be included in Class 29 will now be eligible to be included in new Class 53.
Equipment and machinery that is subject to being included in new CCA Class 53 will be subject to the "half-year rule", which allows half the CCA deduction otherwise available in the taxation year in which an asset is first available for use by a taxpayer. In addition, the assets in question will be considered "qualified property" for the purpose of the Atlantic Investment Tax Credit.
Equipment and machinery acquired in 2026 and subsequent years will no longer qualify for the accelerated CCA rate of 50% under new Class 53 and will instead be subject to the 30% declining-balance rate under Class 43.
Agricultural Cooperatives: Deferral of Tax on Patronage Dividends Paid on Shares
In order to support the capitalization of agricultural cooperative corporations, the 2005 Budget introduced a temporary measure to provide a tax deferral that applied to patronage dividends paid to members by an eligible agricultural cooperative in the form of eligible shares. To be eligible for this tax deferral, the 2005 Budget provided that a share must be issued after 2005 and before 2016.
The Budget proposes to extend this tax deferral measure to apply in respect of eligible shares issued before 2021. Without an extension of this tax deferral, a patronage dividend paid by an agricultural cooperative corporation would have been taxable to the recipient member of the cooperative in the year received. In addition, the cooperative corporation paying the dividend would have been required to withhold an amount from the dividend and remit it to the Canada Revenue Agency on account of the recipient's tax liability. Before the introduction of the tax deferral as part of the 2005 Budget, a portion of the dividend was commonly paid in cash to fund the recipient's tax liability. The cash portion of this dividend was understood to constitute a significant capital outlay for agricultural cooperative corporations.
The extension of the tax deferral measure for dividends paid in the form of eligible shares should be welcome news for members of agricultural cooperative corporations. The extension will permit eligible members to defer the inclusion in income of all or a portion of any patronage dividends received as eligible shares until the share is actually disposed of or deemed to have been disposed of for the purposes of the Tax Act. There is no withholding obligation in respect of a patronage dividend issued in the form of an eligible share; however, there is a withholding obligation when the share is redeemed. In addition, an eligible share must not (other than in the case of death, disability or ceasing to be a member) be redeemable or retractable within five years of its issue.
Consultation on Eligible Capital Property
Budget 2014 announced a public consultation on the proposal to repeal the eligible capital property regime and replace it with a new capital cost allowance class. The Budget confirms that the public consultation is continuing and the Federal Government will consider all public representations in the development of the rules relating to the new capital cost allowance class as well as the transitional rules. The Federal Government intends to release detailed draft legislative proposals for stakeholder comment before their inclusion in a bill.
PERSONAL INCOME TAX MEASURES
Tax-Free Savings Account
In an effort to encourage Canadians to save, the Federal Government introduced the Tax-Free Savings Account ("TFSA") in 2009. The TFSA is a registered, general-purpose account that allows Canadians to earn tax-free investment income. TFSAs have become popular savings vehicles for many Canadians as they are seen as a flexible savings tool that complements existing registered retirement savings plans ("RRSPs").
Unlike an RRSP, annual contributions made to a TFSA are not tax-deductible. However, investment income earned in a TFSA and withdrawals from a TFSA are not generally subject to income tax. As with RRSPs, unused TFSA contribution room may be carried forward into future taxation years. Withdrawals from a TFSA may also be re-contributed to a TFSA in future years.
When first introduced, TFSAs were subject to an annual contribution limit of $5,000 per individual account holder. As a result of the contribution limit being indexed to inflation in $500 increments, the TFSA contribution limit was increased to $5,500 on January 1, 2013, and it has remained at $5,500 since then.
As was widely speculated in the media and anticipated prior to Budget Day, the Budget proposes to increase the TFSA annual contribution limit to $10,000 per individual. The increase is expected to be retroactive and will apply as of January 1, 2015 and to all future taxation years. Although the TFSA contribution limit will no longer be indexed to inflation or be subject to any other means of indexation, the Budget proposal offers a significant contribution limit increase that provides Canadians with a tax-efficient means of saving.
