Explanatory Notes Relating to the Air Travellers Security Charge, the First Nations Goods and Services Tax, Income Tax and Other Related Measures : 1

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Preface

These explanatory notes describe proposed amendments to the Air Travellers Security Charge Act, the First Nations Goods and Services Tax Act and the Income Tax Act and related Acts. These explanatory notes describe these amendments, clause by clause, for the assistance of Members of Parliament, taxpayers and their professional advisors.

The Honourable Ralph Goodale, P.C., M.P.,
Minister of Finance

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These explanatory notes are provided to assist in an understanding of proposed amendments to the Air Travellers Security Charge Act, the First Nations Goods and Services Tax Act and the Income Tax Act. These notes are intended for information purposes and should not be construed as an official interpretation of the provisions they describe.

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Part 1

Air Travellers Security Charge Act

Clause 2

Amount of Charge if Service Acquired in Canada

ATSCA
12(1)(a) to 12(1)(e)

Existing subsection 12(1) of the Air Travellers Security Charge Act sets out the amount of the charge that is payable on an air transportation service acquired in Canada. This includes air transportation services deemed under section 13 of the Act to have been acquired in Canada.

For domestic air travel, the amount of the charge is $7 (including the GST or the federal component of the HST where applicable) per chargeable emplanement to a maximum of $14 per ticket. For transborder air travel the amount of the charge is $12 (including the GST or the federal component of the HST where applicable) per chargeable emplanement to a maximum of $24 per ticket. For air travel from Canada to another international destination, the charge is $24.

The subsection is amended to reduce the charge for domestic air travel to $6 from $7 for one-way travel and to $12 from $14 for round-trip travel, for transborder air travel to $10 from $12 and for air travel from Canada to another international destination to $20 from $24. The reduced rates are applicable to air travel that includes a chargeable emplanement on or after April 1, 2004 and that is purchased on or after that date.

New paragraphs 12(1)(a) and (b) set out the new reduced amount of the charge for domestic air travel. The new paragraphs provide that the amount of the charge in respect of an air transportation service acquired in Canada that does not include transportation to a destination outside of Canada is:

(a) $5.61 for each chargeable emplanement included in the service, to a maximum of $11.22, if tax under subsection 165(1) of the Excise Tax Act (i.e., the GST, or the federal component of the HST) is required to be paid in respect of the service; or

(b) $6.00 for each chargeable emplanement included in the service, to a maximum of $12.00, if tax under subsection 165(1) of the Excise Tax Act is not required to be paid in respect of the service.

New paragraphs 12(1)(c) and (d) set out the new reduced amount of the charge for transborder air travel. The new paragraphs provide that the amount of the charge in respect of an air transportation service acquired in Canada that includes transportation to a destination outside Canada and does not include transportation to a destination outside the continental zone is:

(c) $9.35 for each chargeable emplanement included in the service, to a maximum of $18.69, if tax under subsection 165(1) of the Excise Tax Act (i.e., the GST, or the federal component of the HST) is required to be paid in respect of the service; or

(d) $10.00 for each chargeable emplanement included in the service, to a maximum of $20.00, if tax under subsection 165(1) of the Excise Tax Act is not required to be paid in respect of the service.

New paragraph 12(1)(e) sets out the new reduced amount of the charge for air travel from Canada to another international destination. The new paragraph provides that the amount of the charge in respect of an air transportation service acquired in Canada that includes transportation to a destination outside the continental zone is:

(e) $20.00, if the service includes transportation to a destination outside the continental zone.

Amount of Charge if Service Acquired outside Canada

ATSCA
12(2)(a) to 12(2)(c)

Existing subsection 12(2) of the Act sets out the amount of the charge that is payable on an air transportation service acquired outside Canada.

For transborder air travel, the amount of the charge is $12 (including the GST or the federal component of the HST where applicable) per chargeable emplanement to a maximum of $24 per ticket. For air travel from Canada to another international destination, the charge is $24.

