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Feb 27, 2018
Highlights of the 2018 Federal Budget
Canada’s Department of Finance (“
Finance”) released Canada’s federal budget for 2018 (“ Budget 2018”) on February 27, 2018 (“ Budget Day”).
Finance has made good on its promise made on October 18, 2017 to introduce proposals regarding the taxation of passive income earned in private corporations but in a form that differs substantially from the rules initially proposed. Finance is combating its perceived problem by limiting the small business deduction available in a corporate group that earns significant passive investment income and by limiting a private corporation’s ability to fully clear out its refundable dividend tax on hand if it only pays “dividends” that match the nature of the income giving rise to the refund.
Among other domestic measures included in Budget 2018 are those aimed at further closing perceived tax loopholes, such as preventing taxpayers (primarily targeted at Canadian financial institutions and banks) from creating artificial tax losses through the use of sophisticated financial instruments and structured share repurchase transactions, and clarifying the application of the at-risk and limited partnership loss rules in the context of multi-tier partnerships.
Internationally, Budget 2018 focuses primarily on tightening existing rules dealing with cross-border surplus stripping, narrowing some of the various exceptions to the “investment business” definition contained in the foreign affiliate property income rules and deeming certain foreign affiliates to be a controlled foreign affiliate of a taxpayer where the taxpayer benefits from what Finance calls a “tracking arrangement” in respect of the foreign affiliate. Other proposed measures deal with reductions in a taxpayer’s deadline to file information returns of foreign affiliates and extensions of the time within which the Canada Revenue Agency (“
CRA”) may assess such returns.
Notably absent from Budget 2018 is any response to recent tax reform in the United States. This could be expected given that the far-reaching effects of such reform cannot be known with any certainty and related legislation was enacted quite speedily only at the end of 2017. Further, Finance may be waiting to obtain clarity on Canada’s overall trade position with the United States before considering any response.
The following summary provides an overview of business, international, and personal income tax measures included or proposed in Budget 2018. It also provides a brief overview of some administrative changes that have been proposed including some changes to certain reassessment periods.
BUSINESS TAX MEASURES
Passive Investment Income Rules - Reduction of Small Business Deduction: Budget 2018 contains the long-awaited release of the proposed rules governing the taxation of passive investment income earned by private corporations (the “ PII Rules”). In July of 2017, Finance announced that it was exploring ways to eliminate the perceived investment advantage shareholders enjoyed over employed individuals due to the greater amount of after tax capital within a corporation versus the lesser amount of after tax income individual taxpayers generated on the same income. Budget 2018 introduced a simplified approach to address the perceived advantage. The PII Rules contained in Budget 2018 work to achieve Finance’s stated objectives of leveling the playing field between incorporated business persons and employed individuals in two ways.
The first of these methods is to progressively reduce the amount of “small business deduction” (“
SBD”) on active business income earned by a “Canadian-controlled private corporation” (“ CCPC”) to the extent by which the CCPC’s “adjusted aggregate investment income” (“ AAII”) exceeds $50,000. The second of these methods is to restrict a corporation’s ability to trigger a refund of its “refundable dividend tax on hand” (“
RDTOH”) through the payment of preferentially taxed eligible dividends.
Proposed subsection 125(5.1) of the
Income Tax Act (Canada) (“ Tax Act”) provides that a CCPC’s SBD will be reduced on a straight line basis to the extent that the corporation, or any other corporation with which the first corporation is associated, earns AAII in excess of $50,000. If a CCPC has AAII of $150,000 or more in a given taxation year, the CCPC’s SBD limit will be ground to nil. The term AAII is defined in the proposed revision to subsection 125(1) of the Tax Act as the “aggregate investment income” of a corporation if that definition:
excluded capital gains and losses on “active assets;”
excluded losses carried forward under paragraph 111(1)(b) of the Tax Act;
included dividends from non-connected corporations;
included proceeds from a life insurance policy included in its income and not otherwise included in its “aggregate investment income;” and
were read as though no adjustment were made to the corporation’s income under subsection 91(4) of the Tax Act.