Minimum Withdrawal Factors for Registered Retirement Income Funds
Until an individual attains the age of 71, there is no obligation to withdraw funds from a RRSP and continued contributions on a tax-deferred basis are allowed. By the end of the year in which the holder of a RRSP attains the age of 71, his or her RRSP must be converted to a registered retirement income fund ("RRIF"), or the savings used to purchase a qualifying annuity. A minimum amount must then be withdrawn annually from a RRIF beginning in the year in which the RRIF holder turns 72. Such minimum amount is calculated by applying a percentage or factor (the "minimum withdrawal factor"), based on the age of the RRIF holder (or his or her spouse, depending on the relevant election), to the amount held in the RRIF.
The Budget proposes to reduce the minimum withdrawal factors that apply to RRIFs with respect to RRIF holders between the ages of 71 and 94. The adjustment is based on a 5% nominal rate of return and a 2% indexing, which is explained as being more consistent with historical long-term rates of return on an investment portfolio and expected inflation than the current assumptions of 7% nominal rate of return and 1% indexing. The RRIF factors will continue to be capped at a rate of 20% for ages 95 and above in order to ensure that the RRIF can continue for the life of the holder (or the holder's spouse or common-law partner).
The new RRIF withdrawal factors will apply to the 2015 and subsequent taxation year and will enable RRIF holders to preserve more of their RRIF savings, and thereby provide them with income at older ages. This is beneficial given the increasing life expectancies of Canadians and is consistent with the expectation that the tax deferral afforded to contributions to a RRSP and the savings in the RRIF serves a retirement income purpose.
There will be no change to the minimum withdrawal factors that apply in respect of ages 70 and under.
The RRIF minimum withdrawal factors are also used to determine the minimum amount that must be withdrawn annually, beginning at 71 years of age, from a defined contribution Registered Pension Plan ("RPP") and a Pooled Registered Pension Plan ("PRPP").
Because the new RRIF withdrawal factors apply to the 2015 and subsequent taxation years, RRIF holders who at any time in 2015 withdraw more than the reduced 2015 minimum amount will be able to re-contribute the excess to their RRIFs and will be entitled to the continued tax deferral in respect of such excess. These re-contributions will be permitted until February 29, 2016 and will be deductible for the 2015 taxation year. Similar rules will be in place for those receiving annual payments from a defined contribution RPP or a PRPP which exceed the reduced 2015 minimum amount.
Registered Disability Savings Plan - Legal Representation
A temporary measure introduced as part of Budget 2012, enables the parent, spouse or common-law partner (a "qualifying family member") of a disabled individual (the "beneficiary") to become the planholder of a Registered Disability Savings Plan ("RDSP") for the benefit of the beneficiary. This measure is currently relied upon in circumstances where the beneficiary may not have the contractual capacity to open an RDSP account for their own benefit. Budget 2012 provided that such temporary measure would only be in place until the end of 2016. The Budget has extended such measure until the end of the 2018 calendar year.
Permitting a qualifying family member to act as a planholder of an RDSP for the benefit of their spouse, common-law partner or adult child was the federal government's response to the circumstance where a disabled individual lacks the necessary mental capacity to establish and maintain his or her own RDSP. In certain provinces, the only way that an RDSP can be opened for the benefit of a beneficiary who lacks the requisite capacity is for the court to declare such individual legally incompetent and to appoint a legal guardian, who may then open an RDSP for the beneficiary. This is a potentially lengthy and costly process and may be inappropriate depending on the nature and extent of the individual's disabilities.
The Federal Government has noted that questions of capacity and legal representation are matters of provincial and territorial jurisdiction and are not the responsibility of the Federal Government. Some provinces and territories have already enacted measures and streamlined processes to allow for the appointment of a trusted person to manage resources on behalf of a disabled person who lacks contractual capacity. However, many provinces have yet to enact any such measures and certain disabled individuals may continue to have difficulties establishing RDSPs in these provinces. By extending the ability of qualifying family members to act as planholders of RDSPs, the remaining provinces and territories will be have additional time to address the RDSP legal representation issue. The rules implementing the Budget 2012 measure will not be altered and a qualifying family member who becomes a planholder before the end of 2018 can remain the plan holder after 2018.