The subsection is amended to reduce the charge for transborder air travel to $10 from $12 and for air travel from Canada to another international destination to $20 from $24. The reduced rates are applicable to air travel that includes a chargeable emplanement on or after April 1, 2004 and that is purchased on or after that date.

New paragraphs 12(2)(a) and (b) set out the new reduced amount of the charge for transborder air travel. The new paragraphs provide that the amount of the charge in respect of an air transportation service acquired outside Canada that includes transportation to a destination outside Canada but within the continental zone is:

(a) $9.35 for each chargeable emplanement by an individual on an aircraft used to transport the individual to a destination outside Canada but within the continental zone, to a maximum of $18.69, if tax under subsection 165(1) of the Excise Tax Act (i.e., the GST, or the federal component of the HST) is required to be paid in respect of the service; or

(b) $10.00 for each chargeable emplanement by an individual on an aircraft used to transport the individual to a destination outside Canada but within the continental zone, to a maximum of $20.00, if tax under subsection 165(1) of the Excise Tax Act is not required to be paid in respect of the service.

New paragraph 12(2)(c) sets out the new reduced amount of the charge for air travel from Canada to another international destination. The new paragraph provides that the amount of the charge in respect of an air transportation service acquired outside Canada that includes transportation to a destination outside the continental zone is:

(c) $20.00, if the service includes transportation to a destination outside the continental zone.

Part 2

First Nations Goods and Services Tax Act

Clause 3

Definitions and Interpretation

FNGSTA
2(1)

A new Part and schedule is added to the First Nations Goods and Services Tax Act. These additions require specifying each Part and schedule in the definitions of "administration agreement", "governing body" and "lands".

FNGSTA
2(2) and (3)

A new Part and schedule is added to the First Nations Goods and Services Tax Act. These additions require specifying the reference to "part" in subsections 2(2) and (3) of that Act.

Clause 4

Creation of Part 1

FNGSTA

A new Part and schedule is added to the First Nations Goods and Services Tax Act. These additions require specifying where Part 1 is introduced. Part 1 is introduced after section 2.

Clause 5

Section 89 of the Indian Act

FNGSTA
3(1.1)

Section 89 of the Indian Act protects the real and personal property of an Indian or a band situated on a reserve against seizures at the instance of any person other than an Indian or a band.

The addition of subsection 3(1.1) of the First Nation Goods and Services Tax Act provides that where a first nation law is enacted, Canada or an agent of the first nation administering the tax will be able to make seizures in cases of non-compliance with the first nation law. In the absence of this addition, a first nation law may not be able to be administered and enforced effectively.

Subsection 4(1) applies despite any other Act of Parliament

FNGSTA
3(2)

A new Part and schedule is added to the First Nations Goods and Services Tax Act. These additions require specifying the reference to "schedule" in subsection 3(2) of that Act.

Clause 6

Authority to impose tax

FNGSTA
4(1)

A new Part and schedule is added to the First Nations Goods and Services Tax Act. These additions require specifying the reference to "schedule" in subsection 4(1) of that Act.

Supply made on lands

FNGSTA
4(2)

The purpose of this addition is to clarify that subsection 4(2) is meant to apply in the context of subsection 4(1).

Imported taxable supply made on lands

FNGSTA
4(4)

The purpose of this addition is to clarify that subsection 4(4) is meant to apply in the context of paragraph 4(1)(c).

Exception

FNGSTA
4(6)

The purpose of this addition is to clarify that subsection 4(6) is meant to apply in the context of paragraph 4(1)(b).

Carriers

FNGSTA
4(7)

A new Part and schedule is added to the First Nations Goods and Services Tax Act. These additions require specifying the reference to "Part" in subsection 4(7) of that Act.

Clause 7

Rules where agreement

FNGSTA
11(3)(a)

The amendment proposes to replace the exclusion to the criminal offences created under subsection 327(2) of the Excise Tax Act with a more general statement excluding all types of criminal offences. Although currently, all criminal offences under Part IX of the Excise Tax Act are created under subsection 327(2), the amendment would ensure that any future addition of criminal offences in another section would also be excluded from the law making power of the governing body.

