The Minister of Finance (Canada), the Honourable Bill Morneau, presented the Government of Canada's (the "Federal Government") 2018 Federal Budget ("Budget 2018") on February 27th, 2018 ("Budget Day"). Budget 2018 contains significant proposals to amend the Income Tax Act (Canada) (the "ITA") and the Excise Tax Act (the "ETA") while also providing updates on previously announced tax measures and policies.
Significant Budget 2018 proposals and updates include:
- Introduction of simplified measures (compared to the July 2017 proposals) applicable to passive investment income in a private corporation that will: (i) limit access to the small business rate for small businesses with significant passive savings, and (ii) limit access to refundable taxes for larger Canadian-controlled private corporations ("CCPCs").
- Rules applicable to equity-based financial arrangements including synthetic equity arrangements and securities lending arrangements.
- Rules to prevent tax-free distributions by Canadian corporations to non-resident shareholders through the use of certain transactions involving partnerships and trusts.
- Modification of the foreign affiliate provisions so certain rules cannot be avoided through the use of "tracking arrangements".
- Updates on Canada's participation in the Organisation for Economic Co-operation and Development ("OECD") project on Base Erosion and Profit Shifting ("BEPS").
Selected proposals and tax measures are detailed below:
Proposals to Improve Compliance with the Canadian Tax System
Cracking Down on Tax Evasion and Combatting Tax Avoidance
In Budget 2018, the Federal Government has continued its commitment to a fair tax system by cracking down on tax evasion and combatting tax avoidance. Budget 2018 announced that it will invest $90.6 million over five years to address additional cases that have been identified through enhanced risk assessment systems. The Federal Government will also provide $41.9 million over five years, and $9.3 million per year ongoing, to the Courts Administration Service to support new front-line registry and judicial staff, most of whom are expected to support the Tax Court of Canada.
Budget 2018 also notes that the Federal Government continues to work towards increased transparency for trusts and corporations. The proposed new trust reporting requirements are described below. In December 2017, federal, provincial and territorial Finance Ministers agreed in principle to pursue legislative amendments to their corporate statutes to require the disclosure of accurate and updated information regarding the beneficial owners of corporations and to eliminate the use of bearer shares.
International Tax Avoidance and Evasion - BEPS and the Common Reporting Standard
Budget 2018 confirms the Federal Government's commitment and continued participation in the OECD project on BEPS. The OECD BEPS project is intended to address concerns related to tax planning by multinationals ("MNEs") which rely on bilateral tax treaties and their interaction with domestic tax rules to minimize taxes for the overall enterprise.
Budget 2018 provides an update to the BEPS measures that have been or are in the process of being implemented, including:
- Preventing Treaty Abuse: Canada intends to adopt new rules in its tax treaties to address treaty abuses such as treaty shopping. These include anti-treaty shopping provisions that may be adopted in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the "Multilateral Instrument") or by negotiating new, or renegotiating existing, tax treaties.
- Transfer Pricing: Canada has adopted the revised OECD Transfer Pricing Guidelines. Additional transfer pricing guidance is due to be published in 2018.
- Country-by-Country Reporting: Large MNEs are now required to file country-by-country ("CbC") reports containing information on their global allocation of income and taxes. These reports are exchanged with global tax authorities with whom Canada has an exchange arrangement under a tax treaty or the Multilateral Instrument.
- Spontaneous Exchange of Information: The Canada Revenue Agency ("CRA") will spontaneously exchange information on certain tax rulings with other tax authorities as part of a co-ordinated effort to counter harmful tax practices.
- Multilateral Instrument: In 2017, Canada became a signatory to the Multilateral Instrument which is intended to allow participating jurisdictions to modify their tax treaties without renegotiating such treaties. In 2018, Canada will be taking steps to enact the Multilateral Instrument and bring it into force. Canada will continue to update its network of tax treaties and tax information exchange agreements.
The Federal Government will provide $38.7 million over 5 years to the CRA to expand its offshore compliance activities. This funding will be used to improve risk assessment systems and will facilitate the hiring of additional auditors. This increased investment is intended to leverage the information received as part of the implementation of the OECD/G20 Common Reporting Standard to automatically exchange information on financial accounts held by non-residents.
Business Income Tax Measures
Holding Passive Investment Income inside a Private Corporation
As previously indicated, Budget 2018 introduces rules in respect of the taxation of passive income in a private corporation. The proposals are intended to address the Federal Government's concern where funds invested passively within a private corporation have been financed with retained earnings that have been taxed at preferential corporate income tax rates. The Federal Government's concern is that the owners of the corporation are benefitting from a tax deferral advantage relative to the situation where the corporation distributes the retained earnings and the shareholders invest personally in passive investments. This was one of the issues that was subject to public consultations by the Department of Finance in July 2017.