The term “active assets” is also defined in the proposed revision to subsection 125(1) of the Tax Act. “Active assets” are defined as property which are:
a) used by the corporation or a related CCPC primarily in an active business carried on in Canada;
b) shares of a connected corporation which would be QSBC shares if the references to individual shareholders were replaced with references to the particular corporation; or
c) an interest in a partnership at a particular time, where
the partnership interest represents not less than 10% of the value of all interests in the partnership;
50% of the partnership’s assets consisted of assets described in paragraphs (a) and (b) throughout the 24-month period immediately preceding the particular time; and
all or substantially of the partnership’s assets (i.e. 90%) consist of the assets described in paragraphs (a) and (b) at the particular time.
The rules will operate in tandem with the reduction in the business limit with respect to corporations that have taxable capital employed in Canada in excess of $10,000,000. These rules are set to take effect for taxation years which begin after 2018. However, proposed subsection 125(5.2) contains an anti-avoidance rule which deems related corporations which are otherwise unassociated to be associated for the purposes of subsection 125(5.1) where one corporation transfers or lends property to the other for the purpose of reducing its AAII as calculated in the second formula in proposed subsection 125(5.1).
Reform of RDTOH Regime
The second mechanism in the PII Rules to deter the accumulation of passive investments in business corporations consists of a new distinction between “eligible refundable dividend tax on hand” (“
Eligible RDTOH”) and “non-eligible refundable dividend tax on hand” (“ Non-Eligible RDTOH”). Both terms are defined in the proposed revision to subsection 129(4) of the Tax Act.
The Eligible RDTOH of a private corporation is the amount by which the total of the
Part IV tax paid by it in the year on eligible dividends paid to it by non-connected corporations;
Part IV tax paid by it in the year on taxable dividends paid to it from connected corporations where the payment of such dividends resulted in a dividend refund of the payer corporation from its Eligible RDTOH account; and
Its Eligible RDTOH balance at the end of the preceding taxation year (if it were a private corporation in that year)
exceeds the dividend refund received from its Eligible RDTOH for the preceding taxation year.
The Non-Eligible RDTOH of a private corporation is calculated in the same way as RDTOH is currently calculated in subsection 129(3) of the Tax Act, except that any amount included in Eligible RDTOH is excluded from Non-Eligible RDTOH.
The proposed revision to subsection 129(1) of the Tax Act provides that payment of an eligible dividend can only trigger a refund of Eligible RDTOH. In other words, if the only RDTOH account in which a corporation has a positive balance is its Non-Eligible RDTOH, that corporation’s payment of an eligible dividend will not trigger any dividend refund. Relatedly, payment by the private corporation of a non-eligible dividend will first trigger a refund of Non-Eligible RDTOH and will only trigger a refund of Eligible RDTOH to extent that 38.33% of non-eligible dividends paid by the private corporation exceeds its Non-Eligible RDTOH balance.
Budget 2018 provides a transition rule for the division of RDTOH into Eligible RDTOH and Non-Eligible RDTOH in the first year in which the new regime applies to a private corporation. Proposed subparagraph 129(5)(a)(i) of the Tax Act sets out that, in the first taxation year in which the definition of Eligible RDTOH applies to a particular private corporation, that private corporation’s Eligible RDTOH for the preceding taxation year (and thus its starting point for the current taxation year) is deemed to be lesser of its RDTOH balance for the previous year otherwise determined and 38.33% of the difference between its “general rate income pool” for the previous taxation year less the amount by which eligible dividends paid by it in the year exceeded its “excessive eligible dividend designations” in the year. Proposed subparagraph 129(5)(a)(ii) provides, in the first taxation year in which the definition of Non-Eligible RDTOH applies to a particular private corporation, that private corporation’s Non-Eligible RDTOH for the preceding taxation year is deemed to be its RDTOH balance otherwise determined less the amount determined by the second formula in proposed paragraph in 129(5)(a) of the Tax Act.
Accordingly only retained earnings out of a corporation’s “general rate income pool” at the end of its current taxation year will effectively be grandfathered under the current system.
