Archived - Legislative Proposals and Explanatory Notes to Implement Remaining Budget 2007 Tax Measures

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Functional currency reporting

ITA
261(4)

New subsection 261(4) of the Act is the operative rule for section 261. It sets out the rules that are to be followed in a particular taxation year of a taxpayer that is a functional currency year of a taxpayer. Specifically, the following operative rules apply:

• the taxpayer’s Canadian tax results for the particular taxation year are to be determined using the taxpayer’s functional currency for the particular taxation year,
• each reference in the Act or the Regulations to a particular amount expressed in Canadian dollars is to be read as a reference to a particular amount expressed in the taxpayer’s functional currency determined by applying the currency exchange rate in respect of the conversion of Canadian currency into that functional currency as of the first day of the particular taxation year,
• subject to subsection 79(7), paragraphs 80(2)(k) and 142.7(8)(b), if a particular amount that is relevant in computing the taxpayer’s Canadian tax results for the particular taxation year is an amount expressed in a currency other than the taxpayer’s functional currency, that amount is to be converted to an amount expressed in the taxpayer’s functional currency by using the rates of exchange quoted by the Bank of Canada at noon on the day that the particular amount came into existence for the exchange of the Canadian dollar for a unit of each of those currencies or such other rate of exchange as is acceptable to the Minister of National Revenue,
• the references in subsection 79(7), paragraph 80(2)(k) and subsections 80.01(11) and 80.1(8) to “Canadian currency” are instead to be read as references to “the taxpayer’s functional currency”,
• the reference in subsection 39(2) to “the value of the currency or currencies of one or more countries other than Canada relative to Canadian currency, a taxpayer has made a gain or sustained a loss in a taxation year” is to be read as reference to “the value of the currency or currencies of one or more countries (other than the taxpayer’s functional currency for the taxation year) relative to a taxpayer’s functional currency for a taxation year, the taxpayer has made a gain or sustained a loss in the taxation year” and the references in that subsection to “currency of a country other than Canada” shall be read as references to “currency other than the taxpayer’s functional currency for the taxation year”,
• the definition “foreign currency” in subsection 248(1) is, in respect of the taxpayer, to be, at any time in the particular taxation year, read as meaning a currency other than the taxpayer’s functional currency for the particular taxation year, and
• where a taxation year of a foreign affiliate of the taxpayer ends in the particular taxation year of the taxpayer, the references to “Canadian currency” in section 95 (and the references in the Regulations made for the purposes of section 95) are to be read, in respect of the foreign affiliate, as a reference to “the taxpayer’s functional currency for the taxpayer’s particular taxation year”.

Converting Canadian currency amounts

ITA
261(5)

Proposed subsection 261(5) of the Act provides rules that are to be applied in a particular functional currency year of a taxpayer when the taxpayer is determining certain tax attributes that are computed by reference to amounts of expenditures, debt or other amounts made or incurred by the taxpayer that arose in a Canadian currency year that precedes the initial functional currency year of the taxpayer. Specifically, subsection 261(5) provides that, in applying the provisions of the Act to the taxpayer for a particular functional currency year of the taxpayer

• subject to the rules in subparagraph (10)(b)(iii), in determining the amount (expressed in the taxpayer’s functional currency) that may be deducted, or relevant in determining the amount that may be deducted, under subsection 37(1) or 66(4), section 110.1 or 111 or subsection 126(2), 127(5), 129(1), 181.1(4) or 190.1(3) in the particular functional currency year, each amount (determined in Canadian currency) that is relevant to the determination and that was determined for a taxation year of the taxpayer that preceded the taxpayer’s initial functional currency year, is to be converted to the taxpayer’s functional currency using the transitional exchange rate of the taxpayer,
• in determining the cost (determined in the taxpayer’s functional currency) to the taxpayer of a property at any time in the particular functional currency year, that was acquired by the taxpayer before the beginning of the taxpayer’s initial functional currency year, the cost (determined in Canadian currency) to the taxpayer of the property at the end of the last Canadian currency year of the taxpayer is to be converted to the taxpayer’s functional currency using the transitional exchange rate of the taxpayer,
• in determining, at any time in the particular functional currency year, the adjusted cost base (expressed in the taxpayer’s functional currency) to the taxpayer of a capital property that was acquired by the taxpayer before the beginning of the taxpayer’s initial functional currency year, each amount (determined in Canadian currency) that was required by section 53 to be added or deducted in computing, at any time before the beginning of the initial functional currency year of the taxpayer, the adjusted cost base of the property to the taxpayer is to be converted to the taxpayer’s functional currency for the particular functional currency year using the transitional exchange rate of the taxpayer,
• in determining, at any time in the particular functional currency year, the amount (determined in the taxpayer’s functional currency) of the taxpayer’s undepreciated capital cost of depreciable property of a prescribed class, cumulative eligible capital in respect of a business, cumulative Canadian exploration expense (within the meaning assigned by subsection 66.1(6)), cumulative Canadian development expense (within the meaning assigned by subsection 66.2(5)), cumulative foreign resource expense in respect of a country other than Canada (within the meaning assigned by subsection 66.21(1)) and cumulative Canadian oil and gas property expense (within the meaning assigned by subsection 66.4(5)), (each of such amount referred to as a “pool amount”) each amount (determined in Canadian currency) that was added to or deducted from a particular pool amount of the taxpayer in respect of a taxation year of the taxpayer preceding the initial functional currency year of the taxpayer is to be converted to the taxpayer’s functional currency using the transitional exchange rate of the taxpayer,
• in determining any amount (determined in the taxpayer’s functional currency) that has been deducted or claimed as a reserve in computing the income of the taxpayer for its last Canadian currency year, that amount (determined in Canadian Currency) deducted or claimed as a reserve is to be converted to the taxpayer’s functional currency using the transitional exchange rate of the taxpayer,
• in determining the amount (determined in the taxpayer’s functional currency) of any outlay or expense referred to in subsection 18(9) that was made or incurred by the taxpayer and the amount that was deducted in respect of that outlay or expense in a taxation year preceding the taxpayer’s initial functional currency year, such amounts (determined in Canadian currency for those years) of outlay or expense or deductions are to be converted to the taxpayer’s functional currency using the transitional exchange rate of the taxpayer,
• in determining the amount (determined in the taxpayer’s functional currency) of the taxpayer’s paid-up capital in respect of any class of shares of its capital stock at any time in the particular functional currency year, any amount (determined in Canadian currency) added or deducted in computing the taxpayer’s paid‑up capital in respect of the class in a taxation year preceding the initial functional currency year of the taxpayer is to be converted to the taxpayer’s functional currency using the transitional exchange rate of the taxpayer,
• where the taxpayer issued a debt obligation in a taxation year of the taxpayer preceding the initial functional currency year of the taxpayer, in determining the amount (determined in the taxpayer’s functional currency) for which the obligation was issued, the principal amount (determined in the taxpayer’s functional currency) of the obligation, any amount (determined in the taxpayer’s functional currency) paid in satisfaction of the principal amount of the obligation in a taxation year of the taxpayer preceding the taxpayer’s initial functional currency year, and the amount (determined in the taxpayer’s functional currency) of any gain or loss attributable to the fluctuation in the values of currencies:

• in determining the amount (determined in the taxpayer’s functional currency) of tax payable under Part I for a Canadian currency year, for the purpose of determining the taxpayer’s first instalment base or second instalment base for the taxpayer’s initial functional currency year, the amount (determined in Canadian currency) of tax payable is to be converted to the taxpayer’s functional currency using the transitional exchange rate of the taxpayer, and
• any amount (determined in Canadian currency), not already referred to in subsection 261(5), determined under the provisions of the Act in or in respect of a taxation year preceding the taxpayer’s initial functional currency year that is relevant in determining the Canadian tax results (determined in the taxpayer’s functional currency) of the taxpayer for the particular functional currency year is to be converted to the taxpayer’s functional currency using the transitional exchange rate of the taxpayer.

Example 1 Facts 1. Y Corp, a corporation resident in Canada elects to become a foreign currency reporter and to determine its income for tax purposes in its US functional currency for the 2008 and subsequent taxation years. 2. As of December 31, 2007 (the end of Y Corp’s 2007 taxation year), Y Corp’s tax balance sheet was as follows:
Cash	C$10,000
Short-term deposits	C$5,000
Inventory 1	C$25,000
Total Current Assets	C$40,000
Land	C$40,000
Building (Class 1)  (less accumulated depreciation of C$4,841)	C$45,159
Equipment (Class 8)  (less accumulated depreciation of C$6,360)	C$8,640
Shares in other corporations	C$10,000
Total Assets	C$143,799
Debt
Long term debt 2	C$70,000
Shareholder’s Equity
Common stock	C$60,000
Accumulated earnings	C$18,799
Deficit 3	(C$5,000)
Total Liabilities and Shareholder’s Equity	C$143,799
Notes 1 Inventory denominated in US$ converted to C$ at average rate for year 2 Debt issued in 2005 with principal amount of US$90,000 converted at time of issue to C$100,000, repayment terms of US$9,000/year, starting December 31, 2005. There was no foreign exchange gain or loss on the December 31, 2005 and 2006 payments as the Canada/US exchange rate for both those years was C$1=US$0.90. Y Corp realized a foreign exchange gain on the December 31, 2007 payment as the Canada/US exchange had changed to C$1=US$0.95. 3 Capital loss of C$5,000 realized by Y Corp in 2006.
3. In 2007, the average Canada-US currency exchange rate for the year is C$1 = US$0.95, which is Y Corp’s transitional exchange rate. Results Conversions on Transition Tax Balance sheet of Y Corp as of January 1, 2008:
Cash 1	US$9,500
Short-term deposits 2	US$4,750
Inventory 3	US$23,750
Total Current Assets	US$38,000
Land 4	US$38,000
Building (Class 1)  (less accumulated depreciation of US$4,599) 5	US$42,901
Equipment (Class 8) (less accumulated depreciation of US$6,042) 6	US$8,208
Shares in other corporations 7	US$9,500
Total Assets	US$136,609
Debt
Long term debt 8	US$63,000
Future tax liability 9	US$3,500
Shareholder’s Equity
Common stock 10	US$57,000
Accumulated earnings 11	US$17,859
Deficit 12	(US$4,750)
Total Liabilities and Shareholder’s Equity	US$136,609
Notes 1 Cash cost converted into US functional currency at transitional exchange rate of C$1 = US$0.95, pursuant to paragraph 261(5)(b). 2 Deposits cost converted into US functional currency at transitional exchange rate of C$1 = US$0.95, pursuant to paragraph 261(5)(b). 3 Inventory cost converted into US functional currency at transitional exchange rate of C$1 = US$0.95, pursuant to paragraph 261(5)(b). 4 Land cost converted into US functional currency at transitional exchange rate of C$1 = US$0.95, pursuant to paragraph 261(5)(b). 5 Building cost and amounts relevant to computing undepreciated capital cost converted into US functional currency at transitional exchange rate of C$1 = US$0.95, pursuant to paragraphs 261(5)(b) and (d). 6 Equipment cost and amounts relevant to computing undepreciated capital cost converted into US functional currency at transitional exchange rate of C$1 = US$0.95, pursuant to paragraphs 261(5)(b) and (d). 7 Shares cost converted into US functional currency at transitional exchange rate of C$1 = US$0.95, pursuant to paragraph 261(5)(b). 8 Debt issuance and principal amount and amounts paid on debt are those amounts determined in US$ in the years when amounts arose, pursuant to subparagraph 261(5)(h)(i) – Principal amount = US$90,000 – 3 payments of US$9,000 = US$63,000. 9 Amount of foreign exchange gain that would have been realized by Y Corp if it had settled the debt on December 31, 2007 is converted to US$ and will be realized as payments are made in satisfaction of the principal amount of the debt in the future – C$3,684 x US$0.95 / C$1 = US$3,500, pursuant to subsection 261(6). 10 Paid-up capital converted into US functional currency at transitional exchange rate of C$1 = US$0.95, pursuant to paragraph 261(5)(g). 11 The amount required to balance the balance sheet that should reflect accumulated earnings converted into US functional currency at transitional exchange rate of C$1 = US$0.95, pursuant to paragraph 261(j). 12 Carry forward of capital loss converted into US functional currency at transitional exchange rate of C$1 = US$0.95, pursuant to paragraph 261(5)(a).