This tax deferral arises because active business income earned by private corporations is taxed at corporate income tax rates that are generally lower than personal income tax rates. Additionally, a small CCPC can benefit from a corporate income tax rate on qualifying active business income that is lower than the general corporate income tax rate.
Budget 2018 proposes two measures, applicable to taxation years that begin after 2018, to limit the ability to defer tax on passive investment income earned inside private corporations. The Federal Government notes that these proposed measures take into account the comments received from stakeholders in response to the July 2017 consultation.
These proposed measures are much less complex than the regime proposed in the July 2017 consultation, should be simpler to deal with administratively and should affect fewer private corporations. Budget 2018 notes that less than 3% of CCPCs will be affected and more than 90% of the tax revenues generated from the two measures would be from households whose income is in the top 1% of the income distribution.
Limiting Access to the Small Business Rate
The Federal Government has proposed to reduce the tax rate for qualifying active business income of certain CCPCs from 10.5% to 10% for 2018 and to 9% as of 2019 through the small business deduction. This preferential rate can be compared to the 15% general corporate rate. Budget 2018 notes that the purpose of the small business deduction is to increase the after-tax income available for reinvestment in the active business. This preferential tax rate generally applies on up to $500,000 of qualifying active business income of a CCPC (the "Business Limit").
It is proposed that the Business Limit will be reduced on a straight-line basis for CCPCs having between $50,000 and $150,000 in investment income. In other words, the Business Limit will be reduced by $5 for every $1 of investment income above the $50,000 threshold, such that the Business Limit will be reduced to zero at $150,000 of investment income. For example, a CCPC with $100,000 of investment income would have its Business Limit reduced to $250,000. CCPCs with business income above the reduced Business Limit will be taxed on the excess at the general corporate tax rate.
This proposal is much simpler than the alternatives proposed as part of the July 2017 consultation process. For example, the revised proposal will not require the tracking of old and new pools of passive investments and, as promised in announcements made in October, 2017, the Budget 2018 proposal only targets private corporations with more than $50,000 in passive investment income. The proposal will not affect existing passive savings.
Furthermore, the capital gains realized from the sale of active investments or investment income incidental to the business (such as short-term working capital) will not be considered investment income for the purposes of these rules. In this regard, Budget 2018 proposes a new definition of "adjusted aggregate investment income" which will be based on the "aggregate investment income" concept that is currently used in computing the amount of refundable taxes in respect of a CCPC's investment income subject to certain adjustments including: (i) the exclusion of taxable capital gains (and losses) from the disposition of a property used principally in an active business carried on primarily in Canada, or a share of another CCPC that is connected with the CCPC to the extent where, generally, all of the fair market value of the other CCPC is attributable directly or indirectly to active business assets, (ii) the exclusion of net capital losses from other taxation years, (iii) the addition of dividends from non-connected corporations, and (iv) the addition of income from insurance policies that are not exempt policies.
The proposed Business Limit reduction will operate alongside the existing Business Limit reduction that applies to corporations with taxable capital in excess of $10 million. The reduction in a corporation's Business Limit will be the greater of the reduction under this measure and the existing reduction. The reduction of the Business Limit for any particular corporation will be based on the investment income of the corporation and any associated corporations.
This measure will apply to taxation years that begin after 2018.
Refundability of Taxes on Investment Income
The second passive income measure proposed in Budget 2018 is intended to correct a technical issue in the refundable dividend tax regime. Under the current rules, a corporation can receive a refund of taxes paid on investment income or a refundable dividend tax on hand ("RDTOH") refund, regardless of the source of the dividend (i.e. investment income or active business income). The result is that corporations (that pay tax at the general rate) can choose to pay out dividends from active business and still benefit from a refund of taxes paid on investment income. The proposed measures will impose limits on the timing and conditions to receive a RDTOH refund.
This proposal will require creating a new RDTOH account, known as the eligible RDTOH account, which will track refundable taxes paid under Part IV of the ITA on eligible portfolio dividends. Subject to the ordering rule described below, any taxable dividend will entitle the corporation to a refund from its eligible RDTOH account.
The current RDTOH account, will now be known as the non-eligible RDTOH account, will track refundable taxes paid under Part I of the ITA on investment income as well as under Part IV of the ITA on non-eligible portfolio dividends. Refunds from this account will be obtained only upon the payment of non-eligible dividends.