Like the rules governing the reduction of a CCPC’s SBD owing to its passive investment income, the division of RDTOH into Eligible RDTOH and Non-Eligible RDTOH generally takes effect for taxation years beginning after 2018. These rules may take effect for taxation years beginning before 2019 and after 2018 if it can be reasonably determined a short-taxation year was triggered for the purpose of deferring the application of this new regime.
Artificial Losses Using Equity-Based Financial Arrangements
In 2015, Finance introduced amendments to the dividend rental arrangement rules to deny the inter-corporate dividend deduction on dividends received by a taxpayer in respect of which there is a synthetic equity arrangement. Very generally, a synthetic equity arrangement in respect of a share owned by a taxpayer is considered to exist where the taxpayer enters into an arrangement with an investor under which all or substantially all of the risk of loss and opportunity for gain or profit in respect of the share is shifted to the investor (e.g. total return swaps, certain forward contracts, certain put-call arrangements, etc.,). A key exception from the inter-corporate dividend denial rule applies to the extent that each investor party to the synthetic equity arrangement in question can be shown not to be a “tax indifferent investor” (e.g. tax-exempts, certain non-residents, certain partnerships and trusts with sufficient tax-exempts or non-residents as members or beneficiaries referred to as the “no tax indifferent investor exception”). Prior to the enactment of the synthetic equity arrangement rules, Finance was concerned that a taxpayer who had entered into a synthetic equity arrangement and who was required to transfer the benefit of dividends received on the subject shares through dividend-equivalent payments could claim the intercorporate dividend deduction in respect of the dividend received while also deducting the amount of the dividend-equivalent payments made to the investor, thereby realizing a loss.
Finance is concerned that taxpayers are still engaging in arrangements designed to circumvent the dividend rental arrangement rules. Consequently, Budget 2018 proposes to introduce specific legislation to clarify certain aspects of the synthetic equity arrangement rules as well as the securities lending arrangement rules to prevent taxpayers from realizing artificial tax losses through the use of equity-based financial arrangements.
Synthetic Equity Arrangements
Budget 2018 proposes an amendment to the no tax-indifferent investor exception to the synthetic equity arrangement rules to clarify that it cannot be met when a tax-indifferent investor obtains all or substantially all of the risk of loss and opportunity for gain or profit of a Canadian share in any way (for example, instead of in an arrangement directly with the taxpayer an arrangement with a no tax-indifferent investor counterparty of the taxpayer). The proposed amendments will apply to dividends that are paid, or become payable, after Budget Day.
Securities Lending Arrangements
Finance believes that taxpayers may be entering into securities lending arrangements and other sophisticated arrangements that do not technically qualify as “securities lending arrangements” under the Tax Act in order to achieve the same tax benefit that was originally targeted by the synthetic equity arrangement rules. In such cases, the prohibition against the deductibility of dividend compensation payments would not apply (e.g. the securities lending rules generally deny the deductibility of such dividend compensation payments) and the taxpayer would claim the inter-corporate dividend deduction on the dividends received resulting in the same no-inclusion, deduction and consequential loss problem identified by Finance in 2015. Budget 2018 proposes to broaden the definition of “securities lending arrangement” in the Tax Act to ensure that taxpayers that enter into arrangements that are substantially similar to those that fall within that definition are caught with the result that the dividend rental arrangement rules will generally apply to and dividends received on a share acquired under such a substantially similar arrangement. Budget 2018 also proposes to amend the rules relating to the deductibility of dividend compensation payments made under a securities lending arrangement by permitting a taxpayer that is a registered securities dealer to deduct up to two-thirds of any dividend compensation payment. However, in circumstances where the securities lending arrangement constitutes a dividend rental arrangement, the dividend compensation payment made to the counterparty will be fully deductible (whether the taxpayer is a registered securities dealer or not). These measures will apply to dividend compensation payments that are made on or after Budget Day unless the securities lending or repurchase arrangement was in place before Budget Day, in which case the amendments will apply to dividend compensation payments that are made after September 2018.