Repeated Failure to Report Penalty
The Budget proposes to revise the penalty under the Tax Act in connection with repeated failures to report, which may apply to a taxpayer who fails to report an amount of income in a taxation year and has failed to report an amount of income in any of the 3 preceding taxation years. Presently, the repeated failure to report penalty is equal to 10% of the unreported income for a particular taxation year. The Federal Government has expressed concerns that the repeated failure to report income penalty may be disproportionate to the actual associated tax liability, particularly for lower income individuals.
The repeated failure to report penalty does not apply if the gross negligence penalty under subsection 163(2) of the Tax Act applies. In general, the gross negligence penalty applies if a taxpayer knew or, under circumstances amounting to gross negligence, ought to have known that an amount of income should have been reported. The amount of this penalty is generally equal to 50% of the understatement of tax payable (or the overstatement of tax credits) related to the omission. In some cases, the repeated failure to report penalty has been greater than the gross negligence penalty which might have otherwise applied to a taxpayer's acts or omissions.
Effective for 2015 and subsequent taxation years, the Budget proposes to amend the repeated failure to report income penalty to apply in a taxation year only if a taxpayer fails to report at least $500 of income in the year and in any of the 3 preceding taxation years. The amount of the penalty will equal the lesser of:
- 10% of the amount of unreported income; and
- an amount equal to 50% of the difference between the understatement of tax (or the overstatement of tax credits) related to the omission and the amount of any tax paid in respect of the unreported amount (e.g. by an employer in respect of source deductions made under the Tax Act).
The Budget does not propose any changes or amendments to the gross negligence penalty, which will continue to apply in cases where a taxpayer fails to report income intentionally or in circumstances amounting to gross negligence.
Home Accessibility Tax Credit
The Budget proposes to introduce a non-refundable Home Accessibility Tax Credit for expenditures related to alterations or renovations of an eligible dwelling to allow a qualified individual to gain access to, be more mobile and functional within, or reduce the risk of harm of gaining access to, an "eligible dwelling." Such alterations or renovations would, for example, include the installation of wheelchair ramps and grab bars. The Home Accessibility Tax Credit is proposed to take effect after 2015. The credit available to qualifying individuals will provide tax relief of 15% on up to a maximum of $10,000 of eligible expenditures per calendar year, per qualifying individual, up to a maximum of $10,000 per eligible dwelling.
The Home Accessibility Tax Credit is available in addition to any other tax credits or grants for which a qualifying or eligible individual is entitled to receive. As such, an eligible expenditure may qualify for both the Medical Expense Tax Credit and the new Home Accessibility Tax Credit. However, otherwise eligible expenditures which are to be reimbursed or expected to be reimbursed, other than under a government program, will not qualify for the credit.
Qualifying and Eligible Individuals
In general, seniors (individuals who are 65 years or older at the end of a particular taxation year) and persons with disabilities (individuals who are eligible for the Disability Tax Credit under the Tax Act at any time during a particular taxation year) will be "qualifying individuals" for the purposes of the Home Accessibility Tax Credit.
"Eligible individuals" will also be able to claim the new Home Accessibility Tax Credit. An eligible individual (in relation to a qualifying individual) will be an individual who has claimed the spouse or common law partner amount, eligible dependant amount, caregiver amount or infirm dependant amount for the qualifying individual for the taxation year, or could have claimed any such amount for the taxation year if the qualifying individual had no income for the particular taxation year. As such, provided all other conditions are met, the Home Accessibility Tax Credit could be claimed by a broad range of individuals, including:
- the spouse or common-law partner of the qualifying individual;
- a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the qualifying individual; or
- a parent, grandparent, child, grandchild, brother, sister, aunt, uncle, niece or nephew of the qualifying individual's spouse or common-law partner.