There will be an ordering rule, such that on the payment of a non-eligible dividend, a private corporation will be required to obtain a refund from its non-eligible RDTOH account before it obtains a refund from its eligible RDTOH account.
A corporation that obtains a refund of RDTOH upon the payment of a dividend to a connected corporation will continue to pay an amount of Part IV tax equal to the refund obtained by the payor corporation. This amount, however, will be added to the RDTOH account of the recipient corporation that matches the RDTOH account from which the payor corporation obtained its refund.
This measure will apply to taxation years that begin after 2018.
Under the transition rules announced in Budget 2018, a corporation's existing RDTOH balance will be allocated as follows: (i) for a CCPC, the lesser of its existing RDTOH balance and an amount equal to 38⅓% of the balance of its general rate income pool, if any, will be allocated to its eligible RDTOH account. The remaining balance will be allocated to its non-eligible RDTOH account, (ii) for other corporations, all of the corporation's existing RDTOH balance will be allocated to its eligible RDTOH account.
Tax Support for Clean Energy
Class 43.1 and 43.2, under the capital cost allowance regime, provide accelerated capital cost allowance rates for investments in specified clean energy generation and conservation equipment. These classes include eligible equipment that generates or conserves energy by:
- Using a renewable energy sources (e.g., wind, solar or small hydro);
- Using a fuel from waste (e.g., landfill gas, wood waste or manure); or
- Making efficient use of fossil fuels (e.g., high efficiency co-generation systems, which simultaneously produce electricity and useful heat).
Class 43.2 was introduced in 2005 and is currently available in respect of property acquired before 2020. In an effort to encourage investment in technologies that can (i) contribute to a reduction in emissions of greenhouse gases and air pollutants and (ii) increase the share of Canada's electricity that is renewable and non-emitting, Budget 2018 proposes to extend eligibility for Class 43.2 by five years so that it is available in respect of equipment acquired before 2025.
This proposed change is purported to increase the after-tax income of approximately 900 businesses, which represents on average an additional $27,000 annually over the next five years that these companies will be able to use to invest in and grow their operations while reducing their carbon footprint.
Artificial Losses Using Equity-Based Financial Arrangements
Synthetic Equity Arrangements
Budget 2015 contained proposals aimed at eliminating tax avoidance associated with "synthetic equity arrangements" ("SEAs"). Generally, an SEA involves a corporation that receives dividends of a Canadian corporation tax-free because such corporation is entitled to claim a deduction under section 112 of the ITA equal to the amount of the dividends received. An SEA is a financial arrangement where a corporate taxpayer retains the legal ownership of a share of a Canadian corporation but the opportunity for gain and the risk of loss in respect of the share is transferred to a counterparty using an equity derivative. Under the terms of the equity derivative, the taxpayer is obliged to pay to the counterparty amounts equal to the economic benefit of any dividends received on the shares. In these circumstances, the taxpayer realizes a loss for Canadian tax purposes because the receipt of dividends on the shares is not taxed in the hands of the taxpayer and the taxpayer also claims a deduction for the amount of the "dividend equivalent payments" paid to the counterparty.
The dividend rental arrangement rules apply to deny the inter-corporate dividend deduction under section 112 where it can reasonably be considered that the main reason for the arrangement is to enable the shareholder to receive a dividend on a share and someone other than the dividend recipient bears the risk of loss or opportunity for gain or profit in any material respect. To the extent that a taxpayer could rely on the position that the dividend rental arrangement rules did not apply to an SEA, there was said to be an erosion of Canada's tax base when the counterparty was a "tax-indifferent investor" that is not subject to Canadian tax on the dividend equivalent payment (for example, a non-resident of Canada or a tax-exempt entity).
Budget 2015 modified the dividend rental arrangement rules to include specific provisions applicable to SEAs to ensure the denial of the tax benefits of an SEA. These modification also included certain exceptions to the broadened dividend rental arrangement rules. For instance, an exception applies where a taxpayer can establish that no tax-indifferent investor has all or substantially all of the risk of loss or opportunity for gain or profit in respect of the share by virtue of an SEA or another equity derivative that is entered into in connection with the SEA (the "No TII Exception").
Budget 2018 contains new changes to the SEA rules to narrow the potential application of the No TII Exception. Of particular concern to the Federal Government are situations where a taxpayer could claim that the No TII Exception was applicable because the tax-indifferent investor was not party to an SEA even though, ultimately, it obtained all or substantially all of the risk of loss and opportunity for gain or profit from a Canadian share from a counterparty to the taxpayer by some other means. To address this concern, amendments are proposed in respect of the No TII Exception that provide that such exception will not apply where a tax-indifferent investor obtains all or substantially all of the risk of loss and opportunity for gain or profit in respect of the Canadian share, in any way, even if such investor, itself, is not party to an SEA in respect of the share.