Stop-Loss Rule on Share Repurchase Transactions
Up until 2011, Canadian financial institutions subject to the mark-to-market rules were able to rely on certain exceptions to the dividend stop-loss rules in the Tax Act which are designed to reduce the amount of any loss realizable by a corporation on the disposition of a share by the amount of tax-free dividends received on such shares on or before the disposition. Instead of participating in a public share buy-back program or issuer bid, the Canadian financial institution would enter into a separate private agreement with the issuer for the repurchase of its shares. Given that such repurchase would not occur in the “open market”, the exception at subsection 84(6) of the Tax Act to the rule at subsection 84(3) of the Tax Act which deems the amount of the sale proceeds in excess of the paid-up capital in the repurchased share to be a dividend would not apply. Consequently, the Canadian financial institution could claim an inter-corporate dividend deduction that would offset the deemed dividend, but also deduct the amount of the deemed dividend from its proceeds of disposition for purposes of calculating any profit or loss on the share repurchase.
Measures were announced in 2011 to apply the dividend stop-loss rules in such circumstances. However, Finance acknowledges that as formulated the rules generally deny only a portion of the loss realized on a share repurchase (the amount by which the financial institution’s original cost exceeds paid-up capital) on the theory that the remaining portion of the loss would have been previously recognized in the mark-to-market income of the financial institution. This premise is not correct where there repurchased shares were fully hedged (as the mark-to-market income would be fully offset under the hedge).
Accordingly, Budget 2018 proposes to amend the provisions of the Tax Act pertaining to shares held as mark-to-market property to ensure that the tax loss otherwise realized on a share repurchase is reduced by the dividend deemed to be received on that repurchase when that dividend is eligible for the inter-corporate dividend deduction.
This measure will apply in respect of share repurchases that occur on or after Budget Day.
At-Risk Rules for Tiered Partnerships
In response to the recent Federal Court of Appeal decision in
Canada v. Green, J.N. et al, 2017 FCA 107 (“ ”), Budget 2018 proposes to clarify that the at-risk rules apply to a partnership that is itself a limited partner of another partnership. The stated aim of these rules is to ensure that the at-risk rules apply appropriately at each level of a tiered partnership structure. Green
Green, the taxpayers were partners of a limited partnership that was, in turn, a limited partner in several underlying limited partnership each of which incurred annual business losses. Such losses were allocated almost entirely to the top-tier limited partnership and, in turn, to the taxpayers. The top-tier partnership had a low or no at-risk amount in the lower tier partnership. If the partners of the top-tier partnership had a direct limited partnership interest in the lower-tier partnership and no at-risk amount, the allocated business losses would not be deductible in computing the income of the taxpayer’s as such, but instead would be characterized as limited partnership losses available only as a deduction against future partnership income. In Green, the trial judge found that the business losses of a bottom-tier partnership that exceeded the top-tier partnership’s at-risk amount do not similarly cease to be business losses to the top-tier partnership and were, therefore, available to be flowed out to partners of the top-tier partnership as business losses. In affirming the decision of the Tax Court, the Federal Court of Appeal concluded that the at-risk rules in paragraphs 96(2.1)(c) and (d) of the Tax Act are only applicable in respect of taxpayers who are required to compute amounts under sections 3 and 111 of the Tax Act and since partnerships are not taxpayers for purposes of those provisions, the at-risk rules could not apply at the partnership level. Consequently, the Federal Court of Appeal determined that Parliament did not intend to apply the restriction on limited partnership losses to partnerships as members of another limited partnership.
Budget 2018 proposes to amend the at-risk rules to make certain that for a partnership that is a limited partner of another partnership, the losses from the other partnership that can be allocated to the top-tier partnership’s members will be restricted by the at-risk amount in respect of that other partnership. Further, limited partnership losses of a limited partner that is itself a partnership will not be eligible for carryforward but will instead be reflected in the adjusted cost base of the partnership’s interest in the limited partnership.
These measures will apply in respect of taxation years that end on or after Budget Day, including in respect of losses incurred in taxation years that end prior to Budget Day. In particular, losses from a partnership incurred in a taxation year that ended prior to Budget Day will not be available to be carried forward to a taxation year that ends on or after Budget Day if the losses were allocated (for the year in which the losses were incurred) to a limited partner that is another partnership.