Deferred amounts relating to debt

ITA
261(6)

Proposed subsection 261(6) of the Act provides rules with respect to the realization of any accrued and unrealized foreign exchange gains and losses in respect of debt obligations of a taxpayer outstanding immediately before the beginning of the initial foreign currency year of the taxpayer. Subsection (6) provides that, in applying the Act to a taxpayer for a particular functional currency year of the taxpayer

• where, at any time in the particular functional currency year, the taxpayer has made a particular payment (determined in the taxpayer’s functional currency) on account of the principal amount (determined in the taxpayer’s functional currency) of a debt obligation that was issued by the taxpayer in a Canadian currency year of the taxpayer that ended before the beginning of the initial functional currency year of the taxpayer

A x B/C

D x E

• notwithstanding paragraph 80(2)(k), where an obligation of the taxpayer was issued in a taxation year of the taxpayer preceding the initial functional currency year of the taxpayer in a currency other than the taxpayer’s functional currency for the particular functional currency year, a forgiven amount arising at any time in the particular functional currency year in respect of the obligation is to be determined by reference to the currency exchange rate on the last day of the taxpayer’s last Canadian currency year in respect of a conversion of an amount determined in the other currency into an amount determined in the taxpayer’s functional currency.

Example 2 Facts 1. X Corp issues a debt obligation on January 1, 2005 in the amount of AU$100,000 with a 10 year term with the principal payable in the amount of AU$10,000 on December 31 of each year from 2005 to 2014. 2. X Corp elects that subsection 261(4) apply for its 2008 taxation year (the calendar year) and subsequent years with a functional currency of US$. 3. The Canada / Australia exchange rate on January 1, 2005 was C$1 = AU$1.66 and on December 31, 2007 was C$1 = AU$1.8. 4. For 2007, the average US /Australia exchange rate was US$1 = AU$2 and the average Canada / US exchange rate was C$1 = US$0.90. Results 1. Application of paragraph 261(5)(h) Principal amount of debt obligation converted to US$50,000
Debt issued (AU$100,000 x US$1/AU$2)		US$50,000.
Amounts paid:
2005 AU$10,000 x US$1/AU$2 =	US$5,000
2006 AU$10,000 x US$1/AU$2 =	US$5,000
2007 AU$10,000 x US$1/AU$2 =	US$5,000
	US$15,000	(US$15,000.)
Amount outstanding on debt obligation		US$35,000
2. Application of subsection 261(6) When the December 31, 2008 payment is made, in addition to any foreign exchange gain or loss arising from the fluctuation in the relative values of US and Australian currency since December 31, 2007, subsection 261(6) will also apply to deem a US$421 gain to X Corp for its 2008 taxation year. A x B/C = US$2,952 x (US$5,000 / US$35,000) = US$421 where A = US$2,952 (the amount, converted into US$, of foreign exchange gain that would have been realized by X Corp if the remainder of the principal amount outstanding on the debt on the last day of X Corp’s last Canadian currency year had been paid on that day) ((AU$70,000 x C$1/AU$1.66) – (AU$70,000 x C$1/AU$1.8)) x US$0.90 / C$1 B = US$5,000 (the amount of the payment in satisfaction of the principal amount) C= US$35,000 (the amount of the debt outstanding on the first day of X Corp’s first functional currency year)

Amounts payable or refundable in respect of a functional currency year

ITA
261(7)

Proposed subsection 261(7) of the Act covers situations where amounts are payable by a taxpayer or refundable to a taxpayer in respect of a functional currency year.

Where an amount is first required under the Act to be paid at any particular time by a taxpayer to the Receiver General in respect of a functional currency year of the taxpayer

• the amount that is determined in the taxpayer’s functional currency is to be converted to Canadian currency by using the currency exchange rate on the earlier of the day the amount is so paid and the day that includes the particular time in respect of a conversion of an amount determined in the taxpayer’s functional currency into an amount determined in Canadian currency, and
• the Canadian currency amount determined is to be paid to the Receiver General in Canadian currency.

Conversely, where an amount (determined in the taxpayer’s functional currency) is first required under the Act to be refunded to the taxpayer by the Minister of National Revenue, at any particular time in a particular functional currency year of the taxpayer or is deemed at any time to be paid on account of an amount payable by the taxpayer under the Act for a particular functional currency year of the taxpayer

• that amount is to be converted to Canadian currency by applying to the amount the currency exchange rate on the particular day that includes the particular time in respect of a conversion of an amount determined in the taxpayer’s functional currency into an amount determined in Canadian currency, and
• the Canadian currency amount is to be paid to the taxpayer by the Minister or is deemed to have been paid to the taxpayer by the Minister, as the case may be, in Canadian currency.

Conditions for the application of subsection (9)

ITA
261(8)

Proposed subsection 261(8) of the Act states that subsection 261(9) will apply to a taxpayer for its taxation years beginning after its last functional currency year.

Converting functional currency amounts

ITA
261(9)

Proposed subsection 261(9) of the Act provides rules for the purpose of applying the Act in respect of a taxation year that is a Canadian currency year (defined in proposed subsection 261(1)) of the taxpayer that commences after the taxpayer’s last functional currency year (defined in proposed subsection 261(1)).

More specifically, subsection 261(9) provides that in applying the Act to a taxpayer for a particular Canadian currency year of a taxpayer

• subject to subparagraph (10)(a)(iii), in determining the amount (expressed in Canadian currency) that may be deducted, or relevant in determining the amount that may be deducted, under subsection 37(1) or 66(4), section 110.1 or 111 or subsection 126(2), 127(5), 129(1), 181.1(4) or 190.1(3) in the particular Canadian currency year,

• in determining the cost (determined in Canadian currency) to the taxpayer of a property at any time in the particular Canadian currency year,

• in determining the adjusted cost base (determined in Canadian currency) to the taxpayer of a capital property at any time in the particular Canadian currency year,

• in determining, at any time in the particular Canadian currency year, the amount (determined in Canadian currency) of the taxpayer’s undepreciated capital cost of depreciable property of a prescribed class, cumulative eligible capital in respect of a business, cumulative Canadian exploration expense (within the meaning assigned by subsection 66.1(6)), cumulative Canadian development expense (within the meaning assigned by subsection 66.2(5)), cumulative foreign resource expense in respect of a country other than Canada (within the meaning assigned by subsection 66.21(1)) and cumulative Canadian oil and gas property expense (within the meaning assigned by subsection 66.4(5)) (each of such amount referred to as a “pool amount”) in the particular Canadian currency year,

• in determining any amount (determined in Canadian currency) that has been deducted or claimed as a reserve in computing the income of the taxpayer in the last functional currency year of the taxpayer preceding the particular Canadian currency year, that amount (determined in the taxpayer’s functional currency) deducted or claimed as a reserve for that last functional currency year is converted to Canadian currency using the reversionary exchange rate of the taxpayer for that last functional currency year,
• in determining the amount (expressed in Canadian currency) of any outlay or expense referred to in subsection 18(9) that was made or incurred by the taxpayer and the amount that was deducted by the taxpayer in respect of that outlay or expense in respect of a taxation year of the taxpayer preceding the particular Canadian currency year,

• in determining, at any time in the particular Canadian currency year, the amount (determined in Canadian currency) of the taxpayer’s paid-up capital in respect of any class of shares of its capital stock,

• where an obligation was issued in a taxation year of the taxpayer preceding the initial reversionary year of the taxpayer, in determining, at any time in the particular Canadian currency year, the amount (expressed in Canadian currency) for which an obligation was issued, the principal amount (expressed in Canadian currency) of the obligation, the amounts (expressed in Canadian currency) paid in satisfaction of the principal amount of the obligation, and the amount (determined in Canadian currency), if any, of any gain or loss attributable to the fluctuation in the value of the Canadian currency relative to the value of the currency in which the obligation was issued,

• where the obligation was issued in Canadian currency, the amount (determined in Canadian currency) for which the obligation was issued, the principal amount (determined in Canadian currency) of the obligation and the amounts (determined in Canadian currency) paid, in a taxation year of the taxpayer preceding the initial reversionary year of the taxpayer, in satisfaction of the principal amount of the obligation, are the amounts so determined in Canadian currency in those preceding years,
• notwithstanding the rule described above, where an obligation was issued in a currency other than Canadian currency in a taxation year of the taxpayer preceding the initial reversionary year of the taxpayer, in determining, in respect of subsection 79(7) or paragraph 80(2)(k) or 142.7(8)(b), the amount (expressed in Canadian currency) for which the obligation was issued, the principal amount (determined in Canadian currency) of the obligation, and the amounts (determined in Canadian currency) paid in satisfaction of the principal amount of the obligation, at any time in the particular Canadian currency year, those amounts are to be determined as if subsections (1) to (7) had not applied to the taxpayer for any preceding taxation year,
• where the particular Canadian currency year is the initial reversionary year of the taxpayer, in determining the amount (determined in Canadian currency) of tax payable under Part I in the last functional currency year of the taxpayer, for the purpose of determining the taxpayer’s first instalment base or second instalment base in the particular Canadian currency year, the amount (determined in the taxpayer’s functional currency) of tax payable is to be converted to Canadian currency using the reversionary exchange rate of the taxpayer for that last functional currency year, and
• in determining any amount (determined in Canadian currency and referred to as the “specified amount”), at any time in or in respect of the particular Canadian currency year, other than an amount already included in subsection (9), that is relevant in determining the Canadian tax results of the taxpayer for the particular Canadian currency year

