The Minister of Finance (Canada), the Honourable James Flaherty, tabled the 2013 Federal Budget ("Budget 2013") on March 21, 2013 ("Budget Day"). Budget 2013 announced a large number of significant tax measures. The following is a summary of these measures, many of which came into effect on Budget Day. In the coming days, the Fasken Martineau tax group will be preparing detailed analysis of many of these tax changes and releasing future bulletins describing how they may affect our clients.
Business Income Tax Measures
Corporate Loss Trading
Budget 2013 introduces a new anti-avoidance rule to combat trading in tax losses and other tax attributes.
The new rule applies, for example, where an unrelated party acquires more than 75% of the equity of a loss company ("Lossco") but no voting control, and injects profitable assets into Lossco in order to receive tax-free intercorporate dividends from Lossco out of income sheltered with Lossco's losses or other tax attributes.
The new rule operates by deeming there to be an acquisition of control of a corporation where:
- a person (or a group of persons) acquires shares of the corporation that have more than 75% of the fair market value of all of the corporation's shares;
- the person or group does not control the corporation; and
- it is reasonable to conclude that one of the main reasons the person or group does not control the corporation is to avoid the application of the acquisition of control tax attribute utilization restrictions.
This measure takes effect on Budget Day. A transaction pursuant to a binding written agreement entered into before Budget Day (that does not have a tax change escape clause) is grandfathered.
Taxation of Corporate Groups
The Government has completed its review of the taxation of corporate groups and has decided that implementing a system of corporate group taxation is not a priority at this time.
In its consultation process, the Government considered various approaches, including a system of formal loss transfers and a system of consolidated reporting. No solution emerged that addressed the concerns raised by the business community and by the provinces and territories.
Budget 2013 proposes changes to better align the deductions available for expenses in the mining sector with those available in the oil and gas sector.
Pre-Production Mine Development Expenses
Pre-production mine development expenses will now be treated as Canadian Development Expenses ("CDE"). The transition from Canadian Exploration Expenses ("CEE") to CDE treatment will be phased in over a period of three calendar years (2015 to 2017) with expenses being allocated between CEE and CDE based on the calendar year in which the expense is incurred.
This measure will apply to expenses incurred on or after Budget Day. The existing CEE treatment for pre-production mine development expenses will be maintained for expenses incurred before Budget Day and will also apply for expenses incurred before 2017:
- under a written agreement entered into by the taxpayer before Budget Day; or
- as part of the development of a new mine where:
a. the construction was started before Budget Day; or
b. the engineering and design work for the construction, as evidenced in writing, was started before Budget Day.
Accelerated Capital Cost Allowance ("CCA") for Mining
Budget 2013 proposes to phase out the additional CCA available for assets acquired for use in new mines or eligible mine expansions. The additional CCA will be phased out over the 2017 to 2020 calendar years.
This measure will apply to expenses incurred on or after Budget Day. The existing additional CCA will be maintained for eligible assets acquired before Budget Day and will also apply to assets acquired before 2018 for a new mine or a mine expansion either:
- under a written agreement entered into by the taxpayer before Budget Day; or
- as part of the development of a new mine or as part of a mine expansion where:
a. the construction was started before Budget Day; or
b. the engineering and design work for the construction, as evidenced in writing, was started before Budget Day.
Scientific Research and Experimental Development Program ("SR&ED")
Budget 2013 proposes amendments aimed at strengthening the ability of the Canada Revenue Agency ("CRA") to identify suspected high-risk SR&ED claims by requiring that third party SR&ED tax information return preparers provide identifying information (e.g. Business Numbers) and details surrounding billing arrangements (e.g., whether contingency fees are used and the amount of fees payable) to the CRA. Penalties in the amount of $1,000 will apply to each SR&ED claim for which the required additional information and details are incomplete, inaccurate or not provided. Taxpayers submitting claims for SR&ED incentives with the assistance of third party SR&ED tax preparers will be jointly and severally liable for such penalties. Taxpayers not using third party SR&ED tax preparers, but submitting claims for SR&ED incentives, must certify that no third party assisted in any respect in the preparation of the SR&ED claim.
Budget 2013 proposes that these amendments apply to SR&ED program claims filed on or after the later of January 1, 2014 and the day on which Royal Assent is granted to the legislation enacting these amendments.