These proposed amendments will apply in respect of dividends that are paid or become payable on or after Budget Day.
Securities Lending Arrangements
The Federal Government is also proposing changes to the securities lending arrangement rules in section 260 of the ITA in an attempt to eliminate tax benefits similar to those obtained under SEAs.
A securities lending arrangement ("SLA") is very common in global capital markets and it is typically used by traders and other market participants to cover short positions, who use the borrowed securities to settle an outright sale of the securities. As a result, the person borrowing securities under an SLA usually does not hold the borrowed securities throughout the term of the arrangement. At the end of the term, the borrower buys identical securities in the market and returns them to the lender. The borrower agrees to pay amounts to the counterparty as compensation for any dividends or interest payable on the securities during the term of the loan ("SLA compensation payments"). Under existing SLA rules, SLA compensation payments are generally not deductible except for Canadian registered securities dealers who are entitled to a restricted deduction equal to two-thirds of the SLA compensation payment under subsection 260(6).
Of particular concern to the Federal Government are circumstances where parties structure a securities loan in a manner that falls outside the definition of an SLA in subsection 260(1). In particular, where a counterparty loans a share issued by a Canadian corporation to a Canadian corporate borrower and the borrower continues to hold the shares over a dividend payment date, the borrower includes the amount of the dividend in computing its income and it claims an inter-corporate dividend deduction under section 112, based on a position that the dividend rental arrangement rules do not apply. The borrower also deducts an amount equal to the SLA compensation payments it makes to the counterparty since the limits in the ITA on deducting such payments under an SLA do not apply. In these circumstances, the borrower is seen to be claiming an "artificial tax loss".
Budget 2018 includes a proposal to create a new concept of a "specified securities lending arrangement" (an "SSLA") which provides for only three of the five requirements found in the definition of an SLA in subsection 260(1). As a result of this broader definition, SSLAs are subject to the same dividend rental arrangement rules as SLAs so that the inter-corporate dividend deduction is denied. Where the dividend rental rules apply, SLA compensation payments continue to be deductible under subsection 260(6.1).
The proposed amendments to the SLA Rules also make it clear that where there is a dividend rental arrangement and an SLA compensation payment is deducted by the borrower under subsection 260(6.1), the rule that permits Canadian registered securities dealers to deduct two-thirds of the SLA compensation payment under subsection 260(6) does not apply (i.e. no double counting).
These amendments apply in respect of amounts paid or payable, or received or receivable, as compensation for dividends on or after Budget Day. However, these changes do not apply in respect of amounts paid or payable, or received or receivable, as compensation for dividends on or after Budget Day and before October 2018, if they are pursuant to a written agreement entered into before Budget Day.
Stop-Loss Rule on Share Repurchase Transactions
The ITA generally permits a corporation to deduct dividends received on a share of a corporation resident in Canada in computing its taxable income (i.e., an inter-corporate dividend deduction). This inter-corporate dividend deduction can apply on a deemed dividend which can occur where a corporation redeems or acquires a share of its capital stock (such deemed dividend being equal to the amount by which the purchase price exceeds the paid-up capital ("PUC") in respect of the share).
To prevent abuses of the inter-corporate dividend deduction, the Federal Government extended the application of the "dividend stop-loss rules" to reduce or stop a loss of a corporation otherwise realized on the redemption or purchase for cancellation of a share of another corporation by the amount of any dividend deemed to be received by the corporate shareholder on the redemption or purchase to the extent that the dividend is deductible by the corporation in computing its taxable income.
Issues have arisen where Canadian financial institutions have relied on the exceptions to the dividend stop-loss rule pertaining to shares held as mark-to-market property to realize artificial tax losses on certain share repurchase transactions. In reaction to these transactions, a measure announced by the Federal Government in 2011 made the dividend stop-loss rule pertaining to shares held as mark-to-market property apply in all cases where the taxpayer is deemed to have received a dividend on a share repurchase. However, the changes in 2011 did not adjust the formula sufficiently, with the result that, even when applicable the formula only denies a portion of the tax loss realized on a share repurchase. The Federal Government states that the portion of the tax loss equal to the mark-to-market income previously realized on the shares is still allowed on the premise that the Canadian financial institution has already paid tax on such income. However, as the repurchased shares would typically be fully hedged this premise does not hold true. Instead, any mark-to-market income realized on the shares due to their increase in value would be fully offset under the hedge. As such, the Canadian financial institution would realize an artificial tax loss on the share repurchase.
