BUSINESS INCOME TAX MEASURES
- Tax Rates
Budget 2010 contains no changes to corporate tax rates. The following are the rates applicable for 2010.
- Income Trusts and Loss Trading
In 2006 the federal government announced its intention to impose a new tax on income trusts and other specified investment flow-through entities (SIFTs), commencing in 2011. In response to this measure, many income trusts have considered converting to a corporate structure, and the federal government introduced legislation to permit the conversion to occur on a tax-deferred basis. Budget 2010 proposes new rules to prevent inappropriate loss-trading in conjunction with the conversion rules.
The current rules in the Income Tax Act restrict the ability of a corporation to utilize its losses following an acquisition of control. Budget 2010 proposes to extend this rule to ensure that the use of losses is restricted where units of a SIFT trust or SIFT partnership are exchanged for shares of a corporation.
Budget 2010 also proposes to ensure that the “acquisition of control” rules do not inappropriately restrict the use of losses where a SIFT trust, the sole beneficiary of which is a corporation, is wound up and distributes the shares of a corporation it holds.
These rules apply to transactions undertaken on or after 4:00 pm (EST) on March 4, 2010 other than transactions that the parties are obligated to complete pursuant to the terms of an agreement in writing between the parties entered into before that time.
- Accelerated Capital Cost Allowance for Clean Energy Generation
The current tax rules provide for accelerated CCA (50 per cent per year on a declining balance basis) for specified clean energy generation and conservation equipment. Budget 2010 proposes to expand this category to include (a) heat recovery equipment used in a broader range of applications; and (b) distribution equipment used in district energy systems that rely primarily on ground source heat pumps, active solar systems or heat recovery equipment.
Budget 2010 also proposes to expand classes 43.1 and 43.2 of the CCA rules to include specified distribution equipment that forms part of a district energy system.
To account for the expansion of properties that are included in class 43.1 and class 43.2 of the CCA rules, and to broaden the ability flow through certain expenses to investors, Budget 2010 proposes to expand the definition of “principal-business corporation” to clarify that flow-through share eligibility extends to corporations the principal business of which is not simply the generation of energy but any one or a combination of producing fuel, generating energy, or distributing energy through the use of a property included in class 43.1 or 43.2.
- CCA on Television Set-Top Boxes
Budget 2010 proposes to increase and equalize the CCA rate applicable to both cable and satellite set-top boxes to 40%.
- Interest on Overpaid Taxes
Certain corporate taxpayers have found that they derive a better return on their funds by overpaying taxes and receiving interest at the prescribed rate under the Income Tax Act, rather than placing excess funds in a bank account. Budget 2010 proposes to reduce the formula and thus the rate at which it pays interest on overpaid taxes.
- Consultation Measures
Budget 2010 proposes to initiate consultations on:
- developing a formal system of loss utilization and consolidate reporting for corporate groups; and
- a system requiring taxpayers to report aggressive tax planning transactions.
- Specified Leasing Property Rules
These rules attempt to equate the tax position of a lessor of certain property to that of a lender by treating the amount received by the lessor as a blended payment of principal and interest rather than a lease payment. As well, the lessor is restricted in its ability to claim capital cost allowance on the leased property. The rules do not apply to certain “exempt property”. Budget 2010 proposes to extend the rules to exempt property that is leased to a government, another form of tax-exempt entity or to a non-resident, where the value of the leased property equals or exceeds $1 million.
INTERNATIONAL TAX MEASURES
- Taxable Canadian Property - Section 116 Clearance Certificates
Budget 2010 proposes to amend the definition of “taxable Canadian property” so that it does not include corporate shares or other ownership interests that, during the preceding five years, did not derive their value principally from real property situated in Canada, Canadian resource properties, timber resource properties and options in respect thereof. Accordingly, the gain on disposition of such shares or other interests will not be taxable in Canada. Such gains generally benefit from an exemption from tax under Canada’s various bilateral income tax treaties. However, a non-resident vendor generally had to comply with the clearance certificate requirement in any event. This amendment will facilitate investment in, and the eventual disposition of, such interests.
- Refunds for Non-Resident Service Providers and Vendors of Taxable Canadian Property
Persons paying a non-resident service provider or a non-resident vendor of taxable Canadian property are required to withhold and remit certain amounts to the Canada Revenue Agency on account of the non-resident’s Canadian income tax liability. There is no time limit for the Canada Revenue Agency to assess such payers. In cases where the non-resident was not ultimately liable for the amount of tax withheld, the non-resident could claim a refund but only if the non-resident took action within a prescribed period of time. Budget 2010 proposes to align the time limitation provisions in the Income Tax Act to facilitate a non-resident’s claim for a refund of tax regardless of the time at which the Canada Revenue Agency assesses the payer.