Reserve for Future Services
The reserve under paragraph 20(1)(m) of the Income Tax Act (Canada) for amounts received for future services will be amended to ensure that it may not be used for amounts received for the purpose of funding future reclamation obligations. This measure will generally apply to amounts received on or after Budget Day.
Additional Deduction for Credit Unions
Credit unions have access to the preferential income tax rate available to certain Canadian-controlled private corporations (through the small business deduction). However, a credit union also has access to the preferential income tax rate for taxable income that is not eligible for the small business deduction, subject to a limit based on the credit union's cumulative taxable income taxed at the preferential rate and the amount of its deposits and member shares.
Budget 2013 proposes to phase out this additional deduction for credit unions over five years, beginning in 2013 (80% in 2013, 60% in 2014, 40% in 2015, 20% in 2016 and nil in 2017 and after). This measure will apply on a pro-rated basis for non-calendar taxation years.
Leveraged Life Insurance Arrangements
Budget 2013 proposes to eliminate certain tax benefits associated with "leveraged insured annuities" and "10/8 arrangements."
Leveraged insured annuities generally involve using borrowed funds to acquire both a lifetime annuity and life insurance policy issued on the life of an individual. Typically, the life insurance policy continues during the entire life of the individual, the death benefit equals the amount invested in the annuity and both the policy and the annuity are assigned to the lender of the borrowed funds. These are typically sold to closely-held private corporations.
Budget 2013 proposes to introduce the concept of a "LIA policy" and to eliminate tax benefits associated with a LIA policy by: (i) taxing income accruing in a LIA policy on an annual basis rather than allowing any portion of such income to be exempt from tax on an otherwise exempt life insurance policy, (ii) denying deductions for any portion of a premium paid on the policy, (iii) denying any increase in the capital dividend account for the death benefit, and (iv) deeming the fair market value of the annuity contract assigned to the lender, in connection with a LIA policy, to be equal to the total of the premiums paid for the purposes of the deemed disposition on death.
This measure applies to taxation years ending on or after Budget Day, but will not apply to leveraged insured annuities for which all borrowings are entered into before Budget Day.
10/8 arrangements involve a taxpayer investing in a life insurance policy, borrowing an equal amount secured by the policy or an investment account in respect of the policy, and investing the borrowed amount in income producing assets. Under a typical arrangement, the taxpayer pays interest on the borrowed funds and earns interest income on the amount invested in the policy. The interest earned (say 8%) is less than the interest expense on the borrowed funds (say 10%) so that a spread is earned by the financial institution involved. However, the taxpayer benefits by claiming a full deduction for the interest expense but taking the position that the interest income is not taxable because the policy is an exempt policy.
The government is challenging 10/8 arrangements under existing tax provisions, but is also proposing new rules to deny the associated tax benefits including the deductibility of interest on borrowings for periods after 2013 and the deductibility of premiums relating to periods after 2013. In addition, a capital dividend account will not be increased by the amount of the death benefit payable after 2013 that is associated with the borrowings. Certain relief is to be provided to facilitate the termination of existing 10/8 arrangements before the end of 2013.
Restricted Farm Losses
Under the Income Tax Act (Canada), the deductibility of farm losses by a taxpayer is restricted (currently, to an annual maximum of $8,750) where the taxpayer's chief source of income for a taxation year is neither farming nor a combination of farming and some other source of income. The determination of whether a taxpayer's chief source of income is a combination of farming and some other source of income where the "other source of income" is predominant has been the subject of recent court decisions in which taxpayers have prevailed.
In The Queen v.Craig, 2012 S.C.C. 43, the issue was the application of the restricted farm loss rules where a taxpayer deducted farm losses sustained in a horse racing business where the taxpayer earned substantial professional income. The Supreme Court of Canada concluded that the restricted farm loss rules did not apply in this case, focussing on whether the taxpayer placed a significant emphasis on both the farming and non-farming sources of income. The Court ruled that farming did not need to be the chief source of income in order to deduct the full amount of farm losses incurred.
Budget 2013 proposes to amend the Income Tax Act (Canada) so a taxpayer's farm loss will be a restricted farm loss (deductible to an increased annual maximum of $17,500) if the taxpayer's chief source of income is neither farming, nor a combination of farming and some other source of income that is a subordinate source for the taxpayer.
The proposed amendmen applies to taxation years that end on or after Budget Day.