INTERNATIONAL TAX MEASURES
Budget 2018’s International tax measures focus primarily on tightening existing rules dealing with cross-border surplus stripping, narrowing some of the various exceptions to the “investment business” definition contained in the foreign affiliate property income (“
FAPI”) rules and deeming certain foreign affiliates to, instead, constitute a controlled foreign affiliate of a taxpayer where the taxpayer benefits from a tracking arrangement in respect of the foreign affiliate. Other proposed measures reduce the period of time in which information returns in respect of foreign affiliates are due as well as extend the normal reassessment period during which the CRA may reassess a taxpayer’s return in respect of income from a foreign affiliate.
Cross Border Surplus Stripping
Section 212.1 of the Tax Act applies so as to prevent a non-resident shareholder from entering into transactions to extract a Canadian corporation’s surplus in excess of the paid-up capital of its shares in a tax-free manner or to otherwise artificially increase the paid-up capital in respect of the shares of a Canadian corporation. Where applicable, the provision operates to result in a deemed dividend subject to withholding tax to the non-resident or to suppress the paid-up capital that would have otherwise been created. Section 212.1 of the Tax Act is engaged where a non-resident person (or designated partnership) disposes of shares of the capital stock of one Canadian corporation to another Canadian corporation and certain other conditions are met.
Budget 2018 notes that section 212.1 of the Tax Act does not address situations where a non-resident person disposes of an interest in a partnership that owns shares of a Canadian corporation. Consequently, a reorganization (or variations thereof) involving the transfer of shares of a Canadian corporation to a partnership followed by a transfer of the partnership interest to another Canadian corporation would not generally be caught. Budget 2018 notes a similar problem in the context of the corporate immigration rules contained in section 128.1 of the Tax Act.
Budget 2018 proposes to amend both sets of rules by adding comprehensive “look through” provisions to deal with partnerships and trusts. These rules will allocate the assets, liabilities and transactions of a partnership or trust to its members or beneficiaries, as applicable, on the basis of the relative fair market value of their interests.
This measure will apply to transactions that occur on or after Budget Day and Budget 2018 cautions that transactions occurring prior to Budget Day may be challenged under the GAAR and transactions not technically caught by the new rules after Budget Day would be expected to be challenged under the GAAR.
Budget 2018 does not contain proposed technical legislation for this measure.
However, the accompanying Notice of Ways and Means Motion does include similarly themed amendments to the thin-capitalization rules contained in section 18 of the Tax Act and the surplus-stripping rules in section 84 of the Tax Act by reducing a taxpayer’s contributed surplus component of its “equity amount” (for purposes of the thin-capitalization rules) or a taxpayer’s contributed surplus (for purposes of the rules at paragraphs 84(1)(c.2), (c.3) and (c.4) which otherwise permit a corporation to convert contributed surplus into paid-up capital without triggering a deemed dividend) by any contributed surplus that arose at a time when the taxpayer corporation was a non-resident or on a disposition to which the rules in subsection 212.1(1) applies.
Foreign Affiliates – Investment Business More-than-Five Full-Time Employees Condition & Tracking Arrangements
Income from an investment business (e.g. a business the principal purpose of which is to derive income from property) carried on by a foreign affiliate of a taxpayer is generally included in the foreign affiliate’s FAPI. A key exception to this rule is where the foreign affiliate’s investment activities are sufficiently significant so as to treat the foreign affiliate’s business as an active business (not included in FAPI) rather than an investment business. The Tax Act contains bright-line tests for determining whether such activities are sufficiently significant, a key condition of which is that the affiliate employ more than five full-time employees (or the equivalent) in the active conduct of the business.
Finance notes that certain taxpayers whose foreign investment activities would not warrant more than five full-time employees have engaged in tax planning with other taxpayers in similar circumstances also seeking to meet this test by grouping their financing assets in a common foreign affiliate, but determining their respective returns from the foreign affiliate separately by reference to their own contributed assets while also retaining control over such contributed assets (a “
Budget 2018 proposes to introduce a rule for the investment business definition so that where income attributable to specific activities that accrues to the benefit of a specific taxpayer under a tracking arrangement, those activities carried out to earn such income will be deemed to be a separate business carried on by the foreign affiliate. Each separate business carried on by the foreign affiliate must satisfy the tests for determining whether they are sufficient significant to be considered an active business, including the more-than-five full-time employees condition noted above.