Budget 2018 proposes to amend the ITA in respect of shares held as mark-to-market property so that the tax loss otherwise realized on a share repurchase is generally decreased 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 repurchase transactions that occur on or after Budget Day.
At-Risk Rules for Tiered Partnerships
In May 2017, the Federal Court of Appeal released its decision in The Queen v. Green et al., in which it upheld a Tax Court of Canada decision regarding the interpretation of the at-risk rules contained in subsection 96(2.1) of the ITA in the context of tiered partnerships. The decision was at odds with a long standing CRA administrative position. The issue was whether losses incurred by a limited partnership that are allocated to a member that is itself a limited partnership are subject to the at-risk rules or whether they can flow through to the members of the top tier partnership.
In simplified terms, under the "at risk rules" a limited partner's share of a partnership's loss that exceeds the amount that the limited partner has economically invested in the partnership is not deductible. The denied loss, called a "limited partnership loss," can be carried forward indefinitely but only deducted against income from the partnership. To the extent the "limited partnership loss" has not been used it is reflected in the adjusted cost base of the limited partner's interest in the partnership.
If a limited partner is a partnership, then based on the CRA's administrative position the "limited partnership loss" cannot be used by the top tier partnership but such loss would be reflected in the adjusted cost base of its interest in the lower tier partnership. The decision in Green held that this was not the case as the top tier partnership is not a taxpayer that is required to compute amounts under the provisions that are referred to in the at-risk rules.
Budget 2018 proposes to amend the ITA to reflect the CRA policy to apply the at-risk rules to limited partners that are themselves partnerships. As a result, a partnership that is a limited partner will only be permitted to allocate losses from the lower tier partnership to its members to the extent that the upper tier partnership has an at-risk amount in its investment in the lower tier partnership. Any "limited partnership loss" of the upper tier partnership cannot be carried forward but will be reflected in its adjusted cost base in its interest in the lower tier partnership.
These measures will apply to taxation years that end on or after Budget Day. This will impact losses incurred prior to Budget Day in that they will not be able to be carried forward to a taxation year that ends on or after Budget Day.
Discontinuance of Health and Welfare Trusts
A Health and Welfare Trust ("HWT") is an inter vivos trust structure used by employers to fund health and other benefits for their employees. The tax treatment of a HWT is not set out in the ITA but, rather, is set out by the CRA administratively as an employee health and welfare benefit program provided it meets certain conditions.
In 2010, the Employee Life and Health Trust ("ELHT") rules were added to the ITA. The ELHT rules are similar to the CRA's administrative regime for HWTs but deals with certain issues not addressed in the CRA's administrative positions for a HWT.
Budget 2018 proposes that only one set of rules apply to both HWTs and ELHTs. As such, the CRA will no longer apply their administrative positions with respect to HWTs after the end of 2020.
Transitional rules will be added to the ITA to facilitate the conversion from HWTs to ELHTs but trusts that do not convert to an ELHT (or wind up) will be subject to the normal income tax rules for a trust. The CRA will not apply its administrative positions with respect to HWTs to trusts established after Budget Day and will announce transitional administrative guidance relating to the winding up of existing HWTs.
Stakeholders are invited to submit comments on transitional issues by June 29, 2018.
International Tax Measures
Cross-Border Surplus Stripping Using Partnerships and Trusts
The PUC of the shares of a Canadian corporation can be returned to a shareholder free of Canadian income tax. The PUC generally represents amounts that shareholders have paid to the corporation in connection with its shares.
Under existing rules, if a non-resident of Canada transfers shares of one Canadian corporation to a second Canadian corporation with which the non-resident does not deal at arm's length, and the two Canadian corporations are "connected," the non-resident will be subject to tax if it receives non-share consideration from the second corporation that exceeds the amount of the PUC of the shares of the first Canadian corporation. In addition, the amount that is added to the PUC of the shares of the second corporation on the share exchange is limited to the PUC of the shares of the first Canadian corporation (minus the amount of any non-share consideration).
These rules can be circumvented if a non-resident first transfers shares of the Canadian corporation to a partnership or trust (on a tax free basis if the shares are not "taxable Canadian property"). Upon the subsequent transfer of the interest in the partnership or trust to the second Canadian corporation, the non-resident can receive non-share consideration (free of withholding tax), or shares of the second corporation with a PUC, equal to the fair market value of the interest in the trust or partnership (which reflect the fair market value of the shares of the first Canadian corporation).
