Canada: 2017 Federal Budget: Tax Highlights

The Liberal government's second budget (Budget 2017) comes during a period of exceptional global political and economic uncertainty. Of particular importance from a Canadian economic and tax policy perspective is the uncertainty about how the Trump administration's agenda will unfold in the coming months. Will its foreign and trade policies have a material impact on Canada, and will the United States pursue a tax reform agenda that will impose practical constraints on Canadian policy alternatives?

As the government attempts to advance its stated priorities of innovation, job creation and infrastructure investment, there has been much speculation in the weeks leading up to Budget Day (March 22, 2017) regarding the extent to which Mr. Trump's promises of extensive U.S. corporate tax reform will influence the Liberal government's approach to anticipated Canadian tax reforms. For instance, the federal government's recent extension of its federal tax credit review, which was originally expected to culminate in a tax reform plan that would be released on Budget Day, will allow the government to first observe how the promised U.S. tax reform unfolds. In recent months, the most prominently rumoured Canadian tax change has been a suspected increase in the capital gains inclusion rate. For the second consecutive year, this rumour has not come to fruition, as Budget 2017 leaves the taxation of capital gains unchanged.

The principal tax changes announced in Budget 2017 of interest to the business community are summarized below.

Income Tax Measures

Elimination of Billed-Basis Tax Reporting

Accountants, dentists, lawyers, doctors, veterinarians and chiropractors have been able to compute their income for tax purposes by including in income amounts that have been billed during the year and excluding work in progress that remains unbilled at the end of the year. The costs incurred in the year are deducted against the billed income. In an unexpected move, Budget 2017 proposes to eliminate this rule. Such professionals will no longer be able to report income on the billed basis. A transitional rule provides that in the first taxation year that begins after Budget Day, both the cost and the fair market value of the taxpayer's work in progress is one half of the amount otherwise determined. This change accelerates income that would otherwise have been taxable in the next year into an earlier year; it does not affect the total amount of income over time. The Budget Supplementary Information indicates that this change is expected to generate $425 million in revenue over the next three years.

The cash-basis reporting available to farming and fishing business is not affected by this change, although Budget 2017 announces a consultation on the treatment of deferred cash purchase tickets that could lead to the elimination of the deferral opportunity they provide in respect of "listed grain" sales.

Timing of Recognition of Gains and Losses on Derivatives

As part of Budget 2017, the government proposes two measures addressing the timing of recognition of gains and losses on derivatives. The first one addresses the outcome of the Federal Court of Appeal decision in Kruger Inc. v. Canada (for our previous release see The Federal Court of Appeal Permits Use of Mark-To-Market Tax Accounting). This case held that the taxpayer was entitled to use the mark-to-market method in computing its income for federal income tax purposes and, as a result, it was entitled to recognize an accrued year-end loss on its book of foreign exchange option contracts. To provide a clear framework for exercising the choice of using the mark-to-market method and to ensure that this choice does not lead to avoidance opportunities, Budget 2017 proposes to introduce an elective mark-to-market regime for derivatives held on income account. Specifically, an election will allow taxpayers to mark to market all of their eligible derivatives. Once made, the election will remain effective for all subsequent years unless revoked with the consent of the government. This election will be available for taxation years that begin on or after Budget Day.

A second measure deals with so-called straddle transactions. Typically, a straddle is a transaction in which a taxpayer concurrently enters into derivative positions that are expected to generate equal and offsetting gains and losses. Shortly before its taxation year-end, the taxpayer disposes of the position with the accrued loss, while shortly after the beginning of the following taxation year, the taxpayer disposes of the offsetting position with the accrued gain. There are several variations to this type of transaction, including combining it with an exit strategy that shifts the offsetting gain to a tax-indifferent investor. The government has been challenging these transactions using various rules and principles, including the general anti-avoidance rule. Now Budget 2017 proposes to introduce a stop-loss rule that will effectively defer the realization of any loss on the disposition of a position to the extent of any unrealized gain on an offsetting position. The stop-loss rule will be subject to several exceptions, including for financial institutions and hedging transactions. A carve-out would also apply if none of the main purposes of the transactions is to defer or avoid tax. This measure will apply to any loss realized on a position entered into on or after Budget Day.