If one or more qualifying or eligible individuals make a claim for a Home Accessibility Tax Credit in respect of an eligible dwelling, the total of all amounts claimed by the qualifying and/or eligible individuals for the taxation year in respect of the eligible dwelling cannot exceed $10,000.
An eligible dwelling must be the qualifying individual's principal residence at any time during the taxation year in question. For the purposes of the new Home Accessibility Tax Credit, an eligible dwelling includes the land on which the dwelling is situated.
Under the new rules, in general, a housing unit will be considered to be a qualifying individual's principal residence if it is:
- ordinarily inhabited or expected to be ordinarily inhabited by the qualifying individual within the taxation year; and
- owned by the qualifying individual or the qualifying individual's spouse or common-law partner.
A qualifying individual may only have one principal residence at any time, but may, in fact, have more than one principal residence during a taxation year. Such a situation may, for example, arise if the qualifying individual moves during the year. In any case involving a qualifying individual with more than one principal residence during a taxation year, the total eligible expenditures for the Home Accessibility Tax Credit in respect of all principal residences of the qualifying individual for that year will be subject to the $10,000 annual limit.
For condominiums and co-operative housing corporations, the new Home Accessibility Tax Credit will be available for eligible expenditures incurred to renovate the unit which constitutes the qualifying individual's principal residence and may also be applied towards the qualifying individual's share of eligible expenditures incurred in respect of common areas. If a qualifying individual does not own a principal residence, a dwelling will also be considered to be an eligible dwelling of the qualifying individual if it is the principal residence of an eligible individual in respect of the qualifying individual and if the qualifying individual ordinarily inhabits the dwelling in question with the eligible individual.
The cost of alterations or renovations of an eligible dwelling will, in general, qualify for the Home Accessibility Tax Credit if they are supported by a receipt and made or incurred for the purposes of:
- allowing a qualified individual to gain access to or to be more mobile and functional within a dwelling; or
- reducing the risk of harm to a qualifying individual within a dwelling or with respect to gaining access to a dwelling.
The Department of Finance has provided examples of eligible expenditures, which include expenditures relating to:
- wheelchair ramps;
- walk-in bathtubs;
- wheel-in showers; and
- grab bars.
Eligible expenditures will include the cost of labour and professional services, building materials, fixtures, equipment rentals and permits. These eligible expenditures must be of an enduring nature and they must be integral to the eligible dwelling.
The Department of Finance has also provided examples of expenditures which would not qualify for the Home Accessibility Tax Credit, which include expenditures related to:
- improvements for enhancing or maintaining a dwelling's value;
- routine repairs and maintenance which would be performed on a property on a regular basis;
- household appliances and devices;
- general household maintenance services;
- mortgage interest costs of financing a renovation;
- goods or services provided by a person not dealing at arm's length with a qualifying or eligible individual, unless the person is registered for Goods and Services Tax or Harmonized Sales Tax under the Excise Tax Act; and
- otherwise eligible expenditures made in respect of areas of the personal residence which are used to generate business or rental income.
In addition, if expenditures are made which benefit common areas or a housing unit as a whole, the CRA will apply its general administrative practices to determine how business or rental income and expenditures should be allocated between personal use and income-earning use for the purposes of claiming the Home Accessibility Tax Credit.
Lifetime Capital Gains Exemption for Qualified Farm or Fishing Property
The Budget proposes to increase the Lifetime Capital Gains Exemption ("LCGE") provided under the Tax Act for dispositions of qualified farm and fishing property to $1 million. Currently, the Tax Act provides an individual with a lifetime exemption of $813,600 (for 2015, as indexed for inflation) for capital gains arising on the disposition of qualified small business corporation shares and qualified farm or fishing property.
The new LCGE is proposed to apply to dispositions of qualified farm or fishing property that occur on or after Budget Day and will be the greater of:
- $1 million; and
- the indexed LCGE applicable to capital gains realized on the disposition of qualified small business corporation shares.