Example 3 Facts (the same as Example 1 with these additional facts): 1. In 2010, Y Corp ceases to be a foreign currency reporter and must determine its income for tax purposes for that year in Canadian currency. 2. The average US/Canada exchange rate for Y Corp’s 2008 taxation year is US$1 = C$1.11. 3. The average US/Canada exchange rate for Y Corp’s 2009 taxation year is US$1 = C$1. 4. At December 31, 2009, Y Corp’s tax balance sheet is as follows:
Cash	US$9,500
Short-term deposits	US$4,750
Inventory	US$23,750
Total Current Assets	US$38,000
Land	US$38,000
Building (Class 1)  (less accumulated depreciation of US$7,962) 1	US$39,538
Equipment (Class 8)  (less accumulated depreciation of US$8,997) 2	US$5,253
Shares in other corporations	US$9,500
Total Assets	US$130,291
Debt
Long term debt 3	US$45,000
Future tax liability 4	US$2,500
Shareholder’s Equity
Common stock	US$57,000
Preferred stock 5	US$10,000
Accumulated earnings 6	US$30,541
Deficit	(US$4,750)
Total Liabilities and Shareholder’s Equity	US$130,291
Notes 1 US$1,716 in CCA deducted in 2008 and US$1,647 deducted in 2009. 2 US$1,642 in CCA deducted in 2008 and US$1,313 deducted in 2009. 3 US$9,000 paid in satisfaction of the debt in each of 2008 and 2009. 4 $500 deemed capital gain realized under subsection 261(6) in each of 2008 and 2009 (out of a total of US$3,500 gain that will have been deemed to have been realized once the entire principal amount is satisfied). 5 10,000 preferred shares issued in 2009 by Y Corp with PUC of US$10,000. 6 Accumulated earnings of US$12,682 added in 2009 to the US$17,859 accumulated in Canadian currency years.
Results Conversion on Reversion Conversion of tax attributes of Y Corp under subsection 261(9) for the 2010 Taxation year Tax attributes as of the end of 2009 must be converted into Canadian amounts. The tax balance sheet of Y Corp on January 1, 2010 is as follows:
Cash 1		C$9,500
Short-term deposits 2		C$5,000
Inventory 3		C$23,750
Total Current Assets		C$38,250
Land 4		C$40,000
Building (Class 1) (less accumulated depreciation of C$8,393) 5		C$41,607
Equipment (Class 8) (less accumulated depreciation of C$9,496) 6		C$5,504
Shares in other corporations 7		C$10,000
Total Assets		C$135,358
Debt
Long term debt 8		C$50,000
Future tax liability 9		C$0
Shareholder’s Equity
Common stock 10		C$60,000
Preferred Stock 11		C$10,000
Accumulated earnings 12		C$20,358
Deficit 13		(C$5,000)
Total Liabilities and Shareholder’s Equity		C$135,358
Notes 1 Cash cost converted into Canadian currency at 2009 reversionary exchange rate of C$1 = US$1, pursuant to subparagraph 261(9)(b)(i) (for the purposes of this example, it is assumed that all of the cash was obtained in 2009). 2 Cost of deposits acquired in Canadian currency year deemed to be the original Canadian currency cost (C$5,000), pursuant to subparagraph 261(9)(b)(ii). 3 Cost of inventory converted into Canadian currency at 2009 reversionary exchange rate of C$1 = US$1, pursuant to subparagraph 261(9)(b)(i) (for the purposes of this example, it is assumed that all of the inventory was obtained in 2009). 4 Cost of land acquired in Canadian currency year deemed to be the original Canadian currency cost, pursuant to subparagraph 261(9)(b)(ii). 5 Cost of building acquired in Canadian currency year deemed to be the original Canadian currency cost (C$50,000), pursuant to subparagraph 261(9)(b)(ii). Pursuant to subparagraph 261(9)(d)(ii), amounts added to and subtracted from the undepreciated capital cost of the building in Canadian currency years (2005 – 2007 - C$4,841) are those amounts determined in those years. Pursuant to subparagraph 261(9)(d)(i), amounts added to and subtracted from the undepreciated capital cost of the building in functional currency years 2008 and 2009 are converted to Canadian currency at the respective reversionary exchange rate (2008 – US$1,716 / US$1x C$1.11 = C$1,905) (2009 – US$1,647 / US$1 x C$1 = C$1,647). 6 Cost of equipment acquired in Canadian currency year deemed to be the original Canadian currency cost (C$15,000), pursuant to paragraph 261(9)(b). Pursuant to subparagraph 261(9)(d)(ii), amounts added to and subtracted from the undepreciated capital cost of the equipment in, Canadian currency years (2005 – 2007 - C$6,360) are those amounts determined in those years. Pursuant to subparagraph 261(9)(d)(i), amounts added to and subtracted from the undepreciated capital cost of the equipment in functional currency years 2008 and 2009 are converted to Canadian currency at the respective reversionary exchange rate (2008 – US$1,642 / US$1 x C$1.11 = C$1,823) (2009 – US$1,313 / US$1 x C$1 = C$1,313). 7 Cost of shares acquired in Canadian currency year deemed to be the original Canadian currency cost (C$10,000), pursuant to subparagraph 261(9)(b)(ii). 8 Principal amount and amount for which debt was issued of debt obligation acquired in Canadian currency year deemed to be the original Canadian currency principal amount and amount for which debt was issued (C$100,000), pursuant to subclause 261(9)(h)(i)(A)(I). The amounts paid in satisfaction are determined, for the purposes of determining a forgiven amount, as if subsections 261(1) to (7) had not applied (5 payments of C$10,000). 9 When the taxpayer begins to report in Canadian currency, any unrealized deemed gains that would have been deemed on future payments of principal in functional currency years disappear. 10 Amounts added to paid-up capital in Canadian currency year deemed to be the original Canadian currency cost (C$60,000), pursuant to subparagraph 261(9)(g)(ii). 11 Amounts added to paid-up capital in 2009 converted into Canadian currency at 2009 reversionary exchange rate of C$1 = US$1, pursuant to subparagraph 261(9)(g)(i) (US$10,000 / US$1 x C$1 = C$10,000). 12 The amount required to balance the balance sheet and should reflect accumulated earnings expressed in Canadian dollars. 13 Carry forward capital losses added in Canadian currency years deemed to be the Canadian amount originally added to capital loss (C$5,000), pursuant to subparagraph 261(9)(a)(ii).

Functional currency and Canadian currency amounts carried back

ITA
261(10)

Proposed subsection 261(10) mandates certain rules where an amount is claimed by a taxpayer for a taxation year of the taxpayer under section 111 or subsection 126(2), 127(5), 181.1(4) or 190.1(3) in respect of a loss incurred or tax credit arising, or an expenditure made, in a taxation year of the taxpayer.

Where the particular taxation year is a Canadian currency year of the taxpayer, the amount that may be claimed (determined in Canadian currency) is to be determined,

• by converting each amount (determined in the taxpayer’s functional currency) of a loss incurred, tax credit arising and expenditure made in or in respect of a particular functional currency year of the taxpayer that ends after the particular taxation year to Canadian currency using the currency exchange rate in respect of the conversion of an amount determined in the taxpayer’s functional currency into an amount determined in Canadian currency on the last day of that particular functional currency year,
• as if each amount (determined in Canadian currency) of a loss incurred, tax credit arising, expenditure made and deduction claimed in or in respect of a Canadian currency year of the taxpayer were the amount of that loss incurred, tax credit arising, expenditure made and deduction claimed in Canadian currency in the Canadian currency year of the taxpayer, and
• by converting each amount (determined in the taxpayer’s functional currency) claimed in or in respect of a particular functional currency year of the taxpayer preceding the initial reversionary year of the taxpayer (in respect of an amount of loss incurred, tax credit arising or expenditure made by a taxpayer in or in respect of a Canadian currency year) to Canadian currency using the currency exchange rate on the last day of the Canadian currency year of the taxpayer in or in respect of which the amount claimed arose in respect of the conversion of an amount determined in the taxpayer’s functional currency to an amount determined in Canadian currency.

Where the particular taxation year is a functional currency year of the taxpayer, the amount that may be claimed (determined in the taxpayer’s functional currency) is to be determined,

• by converting an amount (determined in Canadian currency) of a loss incurred, tax credit arising and expenditure made in or in respect of a particular Canadian currency year of the taxpayer that ends after the particular taxation year to an amount determined in the taxpayer’s functional currency using the currency exchange rate on the last day of the particular Canadian currency year of the taxpayer in respect of the conversion of an amount determined in Canadian currency into an amount determined in the taxpayer’s functional currency,
• as if an amount (determined in the taxpayer’s functional currency) of a loss incurred, tax credit arising, expenditure made and deduction claimed in or in respect of a functional currency year of the taxpayer were the amount of that loss incurred, tax credit arising, expenditure made and deduction claimed in the taxpayer’s functional currency, and
• by converting an amount (determined in Canadian currency) claimed in or in respect of a particular Canadian currency year of the taxpayer preceding the initial functional currency year of the taxpayer (in respect of an amount of loss incurred, tax credit arising or expenditure made by a taxpayer in or in respect of a functional currency year) to the functional currency of the taxpayer using the currency exchange rate on the last day of the functional currency year of the taxpayer in or in respect of which the amount claimed arose in respect of the conversion of an amount determined in Canadian currency to an amount determined in the taxpayer’s functional currency.

Example 4 Facts (the same as Example 1, with these additional facts): 1. In 2008, Y Corp realizes a non-capital loss of US$15,000, and Y Corp applies the loss against its 2007 income. 2. In 2007, Y Corp had income for tax purposes of C$7,000. Results Loss Carry-Back From 2008 Conversion of 2008 non-capital losses – losses carried back to 2007 and loss carry-forward balance A. Loss carried back pursuant to subparagraph 261(10)(a)(i) Maximum non-capital loss carry-back to 2007 in respect of the 2008 non-capital loss of US$15,000, using the currency exchange rate on the last day of Y Corp’s 2008 taxation year = US$15,000 / US$1 x C$1.11 = C$16,667. 2007 income – C$7,000 Amount claimed C$7,000 B. Loss carry-forward pursuant to subparagraph 261(10)(b)(iii) 2008 non-capital loss of US$15,000 Amount claimed in 2007 – C$7,000 / C$1.11 / US$1 = US$6,300 Carry-forward US$15,000 – US$6,300 = US$8,700

Subsection 88(1) wind-ups – effect on subsidiary

ITA
261(11) & (12)

Proposed subsections 261(11) and (12) of the Act deal with situations where a corporation is wound up into a parent under subsection 88(1) of the Act in a functional currency year of the corporation.

Proposed subsection 261(11) of the Act provides that subsection 261(12) will apply to a corporation (the “subsidiary”) that has been wound up into another corporation (the “parent”) if

• subsection 88(1) applied to the subsidiary and the parent in respect of the winding-up of the subsidiary,
• the taxation year of the subsidiary (the “distribution year of the subsidiary”) in which any portion of a property (such portion of the property referred to as the “distributed property”) of the subsidiary was distributed to the parent, or any portion of an obligation (such portion of the obligation referred to as the “assumed obligation”) of the subsidiary was assumed by the parent, on the winding-up of the subsidiary would, were section 261 read without reference to subsection 261(11), be a functional currency year of the subsidiary, and
• either

Proposed subsection 261(12) of the Act provides that, where it applies to the subsidiary, for the purposes of section 261

• the last taxation year of the subsidiary that ends immediately before the beginning of the distribution year of the subsidiary is deemed to be the last functional currency year of the subsidiary, and
• subsection 261(4) is deemed not to apply to the subsidiary for each taxation year of the subsidiary beginning after the end of the subsidiary’s deemed last functional currency year. Consequently, those years will be Canadian currency years of the subsidiary.

Amalgamations – effect on predecessor corporations

ITA
261(13) & (14)

Proposed subsections 261(13) and (14) of the Act deal with situations where a corporation, in a functional currency year of the corporation, amalgamates with another corporation.

Proposed subsection 261(13) provides that subsection 261(14) will apply to a corporation (the “specified predecessor”) that has merged with one or more other corporations to form one corporate entity (the “new corporation”) if

• the merger was an amalgamation within the meaning assigned by subsection 87(1),
• the taxation year of the specified predecessor (the “last taxation year of the specified predecessor”) that ended immediately before the amalgamation would, were section 261 read without reference to subsection 261(14), be a functional currency year of the specified predecessor, and
• either

Proposed subsection 261(14) provides that, where it applies to the specified predecessor, for the purposes of section 261

Deemed continuation on winding-up or amalgamation

ITA
261(15), (16) and (17)

Proposed subsection 261(15) provides that, for the purposes of section 261, after a winding-up (to which subsection 88(1) has applied) or an amalgamation (within the meaning assigned by subsection 87(1)), as the case may be, the parent or the successor corporation is deemed to be a continuation of the subsidiary or the predecessor corporation, as the case may be. This deemed continuation is subject to proposed subsections 261(16) and (17).

Proposed subsection 261(16) provides that, where the parent would not, in a taxation year of the parent ending after the time the subsidiary was wound up, satisfy the requirements of paragraph 261(3)(e) because the last functional currency year of the subsidiary referred to in proposed subsection 261(12) in respect of the winding-up is, because of proposed paragraph 261(15)(a), the last functional currency year of the parent, paragraph 261(15)(a) will not apply, for the purposes of paragraph 261(3)(e), to the parent in respect of the subsidiary if the total of all amounts each of which is the cost amount, at the end of the taxation year of the parent in which the property of the subsidiary was distributed to the parent in the course of winding-up, to the parent of a property of the parent that was distributed to the parent on the winding-up (or property substituted for such property) is less than 50 per cent of the total of all amounts each of which is the cost amount, at the end of that taxation year, to the parent of a property of the parent.

Proposed subsection 261(17) provides that, where the new corporation would not, in a taxation year of the new corporation commencing on or after the time of the amalgamation, satisfy the requirements of paragraph 261(3)(e) because the last functional currency year of the predecessor referred to in subsection 261(14) in respect of the amalgamation is, because of paragraph 261(15)(b) the last functional currency year of the new corporation, paragraph 261(15)(b) shall not apply, for the purposes of paragraph 261(3)(e), to the new corporation in respect of the predecessor if the total of all amounts each of which is the cost amount, at the end of the taxation year of the new corporation that began at the time of the amalgamation, to the new corporation of a property of the new corporation that, immediately before the amalgamation, was a property of the predecessor corporation (or property substituted for such property) is less than 50 per cent of the total of all amounts each of which is the cost amount, at the end of that taxation year of the new corporation, to the new corporation of a property of the new corporation.