Budget 2018 proposes to expand the application of the existing rules to capture these types of transactions that occur on or after Budget Day.
Investment Businesses and Controlled Foreign Affiliate Status
A foreign affiliate's income from an investment business is generally included in its foreign accrual property income ("FAPI"). The FAPI of a controlled foreign affiliate of a taxpayer is generally taxable in the hands of the taxpayer for the year in which it is earned, whether or not the FAPI is distributed. An investment business is a business the principal purpose of which is to derive income from property, including certain enumerated types of property income. Exceptions to the investment business definition can apply where several conditions are satisfied, including that the affiliate employ the equivalent of at least six full-time employees in the active conduct of the business.
In order to more easily qualify for the investment business exception, some taxpayers have pooled investment assets in a single foreign affiliate but with each taxpayer receiving a return that tracks the performance of the assets contributed by that taxpayer to the foreign affiliate ("tracking arrangements"). Budget 2018 proposes to eliminate this planning opportunity by treating specific activities carried out by a foreign affiliate that accrues to the benefit of a specific taxpayer under a tracking arrangement as a separate business, which must separately satisfy the six-employee test and other requirements to the exception to investment business status.
FAPI of a foreign affiliate of a taxpayer is included in the taxpayer's income on an accrual basis only where the foreign affiliate is a controlled foreign affiliate of the taxpayer. Budget 2018 proposes to deem a foreign affiliate to be a controlled foreign affiliate of a taxpayer if FAPI from activities of the foreign affiliate accrues to the benefit of the taxpayer under a tracking arrangement. This measure is intended to cause each taxpayer involved in a tracking arrangement to be subject to accrual taxation on FAPI attributable to that taxpayer regardless of the size of the group of taxpayers having an equity interest in the foreign affiliate.
These measures will apply to taxation years of a taxpayer's foreign affiliate that begin on or after Budget Day.
Trading or Dealing in Indebtedness
Where the principal purpose of a business of a foreign affiliate of a taxpayer is to derive income from trading or dealing in indebtedness, the income from such business is generally treated as FAPI of the affiliate. An exception to this rule is available to certain regulated foreign financial institutions. This is similar to an exception to the investment business definition. However, that exception to the investment business definition includes a condition that requires the taxpayer satisfy certain minimum capital requirements. Budget 2018 proposes to add a similar minimum capital requirement to the exception to the trading or dealing indebtedness rule.
This measure applies to taxation years of a taxpayer's foreign affiliate that begin on or after Budget Day.
Reassessment Period - Requirements for Information and Compliance Orders
Currently, where the CRA issues a requirement for foreign-based information to a taxpayer and that requirement is contested in court by the taxpayer, a "stop-the-clock" rule provides that the period open for reassessment by the CRA is extended by the amount of time during which the requirement is contested.
Budget 2018 proposes to extend the application of the "stop-the-clock" rule to requirements for information generally and to 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.
The period will generally start, in the case of: (i) a requirement for information: at the time the taxpayer makes an application for judicial review of the requirement; or (ii) a compliance order: at the time the taxpayer opposes (generally by way of notice of appearance) the CRA's application for a compliance order. The period will end upon the final disposition of the application including any appeals.
Related amendments will also be made to conform the rules with respect to requirements for foreign-based information.
This measure will apply in respect of challenges instituted after Royal Assent to the enacting legislation.
Reassessment Period – Non-Resident Non-Arm's Length Persons
Budget 2018 proposes to provide the CRA with an additional three years to reassess a prior taxation year of a taxpayer, to the extent the reassessment relates to the adjustment of a loss carryback.
The extension will apply where: (i) a reassessment of a taxation year is made as a consequence of a transaction involving a taxpayer and a non-resident person with whom the taxpayer does not deal at arm's length, (ii) the reassessment reduces the taxpayer's loss for the taxation year that is available for carryback, and (iii) all or any portion of that loss had in fact been carried back to the prior taxation year.
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 the following measures to facilitate the sharing of information in relation to criminal matters:
- allow the legal tools available under the Mutual Legal Assistance in Criminal Matters Act ("MLACMA") to be used with respect to the sharing of criminal tax information under Canada's tax treaties, Tax Information Exchange Agreements and the Convention on Mutual Administrative Assistance in Tax Matters, whereby the Attorney General has the ability to obtain court orders to gather and send information;
- continue the CRA's involvement in sharing tax information internationally and collaboration with the Department of Justice, which administers the MLACMA;
- enable the sharing of tax information with Canada's MLACMA partners in respect of acts that, if committed in Canada, would constitute terrorism, organized crime, money laundering, criminal proceeds or designated substance offences; and
- enable confidential information under Part IX of the ETA and the Excise Act, 2001 (the "Excise Act") 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 ITA.