Manufacturing and Processing Machinery and Equipment: Accelerated CCA
Budget 2013 proposes to extend by an additional two years (to 2014 and 2015) the temporary accelerated CCA rate of 50%, subject to the half-year rule, for qualifying machinery and equipment acquired for the manufacturing or processing of goods for sale or lease.
Clean Energy Generation Equipment: Accelerated CCA
The accelerated CCA (50% - Class 43.2) for investment in specified clean energy generation and conservation equipment will be expanded by making biogas production equipment that uses more types of organic waste eligible for inclusion in Class 43.2.
Budget 2013 also proposes to broaden the range of cleaning and upgrading equipment used to treat eligible gases from waste that is eligible for inclusion in Class 43.2 by removing certain limitations that currently apply.
This measure will apply in respect of property acquired on or after Budget Day that has not been used or acquired for use before Budget Day.
The thin capitalization rules restrict interest expense deductions of a Canadian resident corporation where the amount of the corporation's debt owing to specified non-residents exceeds 150% of the corporation's "equity" (as defined).
Last year's Budget extended the thin capitalization rules to apply to partnerships with Canadian resident corporate partners. Budget 2013 further extends the rules to apply to Canadian resident trusts and to non-resident corporations and trusts that operate in Canada.
In the case of a Canadian resident trust, special rules will apply for determining debt to specified non-residents and "equity" and for designating non-deductible interest as a payment to a non-resident beneficiary. The 150% debt-to-equity ratio applicable to Canadian resident corporations will also apply to Canadian resident trusts. The designated payment to a non-resident beneficiary will be subject to Part XIII tax and possibly Part XII.2 tax, depending on the type of income earned by the trust.
In the case of a non-resident corporation or trust, a loan from a non-arm's length non-resident that is used in the corporation's or trust's Canadian branch will be a debt to a specified non-resident. In order to parallel the 150% debt-to-equity ratio applicable to Canadian resident corporations and trusts, there will be a 60% debt-to-asset ratio for non-resident corporations and trusts. In the case of a non-resident corporation, the thin capitalization rules may result in additional branch tax being payable. Where a non-resident trust or corporation has made a section 216 election in respect of Canadian source rental income, the thin capitalization rules for non-residents (rather than those for residents) will apply.
In keeping with the 2012 extension to partnerships, the thin capitalization rules will apply to partnerships with Canadian resident trusts or non-resident corporations or trusts as partners.
These new rules apply to taxation years beginning after 2013 and apply to both new and existing borrowings.
The Government intends to start a consultation process on measures to combat "treaty shopping" and will be releasing a consultation paper to give stakeholders an opportunity to provide input. The Government wants to "protect the integrity of Canada's tax treaties while preserving a business tax environment that is conducive to foreign investment."
Budget 2013 gives the following example of treaty shopping:
- a non-resident forms an intermediary company in a treaty jurisdiction in order to channel Canadian source income and gains eligible for treaty benefits through the company; and
- the non-resident would not have been entitled to those treaty benefits if the non-resident had earned the income and gains directly.
The Government acknowledges that it has had little success in challenging treaty shopping in court and notes that other countries have added provisions to their domestic legislation to combat treaty shopping.
Tax Compliance Measures relating to International Transactions
Budget 2013 introduces several proposals intended to assist the CRA with combatting international tax evasion and aggressive tax avoidance.
i. International Electronic Funds Transfers
To combat attempts by taxpayers to conceal funds and associated income by engaging in foreign financial transactions, Budget 2013 proposes to amend the Income Tax Act (Canada), the Excise Tax Act (Canada), and the Excise Act, 2001 (Canada), to require that certain financial intermediaries, such as banks, credit unions and trust and loan companies, report to the CRA international electronic funds transfers ("EFTs") of $10,000 or more within 5 working days after the day of transfer. The reporting requirement will begin in 2015 and will be the same as the current EFT reporting requirements imposed under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The CRA will be provided with $15 million over five years to fund this initiative.
ii. Information Requirements Regarding Unnamed Persons
Current provisions under the Income Tax Act (Canada), the Excise Tax Act (Canada), and the Excise Act, 2001 (Canada) permit the CRA to require any person to provide information or documentation for tax administration or enforcement purposes. Judicial authorization is required before issuing the requirement to a third party to provide information regarding unnamed persons. The rules currently permit the CRA to obtain the judicial authorization on an ex parte basis.
To streamline the court order process, Budget 2013 proposes to require the CRA to provide notice to the third party when it initially seeks a court order. In these circumstances, the third party will be required to make any related representations at the hearing of the application for the court order, rather than after the order has been granted.
