Canada: 2017 Federal Budget: Key Tax Changes

 The 2017 Federal Budget (the "Budget") was released March 22nd, 2017 ("Budget Day"). Highlights include:

Upcoming Review of Private Corporation Tax Planning

The Budget announced that the federal government will be looking into:

  1. Income sprinkling using private corporations: The Budget states that this strategy can reduce income taxes by causing income that would otherwise be realized by an individual at a high personal income tax rate to instead be realized by family members who are subject to lower personal tax rates;
  2. Holding a passive investment portfolio inside a private corporation: The Budget provides that since corporate income tax rates are generally lower than personal income tax rates, the use of private corporations facilitate the accumulation of earnings that may not be possible for others; and
  3. Converting a private corporation's regular income into capital gains: The Budget maintains that, since only one-half of capital gains are included in income, this strategy takes advantage of the lower tax rates on capital gains by converting income to capital gains that should have been treated as income by way of dividends.

The government will release a paper in the coming months setting out the nature of these issues in more detail as well as proposed policy responses. We note that the second point, above, seems to ignore the high rate of tax (49.7% in British Columbia) already paid by Canadian-controlled private corporations on investment income.

Key Income Tax Legislative Changes

Broadening of Factual Control Test

The Income Tax Act recognizes two types of control of a corporation. The first is legal (de jure) control and the second is factual (de facto) control. Legal control is generally the right to elect a majority of the board of directors of a corporation. Factual control is a broader test and considers other factors that may allow a person to control a corporation, such as family ties with other shareholders. Factual control is significant for purposes of determining whether one or more corporations are associated for purposes of accessing the small business deduction. The small business deduction must be shared among associated corporations.

The Budget introduced a provision that broadens the scope of factors and circumstances that may be considered in determining whether factual control exists effective for taxation years beginning as of Budget Day. This proposed amendment is in response to recent case law which concluded that some factors or circumstances were too subjective to be considered in determining factual control and would lead to unpredictability in the law.

New Election for Mark-to-Market Accounting of Financial Derivatives

In response to recent case law that found that taxpayers are generally permitted to account for their derivatives on income account using a mark-to-market method, as opposed to the realization method on capital account, the Budget introduced an optional election for taxpayers that wish to use the mark-to-market method for "eligible derivatives." Eligible derivatives are essentially derivatives held on income account valued at fair market value in financial statements.

Additionally, the election will provide a tax-deferral on any accrued gains of existing derivatives that occurs by virtue of making the election until disposed of. Once the election is made, it cannot be revoked without permission of the CRA.

According to the Budget, the election can be made in respect of taxation years beginning on or after Budget Day.

Anti-Avoidance Rules on Certain Uses of the Realization Method

The Budget released a new set of anti-avoidance stop-loss rules that generally apply when a taxpayer uses the realization method to account for its derivative positions and engages in selective transactions to realize losses in a tax year without realizing gains. These are known as "straddle" transactions. The rule will operate by deferring recognition of any losses on a derivative position to the extent of any unrealized gain on an offsetting position.

This anti-avoidance stop-loss rule is proposed to come into effect in respect of losses on derivative positions entered into on or after Budget Day.

Elimination of Billed-Based Accounting for Professionals

Taxpayers generally must include the value of work in progress in computing their business income for tax purposes. However, certain professionals (such as accountants, dentists, lawyers and doctors) may elect to deduct the value of their work in progress in computing their income for the year through the use of an optional election. This allows for some deferral of tax by allowing for a deduction of expenses without a corresponding inclusion of income in respect of work in progress.

The Budget proposed to disallow the billed-based accounting election for tax years beginning on or after Budget Day, with some transitional relief. For the first tax year after Budget Day, 50% of the lesser of cost and fair market value of the work in progress will be taken into account for purposes of determining inventory for tax purposes. After that tax year, the full amount of the lower of cost and fair market value will be accounted for.

Expansion of Tax-Deferral Transfers of Investment Funds

The Budget introduced additional rules in order to allow for the reorganization of a switch mutual fund corporation into multiple mutual fund trusts on a tax-deferred basis. A switch mutual fund corporation is a corporation whereby the returns of various funds or asset portfolios of the corporation are attributable to a particular class of shares.

These proposed rules will take effect in respect of reorganizations that occur on or after Budget Day.

Mineral Exploration Tax Credit for Flow-Through Share Investors

The tax credit available to flow-through shareholders in resource companies that incur Canadian

exploration expenses has been extended by another year and will apply to flow-through share agreements entered into prior to April 1, 2017.

Tax Administration

Added Resources Tax Enforcement and Combatting Tax Avoidance

The Budget provides that the federal government will invest an added $523.9 million over five years to combat tax evasion and prevent tax avoidance. In particular, the Budget proposes to allocate the money to the following:

  1. Increased verification activities;
  2. Hiring additional auditors and specialists with a focus on the underground economy;
  3. Develop business intelligence systems to target high-risk international tax and abusive tax avoidance; and
  4. Improve quality of investigative work targeting criminal tax evaders.

Ownership Transparency

The Budget states that the federal government will look to collaborate with provinces and territories to improve the transparency of legal persons and legal arrangements, and increase the availability of beneficial ownership information. The federal government indicates it is looking for ways to enhance the tax reporting requirements for trusts to improve the collection of beneficial ownership information to combat tax evasion, terrorist financing and money laundering.

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

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

Gareth Williams
In association with
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (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

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’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.


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.


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 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.


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.


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.


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.


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

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

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

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