Canada: Budget 2017: No Game-Changers In Holding-Pattern Budget

Despite rising deficits, Budget 2017 does not propose any general tax increases or other game-changing measures that were the subject of much speculation in recent weeks. This is arguably a "holding-pattern" budget, giving the Government of Canada time to gauge external developments prior to deciding whether to implement more significant tax changes at a later time.

Lire cette analyse en français

From a business perspective, perhaps most newsworthy is what is not in Budget 2017.  The Budget did not increase the capital gains inclusion rate. This had been widely speculated and was the impetus for many pre-Budget capital gain realization transactions. Budget 2017 also did not propose changes to the stock option regime, another favorite topic for pre-Budget speculation. The income tax changes with the most significant financial impact on business focused on very specific groups of taxpayers: professionals will be taxed on their work in progress; an anti-avoidance rule will prevent the deferral of income using "straddle transactions"; and deductions will be limited for oil and gas discovery wells. 

For individuals, Budget 2017 proposes only minor tweaks to certain tax credit programs and the elimination or reduction of certain tax preferences on the basis of inefficiency or to close perceived tax loopholes. However, in keeping with Budget 2017's theme of "Building a Strong Middle Class," the Minister of Finance stated very clearly that the Government of Canada remains concerned with income inequality, perceived tax loopholes, and the steps taken by some taxpayers to reduce their taxes. 

In particular, tax planning strategies by wealthy individuals using private corporations will be scrutinized and policy responses will be developed. The issues have been known for years and addressed in various ways in prior budgets, but the government is signaling once more that the rules may be further tightened to limit "sprinkling income" and the use of private corporations to accumulate passive investment portfolios. Budget 2017 strongly suggests that additional measures to address these issues are being considered and could be introduced in the near-term. Buckle up!

More Tax Auditors and Enforcement

Budget 2017 enhances measures from Budget 2016, deploying additional and substantial resources to crack down on tax evasion and avoidance. The Budget 2017 document conflates evasion and avoidance, reminiscent of the October 2016 Report of the Standing Committee on Finance and the February 23, 2017 Government of Canada response. A preferred view may have been to seek to address "abusive" tax avoidance.

In any case, over the next five years, the Canada Revenue Agency ("CRA") will receive $523.9 million to fund increasing verification activities, hire more auditors and specialists focusing on the underground economy, develop robust business intelligence infrastructure and risk assessment systems to target high-risk international tax and abusive tax avoidance cases and improve the quality of investigative work targeting criminal tax evaders. Touting a proven track record of meeting expectations from targeted compliance interventions, the expected five year revenue impact of $2.5 billion results in a five to one "return on investment."

We have already observed the consequences of this enhanced focus on tax enforcement, by more aggressive CRA audits and collection actions. This is bound to increase.

Private Company Planning Scrutinized

Budget 2017 expresses concern in regard to tax planning strategies using private corporations, which can result in high income individuals gaining what are perceived to be unfair tax advantages. No specific measures are proposed, but a number of tax planning strategies are identified:

  • Using private corporations to sprinkle income among family members with lower marginal tax rates;
  • Holding passive investments in private corporations to facilitate higher income accumulation due to the fact that the general corporate tax rate is generally lower than personal tax rates; and
  • Converting private corporation income into capital gains, instead of realizing it as dividends.

Budget 2017 announces the Government's intention to release a study paper on the issues raised by these strategies and on its proposed policy approach in the coming months. The study paper will review inappropriate results from the perspective of both the tax system and family-owned businesses. 

Straddle Transactions Curtailed

"Straddle transactions" involve options and other derivatives to create offsetting positions in shares, commodities or other property where a loss position is realized before a taxation year-end and a gain position is not realized until after the taxation year-end, thus creating a deferral. Budget 2017 proposes a new set of tax rules to eliminate the use of these "straddle transactions" that are subject to taxation on a realization basis.

The new anti-avoidance rule proposed by Budget 2017 will defer the realization of a loss position through a stop-loss rule to the extent of any unrealized gain on an offsetting position. It is intended that the new rule will not apply to certain financial institutions, mutual fund trusts, mutual fund corporations, or to certain normal course hedging activities, where the offsetting gain position is held for specified period of time, or where the loss arises as part of a series of transactions none of the purposes of which was to defer or avoid tax. One might expect that the exceptions will give rise to potential uncertainty in certain circumstances.

The new stop-loss rule will apply to any loss realized on a position entered into after March 22, 2017.

Combating International Tax Avoidance

Budget 2017 is largely silent on international tax measures. This is somewhat surprising in light of the significant work performed by the Government of Canada and international tax community in recent years to combat international tax avoidance and evasion. The only new measure introduced by Budget 2017 in this regard is limited solely to Canadian-resident life insurers and their foreign branches.