This measure will apply on Royal Assent to the enacting legislation.
iii. Whistle Blowers
A particularly noteworthy and concerning aspect of Budget 2013 is the proposed launch of the "Stop International Tax Evasion Program". This program contemplates monetary rewards being paid to individuals for providing the CRA with information regarding major international tax non-compliance, which information leads to the assessment, reassessment and collection of outstanding federal taxes exceeding $100,000. It is proposed that contracts between the CRA and such individuals will provide for payment of up to 15% of the federal tax collected. Major international tax non-compliance must involve foreign property located or transferred outside Canada, or transactions conducted partially or entirely outside Canada.
To be eligible for rewards, individuals reporting non-compliance cannot have been convicted of the tax evasion about which they have information. Further information regarding the "Stop International Tax Evasion Program" will be provided by the CRA.
The proposed program is akin to the United States "Whistleblower Rules," which are administered by the Internal Revenue Service and have been in place for several years.
iv. Form T1135
In certain circumstances, a Canadian entity (including a Canadian resident individual) is required to file an information return (Form T1135) reporting specified foreign property (very generally, income earning property held outside of Canada) of the entity, where the cost amount to the entity of the specified foreign property exceeds $100,000. Form T1135 assists the CRA in identifying sources of foreign income of Canadian taxpayers. In an effort to assist the CRA in determining whether a taxpayer has accurately reported foreign income in its income tax returns, Budget 2013 proposes to extend the normal reassessment period (during which the CRA may reassess a taxpayer) by three years where (1) the taxpayer has failed to report income for specified foreign property on its annual income tax return; and (2) the Form T1135 was not filed in a timely fashion by the taxpayer, or a specified foreign property was not identified or was improperly identified in the Form T1135. The extension of the normal reassessment period will apply to 2013 and subsequent taxation years.
Further, Budget 2013 proposes to revise Form T1135 to require that substantially more detail and information be reported regarding specified foreign property and foreign-sourced income (e.g., the name of foreign institution or other entity holding funds outside of Canada, the specific country to which the specified foreign property relates and the foreign income generated from the property). The revised Form T1135 will be required for 2013 and subsequent taxation years.
Finally, Budget 2013 proposes to implement measures to assist taxpayers in meeting their Form T1135 filing requirements. Budget 2013 states that the CRA will remind taxpayers, on their Notices of Assessment, of their obligations to file Form T1135 and that the CRA will clarify the filing instructions for Form T1135. In addition, Budget 2013 states that the CRA is in the process of developing the necessary system to permit electronic filing of Form T1135 (currently not available).
International Banking Centres
Budget 2013 repeals the International Banking Centre ("IBC") provisions effective for taxation years beginning on or after Budget Day.
These rules were introduced in 1987 to attract foreign banking activity to Canada and exempt certain income earned by prescribed financial institutions through a branch or office in Vancouver or Montreal. The Government says that the IBC exemption was not being used in recent years and that its repeal will simplify the tax system and enhance neutrality across sectors and regions.
Personal and Trust Income Tax Measures
Lifetime Capital Gains Exemption (the "LCGE")
Owner/entrepreneurs will welcome the announced increase of the lifetime capital gains exemption applicable to the disposition of qualified small business corporation shares, qualified farm property and qualified fishing property ("Qualified Property").
It is proposed that the LCGE will be increased from $750,000 to $800,000 on capital gains realized by an individual on Qualified Property. This change is not immediately effective but rather will apply to capital gains realized in the 2014 taxation year. Budget 2013 also announced that for taxation years after 2014, the LCGE will be indexed to inflation.
The new LCGE limits will apply to all qualifying Canadian resident individuals, even those who have previously used the LCGE.
Budget 2013 proposes to introduce specific legislative measures to ensure that the appropriate tax consequences apply to synthetic disposition transactions. These are transactions that seek to defer gains or obtain other tax benefits by allowing a taxpayer to economically dispose of a property while continuing to own it for income tax purposes for more than one year. Some of the transactions that will be caught by these rules are "monetization" transactions where a taxpayer would effectively receive the value of a property with an accrued gain typically by way of a loan without actually disposing of the property.
If a taxpayer enters into a "synthetic disposition arrangement" in respect of property owned by the taxpayer, the taxpayer will be deemed to have disposed of (and reacquired) the property for fair market value proceeds and be taxed accordingly.