The Budget does not propose an increase to the LCGE for dispositions of qualified small business corporation shares. The LCGE exemption for qualified small business corporation shares will therefore remain, at least for the time being, at $813,600 (for 2015, as indexed for inflation).
Transitional rules are proposed to address the increase in the LCGE relating to dispositions of qualified farm or fishing property on or after Budget Day and to address the resulting difference from the LCGE applicable to dispositions of qualified small business corporation shares.
Alternative Arguments in Support of Assessments
In response to a recent court decision, Last v. R., 2014 FCA 129, the Budget proposes to amend the Tax Act to clarify that the CRA and the courts may increase or adjust an amount included in an assessment that is under objection or appeal at any time, provided the total amount of the assessment does not increase. Similar amendments are proposed to be made to Part IX of the Excise Tax Act (in relation to the Goods and Services Tax/Harmonized Sales Tax) and the Excise Act, 2001 (in relation to excise duties on tobacco and alcohol products), to help ensure consistency in administrative measures in federal tax statutes. The measures are expected to come into force upon Royal Assent.
The Federal Government's interpretation of the judgement is that while the basis of an assessment can be changed after the expiration of the normal reassessment period, each source of income is to be considered in isolation and the amount of the assessment in respect of any particular source of income cannot increase. This is somewhat inconsistent with the Federal Government's understanding of the CRA's powers with respect to reassessments made after the normal reassessment period.
In support of its position, the Federal Government states that, in its view, long-standing jurisprudence has held that on appeal from a tax assessment, the question to be answered is, generally, whether the CRA's assessment is higher than mandated under the Tax Act. The Federal Government further states that, in cases of reassessments made after the normal reassessment period, although the total amount from all sources that is assessed cannot increase, the basis of the assessment can change. This would allow, for instance, a reduced liability in relation to one item included in the computation of an assessment to be offset by an increased liability in relation to another item.
Consistent with this principle, the Federal Government points to a specific provision in the Tax Act (namely, subsection 152(9)), which provides that the Minister of National Revenue may advance an alternative argument in support of an assessment at any time after the normal reassessment period. In the Federal Government's view, the purpose of this provision is to allow the Minister to advance an alternative argument after the relevant reassessment period has expired, and this process of raising arguments and counter-arguments 'in the alternative' is a conventional part of the litigation process.
Information Sharing for the Collection of Non-Tax Debts
The CRA collects debts owing to the Federal and Provincial Governments under both tax and non-tax programs. Non-tax programs include the Government Employees Compensation Act, the Canada Labour Code, the Canada Student Loans Act, the Wage Earner Protection Program Act and the Apprentice Loans Act. Currently, confidential taxpayer information cannot be used by CRA staff to collect debts under many non-tax programs. Likewise, CRA staff engaged in non-tax collection activities cannot share taxpayer information with staff engaged in tax collection activities. Consequently, the CRA has to have segregated and separate staff for collecting tax and non-tax debts. According to the Federal Government, this limits the Federal Government's efficiency and can be frustrating for taxpayers who may be contacted by more than one Canada Revenue Agency debt collector where the taxpayer owes amounts under both tax and non-tax programs.
The Budget proposes to amend the Tax Act, Part IX of the Excise Tax Act (in relation to the Goods and Services Tax/Harmonized Sales Tax) and the Excise Act, 2001 (in relation to excise duties on tobacco and alcohol products) to permit the sharing of taxpayer information within the CRA in respect of non-tax debts under certain Federal and Provincial Government Programs.
To ensure greater consistency in the information sharing rules in federal tax statutes, the Budget also proposes to amend Part IX of the Excise Tax Act and the Excise Act, 2001 to permit information sharing in respect of certain programs where such information sharing is already permitted under the Tax Act.
The new measure will apply on Royal Assent to the enacting legislation.