This measure will apply to taxation years of a taxpayer’s foreign affiliate that begin after Budget Day. Budget 2018 does not contain proposed technical legislation for this measure.
Controlled Foreign Affiliate Status & Tracking Arrangements
In addition to using tracking arrangement in order to pool financial assets in an effort to meet the more-than-five full-time employees condition in the investment business definition, Finance notes that taxpayer’s may also pool assets in a foreign affiliate and use tracking arrangements to avoid controlled foreign affiliate status. This is significant as FAPI only accrues to a taxpayer in respect of its controlled foreign affiliates.
Budget 2018 proposes to deem a foreign affiliate of a taxpayer to be a controlled foreign affiliate of the taxpayer if FAPI, attributable to activities of the foreign affiliate, accrues to the benefit of the taxpayer under a tracking arrangement. This measure would ensure that each taxpayer involved in such a tracking arrangement is subject to accrual taxation in respect of FAPI attributable to the taxpayer.
This measure will apply to taxation years of a taxpayer’s foreign affiliate that begin after Budget Day. Budget 2018 does not contain proposed technical legislation for this measure.
Investment Business Exception – Trading or Dealing in Indebtedness
One of the exceptions from the investment business rules includes a condition that a taxpayer engaged in certain regulated financial activities satisfy certain minimum capital requirements. Introduced in 2014, subsection 95(2.11) of the Tax Act provides that the exception in the investment business definition for certain financial activities of regulated financial institutions will only be met where,
inter alia, either the Canadian parent financial institution has, or is deemed to have, more than $2 billion of equity under certain Canadian banking or trust statutes, or more than 50% of the corporation’s taxable capital employed in Canada is attributable to a regulated business carried on in Canada.
Budget 2018 proposes to add a similar minimum capital requirements to the trading or dealing in indebtedness rules.
This measure will apply to taxation years of a taxpayer’s foreign affiliate that begin after Budget Day. Budget 2018 does not contain proposed technical legislation for this measure.
PERSONAL TAX MEASURES
New Reporting Requirements for Trusts
A trust that does not earn income or make distributions in a year is generally not required to file an annual (T3) return of income. A trust is required to file a T3 return if the trust has tax payable or it distributes all or part of its income or capital to its beneficiaries. Even if a trust is required to file a tax return for a year, there is no requirement for the trust to report the identity of all the beneficiaries. Budget 2018 introduces new reporting requirements that significantly expand the collection of information with respect to trusts, which will apply for the 2021 and subsequent taxation years.
The Budget proposes that certain trusts provide additional information on an annual basis. The new reporting requirements will impose an obligation on many trusts to file a T3 return where one does not currently exist. This information would be used to help the CRA assess the tax liability for trusts and its beneficiaries.
The new reporting requirements will apply to express trusts that are resident in Canada and to non-resident trusts that are currently required to file a T3 return. Trusts that fall under this category include trusts that hold investment assets of more than $50,000 and trusts that own shares of private companies. While they are some exceptions (i.e. certain estates, charitable trusts, etc.) these exceptions are limited and will not apply to most private client situations.
Where the new reporting requirements apply to a trust, the trust will be required to report the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability to exert control over the trust’s assets.
There are potential substantial penalties for failure to file.
Measures for Individuals with Disabilities
(a) Registered Disability Savings Plan – Qualifying Plan Holders
Where a mentally incapable adult does not have a legal guardian in place, a qualifying family member (i.e., a parent, spouse or common-law partner) is permitted to be the plan holder of the individual’s Registered Disability Savings Plan (“
RDSP”). This measure is legislated to expire at the end of 2018, but Budget 2018 proposes to extend the temporary measure by five years, to the end of 2023. A qualifying family member who becomes a plan holder before the end of 2023 can remain the plan holder after 2023.
(b) Canada Workers Benefit
Budget 2018 also contains measures to increase the maximum amount of the Canada Workers Benefit disability supplement to $700 in 2019 and the phase-out threshold of the supplement ($24,111 for single individuals and $36,483 for families). The reduction rate of the supplement will be decreased to 6 percent where both partners in a family are eligible for the supplement and 12 percent in all other cases. Budget 2018 also includes proposals to allow the CRA to assess an individual’s eligibility for the benefit where the individual does not apply for it.