This measure will apply where a taxpayer (or a person who does not deal at arm's length with the taxpayer) enters into one or more agreements that have the effect of eliminating all or substantially all the taxpayer's risk of loss and opportunity for gain or profit in respect of a property of the taxpayer for a period of more than one year. These deemed transactions will not have tax consequences for other parties involved in the synthetic transaction.
This measure will apply regardless of the particular form of the agreement(s). However, it should not apply, for example, to ordinary hedging transactions or to ordinary commercial leasing transactions.
Notwithstanding the deemed reacquisition of the property, the taxpayer will not be considered the owner of the property for certain holding period tests in stop-loss rules and other provisions.
These measures will apply to agreements entered into on or after Budget Day and to agreements entered into before Budget Day if their term is extended on or after Budget Day.
Character Conversion Transactions
Many investments funds use a strategy that converts their returns from ordinary income to capital gains. These funds enter into forward contracts to buy or sell a basket of "Canadian securities" which are capital property to the fund. Under these arrangements, the return realized by the fund upon selling or acquiring the "Canadian securities" is based on the value of a "reference asset" which is something other than the value of the "Canadian securities" themselves. The reference asset could be, for example, an index, a commodity price, or units of another fund. If the investment fund invests directly in the reference asset it may realize ordinary income whereas if the fund invests in a forward agreement that provides it with economic exposure to the reference asset the fund's returns are on capital account through the sale of the "Canadian securities."
Budget 2013 proposes to treat returns from such forward agreements as being on income account and being distinct from the disposition of the capital property that is purchased or sold under the derivative forward agreement. The measure is not specifically aimed at investment funds or "Canadian securities" as it applies to all taxpayers that enter into an agreement to purchase or an agreement to sell any capital property if the sale price (in the case of a forward sale agreement) or the amount of property to be received (in the case of a forward purchase agreement) on a settlement or partial settlement is determined in whole or in part by reference to anything other than the value of the capital property or the income or capital gains in respect of the capital property.
The income (or loss) realized under the new rule will be included (or deductible) in computing the income of the taxpayer at the time of disposition if the capital property is subject to a derivative forward sale agreement, and at the time of acquisition if the capital property is subject to a derivative forward purchase agreement. Accordingly, there is no immediate income inclusion (or loss) but rather a re-characterization of the return at the time it is otherwise realized.
The income (or loss) described above will be added to (or deducted from) the adjusted cost base of the capital property to avoid double taxation (or double counting losses).
This measure will apply to a derivative forward agreement that has a duration of more than 180 days or an agreement that is part of a series of agreements with a term that exceeds 180 days. It is not clear if the 180 day term for a series of agreements only begins to be counted on Budget Day or if it looks back to the date any series started including one that started before Budget Day. An agreement that was entered into before Budget Day is not affected unless the existing termination date of the agreement is extended at any time on or after Budget Day. Other changes to the terms and conditions of an existing pre-Budget Day agreement should not taint the "grandfathered" status of the agreement unless the changes are so material as to constitute a novation of the agreement. As currently drafted, and subject to possible revisions by the Department of Finance, increasing the size of the exposure under a forward agreement which contemplates such expansion should also not taint the status of an existing agreement.
Trust Loss Trading
Budget 2013 proposes to extend to trusts, with appropriate modifications, the loss-streaming and related rules that currently apply on an acquisition of control of a corporation, including the limited exception allowing the ongoing use of non-capital losses from a business. This will prevent a trust from using accumulated capital losses (and potentially non-capital losses) after it is acquired by a person or group of persons who are entitled to more than 50% of the income or capital of the trust.
The proposed measure will apply if the trust is subject to a "loss restriction event" (i.e. when a person or partnership becomes a "majority-interest beneficiary" of the trust or a group becomes a majority-interest group of beneficiaries of the trust). There are proposed rules that provide for situations where persons are deemed to be, or not to be, majority interest beneficiaries.
Existing rules that deem certain transactions or events to involve (or not involve) an acquisition of control of a corporation will be extended to apply in determining whether a trust is subject to a loss restriction event.
This measure, including any relieving changes that may be made as a result of public consultation, will apply to transactions that occur on or after Budget Day, 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 Budget Day.