To give effect to these measures, amendments may be proposed to each of the applicable legislations. The Federal Government intends to propose that any such amendments come into force upon Royal Assent to the enacting legislation.
Personal Income Tax and Charities Measures
Registered Disability Savings Plan - Qualifying Plan Holders
Budget 2018 extends the "qualifying family member" ("QFM") program for Registered Disability Savings Plans ("RDSP").
If the intended beneficiary of an RDSP is an adult but is not capable of entering into a contract, the "holder" of the RDSP (the person who opens the RDSP and authorizes contributions to the RDSP) can be a person who is legally authorized to act for the beneficiary under provincial law, such as a guardian, tutor, or curator. The QFM program relaxes this requirement by permitting a QFM to be the holder of an RDSP for an adult beneficiary if the beneficiary's capacity to enter into a contract is in doubt, recognizing that the appointment of a guardian can be both time-consuming and expensive. A QFM includes a spouse, common-law partner, or parent of the beneficiary.
The QFM program was scheduled to expire at the end of 2018. Budget 2018 extends the program by five years. Specifically, if an RDSP is opened for an adult beneficiary whose capacity is in doubt, a QFM will continue to be an eligible holder of the RDSP if it is opened before the end of 2023.
Charities - Miscellaneous Technical Issues
Municipalities as Eligible Donees
A charity can lose its charitable registration if it does not comply with the requirements applicable to charities or it can request that it be revoked. On revocation, a revocation tax is imposed equal to 100% of the total net value of its assets. The revocation tax can be reduced if the charity makes qualifying expenditures including gifts to other registered charities, a majority of whose directors or trustees deal at arm's-length with the directors or trustees of the revoked charity.
Budget 2018 proposes to allow transfers of property to municipalities to be considered qualifying expenditures for the purposes of the revocation tax subject to approval of the Minister of National Revenue on a case by case basis.
This measure will apply to transfers made on or after Budget Day.
Universities Outside Canada
Since 2011 certain categories of qualified donees including foreign universities were required to register with the CRA and meet certain receipting and record keeping requirements and could have their registration suspended or revoked for non-compliance with the rules. Once registered such qualified donees are also listed on the Federal Government's website.
Budget 2018 proposes to simplify the administration of these rules and streamline the registration process by removing the requirement that universities outside Canada be prescribed in the Income Tax Regulations.
This measure will apply as of Budget Day.
Reporting Requirements for Trusts
In order to improve the collection of information related to the beneficial ownership of trusts, Budget 2018 propose to impose additional annual reporting requirements on certain trusts for the 2021 and subsequent taxation years. These new reporting requirements will impose an obligation on certain trusts that are not currently required to file a T3 return to file such a return. In addition, they will also require Canadian resident express trusts (i.e., those created with a settlor's express intent) and non-resident trusts that are currently required to file a T3 return 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 trustee decisions regarding the appointment of income or capital (whether through the terms of the trust agreement itself or a related agreement).
Certain trusts will be exempted from the additional reporting requirements, namely mutual fund trusts, segregated funds, master trusts, trusts governed by registered plans, lawyers' general trust accounts, graduated rate estates, qualified disability trusts, trusts that are non-profit organizations or registered charities, and trusts that have been in existence for less than three months and which hold less than $50,000 in assets throughout the taxation year (provided, in the latter case, that the assets are confined to deposits, government debt obligations and listed securities).
In addition to existing penalties, penalties of $25 per day of delinquency, with a minimum penalty of $100 and a maximum penalty of $2,500 will be imposed. If the delinquency was made knowingly or in circumstances amounting to gross negligence, an additional penalty of 5% of the maximum fair market value of property held by the trust in the taxation year, with a minimum penalty of $2,500, will be imposed.
The new penalties will apply in respect of returns required to be filed for the 2021 and subsequent taxation years.
Budget 2018 also proposes to provide additional funding for the development of an electronic platform for processing T3 returns.
These proposed new reporting requirements will apply to returns required to be filed for the 2021 and subsequent taxation years.
Extension of Mineral Exploration Tax Credit for Flow-Through Share Investors
Budget 2018 proposes to extend eligibility for the 15% mineral exploration tax credit for one year to flow-through share agreements entered into on or before March 31, 2019.