Anti-avoidance

ITA
261(18)

Proposed subsection 261(18) provides a rule that prevents against the transferring of the assets of a business from one corporation to another in order to avoid the application of proposed paragraph 216(3)(e). In such a case, the corporation acquiring the assets is deemed, for the purposes of section 261, to be the same corporation as the transferor.

Authority to designate stock exchange

ITA
262

New section 262 forms part of the replacement of the existing concept of “prescribed stock exchange”, currently used for various purposes under the Act, with three new categories of stock exchange:

• “designated stock exchange” – a new definition under subsection 248(1);
• “recognized stock exchange” – a new definition under subsection 248(1); and
• “stock exchange” – an undefined term to which the generally accepted legal and commercial meaning is intended to apply

Currently, sections 3200 and 3201 of the Regulations list the stock exchanges inside and outside Canada that are prescribed for various purposes of the Act. For example, whether a particular share is taxable Canadian property, a qualified investment for registered retirement savings plans, or a qualified security for the purposes of the rules applying to securities lending arrangements, may depend upon whether the share is listed on a prescribed stock exchange.

Most of the provisions in the Act that now refer to “prescribed stock exchange” are amended to refer to “designated stock exchange”. New section 262 provides the mechanism for the Minister of Finance to designate stock exchanges for the purposes of the Act.

Subsections 262(1) and (2) provide the authority for the Minister to designate a stock exchange or part of a stock exchange for the purposes of the Act, and to revoke such a designation. Subsection (3) requires the Minister to specify the time at and after which the designation or revocation is in effect, and provides authority for a designation or revocation to have retroactive effect.

Subsection 262(4) requires the Minister to cause to be published on the Department of Finance website, or by any other means that the Minister considers appropriate, the names of stock exchanges, or parts of stock exchanges, that are, or previously were, designated.

Subsection 262(5) provides a transitional rule, pursuant to which the Minister is deemed to have designated each stock exchange, and each part of a stock exchange, that was prescribed under either section 3200 or 3201 of the Regulations immediately before the day of coming into force of section 262. These deemed designations take effect on the day on which new section 262 comes into force, thus ensuring a seamless transition from the existing list of prescribed stock exchanges to the new category of designated stock exchanges.

New section 262 applies on and after the day on which Royal Assent is given to the amending bill. The Department of Finance is developing a note that explains the new process through which a candidate stock exchange can apply to the Minister for designation. The note will be released shortly after Royal Assent for public comment.

The designation of a stock exchange by the Minister is intended to apply only for the various purposes specified under the Act; it must not be construed as an endorsement by the Minister, the Department of Finance, or the Government of Canada of the exchange generally or of the securities listed on the exchange.

Clause 55

Replacement of “prescribed stock exchange” by “designated stock exchange”

ITA
Various references

These clauses amend various provisions of the Act consequential to the replacement of the “prescribed stock exchange” concept by the new category of “designated stock exchange”, as explained in more detail under the notes to new section 262. These amendments update the language of the provisions but are not intended to alter their substantive effect. The amendments apply on and after the day on which the amending bill receives Royal Assent. The provisions of the Act amended by these clauses are the following:

• subparagraphs 7(9)(d)(i) and (ii);
• subparagraph 13(27)(f)(i);
• paragraph (e) of the definition “Canadian newspaper” in subsection 19(5);
• subparagraph 38(a.1)(i);
• subparagraph 48.1(1)(a)(ii);
• paragraphs (b) and (c) of the definition “qualified person” in subsection 55(1);
• subsection 55(6);
• paragraph (b) of the definition “excluded security” in subsection 80(1);
• clause (c)(ii)(A) and subparagraph (d)(ii) of subsection 86.1(2);
• subsection 87(4.3) and paragraphs 87(9)(a.2) and (10)(e);
• paragraph (a) of the definition “public corporation” in subsection 89(1);
• the definitions “arm’s length transfer” and “excluded property” in subsection 94(1);
• the definitions “arm’s length interest” and “exempt interest” in subsection 94.1(1);
• the definitions “readily obtainable fair market value” and “trading day” in subsection 94.2(1);
• paragraph 94.2(2)(b);
• subparagraph 108(2)(b)(vi);
• subsection 110.1(6);
• paragraph 112(2.21)(c);
• clauses (a)(i)(A) and (B) of the definition “qualified investment” in subsection 115.2(1);
• paragraphs 118.1(18)(a), (b) and (c);
• subparagraphs (a)(i) and (ii) and clauses (c)(ii)(A) and (B) of the definition “split income” in subsection 120.4(1);
• paragraph (c) of the definition “Canadian-controlled private corporation” in subsection 125(7);
• subsection 137(4.1);
• the portion of subsection 141(5) before paragraph (a);
• paragraph (b) of the definition “non-qualified investment” in subsection 149.1(1);
• the portion of paragraph 187.3(2)(d) before subparagraph (d)(i);
• subparagraphs (c)(i) and (ii), and paragraph (d) of the definition “qualified investment” in section 204;
• subsection 207.1(5);
• subsection 207.5(2);
• paragraph (a) of the definition “Canadian property mutual fund investment” in subsection 218.3(1);
• the portion of paragraph (d) before subparagraph (i) in the definition “grandfathered share” in subsection 248(1);
• paragraphs (d) to (f) of the definition “taxable Canadian property” in subsection 248(1); and
• paragraph (d.1) of the definition “term preferred share” in subsection 248(1).

Income Tax Application Rules

Clause 56

Certificates of exemption

ITAR
10(5)

Current subparagraph 212(1)(b)(iv) of the Income Tax Act exempts from tax under Part XIII of that Act payments of interest to non-resident persons who hold “certificates of exemption” issued under subsection 212(14) of that Act and who deal at arm’s length with the payer of the interest. ITAR subsection 10(5) provides for the continuing validity of certificates issued under the previous version of the Income Tax Act.

With the general exemption of all interest paid by persons in Canada to arm’s length non-residents, these certificates will no longer be necessary, and subsection 10(5) is repealed. This measure will apply when the Canada-U.S. tax treaty generally removes source-country tax from cross-border payments of arm’s length interest.

Income Tax Conventions Interpretation Act

Clause 57

Stock exchanges

ITCTA
4.2

New section 4.2 is added to the Income Tax Conventions Interpretation Act, to ensure that each reference in any of Canada’s tax treaties to a stock exchange that is prescribed under, or for the purposes of, the Income Tax Act is read as a reference to a designated stock exchange as defined under that Act. This amendment, which applies on and after the amending bill receives Royal Assent, is consequential to the replacement of the concept of “prescribed stock exchange” by the new category of “designated stock exchange” under the Income Tax Act.

Income Tax Regulations

Clause 58

Remittance – quarterly basis

ITR
108(1.12)

Subsection 153(1) of the Income Tax Act (the Act) authorizes the withholding of tax from payments described in that subsection. Subsection 21(1) of the Canada Pension Plan Act and subsection 82(1) of the Employment Insurance Act authorize the deduction of employee contributions and the deduction of employee premiums respectively for any period in which remuneration is paid.

An employer is required to remit the amounts withheld or deducted to the Receiver General on behalf of its employees. The amount of tax withholdings, as well as employee and employer contributions and premiums payable, must be remitted on or before specific dates. Currently an employer with an average monthly withholding amount of less than $1,000 for the first or the second preceding calendar year, and who has no compliance irregularities for the preceding 12 months, can remit on a quarterly basis, instead of on a monthly basis. For this purpose, the average monthly withholding amount is described in subsection 108(1.2) of the Income Tax Regulations (the Regulations).

Subsection 108(1.12) of the Regulations is amended to ensure that an employer with an average monthly withholding amount of less than $3,000 (instead of $1,000) for the first or the second preceding calendar year, and who has no compliance irregularities for the preceding 12 months, can remit on a quarterly basis, instead of on a monthly basis.

Subsection 108(1.12) of the Regulations is amended in two respects. First, a reference in paragraph 108(1.12)(a) to the average monthly withholding amount of $1,000 is changed to “$3,000.” Second, paragraph 108(1.12)(b) is rewritten to simply the provision and by combining the requirements in subparagraphs 108(1.12)(b)(i) and (ii) into paragraph (b). These amendments to subsection 108(1.12) apply in respect of amounts required to be deducted or withheld after 2007.

Clause 59

Stock exchanges

ITR
3200 and 3201

Currently, sections 3200 and 3201 of the Regulations list the stock exchanges inside and outside Canada that are prescribed for various purposes of the Act. For example, whether a particular share is taxable Canadian property, a qualified investment for registered retirement savings plans, or a qualified security for the purposes of the rules applying to securities lending arrangements, may depend upon whether the share is listed on a prescribed stock exchange.

The concept of “prescribed stock exchange” is now being replaced with three new categories of stock exchange:

• “designated stock exchange”, as defined under subsection 248(1);
• “recognized stock exchange”, as defined under subsection 248(1); and
• “stock exchange”, an undefined term to which the generally accepted legal and commercial meaning is intended to apply.

The process of prescription under the Regulations is also replaced, with a new process whereby the Minister of Finance will designate stock exchanges for the purposes of the Act. New section 262 provides authority for the Minister to so designate stock exchanges.

The designation of a stock exchange by the Minister is intended to apply only for the various purposes specified under the Act; it must not be construed as an endorsement by the Minister, the Department of Finance, or the Government of Canada of the exchange generally or of the securities listed on the exchange.

The amendments giving effect to the new categories of stock exchange come into force on the day on which the amending bill receives Royal Assent. As of that time, sections 3200 and 3201 will no longer be necessary, and are therefore repealed with effect on that day.

A transitional rule in new subsection 262(5) provides that the Minister is deemed to have designated each stock exchange, and each part of a stock exchange, that was prescribed under either section 3200 or 3201 of the Regulations immediately before the day of coming into force of section 262. These deemed designations take effect on the day on which section 262 comes into force, thus ensuring a seamless transition from the existing list of prescribed stock exchanges to the new category of designated stock exchanges.

A number of changes are also made to section 3201 of the Regulations, effective on the day immediately before the day on which the repeal of sections 3200 and 3201 takes effect (or earlier, where noted). These changes update the names of the stock exchanges that are prescribed in section 3201, so that the names are current at the time when the deemed designations under subsection 262(5) take effect. These changes to section 3201 are the following:

• the reference to “the Australian Stock Exchange” in paragraph (a) is replaced with a reference to “the Australian Securities Exchange”;
• the reference to “the Brussels Stock Exchange” in paragraph (b) is replaced with a reference to “Euronext Brussels”;
• the reference to “the Paris Stock Exchange” in paragraph (c) is replaced with a reference to “Euronext Paris”;
• the reference to “the Amsterdam Stock Exchange” in paragraph (i) is replaced with a reference to “Euronext Amsterdam”;
• the reference to “the Zurich Stock Exchange” in paragraph (m) is replaced with a reference to “the SWX Swiss Exchange” and this change is deemed to have come into force on January 1, 2007;
• the reference to “the Cincinnati Stock Exchange” in subparagraph (o)(v) is replaced with a reference to “the National Stock Exchange”;
• subparagraph (o)(vi), which refers to the Intermountain Stock exchange, is repealed since the exchange is no longer operational;
• the reference to “the Midwest Stock Exchange” in subparagraph (o)(vii) is replaced with a reference to “the Chicago Stock Exchange”;
• the reference to “the Pacific Stock Exchange” in subparagraph (o)(x) is replaced with a reference to “NYSE Arca” and this change is deemed to have come into force on April 1, 2006; and
• the reference to the Spokane Stock Exchange under subparagraph (o)(xii) is deleted, as the exchange is no longer operational.

For greater clarity, the updated names of stock exchanges which will be deemed pursuant to new subsection 262(5) to be “designated stock exchanges” effective on the day on which the amending bill receives Royal Assent, are set out in the following table. The Government invites comments from interested parties on the above name changes.