Transfer of Education Credits - Effect on the Family Tax Cut
The Family Tax Cut ("FTC"), proposed in October, 2014, is a non-refundable tax credit that allows eligible parents with at least one child under the age of 18 to notionally transfer up to $50,000 of taxable income from the higher income spouse or common-law partner to the lower income spouse or common-law partner. The intention of the FTC is to allow for income sharing for couples with children under the age of 18, thereby reducing or eliminating the difference in federal tax payable by a one-income earner couple relative to a two-income earner couple with a similar family income. The amount of tax saved by this notional transfer becomes a non-refundable tax credit that can be claimed by either spouse. The tax credit is limited to $2,000 and will apply for the 2014 and subsequent taxation years.
Where personal income tax credits have been transferred from one spouse or common-law partner to the other, the FTC suppresses the use of those credits in the transferee's hands. Instead, the personal income tax credits previously transferred are taken into consideration in the calculation of the transferor's adjusted tax payable. This prevents the double counting of these credits in the calculation of the FTC.
In the same manner, the previously-announced FTC rules prevent transferred education-related amounts, such as tuition, education and textbook tax credits from being included in the FTC calculation. However, the concern with double-counting typically associated with the transfer of personal income tax credits is not, in the Federal Government's view, at issue when calculating education-related credits. As a result, the value of the FTC may be reduced for couples who transfer education-related amounts between themselves. The Federal Government suggests that this affects only a very small percentage of couples claiming the FTC for the 2014 taxation year.
The Budget proposes to revise the calculation of the FTC for the 2014 and subsequent taxation years to ensure that couples claiming the FTC and transferring education-related credits between themselves receive the appropriate value of the FTC. After the enacting legislation receives Royal Assent, the CRA will automatically reassess affected taxpayers for the 2014 taxation year to ensure that they receive any additional benefits to which they are entitled under the FTC.
Charities and Not-for-Profit Measures
The Budget includes a number of welcome proposals for donors and charities.
Capital Gains Exemption Extended to Gifts of Private Shares and Real Estate
Over the past decade, the Federal Government has expanded the capital gains exemption available when certain types of property, particularly gifts of appreciated listed securities, are donated. This year, the Budget proposes to exempt from capital gains tax charitable gifts of the proceeds of disposition of private company shares and real estate.
Donations of capital property to a registered charity (and certain other entities), are generally eligible for donation tax credits or deductions. However, unless an exemption applies, a donor is subject to tax on donations of capital property on any capital gains realized as a result of the transfer. This tax may be sheltered by the tax credits or deductions arising from the gift, but will reduce the overall tax benefit to the donor.
Beginning in 2017, the Budget proposes that the exemption from capital gains tax will be extended to gifts of the proceeds of disposition of private company shares or real estate. This capital gains tax exemption will apply differently than the current exemption for gifts of publicly listed securities, where the capital gains exemption applies to direct gifts of these securities to a qualified donee. If the donor were to sell the securities and donate the cash proceeds, the capital gains exemption would not apply. It appears that the opposite will be true for gifts of private company shares and real estate. The Budget states that the capital gains exemption will be available where:
- cash proceeds from the disposition of the private corporation shares or real estate are donated to a qualified donee within 30 days after the disposition; and
- the private corporation shares or real estate are sold to a purchaser that is dealing at arm's length with both the donor and the qualified donee to which the proceeds are donated.
The Budget proposals include new anti-avoidance rules with respect to this exemption, which will reverse the benefit of the exemption. These anti-avoidance provisions will apply where any of the following occur within five years after the disposition:
- the donor (or a person not dealing at arm's length with the donor) directly or indirectly reacquires any property that had been sold;
- in the case of shares, the donor (or a person not dealing at arm's length with the donor) acquires shares substituted for the shares that had been sold; or
- in the case of shares, the shares of a corporation that had been sold are redeemed and the donor does not deal at arm's length with the corporation at the time of the redemption.
Budget Enables Investment in Limited Partnerships by Registered Charities
Currently, registered charities are not permitted to invest in limited partnerships. This is due to the way the law of partnerships attributes the business activities of the partnership to each limited partner (each partner is deemed to carry on the business of the partnership), and the fact that charities are limited with respect to carrying on a business (or, in the case of a private foundation, completely precluded).