In response to the interpretation of the trust attribution rule by the Federal Court of Appeal in The Queen v. Sommerer (2012 FCA 207), Budget 2013 proposes to amend the deemed trust residence rules to apply to a non-resident trust if the trust holds property on conditions that grant effective ownership of the property to a Canadian resident taxpayer. More specifically, the rule may apply in respect of property held by the trust on condition that: (i) the property can revert to the taxpayer, or (ii) the taxpayer has influence over the trust's dealings in respect of the property.
The new rule will apply such that any transfer or loan of property (regardless of consideration exchanged) made directly or indirectly by the Canadian resident taxpayer will be treated as a transfer or loan of restricted property (as defined in deemed trust residence rules) by the taxpayer. The result will generally be that the Canadian resident taxpayer will be treated as having made a contribution to the trust and the deemed trust residence rules will apply to the trust.
A rule related to the trust attribution rule generally prevents certain tax-deferred distributions of property from a trust where property of that trust that is subject to the trust attribution rule. Budget 2013 will extend this related rule to a trust described above. The trust attribution rule will be amended to apply only in respect of property held by a trust that is a resident of Canada determined without regard to the deemed trust residence rules.
This measure will apply to taxation years that end on or after Budget Day.
Dividend Tax Credit
In general, eligible dividends are dividends that are distributed to an individual from corporate income that has been taxed at the general corporate tax rate and non-eligible dividends are dividends that are distributed to an individual from corporate income that has not been taxed at the general corporate tax rate as a result of the small business deduction. Budget 2013 proposes to adjust the gross-up factor that applies to non-eligible dividends from 25% to 18% and the corresponding dividend tax credit (the "DTC") from 2/3 of the gross-up amount to 13/18 of the gross-up amount. With the proposed changes, the effective rate of the DTC in respect of non-eligible dividends will be 11%.
The purpose of the proposed amendment is to ensure that an individual who receives non-eligible dividends from a corporation will not be in a better position than if the individual had earned the income directly.
This measure will apply to non-eligible dividends paid after 2013.
Registered Pension Plans: Correcting Contribution Errors
Budget 2013 proposes to allow registered pension plan ("RPP") administrators to refund contributions to correct reasonable errors, even if the RPP contribution limits have not been exceeded, and without first obtaining approval from the CRA.
The refund must be made no later than December 31 of the year following the year in which the contribution was made. Refunds will generally be reported as income of the member in the year received and the prior year's deduction will generally not be adjusted. The existing procedure of seeking authorization from the CRA will continue to apply where the RPP administrator seeks to correct a contribution error after this deadline.
This measure will apply in respect of RPP contributions made on or after the later of January 1, 2014 and the date of Royal Assent to the enacting legislation.
Extended Reassessment Period: Tax Shelters and Reportable Transactions
Budget 2013 proposes to extend the normal reassessment period for participants in a tax shelter or a reportable transaction in respect of which an information return that is required is not filed on time.
Under existing tax rules, the late or non-filing of an information return would not extend the normal reassessment period for a participant in a tax shelter or a reportable transaction.
Budget 2013 proposes to modify the existing rules by extending the normal reassessment period to three years after the date that the relevant information return is filed.
This measure will apply to taxation years that end on or after Budget Day.
Taxes in Dispute and Charitable Donation Tax Shelters
Budget 2013 proposes to modify the prohibition against the CRA taking collection action against non-corporate taxpayers who have objected to a notice of assessment or reassessment, where the assessment or reassessment involves charitable donation tax shelters.
Where a taxpayer has objected to an assessment of tax, interest or penalties in respect of a tax shelter that involves a charitable donation, the CRA will be permitted to collect 50% of the disputed tax, interest or penalties, pending the ultimate determination of the taxpayer's liability.
This measure will apply to amounts assessed for the 2013 and subsequent taxation years.
Extension of the Mineral Exploration Tax Credit for Flow-Through Share Investors
Budget 2013 proposes to extend eligibility for the Mineral Exploration Tax Credit for one year, to flow-through share agreements entered into on or before March 31, 2014.
Labour-Sponsored Venture Capital Corporations ("LSVCCs") Tax Credit
Individuals who acquire shares in federally registered or prescribed provincial LSVCCs currently qualify for a federal LSVCC tax credit equal to 15% of their investment up to maximum credit of $750. On the basis that the federal LSVCC tax credit is no longer effective in stimulating Canada's venture capital sector, Budget 2013 proposes to reduce and eventually eliminate the federal LSVCC tax credit. The federal LSVCC tax credit will remain at 15% (to a maximum of $750) when it is claimed in 2013 and 2014 but will be reduced to 10% for the 2015 taxation year (to a maximum of $500) and 5% for the 2016 taxation year (to a maximum of $250). For 2017 and subsequent taxation years, the federal LSVCC tax credit will be eliminated.