Table
Designated Stock Exchanges

Country	Exchange
Canada	Montreal Stock Exchange
Canada	Tiers 1 and 2 of the TSX Venture Exchange
Canada	Toronto Stock Exchange
Australia	Australian Securities Exchange
Austria	Vienna Stock Exchange
Belgium	Euronext Brussels
Denmark	Copenhagen Stock Exchange
Finland	Helsinki Stock Exchange
France	Euronext Paris
Germany	Frankfurt Stock Exchange
Hong Kong	Hong Kong Stock Exchange
Ireland	Irish Stock Exchange
Israel	Tel Aviv Stock Exchange
Italy	Milan Stock Exchange
Japan	Tokyo Stock Exchange
Luxembourg	Luxembourg Stock Exchange
Mexico	Mexico City Stock Exchange
Netherlands	Euronext Amsterdam
New Zealand	New Zealand Stock Exchange
Norway	Oslo Stock Exchange
Poland	The main and parallel markets of the Warsaw Stock Exchange
Singapore	Singapore Stock Exchange
South Africa	Johannesburg Stock Exchange
Spain	Madrid Stock Exchange
Sweden	Stockholm Stock Exchange
Switzerland	SWX Swiss Exchange
United Kingdom	London Stock Exchange
United States	American Stock Exchange
United States	Boston Stock Exchange
United States	Chicago Board of Options
United States	Chicago Board of Trade
United States	Chicago Stock Exchange
United States	National Association of Securities Dealers Automated Quotation System
United States	National Stock Exchange
United States	New York Stock Exchange
United States	NYSE Arca
United States	Philadelphia Stock Exchange

Clauses 60 to 62

Replacement of “prescribed stock exchange” by “designated stock exchange”

ITR
Various references

These clauses amend various provisions of the Regulations consequential to the replacement of the “prescribed stock exchange” concept by the new category of “designated stock exchange”, and the repeal of sections 3200 and 3201 of the Regulations, as explained in more detail under the notes to those sections. These amendments to the Regulations, which take effect on the day on which the amending bill receives Royal Assent, are the following:

• the definition “prescribed stock exchange” in section 3700 is repealed;
• the language of sections 3702 and 8514 is updated to refer to “designated stock exchange”; and
• the language of sections 4800, 4900, and 6201 is updated to refer to “designated stock exchange in Canada”.

Clause 63

Term preferred share and taxable RFI share

ITR
6201(5) and (5.1)

Subsection 6201(5) and (5.1) of the Regulations prescribe certain shares held by securities dealers as shares that are excluded from being “term preferred shares” and “taxable RFI shares”. One of the requirements for the exclusion to apply to a share is that it be held as inventory of the business ordinarily carried on by the securities dealer. This requirement is replaced by a requirement that the share be held for the purpose of sale in the course of the business ordinarily carried on by the securities dealer. This amendment, which was released as a draft regulation on June 1, 1995, is made as a consequence of the introduction of subsection 142.6(3) of the Act, which provides that certain property held by a financial institution is considered not to be inventory. The new requirement is intended to be the same, in substance, as the former requirement.

The amendments to subsections 6201(5) and (5.1) apply to dividends received in taxation years that begin after October 1994. The language of the two subsections is also updated, consequential to the replacement of the “prescribed stock exchange” concept by the new category of “designated stock exchange”, and the repeal of sections 3200 and 3201 of the Regulations, as explained in more detail under the notes to those sections, effective on the day on which the amending bill receives Royal Assent.

Clause 64

Northern Residents Deduction

ITR
7303.1(1)

Individuals who live in prescribed areas in northern Canada for at least 6 consecutive months in a year may claim the northern resident deduction for that year under section 110.7 of the Act.

Subsection 7303.1(1) of the Regulations describes those areas of northern Canada.

Paragraph 7303.1(1)(a) is amended to add a reference to Nunavut. This amendment applies after March 31, 1999, which is the date Nunavut was created.

Budget 2007 includes the District Municipality of Mackenzie in British Columbia in the area of Canada eligible for the northern resident deduction. Paragraph 7303.1(2)(a) is therefore amended to extend the intermediate zone boundary to north of 55°13’N latitude and east of 123°16’W longitude.

This amendment applies for the 2007 and subsequent taxation years.

Clause 65

“prescribed trades”

ITR
7310

The Regulations are amended by adding new section 7310, consequential to the introduction in 2006 of the Apprenticeship Job Creation Tax Credit.

The definition “eligible apprentice” in subsection 127(9) of the Act defines an eligible apprentice to be an individual who is employed in Canada in a trade prescribed in respect of a province or Canada, during the first twenty-four months of the individual's apprenticeship contract. The apprenticeship contract is generally required to be registered with the province or Canada under an apprenticeship program designed to certify or license the individual in a trade.

New section 7310 of the Regulations defines a prescribed trade in respect of a province to mean a trade that is, at any time in that taxation year, approved as a Red Seal trade under the Interprovincial Standards Red Seal program for the province. This amendment applies to taxation years ending on or after May 2, 2006.

Clause 66

Past service pension adjustment – normalized pension

ITR
8303(5)

Subsection 8303(5) of the Regulations provides rules for determining past service pension adjustments (PSPAs), which reduce RRSP deduction room. The rules set out in paragraphs 8303(5)(f.1) and (f.2) make reference to designated plans as defined in section 8515.

Paragraphs 8303(5)(f.1) and (f.2) are amended to eliminate the reference in those paragraphs to section 8515. These amendments are strictly consequential to the introduction of the definition “designated plan” in subsection 8500(1), which applies for the purposes of all of Parts LXXXIII and LXXXV of the Regulations. These amendments apply after 2007.

Clause 67

Interpretation

ITR
8500(1)

Subsection 8500(1) of the Regulations defines a number of expressions that apply for the purposes of Part LXXXV. By virtue of subsection 8300(3), the definitions also apply for the purposes of Part LXXXIII.

Subsection 8500(1) is amended to add the definition “designated plan”, which has the meaning assigned by existing section 8515. This amendment is intended to improve readability and is consequential to the introduction of several provisions in section 8503 that incorporate the expression “designated plan”. This amendment applies after 2007.

ITR
8500(2)

Subsection 8500(2) of the Regulations provides that the definitions in subsection 147.1(1) of the Act also apply for the purposes of Part LXXXV.

Subsection 8500(2) is amended to provide that the definitions in subsection 8300(1) also apply for the purposes of Part LXXXV. This amendment is consequential to the introduction of several provisions in section 8503 that incorporate the expression “past service event”, which is defined in subsection 8300(1). This amendment applies after 2007.

Clause 68

Permissible benefits

ITR
8503

Section 8503 of the Regulations describes the benefits that may be provided under a defined benefit provision of a registered pension plan (RPP) and contains conditions that apply to a plan that has a defined benefit provision.

Eligible service

ITR
8503(3)(a)

Paragraph 8503(3)(a) of the Regulations restricts the lifetime retirement benefits that may be provided to a member under a defined benefit provision of an RPP to benefits that are provided in respect of certain periods of service.

Paragraph 8503(3)(a) is amended to clarify, for greater certainty, that a member’s eligible service may not include any portion of a period that is after the calendar year in which the member attains 71 years of age (which is the pension commencement deadline in paragraph 8502(e)). This amendment is consequential to the introduction of subsection 8503(19), which allows for continued defined benefit accruals after pension commencement. The provision is also consistent with a similar restriction on contributions under a money purchase provision in paragraph 8506(2)(c.1). This amendment applies to benefits that are provided or payable after 2007.

Re-employed member

ITR
8503(9)

Subsection 8503(9) of the Regulations contains rules that apply with respect to the retirement benefits payable under a defined benefit provision of an RPP to a member who becomes re-employed after commencing to receive retirement benefits. As long as payment of the member’s benefits is suspended during the period of re-employment, subsection 8503(9) permits the member to accrue additional benefits in respect of the period of re‑employment. It also allows the member’s benefits to be redetermined in other ways and modifies certain conditions in subsections 8503(2) and (3) and section 8504 to accommodate the benefit redetermination.

Several provisions in Part LXXXIII (pension adjustments, past service pension adjustments, pension adjustment reversals), as well paragraph 8503(2)(m) (commutation of benefits) and subsection 8517(4) (maximum transfer limit), depend on whether retirement benefits had commenced to be paid. Subsection 8503(9) is amended to add a new rule in paragraph (g) to clarify that these provisions apply throughout the period in which the benefits of a re-employed member are suspended as if the member’s benefits had not previously commenced to be paid. This will ensure that these provisions apply in an appropriate manner. For example, it will ensure that the PSPA relief provided under paragraphs 8303(5)(f) to (f.2) for benefit increases arising from the increase in a plan's maximum pension limit will be available for re-employed members, despite the fact their benefits had previously commenced to be paid. (Paragraphs 8303(5)(f) to (f.2) generally do not apply after retirement benefits have commenced to be paid.)

The rule in paragraph 8503(9)(g) is similar to rules in new paragraphs 8503(18)(b) and (21)(b) that apply for purposes of the new provisions relating to phased retirement. This amendment applies to benefits that are provided or payable after 2007.

Definitions

ITR
8503(16)

New subsections 8503(16) to (25) of the Regulations set out rules relating to phased retirement and other older-worker retention programs. In general terms, these rules enable a defined benefit RPP to provide for qualifying employees to receive bridging benefits on a stand-alone basis or to receive up to 60 per cent of their accrued pension while accruing further pension benefits.

Subsection 8503(16) defines the expressions “specified eligibility day” and “qualifying period” for the purposes of these rules. These definitions apply to benefits that are provided or payable after 2007.

“specified eligibility day”

The “specified eligibility day” of a member under a defined benefit provision of a pension plan represents the earliest day on which the plan may provide for the member to receive bridging benefits, or to accrue additional benefits, in accordance with subsection 8503(17) or (19), respectively.

A member’s specified eligibility day is generally the day the member turns 60 years of age. However, if a member is entitled to an unreduced pension before age 60, it can be as early as the day the member turns 55 years of age. More specifically, in this situation, a member’s specified eligibility day is the later of the day the member turns 55 years of age and the earliest day on which the member may commence to receive their lifetime retirement benefits under the provision without the plan imposing a reduction on account of early retirement.

“qualifying period”

The expression “qualifying period” of a member under a defined benefit provision of a pension plan represents the period in respect of which the plan may provide for the member to accrue additional benefits in accordance with subsection 8503(19).

In general terms, a qualifying period of a member is a period of post-pension commencement employment. The period cannot begin any earlier than the member’s “specified eligibility day”. For more details, refer to the commentary on subsection 8503(19).

Bridging benefits payable on a stand-alone basis

ITR
8503(17)

New subsection 8503(17) of the Regulations enables an RPP to provide for the payment of bridging benefits under a defined benefit provision of the plan on a stand-alone basis (i.e., without the simultaneous payment of lifetime retirement benefits). This provision is intended to allow a defined benefit RPP to provide for a qualifying member who continues in employment to receive the bridging benefits that would have been payable if the member had retired and commenced to receive their full pension. Additional rules relating to subsection 8503(17) are set out in subsections 8503(18) and (23) to (25) and in subparagraph 8507(3)(a)(vii). Subsections (19) to (22) are also relevant if the member accrues additional benefits while in receipt of the stand-alone bridging benefits.

By virtue of the condition in subparagraph 8503(2)(b)(i), bridging benefits must not commence to be paid unless lifetime retirement benefits have commenced to be paid. Subsection 8503(17) provides that this condition does not apply with respect to the payment of bridging benefits to a member if several conditions are satisfied.

First, payment of the bridging benefits cannot commence before the member’s “specified eligibility day” under the provision. This expression is defined in subsection 8503(16) as the earlier of

• the day the member turns 60 years of age; and
• the later of the day the member turns 55 years of age and the earliest day on which the member may commence to receive their lifetime retirement benefits under the provision without the plan imposing a reduction on account of early retirement.