The Budget proposes to amend the Tax Act to provide that a registered charity will not be considered to be carrying on a business solely because it acquires or holds an interest in a limited partnership. Beginning on Budget Day, registered charities will be permitted to invest in limited partnerships as long as the following conditions are met:
- the charity – together with all non-arm's length entities – holds 20% or less of the interests in the limited partnership; and
- the charity deals at arm's length with each general partner of the limited partnership.
The Budget also confirms that these measures will apply to registered Canadian amateur athletic associations.
Amendments to Gifts to Foreign Charitable Foundations
Under current rules, a foreign charitable organization that has received a gift from the federal Crown in the previous 24 months can apply for status as a "qualified donee." If the status is granted, a Canadian taxpayer who donates to such entities would be eligible for a tax credit (or deduction). A foreign charitable organization is eligible to apply for qualified donee status if it is carrying on disaster relief work, urgent humanitarian aid, or other work in the national interest of Canada. Qualified donee status is granted in the discretion of the Minister of National Revenue in consultation with the Minister of Finance for a 24-month period, and the organization is included on a list of registered foreign charities maintained on the CRA's website. Under the proposed rules, a foreign charitable foundation will also be able to apply for qualified donee status if it meets the same criteria.
The Budget confirms that this measure will apply upon Royal Assent to the enacting legislation.
For those who interested a more detailed analysis of the Charities and Not-for-Profit sections of the Budget, please consult Miller Thomson's Charities and Not-for-Profit Newsletter: Special Budget Edition.
Aboriginal Tax Policy
In the Budget, the Federal Government reiterated its support for initiatives that encourage the exercise of direct taxation powers by Aboriginal governments.
The Federal Government noted that, to date, it has entered into 35 sales tax arrangements under which Indian Act bands and self-governing Aboriginal groups levy a sales tax within their reserves or their settlement lands. In addition, 14 arrangements respecting personal income taxes are in effect with self-governing Aboriginal groups under which they impose a personal income tax on all residents within their settlement lands.
The Federal Government reiterated its willingness to discuss and put into effect direct taxation arrangements with interested Aboriginal Federal Governments. The Federal Government also reiterated its support of direct taxation arrangements between interested provinces or territories and Aboriginal governments, and noted that it has enacted legislation to facilitate such arrangements.
PREVIOUSLY ANNOUNCED MEASURES
The Budget confirms the Federal 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 announcement or release:
- Legislative proposals released on July 12, 2013, providing new rules to ensure an appropriate income inclusion for stub-year foreign accrual property income on dispositions of foreign affiliate shares.
- Legislative amendments proposed in Economic Action Plan 2014 to ensure that the Office of the Chief Actuary can efficiently and effectively deliver its services to key clients.
- Measures announced in Economic Action Plan 2014 relating to the Goods and Services Tax/Harmonized Sales Tax joint venture election.
- A proposed change announced on December 23, 2014 to the limit on the deduction of tax-exempt allowances paid by employers to employees that use their personal vehicle for business purposes.
- Regulatory proposals released on February 19, 2015, establishing a capital cost allowance rate of 30 per cent for equipment used in natural gas liquefaction and 10 per cent for buildings at a facility that liquefies natural gas.
- Measures announced on March 1, 2015
to support Canadian mining:
- Extending the 15% Mineral Exploration Tax Credit for investors in flow-through shares for an additional year, until March 31, 2016; and
- Ensuring that the costs associated with undertaking environmental studies and community consultations that are required in order to obtain an exploration permit will be eligible for treatment as Canadian Exploration Expenses.
- Measures to make the new Family Caregiver Relief Benefit and Critical Injury Benefit, announced on March 17, 2015 and March 30, 2015, non-taxable to Veterans.
The Budget also reaffirms the Federal Government's commitment to move forward as required with technical amendments to improve the certainty of the tax system.
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.