On March 21, 2013 the federal government released its budget (http://www.budget.gc.ca/2013/doc/plan/toc-tdm-eng.html).
Mining Industry. The CEE (100%) deduction for intangible mine development expenses will become a CDE (30% per year) deduction, to be fully phased in after calendar 2017. The enhanced CCA (100%) deduction for new mine (or mine expansion) plant and equipment will be eliminated, such that only the base CCA (25% per year) deduction will apply, to be fully phased in after calendar 2020. In each case, transitional relief is available for expenses incurred before 2017 provided these are incurred (1) under a written agreement entered into prior to budget day or (2) where mine construction or specified engineering and design work was started before budget day.
Corporate Loss Trading. Loss-streaming rules apply when legal control of a corporation is acquired. Transactions have developed that avoid these rules by the purchaser acquiring a large non-voting equity position in the loss corporation. To eliminate these transactions going forward, rules are being introduced that deem an acquisition of control where (1) a person (or group of persons) acquires shares representing more than 75% of the value of all shares of the loss corporation, and (2) it is reasonable to conclude one of the main reasons legal control is not acquired is to avoid the loss-streaming rules.
Taxation of Corporate Groups. Canada does not have a formal system of corporate group taxation. Rather, the federal government accepts that corporate groups can leverage existing rules to transfer income and losses between related corporations (through financing arrangements, reorganizations, and tax-deferred property transfers). Over the past two years, the government conducted extensive consultations on how a formal system of group taxation could be introduced. The government has now concluded that moving to a formal system of corporate group taxation is “not a priority at this time”. Going forward, the government will work with provinces and territories regarding their concerns around revenue-loss they face with the current approach to in-group loss utilization.
Thin Capitalization. The 2012 federal budget extended the thin capitalization rules to partnerships of which a Canadian-resident corporation is a member. The 2013 budget further extends the thin capitalization rules to non-resident corporations (and certain trusts) as well. As a Canadian branch is not a separate person from the non-resident corporation, the branch does not have shareholders or share equity for purposes of the thin capitalization rules. Instead, a debt-to-asset ratio of 3-to-5 will be used, which parallels the 1.5-to-1 (debt-to-equity) ratio used for Canadian-resident corporations.
Treaty Shopping. The government defines treaty shopping as arrangements which effectively extend tax treaty benefits to third country tax residents in circumstances that were not contemplated when the tax treaty between the other two countries was negotiated. However, attempts to challenge such arrangements in court have been largely unsuccessful. In the 2013 budget, the government announced its intention to release a consultation paper dealing with possible measures that would, in the government’s view, better protect the integrity of Canada’s tax treaties while at the same time preserve a business tax environment conducive to foreign investment.
Synthetic Dispositions. Some arrangements amount to an economic sale of a property without a corresponding legal disposition for tax purposes. Some examples include a forward sale of property, a “put-call collar” in respect of an underlying property, debt exchangeable for property, a “total return swap”, and a securities borrowing to facilitate a short sale. The 2013 budget targets these transactions. A property will now be deemed to be sold (and reacquired) if the arrangement is designed to “eliminate the owner’s risk of loss and opportunity for gain” in respect of a property for a period of more than one year. The rule does not apply if the arrangement results in an actual sale (disposition) of the property within one year, or where the arrangement involves shares or debt of a corporation convertible to shares of the same corporation (under s. 51). Also excluded are ordinary hedging transactions, which the government describes as “managing only the risk of loss”.
Manufacturing Industry. The enhanced Class 29 CCA rate available for manufacturing and processing machinery and equipment will be extended for additional two years. Accordingly, as a Class 29 asset, such property acquired before 2016 will generally qualify for a write-off over 3 years: 25% in the year of acquisition, 50% in the next year, and the balance in the following year.