Sales and Excise Tax Measures
Budget 2018 contains significant, but unsurprising, proposals relating to the ETA and the Excise Act. Specifically, Budget 2018 confirms that the draft legislation relating to "investment limited partnerships", released on September 8, 2017, will be introduced subject to a few key amendments. Budget 2018 also sets out the framework for amendments to the Excise Act relating to the taxation of cannabis products in Canada.
In addition to these two key proposals, which will be discussed below, the Federal Government also announced an increase to the excise duty rates for tobacco products and that it would be issuing a consultation paper and draft legislation relating to the specific GST/HST rules relating to holding companies and their ability to claim input tax credits.
GST/HST Changes for Investment Limited Partnerships
In September of 2017, the Federal Government released draft legislation creating the "investment limited partnership" and proposing to treat it as an "investment plan" for GST/HST purposes and further proposing to specifically tax the provision of management or administrative services by the general partner to the limited partnership (the "September 2017 Proposal"). Budget 2018 confirms the Federal Government's intention to pass this legislation, subject to a few amendments.
First, Budget 2018 clarifies some of the ambiguity in the timing of the application of the tax. The September 2017 Proposal was unclear as to how the new rules would apply to management or administrative services that formed part of an ongoing supply beginning prior to September 8, 2017. Budget 2018 proposes new rules that would deem there to be separate supplies of the services made prior to September 8, 2017, and those made on or after that date. The new rules would not apply to the deemed supply prior to September 8, 2017, unless an amount had already been collected as or on account of tax.
Second, Budget 2018 proposes changes to clarify the interaction between the new proposed rules and the deeming provisions that would otherwise apply to ongoing services split into billing periods. This proposed amendment may apply to investment limited partnerships with periodic payments to the general partner.
Finally, Budget 2018 confirms the Federal Government's intention to define investment limited partnerships as investment plans, and consequently listed financial institutions, effective for fiscal years starting after 2018. However, it also proposes an election that would allow investment limited partnerships to elect to be considered investment plans effective for fiscal 2018. This would allow an investment limited partnership that would qualify as a selected listed financial institution to take advantage of any possible benefits of the application of the special attribution method used by selected listed financial institutions.
Taxation of Cannabis Products
Budget 2018 confirms that the Federal Government plans to implement the taxation framework for cannabis that was announced on November 10, 2017.
Under the proposed cannabis tax regime, most supplies of cannabis will be subject to GST/HST (at rates currently ranging from 5-15% across Canada). Cannabis, both for recreational or medical use, will also be taxed under the Excise Act, which currently imposes federal excise duty on spirits, wine and tobacco product made in Canada. Both taxes on cannabis will be administered by the CRA.
Cannabis producers will be required to obtain a license from the CRA under the Excise Act ("Cannabis Tax License"), in addition to the license issued by Health Canada under the Cannabis Act. The Cannabis Tax License is also required to package or stamp a cannabis product, or to sell, purchase or possess a cannabis product that is not packaged and stamped as required. GST/HST registration may also be required, in addition to the foregoing cannabis license registrations, where the small supplier threshold of $30,000 per annum is exceeded. Cannabis licensees will also need to apply for cannabis excise stamps, with the intended provincial or territorial market, indicating that duty has been paid.
The excise duty regime for cannabis generally will not apply to cannabis products that are produced in Canada by an individual for the individual's own personal use/medical purposes (or by a designated person for the medical purposes of another individual) that is in accordance with the relevant rules in the Cannabis Act or Controlled Drugs and Substances Act, as applicable. Duty relief is also available in limited cases, including the taking of cannabis for destruction in prescribed circumstances.
Other Previously Announced Tax Measures
Budget 2018 confirms the Federal Government's intention to proceed with previously announced tax and related measures including:
- measures confirmed in Budget 2016 relating to the GST/HST joint venture election;
- the measure announced in Budget 2016 on information-reporting requirements for certain dispositions of an interest in a life insurance policy;
- legislative proposals released on September 16, 2016 relating to a division of a corporation under foreign laws and the requirements to qualify as a prescribed share;
- the measure announced on October 16, 2017 to lower the small business tax rate from 10.5% to 10%, effective January 1, 2018, and to 9% effective January 1, 2019 which was included in a Notice of Ways and Means Motion tabled on October 24, 2017 along with related amendments to the gross-up amount and the dividend tax credit for taxable dividends; and
- income tax measures released on December 13, 2017 to address income sprinkling.
Budget 2018 notes that such previously announced tax and related measures will be modified to take into account consultations and deliberations since their release and reaffirms the Federal Government's commitment to move forward as required with technical amendments to improve the certainty of the tax system.