Applications for new federal LSVCC registrations will not be accepted on or after Budget Day. Similarly, new provincially registered LSVCCs will not be prescribed for purposes of claiming the federal LSVCC tax credit unless the LSVCC applied to be prescribed prior to Budget Day.
Recognizing that these changes are likely to have a significant impact on existing LSVCCs, Budget 2013 requests that affected stakeholders submit comments to the Government by May 31, 2013 with respect to tax rules affecting LSVCCs including investment requirements, redemptions and wind-ups.
First-Time Donor's Super Credit
Budget 2013 proposes a First-Time Donor's Super Credit ("FDSC") to encourage charitable giving by new donors. Currently, individual donors receive a federal tax credit of 15% for the first $200 of annual charitable donations and 29% for that portion of annual donations that exceeds $200. The FDSC will supplement the existing federal charitable tax credit by 25%, providing first-time donors with a 40% tax credit for the first $200 donated to charity and a 54% tax credit for that portion of annual donations over $200 but not exceeding $1,000. Only donations of money are eligible for the FDSC.
An individual will be considered a first-time donor for the purposes of the FDSC if neither the individual nor the individual's spouse or common-law partner has claimed charitable tax credits or the FDSC in any taxation year after 2007. Couples may share the FDSC in a given year but the total credit claimed by both must not exceed the amount that would be allowed if only one of them had claimed the credit.
The FDSC will be available for donations made on or after Budget Day, and may be claimed only once in the 2013-2017 taxation years.
Consultation on Graduated Rate Taxation of Trusts and Estates
Budget 2013 announces the Government's intention to consult on possible measures to eliminate the graduated tax rates applicable to inter vivos trusts created before June 1971 ("grandfathered inter vivos trusts"), testamentary trusts and estates (in the case of estates, after a period for estate administration). These trusts are currently taxed at the same graduated tax rates applicable to individuals. Other trusts, including most inter vivos trusts, are taxed at a flat rate of 29%, which is the highest federal tax rate for individuals.
The Government says that it is concerned that the tax treatment of grandfathered inter vivos trusts, testamentary trusts and estates raises questions of tax fairness and neutrality when compared to the tax treatment of inter vivos trusts and individuals who receive equivalent income directly. The Government is also concerned with potential growth in the tax-motivated use of testamentary trusts and its associated impact on the tax base.
A consultation paper will be released to the public to provide stakeholders with an opportunity to comment on the introduction of such measures.
Deduction for Safety Deposit Boxes
Budget 2013 proposes to make the cost of renting a safety deposit box from a financial institution non-deductible for income tax purposes, as taxpayers are increasingly using safety deposit boxes for personal purposes, rather than for income earning purposes.
This measure will apply to taxation years that begin on or after Budget Day.
Adoption Expense Tax Credit
Currently, for the taxation year in which the adoption of a child is finalized, adoptive parents are eligible to claim a 15% non-refundable tax credit in respect of eligible adoption expenses incurred during the adoption period. Under existing rules, the adoption period begins at the earlier of the time that the eligible child's adoption file is opened with a provincial ministry responsible for adoption and the time that an application related to the adoption is made to a Canadian court. Effectively, this means that only expenses incurred after a child is matched with prospective adoptive parents are eligible for the adoption tax credit.
Reflecting the requirements of the adoption process and the fact that adoptive parents incur significant expenses prior to being matched with a child, Budget 2013 proposes to extend the adoption period such that it will commence at the time that an adoptive parent makes an application to register with a provincial ministry responsible for adoption or with an adoption agency licensed by a provincial government, or at the time an adoption-related application is made to a Canadian court. As such, expenses which adoptive parents are required to incur prior to being matched with a child (e.g., home studies, criminal background checks, medical examinations) may be included as eligible adoption expenses.
It is proposed that this amendment will apply to adoptions finalized after 2012.
Sales and Excise Tax
With respect to changes to the GST/HST, Budget 2013 focused on three main areas: (1) supplies of health care services; (2) supplies of paid parking by charities and public sector bodies; and (3) compliance relief for employers participating in registered pension plans.