Second, the plan must provide that bridging benefits are payable to the member only for months in which the member is employed by a participating employer or for months that begin on or after the time that the member’s lifetime retirement benefits commence to be paid. This means that payment of the bridging benefits would have to be suspended in the event the member ceases to be employed by a participating employer (other than because the member retires and commences to receive their full pension). Payment of the bridging benefits could resume once the member’s lifetime retirement benefits commence to be paid.

Finally, subsection 8503(17) does not apply to designated plans or persons who are (or have been) connected with a participating employer. The meanings of the expressions “designated plan” and “person connected with an employer” are set out in subsections 8500(1) and (3), respectively.

Subsection 8503(17) applies to benefits that are provided or payable after 2007.

Rules of application

ITR
8503(18)

New subsection 8503(18) of the Regulations contains two special rules that apply where bridging benefits (which are, by definition, retirement benefits) are paid on a stand-alone basis to a member in accordance with subsection 8503(17). These rules modify the application of certain provisions in Parts LXXXIII and LXXXV of the Regulations that depend on whether retirement benefits had commenced to be paid. Essentially, subsection 8503(18) provides that, in applying these provisions with respect to such a member, the payment of the stand-alone bridging benefits is to be ignored.

Paragraph 8503(18)(a) applies where a member who has received stand-alone bridging benefits dies before starting to receive their lifetime retirement benefits. It allows the plan to provide for benefits payable on the death of the member to be determined as if the stand-alone bridging benefits had not been paid. Thus, for example, the limits on guarantee periods can be determined without regard to the time at which the stand-alone bridging benefits commenced to be paid to the member. In the absence of this rule, a guarantee period would have to begin on the day the stand-alone bridging benefits commenced to be paid.

Paragraph 8503(18)(b) provides a similar disregard for purposes of applying the following provisions that depend on whether the member’s retirement benefits had previously commenced to be paid: Part LXXXIII (pension adjustments, past service pension adjustments, pension adjustment reversals); paragraph 8503(2)(m) (commutation of benefits) and subsection 8517(4) (maximum transfer limit). This will ensure that these provisions apply in an appropriate manner. For example, it will ensure that the PSPA relief provided under paragraphs 8303(5)(f) to (f.2) for benefit increases arising from the increase in a plan's maximum pension limit will be available for members who are receiving stand-alone bridging benefits. (Paragraphs 8303(5)(f) to (f.2) generally do not apply after retirement benefits have commenced to be paid.)

These rules are similar to rules in subsections 8503(9) and 8503(21). They apply to benefits that are provided or payable after 2007.

Benefit accruals after pension commencement

ITR
8503(19)

Existing paragraph 8503(3)(b) of the Regulations prohibits the continued accrual of benefits under a defined benefit provision of an RPP once a member’s pension commences to be paid. This prohibition also applies on a cross-plan basis where an employer who participates in a plan also participates (or does not deal at arm’s length with an employer who participates) in another plan.

New subsection 8503(19) is introduced to allow a defined benefit RPP to provide for qualifying employees to receive up to 60 per cent of their accrued pension while at the same time accruing further pension benefits. This provision will provide more flexibility to employers in designing phased retirement and other older worker retention programs in connection with their defined benefit RPP. For example, it will enable employers to offer phased retirement programs to allow older employees to continue working on a part-time basis, while at the same time receiving a partial pension and accruing further pension benefits in respect of their part-time work. It will also enable employers to increase the reward for full-time work by paying a partial pension to older employees who wish to continue in employment on a full-time basis. There is no requirement that the partial pension be based on a reduction in work time or that there be a corresponding reduction in salary.

Subsection 8503(19) provides that the prohibition on post-pension commencement accruals in paragraph 8503(3)(b) does not apply to retirement benefits (referred to as “additional benefits”) provided under a defined benefit provision of an RPP to a member of the plan where the following conditions are met:

• the additional benefits accrue only in respect of a “qualifying period” of the member;
• the amount of retirement benefits payable to the member for each month in the “qualifying period” does not exceed 60 per cent of the monthly amount of retirement benefits accrued to the member to the beginning of the month (determined without any early retirement reduction);
• the additional benefits accrue on a current service basis; and
• the plan is not a “designated plan” and the member was not “connected with an employer” who participates in the plan (the meanings of those expressions are set out in subsections 8500(1) and (3), respectively).

Subsection 8503(16) defines, for this purpose, the expression “qualifying period” of a member under a defined benefit provision of a pension plan. It is a period, commencing no earlier than the member’s “specified eligibility day” (as defined in subsection 8503(16)) under the provision, throughout which the member is employed by an employer who participates in the plan. Periods of employment that are before the day in respect of which the member first begins accruing additional benefits under the provision following pension commencement are excluded from the definition. The conditions in this definition serve several purposes.

The requirement that a qualifying period not begin any earlier than the member’s specified eligibility day ensures that the provision is targeted to those employees who have the strongest incentive to retire (i.e., employees who are at least 60 years of age and employees who are eligible to receive an unreduced pension and at least 55 years of age). The employment condition and the exclusion of periods before the member begins to simultaneously accrue and receive benefits are relevant for purposes of applying the 60 per cent limit. The former condition ensures that members can receive 100 per cent of their pension once they retire. The latter condition ensures that the 60 per cent limit does not disqualify an employee who had previously been receiving 100 per cent of their pension but who subsequently agrees to a reduction in their pension to 60 per cent in exchange for resumption in benefit accruals.

The 60 per cent limit does not apply to any month after which benefits cease to accrue to the member because of a limit on pensionable service (such as a 35-year cap) or a prohibition on the provision of benefits after attainment of a specific age (such as age 71) or combination of age and service. This ensures that a member who continues in employment beyond their plan’s age or service limit (and thus is no longer eligible to accrue further benefits) will not be prevented from receiving 100 per cent of their accrued pension from that time.

Subsection 8503(19) allows additional benefits to be provided for post-pension commencement employment only if the benefits are provided on a current service basis. However, this prohibition will not prevent benefits that accrue in respect of post-pension commencement employment from being increased, as long as the increase gives rise to a nil PSPA (such as an increase resulting from updating the pensionable earnings base). In determining whether a PSPA is nil for this purpose, qualifying transfers are to be disregarded. Nor will it prevent broad-based benefit improvements that give rise to a non-zero PSPA that is exempt from certification under subsection 8306(1) of the Regulations.

Additional rules relating to subsection 8503(19) are set out in subsections 8503(20) to (25) and in subparagraph 8507(3)(a)(vii).

Subsection 8503(19) applies to benefits that are provided or payable after 2007.

Redetermination of benefits

ITR
8503(20)

New subsection 8503(20) of the Regulations contains a relieving rule that applies where a member’s retirement benefits under a defined benefit provision of an RPP are redetermined to include additional accruals after pension commencement in accordance with subsection 8503(19). Subsection 8503(20) is qualified by an anti‑avoidance rule in subsection 8503(22).

Subsection 8503(20) provides that the bridging benefit limits in paragraph 8503(2)(b) and the maximum pension limits in section 8504 apply with respect to the member’s retirement benefits that are payable after the redetermination as if the member’s benefits had first commenced to be paid at the time of the redetermination. This would allow, for example, a recalculation of any bridging benefit reduction to take into account the member’s age and service at the date of redetermination or a recalculation of the maximum pension limit to take into account the current defined benefit limit.

Several existing exceptions to the equal periodic rule in paragraph 8503(2)(a) of the Regulations are also relevant to benefit redeterminations occurring in these circumstances. Subparagraph 8503(2)(a)(iv) allows the member’s retirement benefits to be increased to include the additional benefits accrued during the qualifying period. Subparagraph 8503(2)(a)(v) allows the member’s retirement benefits to be redetermined to reduce or eliminate the portion of an early retirement reduction that was not required to be applied in order to comply with the early retirement rules in paragraph 8503(3)(c). Subparagraph 8503(2)(a)(ix) accommodates the payment of the partial pension to the member during the qualifying period by allowing the pension of a member who is in receipt of remuneration to be less than it would otherwise be if the member were retired.

Subsection 8503(20) applies to benefits that are provided or payable after 2007.

Rules of application

ITR
8503(21)

New subsection 8503(21) of the Regulations contains two special rules that apply where a member accrues additional benefits in respect of a qualifying period (i.e., a period of post-pension commencement employment) in accordance with subsection 8503(19). These rules modify the application of certain provisions in Parts LXXXIII and LXXXV of the Regulations that depend on whether retirement benefits had commenced to be paid. Essentially, subsection 8503(21) provides that, in applying these provisions with respect to such a member, the payment of the partial pension is to be ignored. Subsection 8503(21) is qualified by an anti‑avoidance rule in subsection 8503(22).

Paragraph 8503(21)(a) applies where the member dies during the qualifying period. It allows the plan to provide for benefits payable on the death of the member to be determined as if the partial pension had not been paid. Thus, for example, the limits on guarantee periods can be determined without regard to the time at which the partial pension commenced to be paid to the member. In the absence of this rule, a guarantee period would have to begin on the day the partial pension commenced to be paid.

Paragraph 8503(21)(b) provides a similar disregard for purposes of applying the following provisions that depend on whether the member’s retirement benefits had previously commenced to be paid: Part LXXXIII (pension adjustments, past service pension adjustments, pension adjustment reversals); paragraph 8503(2)(m) (commutation of benefits) and subsection 8517(4) (maximum transfer limit). This will ensure that these provisions apply in an appropriate manner. For example, it will ensure that the PSPA relief provided under paragraphs 8303(5)(f) to (f.2) for benefit increases arising from the increase in a plan's maximum pension limit will be available for members who are receiving a partial pension. (Paragraphs 8303(5)(f) to (f.2) generally do not apply after retirement benefits have commenced to be paid.) Paragraph 8503(21)(b) applies only during the qualifying period.

These rules are similar to rules in subsections 8503(9) and 8503(18). They apply to benefits that are provided or payable after 2007.

Anti-avoidance

ITR
8503(22)

New subsection 8503(22) of the Regulations is an anti-avoidance rule that denies the application of subsections 8503(20) and (21) where it can be shown that one of the main reasons for the provision of additional benefits was to enable the member to benefit from the specials rules in those two subsections. This is intended, for example, to prevent the provision of nominal benefits to a member after pension commencement so that the amount of the member’s accrued pension can be redetermined to reflect the current defined benefit limit or so that the guarantee period on the member’s benefits can be extended.

Subsection 8503(22) applies to benefits that are provided or payable after 2007.

Cross-plan rules

ITR
8503(23)

New subsection 8503(23) of the Regulations contains three rules that apply where an individual is entitled to benefits under two or more associated defined benefit provisions. The rules are relevant in determining whether certain conditions in subsection 8503(17) (stand-alone bridging benefits) and subsection 8503(19) (benefit accruals after pension commencement) are met in respect of benefits provided under a particular associated provision. In general terms, the rules treat the associated provisions as being a single provision. New subsection 8503(24) defines associated provisions for this purpose.

Paragraph 8503(23)(a) is relevant in determining whether the benefits payable to a member under a particular defined benefit provision comply with the 60 per cent limit in paragraph 8503(19)(b). It provides that all benefits payable to the member under associated defined benefit provisions are to be assumed to be payable under the particular provision.

Paragraph 8503(23)(b) provides that if a member under a particular defined benefit provision had previously commenced to receive their retirement benefits under an associated provision on or after the member’s “specified eligibility day” under the associated provision, the member’s “specified eligibility day” under the particular provision is assumed to be that earlier day.

The following example illustrates the application of paragraphs 8503(23)(a) and (b).

Example At age 57, David retires after a long career at ABC and begins receiving his full unreduced pension. Six months later, David decides to return to the workforce and is hired by XYZ, which is related to ABC. While XYZ sponsors a defined benefit RPP, David is unable to participate because of the cross-plan prohibition on post-pension commencement accruals in paragraph 8503(3)(b). However, by virtue of paragraph 8503(23)(b), David is entitled to use his “specified eligibility day” under ABC’s plan for purposes of satisfying the conditions in subsection 8503(19) in connection with XYZ’s plan. After arranging with ABC to have his pension reduced to 60%, David is entitled to begin accruing pension benefits under XYZ’s plan.