(c) Medical Expense Tax Credit
Budget 2018 contains measures to expand the expenditures eligible under the “Medical Expense Tax Credit” to include those incurred in respect of an animal specially trained to perform tasks for a patient with a severe mental impairment to assist them to cope with their impairment. The proposed expansion to the credit will take affect for expenditures incurred after 2017.
Health and Welfare Trusts
The CRA will no longer apply its administrative position with respect to Health and Welfare Trusts after the end of 2020. Anyone who has a Health and Welfare Trust should therefore consider options such as winding-up the trust or converting it into Employee Life and Health Trust before the end of 2020.
Charities – Miscellaneous Technical Issues
The charitable sector had hoped that there would be a greater focus in Budget 2018 on enhancing the benefits of charities and donors; however, the measures regarding charities are limited to technical matters.
Where the registration of a charity is revoked (voluntarily or involuntarily) the Tax Act imposes a 100-per-cent revocation tax on the charity based on the total net value of its assets. In order to ensure that a revoked charity’s accumulated property stays within the charitable sector, a charity can reduce the amount of revocation tax by making qualifying expenditures, including gifts to “eligible donees”. In some circumstances, a charity may not be able to locate an eligible donee that is willing or able to assume ownership of one or more of its assets. In situations where a suitable recipient cannot be found to keep a property in the charitable sector, Budget 2018 proposes to allow the property to be transferred to a municipality for the benefit of the community.
The other measure proposes to simplify the rules that apply to the registration of universities outside Canada to be considered to be qualified donees for the purposes of the donation tax credit.
Changes to Reassessment Periods and Other Administrative Matters
Extension of Normal Reassessment Period in respect of Foreign Affiliate Income
Budget 2018 proposes to extend the normal reassessment period for a taxpayer by three years from four years to seven years in respect of income arising in connection with a foreign affiliate of the taxpayer.
This measure will apply to taxation years of a taxpayer that begin on or after Budget Day.
Shortening the Information Return Deadline in respect of Foreign Affiliates
Budget 2018 proposes to shorten the information return deadline in respect of a taxpayer’s foreign affiliates from the current deadline of 15 months after the end of the taxpayer’s taxation year to within six months after the end of the taxpayer’s taxation year, aligning the deadline with the normal income tax return filing deadline for corporations (on the basis that most taxpayers with foreign affiliates are corporations).
This measure will apply to taxation years of a taxpayer that begin after 2019.
Requirements for Information and Compliance Orders – Stop-the-Clock Rule
Currently, when a taxpayer contests a requirement from the CRA for foreign-based information, a “stop-the-clock” rule extends the reassessment period by the amount of time during which the requirement is contested.
No similar rules apply when challenges are made to requirements for information that do not involve foreign-based information or to compliance orders. Budget 2018 proposes to amend the Tax Act to introduce a “stop-the-clock” rule fore requirements for information generally and for compliance orders. This rule will extend the reassessment period of a taxpayer by the period of time during which the requirement or compliance order is contested.
This measure will apply in respect of challenges instituted after Royal Asset to the enacting legislation.
Extension of Reassessment Period – Non-Resident non-arm’s length persons
Finance notes a technical problem with enforcing the rules in circumstances where a taxpayer reports a loss in a particular year which it carries back to a prior year in circumstances where the loss is subsequently reduced as a result of the reassessment of a transaction involving the taxpayer and a non-arm’s length non-resident person at a time when the carry-back year is statute-barred. This scenario is most likely to arise in circumstances where the CRA makes a transfer-pricing adjustment in the loss year so as to reduce the quantum of the taxpayer’s loss, but it is unable to make a consequential reassessment to a prior taxation year to which the taxpayer has carried back the loss due to it being statute-barred.
Budget 2018 proposes to amend the Tax Act to provide the CRA with an additional three years to make a consequential reassessment of a prior taxation year of a taxpayer in such circumstances.
This measure will apply in respect of taxation years in which a carried back loss is claimed, where that loss is carried back from a taxation year that ends on or after Budget Day.