Currently, the Income Tax Act (Canada) ("ITA") provides a special exemption to Canadian life insurers from the general rule that Canadian-resident corporations are taxed on their worldwide income. Canadian-resident life insurers are not currently taxed on their income from carrying on business in a foreign jurisdiction through a branch ("Foreign Insurance Branch"). The taxation of the Foreign Insurance Branch currently resembles the taxation of foreign affiliates of Canadian-resident corporations. However, in the case of foreign affiliates, the foreign accrual property income ("FAPI") rules include a specific anti-avoidance rule regarding the insurance of Canadian risk. That is, pursuant to the FAPI rules, income from the insurance of Canadian risks of a controlled foreign affiliate of a Canadian taxpayer is generally considered FAPI and is therefore taxable in the hands of the Canadian taxpayer on an accrual basis. No analogous rule currently exists to prevent income from the insurance of Canadian risks from being shifted to a Foreign Insurance Branch. 

Although other anti-avoidance rules could arguably apply to these situations, Budget 2017 proposes to amend the ITA to ensure that Canadian life insurers are taxable in Canada with respect to their income from the insurance of Canadian risks. The new rule will apply where 10 per cent of more of the gross premium income earned by a Foreign Insurance Branch is premium income in respect of Canadian risks. The rule will deem the insurance of Canadian risks to be part of a business carried on in Canada by the life insurer and the related insurance policies will be deemed to be life insurance policies in Canada.

In addition, complementary anti-avoidance rules will be introduced to ensure that the proposed rule cannot be avoided through either the use of so-called "insurance swaps" or the ceding of Canadian risks. Anti-avoidance rules will also be introduced for situations where it can reasonably be concluded that a life insurer has insured foreign risks through a Foreign Insurance Branch as part of a transaction or a series of transactions one of the purposes of which was to avoid the proposed rule. In such cases, the Canadian-resident life insurer will be treated as if it had insured the Canadian risks. An analogous rule will also be introduced to reinforce the existing anti-avoidance rules in the FAPI regime.

This measure will apply to taxation years of Canadian taxpayers that begin on or after March 22, 2017.

Flow-through Tax Deductions Limited

Flow-through shares are common shares issued by resource companies which provide for the deduction of Canadian exploration expenses ("CEE") (100% deduction in the year incurred) and Canadian development expenses ("CDE") (30% deduction on a declining-balance basis). As a result, companies issuing CEE flow-through shares typically obtain a premium price over issuing CDE flow-through shares.

Budget 2017 proposes that eligible small oil and gas companies (i.e., companies with a taxable capital employed in Canada of not more than $15 million) can no longer treat the first $1 million of CDE as CEE when renounced to shareholders pursuant to a  flow-through share agreement. Very generally, this measure will apply in respect of expenses incurred after 2018, with the exception of expenses incurred after 2018 and before April 2019 that are renounced under a flow-through share agreement entered into after 2016 and before March 22, 2017.

Further, Budget 2017 proposes that expenditures related to drilling or completing the first well in a new reservoir (or in building a temporary access road to, or in preparing a site in respect of, any such well) be classified as CDE instead of CEE. However, there will be certain circumstances where such expenditures can continue to be classified as CEE, or reclassified as CEE. Very generally, this measure will apply to expenses incurred after 2018. However, the measure should not apply to expenses actually incurred before 2021 where the taxpayer has, before March 22, 2017, entered into a written commitment to incur such expenses.

The good news is that Budget 2017 confirms the previously announced extension of the mineral exploration tax credit for an additional year, applicable to mining flow-through share agreements entered into on or before March 31, 2018.

Investment Fund Mergers

Mutual Fund Switch Fund Conversions

Budget 2016 eliminated the tax deferral that previously applied to the exchange of shares between different classes of a mutual fund corporation. As a result, the maintenance of multi-class mutual fund corporations became less desirable. Budget 2017 now proposes to permit a tax-deferred reorganization of multi-class mutual fund corporations into a number of separate mutual fund trusts by extending the existing mutual fund merger rules. Such reorganizations will be subject to detailed rules in the ITA and the new rules will apply to reorganizations occurring on or after March 22, 2017.

Segregated Funds

Segregated funds are life insurance products that, from a tax perspective, are generally subject to taxation under the ITA in a manner that is substantially similar to mutual fund trusts. That said, there has been concern expressed for some time that the existing mutual fund trust merger rules do not clearly apply to segregated funds, thus preventing tax-deferred mergers of segregated funds in cases where it might make commercial sense to do so, for example, on an acquisition of a segregated fund business of one life insurer by another.

Budget 2017 proposes rules that generally parallel the existing mutual fund merger rules to permit the merger of segregated funds. In addition, Budget 2017 proposes to allow segregated funds to carry over non-capital losses, subject to the normal loss carry over restrictions.

These proposals will apply to segregated fund mergers occurring after 2017 and non-capital losses arising in taxation years beginning after 2017, in both cases to allow the life insurance industry to have an opportunity to comment on the proposed rules.

Mark-to-market Election for Derivatives

The decision of the Tax Court of Canada in Kruger v. The Queen in 2015 gave rise to a change to the inventory tax rules proposed in Budget 2016. Now, the decision of the Federal Court of Appeal in Kruger in 2016 has given rise to a further proposed change in Budget 2017.