Paragraph 8503(23)(c) provides that if one or more of the associated provisions is contained in a designated plan, it is assumed that all of the associated provisions are in designated plans.

Subsection 8503(23) applies to benefits that are provided or payable after 2007.

Associated defined benefit provisions

ITR
8503(24) and (25)

New subsection 8503(24) of the Regulations specifies when one defined benefit provision is considered to be associated with another defined benefit provision for the purpose of subsection (23).

Defined benefit provisions that are in the same pension plan are always associated. Defined benefit provisions in separate plans are associated if an employer who participates in one plan also participates, or does not deal at arm's length with an employer who participates, in the other plan.

Where a defined benefit provision (“Provision A”) is associated with another defined benefit provision (“Provision B”) under the normal rules in subsection 8503(24) but it is unreasonable to expect the benefits under Provision B to be coordinated with the benefits under Provision A, new subsection 8503(25) provides that the Minister of National Revenue may agree that Provisions A and B are not associated.

Subsection 8503(24) and (25) apply to benefits that are provided or payable after 2007.

Clause 69

Highest average compensation

ITR
8504(2)

Subsection 8504(2) of the Regulations specifies how to compute the highest average indexed compensation of a member of an RPP for the purpose of determining, under subsection 8504(1), the maximum lifetime retirement benefits that may be paid to the member under a defined benefit provision of the plan. In general terms, the highest average indexed compensation is equal to the average of the best three years of compensation indexed to reflect increases in the average wage from the year in which the compensation was paid to the year in which the member’s retirement benefits commenced to be paid.

Subsection 8504(2) is amended as a consequence of the introduction of subsection 8503(17), which enables an RPP to provide for the payment of bridging benefits on a stand-alone basis (i.e., without the simultaneous payment of lifetime retirement benefits) to qualifying employees. Bridging benefits are considered to be retirement benefits. The amendment to subsection 8504(2) replaces the expression “retirement benefits” with the expression “lifetime retirement benefits”. This ensures that, in computing the highest average indexed compensation of a member who has received stand-alone bridging benefits, the member’s compensation can be indexed to the year in which the member’s lifetime retirement benefits commence to be paid, rather than the possibly earlier year in which the bridging benefits commenced to be paid.

This amendment applies to the 2008 and subsequent calendar years.

Clause 70

Qualifying periods and periods of parenting

ITR
8507(3)(a)

Subsections 147.1(8) and (9) of the Act require that pension adjustments (PAs) not exceed specified limits, including limits that depend on compensation. Compensation is defined in subsection 147.1(1) and includes compensation that is prescribed by section 8507 of the Regulations. This allows a notional amount of remuneration to be included in respect of periods when an individual's remuneration is reduced because the individual is disabled, on leave of absence or rendering services on less than a regular basis. The inclusion of such amounts in compensation enables benefits to accrue under a defined benefit provision, or contributions to be made under a money purchase provision, as if the individual had not had a reduction in remuneration, without violating the PA limits in subsections 147.1(8) and (9).

Subsection 8507(1) prescribes an amount of compensation in respect of an eligible period of reduced pay or temporary absence only if the period is a qualifying period. Paragraph 8507(3)(a) defines the expression “qualifying period”.

Paragraph 8507(3)(a) is amended to exclude, through new subparagraph (vii), any period after the time that the individual commenced to receive bridging benefits, or to accrue additional benefits, under circumstances to which new subsection 8503(17) or (19) applied. These provisions enable a defined benefit RPP to provide for qualifying employees to receive bridging benefits on a stand-alone basis or to receive up to 60 per cent of their accrued pension while continuing to accrue additional benefits. The amendment to paragraph 8507(3)(a) ensures that compensation cannot be prescribed for individuals who have benefited from these new provisions.

This amendment applies to the 2008 and subsequent calendar years.

Clause 71

Replacement of “prescribed stock exchange” by “designated stock exchange”

ITR
8514

This amendment is consequential to the replacement of the “prescribed stock exchange” concept by the new category of “designated stock exchange”. Please refer to the commentary on Clause 59 for more information.

Clause 72

Eligible contributions

ITR
8516

Section 8516 provides that certain contributions made by an employer to an RPP are prescribed contributions for the purposes of subsection 147.2(2) of the Act. Subsections 8516(2) to (4) make reference to designated plans as defined in section 8515.

Subsections 8516(2) to (4) are amended to eliminate the reference in those subsections to section 8515. These amendments are strictly consequential to the introduction of the definition “designated plan” in subsection 8500(1), which applies for the purposes of all of Part LXXXV of the Regulations. These amendments apply after 2007.

Clauses 73

Replacement of “prescribed stock exchange” by “designated stock exchange”

This amendment is consequential to the replacement of the “prescribed stock exchange” concept by the new category of “designated stock exchange”. Please refer to the commentary on Clause 59 for more information.

Clause 74

Prescribed programs of physical activity

ITR
9400

New Part XCIV of the Regulations defines, for the purpose of the definition “eligible fitness expense” in section 118.03 of the Act (the Child Fitness Tax Credit), the activities that qualify as a prescribed program of physical activity.

Definitions

ITR
9400(1)

New subsection 9400(1) of the Regulations defines terms for the purpose of subsection 9400(2) which prescribes certain types of programs of physical activity that qualify under section 118.03 of the Act for the Child Fitness Tax Credit.

“physical activity”

“Physical activity” means a supervised activity suitable for children that contributes to cardio-respiratory endurance and to one or more of the following: muscular strength, muscular endurance, flexibility and balance; for example, hockey, karate, football, swimming and hiking. The physical activity cannot consist of an activity where a child rides on or in a motorized vehicle as an essential component of the activity. This would, for example, exclude from the definition riding a snowmobile but would include waterskiing.

“qualifying child”

“Qualifying child” has the meaning assigned by subsection 118.03(1) of the Act. Please refer to the commentary on that subsection for more information.

Prescribed program of physical activity

ITR
9400(2)

New subsection 9400(2) of the Regulations prescribes programs of physical activity for the purposes of the definition “eligible fitness expense” in subsection 118.03(1) of the Act.

A prescribed program of physical activity is

• a weekly program of a duration of 8 or more consecutive weeks in which all or substantially all of the activities include a significant amount of physical activity (please refer to the commentary on the definition “physical activity” for more information),
• a program of a duration of 5 or more consecutive days of which more than 50 per cent of the daily activities include a significant amount of physical activity (please refer to the commentary on the definition “physical activity” for more information) – for example, this would apply to summer and day camp programs,
• a program offered to children by a club association or similar organization (the “organization”) in circumstances where a participant in the program may select amongst a variety of activities if

• a membership in an organization of a duration of 8 or more consecutive weeks if more than 50 per cent of all the activities offered to children by the organization include a significant amount of physical activity (please refer to the commentary on the definition “physical activity” for more information).

Note that, to qualify as a prescribed program of physical activity, these programs cannot be part of a school’s curriculum.

Example: Sabrina just joined the Girl Guides of Canada. Her mother paid $100 in registration fees for 2 hours of activities per week for 10 weeks. The Girl Guides program provides that 1 hour and 15 minutes of the 2 hours of activities will be devoted to physical activity. Therefore, the program will be considered a prescribed program of physical activity and Sabrina’s mother may claim a child fitness tax credit of $15.50 ($100 x 15.5%).

Mixed-use facility

ITR
9400(3)

New subsection 9400(3) of the Regulations applies in cases where a program is not a prescribed program of physical activity because it does not meet the 50 per cent requirement set out in paragraph 9400(2)(c). In such cases, subsection 9400(3) allows a taxpayer to claim a portion of the amount that is paid for the program as an eligible fitness expense. In such circumstances, a “portion of the program” is considered a prescribed program of physical activity and that portion is either

• the percentage of activities offered to children by the organization that are activities that include a significant amount of physical activity, or
• the percentage of the time scheduled for activities in the program that is scheduled for activities that include a significant amount of physical activity.

Example: Sabrina’s mother pays $200 for the registration of her daughter at a community center. The portion of the activity offered to children by the center that qualifies as physical activities for the purpose of the credit is 40 per cent. Therefore, only 40 per cent of the program will be considered a prescribed program of physical activity and Sabrina’s mother may claim a child fitness tax credit of $12.40 (($200 x 40 per cent) x 15.5%).

Membership

ITR
9400(4)

New subsection 9400(4) of the Regulations provides for cases where a membership in an organization does not meet the 50 per cent activities requirement set out in paragraph 9400(2)(d). Assuming the activity is not part of a school’s curriculum, the portion of the expense that will be eligible for the purpose of the definition “eligible fitness expense” in subsection 118.03(1) of the Act is the portion of the activities offered to children by the organization that are activities that include a significant amount of physical activity.

Horseback riding

ITR
9400(5)

For the purpose of the definition “physical activity”, new subsection 9400(5) of the Regulations deems horseback riding to be an activity that contributes to cardio-respiratory endurance and to one or more of the following: muscular strength, muscular endurance, flexibility and balance.

New Part XCIV of the Regulations applies to the 2007 and subsequent taxation years.

Canada Pension Plan Regulations

Clause 75

Remittance - quarterly basis

CPPR
8(1.12)

Subsection 21(1) of the Canada Pension Plan Act authorizes the deduction of employee contributions for any period in which remuneration is paid.

Similarly, subsection 153(1) of the Income Tax Act authorizes the withholding of tax from payments described in that subsection and subsection 82(1) of the Employment Insurance Act authorizes the deduction of employee premiums, for any period in which remuneration is paid.

An employer is required to remit the amounts withheld or deducted to the Receiver General on behalf of its employees. The amount of tax withholdings, as well as employee and employer contributions and premiums payable, must be remitted on or before specific dates. Currently an employer with an average monthly withholding amount of less than $1,000 for the first or the second preceding calendar year, and who has no compliance irregularities for the preceding 12 months, can remit on a quarterly basis, instead of on a monthly basis. For this purpose, the average monthly withholding amount is described in subsection 108(1.2) of the Income Tax Regulations.

Subsection 8(1.12) of the Canada Pension Plan Regulations is amended to ensure that an employer with average monthly withholding amount of less than $3,000 (instead of $1,000) for the first or the second preceding calendar year, and no compliance irregularities for the preceding 12 months, can remit on a quarterly basis, instead of on a monthly basis.

Subsection 8(1.12) of the Canada Pension Plan Regulations is amended in two respects. First, a reference in paragraph 8(1.12)(a) to the average monthly withholding amount of $1,000 is changed to “$3,000.” Second, paragraph 8(1.12)(b) is rewritten to simply the provision and by combining the requirements in subparagraphs 8(1.12)(b)(i) and (ii) into paragraph (b). These amendments to subsection 8(1.12) apply in respect of amounts required to be deducted or withheld after 2007.

Insurable Earnings and Collection of Premiums Regulations

Clause 76

Withholding amount

IECPR
4(3.1)

Subsection 82(1) of the Employment Insurance Act authorizes the deduction of employee premiums for any period in which remuneration is paid.

Similarly, subsection 153(1) of the Income Tax Act authorizes the withholding of tax from payments described in that subsection and subsection 21(1) of the Canada Pension Plan Act authorizes the deduction of employee contributions, for any period in which remuneration is paid.

An employer is required to remit the amounts withheld or deducted to the Receiver General on behalf of its employees. The amount of tax withholdings, as well as employee and employer contributions and premiums payable, must be remitted on or before specific dates. Currently an employer with an average monthly withholding amount of less than $1,000 for the first or the second preceding calendar year, and who has no compliance irregularities for the preceding 12 months, can remit on a quarterly basis, instead of on a monthly basis. For this purpose, the average monthly withholding amount is described in subsection 108(1.2) of the Income Tax Regulations.

Subsection 4(1.12) of the Insurable Earnings and Collection of Premiums Regulations is amended to ensure that an employer with an average monthly withholding amount of less than $3,000 (instead of $1,000) for the first or the second preceding calendar year, and who has no compliance irregularities for the preceding 12 months, can remit on a quarterly basis, instead of on a monthly basis.