GST/HST on Health Care Services
Budget 2013 makes two changes to services supplied in the health care sector – an expanded exemption for certain home and personal care services and a clarification that the supply of certain services and reports in circumstances that are not directly related to the health of a patient are fully taxable for GST/HST purposes.
To help bring the legislation more in line with the current practices in the provision of home and personal care services by the provinces and territories, Budget 2013 proposes to expand the present exemption for publicly funded or subsidized homemaker services so that it will also apply to publicly funded or subsidized personal care services, including bathing, feeding, assistance with medication and similar services when supplied to qualifying individuals. The changes will apply to all supplies of such services made after Budget Day.
Budget 2013 also proposes to clarify that supplies made by health care professionals are not exempt from GST/HST in circumstances where they are provided solely for non-health care related purposes. Accordingly, effective after Budget Day, GST/HST will apply to the provision of reports, examinations and other services that are not performed for the purpose of protecting, maintaining or restoring the health of a person or for palliative care. The provision of services or reports for the purposes of independent medical examinations in the context of trials or insurance claims will not be exempt from GST/HST. In addition, the supply of additional property or services in respect of that non-health care related service will equally be taxable (e.g. x-rays taken to support findings in a report to an insurer). However, where such services and reports are paid for by provincial or territorial health care plans, they will remain exempt from GST/HST.
GST/HST and Paid Parking supplied by Charities and Public Sector Bodies
Budget 2013 has proposed two measures, described as clarifications, which have the effect of applying GST/HST to supplies of paid parking made by public sector bodies and charities. According to the Budget documents, there has always been an intention that supplies of paid parking made by public sector bodies and charities be subject to GST/HST in circumstances where they might be competing with commercial parking suppliers.
The first proposed "clarification" relates to supplies of paid parking made by charities that are not public institutions (e.g. public hospitals, universities, municipalities). These types of charities (e.g. charitable foundations) have always benefited from an exempting provision that applies to paid parking. This is entirely different from the specific taxation of supplies of paid parking made by public sector bodies (which do not include these types of charities). The proposed amendment will require charities to charge and collect GST/HST on supplies of parking made by way of lease, license or similar arrangement in the course of the charity's business, but only in circumstances where the charity was formed or used by a public institution to operate its parking facilities. Notwithstanding that Budget 2013 describes this proposed amendment as a clarification, it is more accurately a change to the law to eliminate the ability of public institutions to form or use charities to operate their parking facilities in a manner that does not require the collection of tax from the users of the parking spaces. Budget 2013, likely recognizing that this is in fact a change to the law and not simply a clarification, has made this provision effective for all supplies made after Budget Day.
The second proposed "clarification" applies to make supplies of paid parking made by public sector bodies (including all charities), that are made by way of lease, license or similar arrangement in the course of a business carried on by the entity, subject to GST/HST. The intent of this provision is to eliminate the ability of a public sector body to rely on other exempting provisions in the legislation that would allow some public sector bodies to provide such parking exempt from GST/HST. In the ordinary course, supplies of such paid parking have already been specifically carved out from the general exemptions, but in certain circumstances, where a public sector body makes more than 90% of its supplies for no consideration, all of its supplies become exempt. This proposed amendment makes it clear that this deeming exemption does not allow public sector bodies to exempt the supplies of paid parking made in the course of the entity's business activities even if it makes more than 90% of its supplies for free. This proposed amendment is being treated truly as a clarification and has been proposed as a retroactive amendment, with an effective date of the date that the GST legislation was introduced.
GST/HST and Pension Plans
Budget 2013 proposes two measures to assist in simplifying the extremely complex rules surrounding the application of GST/HST to pension plans in Canada.
The first change is the introduction of a new joint tax election to be made by employers participating in a registered pension plan and a pension entity (i.e. a pension trust or corporation) of that pension plan. The purpose of the joint election will be to simplify the employer's compliance burden with respect to how it must otherwise account for deemed taxable supplies that arise every time an employer acquires, uses or consumes property or services in activities relating to the pension plan. This provision will apply to all supplies made after Budget Day for employers that have made this election.
The second change is also aimed at simplifying the GST/HST compliance burden on employers participating in a registered pension plan. For an employer that falls below certain threshold amounts with respect to the amount of GST/HST that it had to account for in the previous fiscal year, it will qualify for full or partial relief from the provisions requiring the accounting for and payment of GST/HST on its deemed taxable supplies. This change will apply for all fiscal years beginning after Budget Day.