The Federal Court of Appeal held that the taxpayer, which was not a financial institution, could mark-to-market its derivatives held on income account for income tax purposes. To create more certainty, Budget 2017 proposes to enact a regime to allow taxpayers who hold derivatives on income account to elect to be taxed on those derivatives on a mark-to-market basis, provided that such derivatives are valued at fair market value under accounting principles. Once made, the election would require the taxpayer to report on a mark-to-market basis unless the election is revoked with the consent of the Minister.

The election will be available in respect of taxation years beginning after March 22, 2017.

Overriding the Case Law on Factual Control

The ITA recognizes two forms of corporate control: de jure and de facto (i.e., factual) control. Determining de jure control is straightforward as it exists where a person (or group) has the power to elect a majority of the board of directors. De facto control is less concrete, requiring a determination of whether a person (or group) has direct or indirect influence that, if exercised, would result in de facto control. The de facto control test is relevant for a variety of ITA provisions and, in particular, to determining whether a corporation is a "Canadian-controlled private corporation" and whether corporations are "associated" for ITA purposes. 

The de facto control test has historically been ambiguous as Canadian courts placed reliance on a variety of subjective factors in their analysis. However, in 2016 the Federal Court of Appeal narrowed the application of the de facto control test in McGillivray Restaurant Ltd v. The Queen, by finding that for a factor to be considered in determining whether de facto control exists, such a factor must include a "legally enforceable right and ability to effect a change to the board of directors or its powers, or to exercise influence over the shareholder or shareholders that have the right and ability".  This was a welcome clarification because it limited the scope of the factors that would otherwise have to be considered in making de facto control determinations.

Budget 2017 responds to McGillivray by proposing new subsection 256(5.11). The new rule provides that the determination of whether a taxpayer has any direct or indirect influence that, if exercised, would result in control in fact of the corporation shall:

  1. Take into account all factors that are relevant in the circumstances; and
  2. Not be limited to, and the relevant factors to be considered in making the determination need not include, whether the taxpayer has a legally enforceable right or ability to effect a change in the board of directors of the corporation, or the board's powers, or to exercise influence over the shareholder or shareholders who have that right or ability.

The effect of this proposed amendment is to reinstate the pre-McGillivray case law on de facto control which will restore the unpredictability associated with de facto control determinations. This measure is expected to apply in respect of taxation years that begin on or after March 22, 2017.

Federal Carbon Pricing Backstop

In an effort to make good on commitments made in the Vancouver Declaration of March 2016 and in the United Nations Paris Agreement on climate change at the First Ministers' Meeting on Clean Growth and Climate Change in December 2016, the Government announced that it would be introducing a federal carbon pricing backstop. Details on the measure were set out in Annex I, to the Pan-Canadian Framework on Clean Growth and Climate Change.

The federal carbon pricing benchmark includes a requirement that all Canadian jurisdictions have carbon pricing by 2018 based on GHG emissions and that such carbon pricing is applied to a common and broad set of sources that, at a minimum, are the same sources as those subject to the British Columbia carbon tax. Provinces and territories have the flexibility to choose between two systems: a direct price on carbon pollution (a carbon tax like British Columbia's or a carbon levy and performance-based emissions system like in Alberta) or a cap-and-trade system (e.g. Ontario and Quebec). The Government will introduce a backstop pricing system that will apply in provinces and territories that do not meet the federal carbon pricing benchmark.

Budget 2017 announces that, in the coming months, the Government will release a consultation paper containing the technical details of this measure.

GST/HST and Excise Tax Measures

New GST/HST and excise tax measures in Budget 2017 were limited. There are excise tax increases for both alcohol and tobacco. Ride sharing drivers are to be placed on the same footing for GST/HST collection as taxi drivers effective July 1, 2017. In addition, the rebate for GST/HST on accommodation sold as part of a tour package is to be eliminated for accommodations paid for after March 22, 2017, and for all such accommodations from January 1, 2018.

The Budget confirms the Government of Canada's intention to proceed with the joint venture election amendments announced in Budget 2016, as well as various proposed amendments announced on July 22, 2016, which included amendments to address a "master pension entity" and revisions to the "drop shipment" rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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

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

Authors
Events from this Firm
14 Sep 2017, Seminar, Birmingham, UK

Has Cloud replaced traditional outsourcing models? We will compare cloud to outsourcing, consider whether they have effectively become the same thing for many solutions and assess some of the advantages and disadvantages of each model.

18 Sep 2017, Seminar, London, UK

Our annual event as part of the London Design Festival is now in its fifth year. We would be delighted if you are able to join us again.

21 Sep 2017, Seminar, London, UK

Has Cloud replaced traditional outsourcing models? We will compare cloud to outsourcing, consider whether they have effectively become the same thing for many solutions and assess some of the advantages and disadvantages of each model.

 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

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

Use of www.mondaq.com

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

Disclaimer

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

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

Registration

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

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

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

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

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

Information Collection and Use

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

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

Mondaq News Alerts

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

Cookies

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

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

Log Files

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

Links

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

Surveys & Contests

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

Mail-A-Friend

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

Security

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

Correcting/Updating Personal Information

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

Notification of Changes

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

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

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