Treaty Shopping

Budget 2016 confirmed the government's commitment to address treaty abuse in accordance with the proposals coming out of the OECD's base erosion and profit shifting (BEPS) project. On November 24, 2016, members of an ad hoc group consisting of more than 100 jurisdictions (including Canada) under the aegis of the OECD concluded negotiations of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). The MLI is intended to be an instrument that can be used to uniformly and efficiently implement recommendations regarding tax treaty policy and practice across thousands of bilateral tax treaties between participating jurisdictions.

In Budget 2017 the government stated that it is pursuing signature of the MLI and is undertaking the necessary domestic processes to do so.

Meaning of Factual Control

Two tests for control of a corporation are recognized in the Income Tax Act (Canada) (ITA): de jure (legal) control and de facto (factual) control. The factual control test is relevant in determining a corporation's status as a Canadian-controlled private corporation, as well as whether corporations are associated, which can affect their small business deduction limit and the limit on qualifying expenditures relating to the refundable 35% SR&ED tax credit. A recent judicial decision (McGillivray Restaurant Ltd. v. The Queen) held that for a factor to be considered in determining whether factual control exists, it 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 who have that right and ability," and rejected consideration of factors related to operational control in making this determination.

Budget 2017 notes that it was not intended from a policy perspective that the factual control test depend on the existence of a legally enforceable right of this nature, or that other factors be disregarded, and proposes to amend the ITA to clarify that the determination whether factual control exists is to be made by taking into consideration all factors that are relevant in the circumstances. This test may lead to considerably more uncertainty in its application than the approach applied in McGillivray. This amendment will apply in respect of taxation years beginning after March 21, 2017.

Anti-Avoidance Rules for Registered Plans

The ITA contains anti-avoidance rules applicable to holders of tax-free savings accounts (TFSAs), registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs). These rules are aimed at ensuring that investments held through registered plans are arm's-length portfolio investments and that no advantages are derived from transactions that would not have occurred on an open market. In these situations, penalty-type taxes apply to the holder of the registered plan. Budget 2017 proposes to extend the application of these anti-avoidance rules to registered education savings plans (RESPs) and registered disability savings plans (RDSPs). Subject to specific exceptions, the proposed rules apply to investments acquired after Budget Day and to investment income generated after Budget Day on previously acquired investments.

Merger of Switch Corporations into Mutual Fund Trusts

Canadian mutual funds can be in the legal form of a trust or a corporation. Switch corporations are mutual fund corporations with multiple classes of shares, where typically each class is a distinct investment fund.

For qualifying reorganizations occurring after March 21, 2017, the budget proposes to extend the current mutual fund merger rules to facilitate the reorganization of a switch corporation into multiple mutual fund trusts on a tax-deferred basis. The rules will apply to a class of shares if all or substantially all of the assets allocable to that class are transferred to a mutual fund trust and the shareholders of that class become unitholders of that mutual fund trust.

Switch fund mutual fund corporations historically allowed a shareholder to convert shares for one class to another class without having a taxable disposition. As a result of amendments announced in Budget 2016, any such conversion is now a taxable disposition to the shareholder except where the switch is a change with respect to management fees or expenses.

Consultation on Taxation of Private Corporations

Budget 2017 does not include any measures that affect the taxation of private corporations. The federal government has announced that it will issue a paper in the coming months discussing certain tax-planning strategies involving private corporations and its proposed responses to these strategies. The following strategies were highlighted in Budget 2017 as items that the government may address in this paper:

  • Using a private corporation to "sprinkle" income via dividends and capital gains among family members who may be subject to a lower rate of tax on the income.
  • Holding a passive investment portfolio inside a private corporation where the corporate tax on the income is lower than the personal rate of tax.
  • Converting income that would be taxed in the hands of individual shareholders as a dividend or salary into a capital gain.

Budget 2017 notes that a number of existing measures limit the scope of certain of these strategies, but that these measures may not apply in all circumstances. The forthcoming paper will include the federal government's proposed policy measures on these issues, including possible legislative changes. The paper may also include relieving measures to existing rules that may provide disincentives to genuine business transactions. No timeline was given as to when this paper would be issued or the consultation period for business to provide its views on these items.

Excise Tax Measures

"Uber" Tax

Budget 2017 proposes to amend the Excise Tax Act (Canada) so that ride-sharing services, such as Uber, will be required to charge goods and services tax/ harmonized sales tax on its services in the same manner as taxis. This measure is intended to level the playing field between ride-sharing services and taxis.

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
 
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.