- Denial of Foreign Tax Credit Generators
Canadian taxpayers are entitled to a foreign tax credit to account for any income tax they may pay to a foreign jurisdiction. In response to certain transactions engaged in by Canadian corporations and their foreign affiliates, which are designed to generate what is perceived as inappropriate foreign tax credits, Budget 2010 proposes to deny claims for foreign tax credits, foreign accrual tax and underlying foreign tax where the foreign jurisdiction considers the Canadian corporation to have a lesser interest in the foreign entity than it has for purposes of the Income Tax Act.
- Foreign Trusts and Foreign Investment Entities
These proposed rules were first introduced in the 1999 Budget as a means of preventing undue tax deferral or savings by investing offshore. Budget 2010 proposes a consultation process on a greatly simplified version of the rules designed to deter inappropriate use of offshore entities.
PERSONAL TAX MEASURES
- Stock Option Regime
Budget 2010 proposes several changes to the taxation of employee stock options.
Employees who dispose of or “cash out” their options in return for a cash payment equal to the “in the money” amount of the options will no longer be entitled to the preferential “capital gains-type” treatment, where the employer claims a deduction for the cash payment.
An employee of a publicly-traded company who exercise an option will no longer be able to defer the income recognition to the year in which the shares are disposed of. Further, Budget 2010 proposes new remittance requirements, to be effective after 2010, to ensure an amount in respect of the stock option benefit is remitted to the government. This requirement will have a significant impact on large stock option benefits, particularly those arising late in a year. The requirement may also restrict an employer’s ability to align employees’ interests with those of the shareholders by requiring the employees to retain the shares acquired on the exercise of options.
For employees of publicly-traded companies who exercised options but deferred the income inclusion, and whose shares are now worth less than the deferred income tax liability, Budget 2010 proposes to introduce elective tax relief. The relief is intended to ensure that the tax liability in respect of the stock option benefit does not exceed the sale proceeds of the shares as reduced by any capital losses in respect of the employer shares available to employee.
Finally, a disposition by an employee to a non-arm’s length person of rights under a stock option plan will have tax consequences to the employee in the year of the disposition, rather than the year in which the transferee exercises the option.
- Mineral Exploration Tax Credit
The 15% investment tax credit for flow-through mining expenses has been an important incentive for new investment in junior mineral exploration in Canada. First introduced in 2000, the measure has been extended by each budget annually since 2004. The 2010 Budget proposes to extend it another year. The tax credit will be available to flow-through share agreements entered into on or before March 31, 2011. Under the “look-back rule”, funds raised with the benefit of the credit before April 2011 can be spent on mineral exploration up to the end of 2012.
- Sharing of Certain Tax Credits
Budget 2010 proposes to permit parents who share custody of children to share the entitlement to the Child Tax Benefit and Universal Child Care Benefit, as well as the Goods and Services Tax/Harmonized Sales Tax Credit.
- Universal Child Care Benefit for Single persons
Budget 2010 proposes to allow a single parent the option of including the aggregate Universal Child Care Benefit amount received, in respect of all of his or her children, in the parent’s income or in the income of the dependant for whom an Eligible Dependant Credit is claimed.
- Scaling Back the Medical Expense Tax Credit for Cosmetic Procedures
Budget 2010 proposes that expenses incurred for purely cosmetic procedures (including related services and travel expenses) will no longer be eligible for the medical expense tax credit.
- Rollover of RRSP into Registered Disability Savings Plan
Budget 2010 proposes to extend the existing RRSP rollover rules to allow a rollover of a deceased individual’s RRSP proceeds to the RDSP of a financially dependent infirm child or grandchild, up to the RDSP beneficiary’s contribution room. Budget 2010 also proposes to amend the Canada Disability Savings Act to allow a 10-year carry forward of entitlements to Canada Disability Savings Grants and Canada Disability Savings Bonds.
- Scholarships – Scaling Back the Tax Exemption
The 2006 Budget introduced a tax exemption for post-secondary scholarships, fellowships and bursaries. Budget 2010 proposes to clarify that a post-secondary program that consists principally of research will be eligible for the Education Tax Credit, and the scholarship exemption, only if it leads to a college or CEGEP diploma, or a bachelor, masters or doctoral degree. Accordingly, post-doctoral fellowships will be taxable. Further, for students enrolled in part-time programs, Budget 2010 proposes to limit the scholarship exemption to the cost of tuition and program-related materials.
- US Social Security Benefits
Currently, 80% of the US Social Security Benefits received by a Canadian resident individual are included in the individual’s income. Budget 2010 proposes to revert to a 50% inclusion rate, for those individuals who have been in receipt of such benefits since before 1996.
Budget 2010 proposes to eliminate the rule that requires a charity to disburse 80% of the previous-year’s receipted donations. Further, Budget 2010 proposes to increase the threshold for the disbursement quota exemption for accumulated capital.