Subsection 4(1.12) of the Earnings and Collection of Premiums Regulations is amended in two respects. First, a reference in paragraph 4(1.12)(a) to the average monthly withholding amount of $1,000 is changed to “$3,000.” Second, paragraph 4(1.12)(b) is rewritten to simply the provision and by combining the requirements in subparagraphs 4(1.12)(b)(i) and (ii) into paragraph (b).

The amendments to subsection 4(1.12) apply in respect of amounts required to be deducted or withheld after 2007.

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Part 2 
Amendments in Respect of the Goods and Services Tax/Harmonized Sales Tax

Excise Tax Act

Clause 77

Imported taxable supply

ETA
217(c.1)

Division IV of Part IX of the Excise Tax Act (the Act) imposes tax in respect of certain supplies made outside Canada and in respect of other supplies on which the recipient, as opposed to the supplier, is required to account for tax. Section 217 of the Act defines those supplies as “imported taxable supplies” for purposes of Division IV.

New paragraph 217(c.1) includes in the definition “imported taxable supply” a taxable supply made in Canada of intangible personal property (“IPP”) that is a zero-rated supply only because it is included in section 10 or 10.1 of Part V of Schedule VI to the Act unless the supply is described by either new subparagraphs 217(c.1)(i) or (ii). Sections 10 and 10.1 zero-rate certain supplies of IPP made to unregistered non-resident persons.

New subparagraph 217(c.1)(i) excludes a supply of IPP made to an individual who is a consumer of that IPP from being an imported taxable supply under new paragraph 217(c.1). The definition “consumer” of property or a service in subsection 123(1) of the Act applies for the purposes of new subparagraph 217(c.1)(i). For example, the purchase by an unregistered non-resident individual of IPP that is a digital music file under a supply made in Canada that is zero-rated by section 10.1 of Part V of Schedule VI would not be an imported taxable supply described by new paragraph 217(c.1) if the music file were acquired for the individual’s personal use because the purchaser would be a consumer of the IPP.

New subparagraph 217(c.1)(ii) excludes a supply of IPP from being an imported taxable supply under new paragraph 217(c.1) if the IPP is acquired for consumption, use or supply exclusively in the course of commercial activities of the recipient of the supply. For example, the purchase by an unregistered non-resident person of IPP that is a patent acquired for use exclusively in manufacturing a product the supply of which is a commercial activity of the person would not be an imported taxable supply described by new paragraph 217(c.1).

New subparagraph 217(c.1)(ii) also excludes a supply of IPP from being an imported taxable supply under new paragraph 217(c.1) when the property is acquired for consumption, use or supply exclusively in the course of activities that are engaged in exclusively outside Canada by the recipient of the supply and that are not part of a business or adventure or concern in the nature of trade engaged in by the recipient in Canada. For example, a supply of IPP that is a software licence for specific management functions acquired for use exclusively in the course of the activity of operating an apartment building situated outside of Canada that is not part of a business or adventure or concern in the nature of trade engaged in by the recipient in Canada would be excluded by new subparagraph 217(c.1)(ii) from being an imported taxable supply under new paragraph 217(c.1).

A supply of a software licence that is zero-rated only under section 10.1 of Part V of Schedule VI would, however, be an imported taxable supply described by new paragraph 217(c.1) if, for example, the software were acquired by a financial institution for use in carrying on an activity that is the making of exempt supplies of financial services and that is engaged in partly in Canada. In this case, new subparagraph 217(c.1)(ii) would not apply to exclude the supply from being an imported taxable supply. The IPP supplied would not be for use exclusively in the course of commercial activities of the recipient financial institution, because the making of exempt supplies is not a commercial activity, nor would the IPP be for use exclusively in the course of activities that are engaged in exclusively outside Canada by the recipient, because the activity of making exempt supplies of financial services is engaged in partly in Canada.

New paragraph 217(c.1) applies to supplies made after March 19, 2007.

Clause 78

Tax in participating province

ETA
218.1

Section 218.1 of the Act imposes tax in respect of the provincial component of the Harmonized Sales Tax (HST) on certain supplies of property or services that are “imported taxable supplies” as defined in section 217 of the Act.

Existing paragraph 218.1(1)(d) is amended to add a reference to supplies that are included in new paragraph 217(c.1) of the Act, which describes an “imported taxable supply” (within the meaning of section 217) of intangible personal property (IPP). As a result of this amendment to section 218.1, a supply of IPP that is included in new paragraph 217(c.1) may also be subject to the provincial component of the HST if the supply is made in a particular participating province.

The amendment applies to supplies made after March 19, 2007.

Clause 79

Meal expenses of truck drivers

ETA
236(1)

Subsection 236(1) of the Act is intended to parallel section 67.1 of the Income Tax Act. Section 67.1 limits the amount allowed as a deduction in respect of food, beverages and entertainment for income tax purposes to reflect the personal consumption aspect inherent in these types of expenses. The net recovery by a person of GST/HST as input tax credits (ITCs) is limited accordingly by subsection 236(1) in respect of these amounts. The intended treatment for GST/HST purposes is to recapture ITCs claimed by the person and attributable to these expenses in the same proportion as the expenses are disallowed as a deduction for income tax purposes.

Subsection 236(1) is amended, consequential to amendments to section 67.1 of the Income Tax Act, to apply a new rate of recapture to ITCs claimed by a person in respect of food and beverages consumed by a long-haul truck driver during the driver’s eligible travel period (as those terms are defined in section 67.1 of the Income Tax Act). The proportion of ITCs claimed by the driver that are recaptured will decrease as the deductible portion of long-haul truck driver meal expenses increase for income tax purposes.

In respect of food and beverage expenses in all other circumstances that are deductible for income tax purposes under section 67.1 of the Income Tax Act, the net rate of recovery of ITCs by a person will remain at 50 per cent. Also, there is no change to the 50 per cent rate of recapture of ITCs claimed by a person in respect of entertainment expenses deductible under section 67.1 of the Income Tax Act.

The amendments apply to amounts in respect of a supply of food, beverages or entertainment if tax under Part IX of the Act in respect of the supply becomes payable, or is paid without having become payable, after March 19, 2007 where no allowance or reimbursement is paid in respect of the supply. The amendments also apply to allowances or reimbursements paid after March 19, 2007 in respect of the supply. The rate of recapture of ITCs claimed by a driver in respect of food and beverages consumed during an eligible travel period will be:

Clause 80

Minimum instalment base

ETA
237(3)

Subsection 237(3) of the Act provides that where a registrant’s instalment base (within the meaning of subsection 237(2) of the Act) is less than $1,500 for a reporting period, it is deemed to be nil. Therefore, where net tax for a fiscal year is less than $1,500, the registrant is not required to make instalment payments for that year or the subsequent year.

Subsection 237(3) is amended to increase, from $1,500 to $3,000, the minimum instalment base below which a registrant is not required to make instalment payments. This will reduce the paper burden of small businesses and improve their cash flow position.

The amendment applies to reporting periods beginning after 2007.

Clause 81

Election for fiscal years

ETA
248

Section 248 of the Act sets out rules relating to an election for annual filing of GST returns.

Subclause 81(1)

Election for fiscal years

ETA
248(1)

Subsection 248(1) of the Act provides that where a registrant’s threshold amount (within the meaning of subsection 249(1) of the Act) for a fiscal year (i.e., generally, the total of all consideration becoming due, or paid without having become due, for total taxable supplies made by a registrant in the preceding fiscal year) does not exceed $500,000, the registrant may elect for annual reporting periods.

Subsection 248(1) is amended to increase, from $500,000 to $1,500,000, the maximum threshold amount below which a registrant may make an election for reporting periods that are fiscal years. This will reduce the paper burden of small businesses and improve their cash flow position.

The amendment applies to fiscal years beginning after 2007.

Subclause 81(2)

Duration of election

ETA
248(2)

Subsection 248(2) of the Act specifies that an election for reporting periods that are fiscal years generally remains in effect until the earliest of the day on which an election for monthly or quarterly filing takes effect, the first day of the second or third fiscal quarter of the registrant for which the threshold amount for the quarter (within the meaning of subsection 249(2) of the Act) of $500,000 is exceeded, and the first day of the fiscal year of a registrant where the threshold amount for that year (within the meaning of subsection 249(1)) exceeds $500,000.

Subsection 248(2) is amended to increase, consequential to the amendment to subsection 248(1), from $500,000 to $1,500,000, the threshold amount applicable in determining the duration of an election for reporting periods that are fiscal years.

The amendments apply to fiscal years beginning after 2007.

Clause 82

Non-taxable importations

ETA
VII/1.2

Schedule VII to the Act enumerates goods that are not subject to the GST/HST on importation under Division III of Part IX of the Act. In particular, section 1 of Schedule VII to the Act includes certain goods that are classified under heading 98.04 of Schedule I to the Customs Tariff. This includes goods up to a specified dollar limit that returning residents bring back from a stay outside Canada and that are not subject to the GST/HST on importation.

The amendment adds new section 1.2 to Schedule VII to provide that subsection 140(2) of the Customs Tariff does not apply in respect of the reference to heading 98.04 in section 1 of Schedule VII. Subsection 140(2) of the Customs Tariff was introduced to ensure that the tax status of imported goods was not changed as a result of the implementation of a new simplified Customs Tariff in 1998.

In respect of the GST/HST, subsection 140(2) of the Customs Tariff provides that a reference in a provision of an Act of Parliament other than the Customs Tariff, or of an order or regulation made under an Act of Parliament, to a heading, subheading, tariff item or code, or portion of a heading, subheading, tariff item or code, of the former Customs Tariff or to a note to a chapter of Schedule I to the former Customs Tariff shall, for any purpose relating to a tax under the Excise Tax Act, be read as a reference to that heading, subheading, tariff item, code, portion or note as it read immediately before January 1, 1998.

The amendment allows section 1 of Schedule VII to refer to goods that are classified under heading 98.04 as amended from time to time in the schedule of the Customs Tariff. One such amendment was included in the Budget Implementation Act, 2007; effective March 20, 2007, the dollar limit by which returning residents of Canada may import goods on a customs duty-free basis, after being abroad for 48 hours, was increased from $200 to $400. The amendment allows that increase in the travellers’ exemption to also apply for GST/HST purposes effective March 20, 2007. Increasing the 48-hour exemption will make it more convenient for travellers to clear customs and will reduce the amount of processing at the border.

New section 1.2 is deemed to have come into force on January 1, 1998, the same day as the simplified Customs Tariff came into effect.

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Part 3 
Amendment to the Excise Tax Act
(Other than with Respect to the Goods and Services Tax/Harmonized Sales Tax)

Excise Tax Act

Clause 83

Excise taxation of renewable fuels

ETA
23.4 and 23.5

Alcohol blended fuels

Existing section 23.4 of the Excise Tax Act (the Act) provides relief from the excise tax on gasoline and diesel fuel for the alcohol portion of blended gasoline-alcohol and diesel-alcohol fuels. The exemption applies only where the alcohol (i.e., ethanol or methanol) is produced from biomass or renewable feedstock.

The amendment repeals section 23.4, effective April 1, 2008. As a result of the repeal, the alcohol portion of blended gasoline-alcohol and diesel-alcohol fuels will be subject to the excise tax on gasoline and diesel fuel, respectively, in accordance with the definitions of “gasoline” and “diesel fuel” in subsection 2(1) of the Act.

Bio-diesel fuel

Existing section 23.5 of the Act provides relief from the excise tax on diesel fuel for bio-diesel fuel, and for the bio-diesel fuel portion of blended diesel-bio-diesel fuels. The exemption applies only where the bio-diesel fuel is produced from waste materials or feedstock of a biological origin.

The amendment repeals section 23.5, effective April 1, 2008. As a result of the repeal, bio-diesel fuel, and the bio-diesel fuel portion of blended diesel-bio-diesel fuels, will be subject to the excise tax on diesel fuel, in accordance with the definition of “diesel fuel” in subsection 2(1) of the Act.

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¹ For taxation years of foreign affiliates of a taxpayer that begin after 2008, clause 95(2)(a)(ii)(E) is renumbered as 95(2)(a)(ii)(A) consequential to the repeal of existing clause 95(2)(a)(ii)(A).   [Return]

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