Sharing Information for Criminal Matters
Budget 2018 proposes to allow the legal tools available under the
Mutual Assistance in Criminal Matters Act to be used with respect to the sharing of criminal tax information under Canada’s tax treaties, tax information and exchange agreements and the Convention on Mutual Administrative Assistance in Tax Matters in order to facilitate the sharing of information Canada is obligated to share in respect of tax-related offences. Any such measures will come into force upon Royal Asset to the enacting legislation.
Sharing Information Relating to Serious Non-Tax Offences
Budget 2018 proposes to enable the sharing of tax information with Canada’s mutual assistance partners in respect of acts that, if committed in Canada, would constitute terrorism, organized crime, money laundering, criminal proceeds or designated substances offences.
Budget 2018 also proposes to enable confidential information under Part IX of the
Excise Tax Act and the Excise Act, 2001 to be disclosed to Canadian police officers in respect of those offences where such disclosure is currently permitted in respect of taxpayer information under the Tax Act.
Other Measures & Updates
Extension of Mineral Exploration Tax Credit
Budget 2018 proposes to extend eligibility for the mineral exploration tax credit to flow-through share agreements entered into on or before March 31, 2019, one year longer than previously envisaged.
Cracking Down on Tax Evasion
To further combat tax evasion and tax avoidance, the Government will invest $90.6 million over five years to address additional cases that have been identified through enhanced risk assessment systems, both domestically and internationally.
Availability of Beneficial Ownership Information – Corporations
The Government proposes to introduce legislative amendments to the
Canada Business Corporations Act to strengthen the availability of beneficial ownership information and will continue to collaborate with the provinces and territories to access potential mechanisms to enhance the effectiveness of the overall system.
Preventing Tax Treaty Abuse & Ratifying the MLI
Canada intends to adopt new rules in its tax treaties to more effectively address treaty abuse, such as treaty shopping. These include anti-treaty abuse provisions that may be adopted under the
Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“ MLI”) or in the process of negotiating new, or renegotiating existing, tax treaties. In 2018, Canada will be taking steps necessary to enact the MLI into Canadian law and to ratify the MLI as needed to bring it into force.
Budget 2018 proposes an excise duty framework for cannabis products. The duty will generally apply to all cannabis products available for legal purchase.
Cannabis cultivators and manufacturers will be required to obtain a cannabis licence from the CRA and remit the excise duty, where applicable
. The framework will come into effect when cannabis for non-medical purposes becomes available for legal retail sale.
Excise duties will be imposed on federally-licenced producers (“
cannabis licensees”) at the higher of a flat rate applied on the quantity of cannabis contained in a final product and a percentage of the dutiable amount of the product as sold by the producer. The dutiable amount generally represents the portion of the producer’s sales price that does not include the cannabis duties under the Excise Act, 2001. The proposed excise duty framework will be applied as follows:
A flat rate duty will be imposed, at the time of packaging for final retail sale, on the quantity of cannabis flowering and non-flowering material.
The flat rate duty will be imposed on a dollar-per-gram basis, or dollar per-seed/seedling basis in the case of seeds/seedlings.
At the time of delivery of a cannabis product by the cannabis licensee that packaged it to a purchaser (e.g., a provincially-authorized distributor), an
ad valorem rate will also be imposed on the dutiable amount of the transaction. Cannabis licensees selling to purchasers will be liable to pay duty at the higher of the flat rate or the
ad valorem rate on the product. The applicable duty will only become payable at the time of delivery to a purchaser. The cannabis licensee who packaged the cannabis product for final retail sale will be liable to pay the applicable excise duty. All cannabis products that will be removed from the premises of a cannabis licensee to enter into the Canadian market for retail sale will be required to have an excise stamp. Excise stamps will have specified colours indicating the provincial or territorial market in which it is intended to be sold. It will be the responsibility of the cannabis licensee who packaged the cannabis product to determine and apply the appropriate excise stamp before its entry into the duty-paid Canadian market.
If you have any questions about Budget 2018, please contact Barbara Worndl, Practice Group Leader, or any member of the Tax and Estates Group.