The Minister of Finance (Canada) delivered the Canadian Federal Government's 2008 Budget on February 26, 2008. Highlights of the tax measures are summarized below.
Proposed Relief for Sales of Taxable Canadian Property by Residents of Treaty Countries
The Budget proposes some welcome changes to the withholding and tax return filing obligations that apply where a non-resident of Canada disposes of taxable Canadian property (such as shares of Canadian private companies) where the gains from such dispositions are exempt from Canadian income tax by virtue of an income tax treaty between Canada and the non-resident's jurisdiction.
Currently, a non-resident person that disposes of taxable Canadian property (other than "excluded property" such as listed shares or mutual fund units) must comply with onerous clearance certificate procedures (under section 116 of the Income Tax Act (Canada) (the "ITA")) and the purchaser of such property is required to withhold and remit a portion of the purchase price unless the purchaser is provided with a clearance certificate specifying a certificate limit at least equal to the amount of the purchase price. This is the case even where any gain from the disposition of the property would be exempt from Canadian income tax as a result of an income tax treaty. Also, the non-resident is still required to file a Canadian income tax return even if it obtains the certificate.
Proposed Amendments to the Clearance Certificate Procedures
The Budget proposes that the types of "excluded properties" that are exempted from the clearance certificate procedure will be expanded to include property any gain on which would be exempt from Canadian income tax by virtue of an income tax treaty. (However, if the purchaser and the non-resident person are related, the purchaser must provide notice to the Canada Revenue Agency of the purchaser's acquisition of the property on or before the day that is 30 days after the date of the acquisition setting out specified information.)
Furthermore, the purchaser will not have any withholding obligation under section 116 in respect of the acquisition of taxable Canadian property (other than certain specified taxable Canadian property such as depreciable property) from a non-resident person where:
- the purchaser concludes after reasonable inquiry that the non-resident person is, under a tax treaty between Canada and a particular country, resident in the particular country;
- any gain from the disposition of the property would be exempt from Canadian income tax by virtue of the income tax treaty between Canada and the particular country if the non-resident person were a resident of the particular country for the purposes of such treaty; and
- the purchaser provides the Canada Revenue Agency with notice of the acquisition on or before the day that is 30 days after the date of the acquisition setting out specified information.
Proposed Amendments to the Tax Return Filing Obligations of Non-Resident Persons
A non-resident person will no longer be required to file a Canadian income tax return for a taxation year as a result of a disposition of taxable Canadian property where no tax is payable by the non-resident person under Part I of the ITA for the year, the taxpayer is not liable to pay any amount under the ITA in respect of any previous taxation year, and each taxable Canadian property disposed of by the taxpayer in the taxation year was "excluded property" (as described above) or a clearance certificate was obtained in respect of the disposition of the taxable Canadian property.
Other noteworthy initiatives in the Budget include the following:
- Tax-free savings accounts. Beginning in 2009, Canadian-resident individuals who are 18 years of age or older will be permitted to contribute a maximum of $5,000 (indexed to inflation) per year to their "tax free savings account" ("TFSA"). To the extent that an individual does not fully utilize his or her contribution room in any particular year, the unused contribution will be carried forward and applied against contributions made in future years. Contributions to a TFSA will not be tax deductible but any income or capital gains realized on the investments held in a TFSA will be exempt from tax and any withdrawals from the TFSA will be tax-free. In order to ensure that there is no loss in an individual's cumulative contribution room for his or her TFSA, the individual will be permitted to re-contribute amounts previously withdrawn from the TFSA without such re-contribution reducing the individual's otherwise available annual contribution limits. An individual will also be permitted to make contributions to a TFSA established by a spouse or common-law partner, provided the spouse or common-law partner has contribution room available. Subject to some exceptions, the investments permitted to be held in an individual's TFSA will be the same as those investments currently permitted for registered retirement savings plans.
- Dividend tax credits. The dividend tax credits available to individual investors receiving dividends from most Canadian public corporations will be significantly reduced on a phased-in basis commencing in 2009, with the final reduction occurring in 2012. This will increase the effective tax rate on such dividends compared to current law.
- Provincial taxation of income funds. Under current law, income trusts will become subject to a special "SIFT" tax on distributions made by them after 2010 (or before then if they breach "normal growth" guidelines.) The Budget proposes that the provincial component of the SIFT tax (that will be paid over to the provinces) will be based on actual provincial corporate tax rates in the provinces to which the distribution is allocated (under a formula giving equal weight to relative province-by-province payrolls and revenues) rather than being a flat rate of 13% (as previously announced). (However, the Quebec tax rate will be treated as nil for these purposes given that Quebec separately imposes a SIFT tax.)
- Mineral exploration. The scheduled expiration time for the "temporary" mineral exploration tax credit will be extended, yet again. The deadline for entering into the related flow-through share agreement will now be March 31, 2009.
- CCA. Various changes to the capital cost allowance rules and rates are proposed in order to encourage investment in manufacturing or environmentally-friendly equipment.
- Scientific research. The maximum annual expenditures of Canadian-controlled private corporations on scientific research and experimental development that are potentially eligible for investment tax credits at the enhanced 35% rate rather than the normal rate of 20% will be increased from $2 million to $3 million.
- GST treatment of nursing homes. Various amendments will effectively confirm that nursing homes and assisted-living facilities qualify as residential complexes for GST purposes – i.e., a portion of their cost of construction will be eligible for a GST rebate of a portion of the GST that was payable on their substantial completion and occupation, and headleases of these facilities will be exempt from GST. These proposals, which confirm the understanding of most industry participants (but not of the Canada Revenue Agency) of how the current GST rules work, will for the most part have retroactive effect.
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