Rules where agreement

FNGSTA
11(3)(b)

Consistent with the amendment to paragraph 11(3)(a) and with the addition of subparagraph 11(3)(e)(viii), paragraph 11(3)(b) is amended to clarify that a first nation law cannot incorporate by reference any provision of the Excise Tax Act that creates a criminal offence.

Rules where agreement

FNGSTA
11(3)(e)(viii)

The purpose of this addition is to confirm, for greater certainty, that nothing in Part 1 of the First Nation Goods and Services Tax Act is construed as conferring on a governing body the power to make an enactment in respect of criminal law.

Clause 8

Meaning of "first nation law"

FNGSTA
12(1)

A new Part and schedule is added to the First Nations Goods and Services Tax Act. These additions require specifying the reference to "schedule" in subsection 12(1) of that Act. Reflecting the addition of subparagraph 11(3)(e)(viii), a reference to that subparagraph is being added in subsection 12(1).

Cessation of agreement

FNGSTA
12(3)

A new Part and schedule is added to the First Nations Goods and Services Tax Act. These additions require specifying the reference to "Part" in subsection 12(3) of that Act.

Clause 9

Amendment of Schedule 1

FNGSTA
15

A new Part and schedule is added to the First Nations Goods and Services Tax Act. These additions require specifying the reference to "schedule" in section 15 of that Act.

Clause 10

First Nations Sales Tax - Quebec

FNGSTA
Part 2

A new Part and schedule is added to the First Nations Goods and Services Tax Act. These additions require specifying where part 2 is introduced. Part 2 is introduced after section 16.

Definitions

FNGSTA
17

Section 17 sets out definitions that apply for the purposes of Part 2 of the First Nations Goods and Services Tax Act.

"band law"

For the purposes of Part 2 of the First Nation Goods and Services Tax Act, a band law will be defined as a law enacted by a council of the band under section 23.

"council of the band"

The term "council of the band" has the same meaning in Part 2 of the First Nations Goods and Services Tax Act as the term "council of the band" in the Indian Act.

"direct"

The term "direct" serves to distinguish a direct tax from an indirect tax. The definition indicates that the term "direct" has the same meaning as in class 2 of section 92 of the Constitution Act, 1867.

"parallel Quebec law"

The term "parallel Quebec law" has the purpose of identifying the band law that is similar to the law of the government of Quebec.

"reserves in Quebec"

The "reserves in Quebec" of a band comprise the area where a band law enacted by the council of that band applies or would apply once the band law comes into force. Only bands that have reserves in the province of Quebec would have the authority to enact a band law under Part 2 of the First Nations Goods and Services Tax Act.

"sales tax"

Under Part 2 of the First Nations Goods and Services Tax Act, a council of the band is provided with the authority to impose a direct sales tax within its reserves in Quebec. The term "sales tax" is defined as being broad enough to encompass various types of sales taxes, such as those imposed by the government of Quebec under the Tobacco tax act, Licenses act, An Act respecting the ministère du Revenu, Act respecting the Québec sales tax and the Fuel tax act. However, it is not meant to cover taxes on income or real property.

Section 87 of the Indian Act and similar provisions

FNGSTA
18(1)

Section 87 of the Indian Act provides a tax exemption in respect of property of an Indian situated on a reserve. Other federal legislative vehicles may also provide tax exemptions similar to the exemption under section 87 of the Indian Act.

Subsection 18(1) of Part 2 of the First Nations Goods and Services Tax Act provides that, if a council of the band listed in schedule 2 to that Act enacts a band law imposing a sales tax within its reserves in Quebec, the obligation to pay that tax or any other amount required to be paid under that law applies despite the exemption under section 87 of the Indian Act or any other similar exemption.

Section 89 of the Indian Act

FNGSTA
18(2)

Section 89 of the Indian Act protects the real and personal property of an Indian or a band situated on a reserve against seizures at the instance of any person other than an Indian or a band.

Subsection 18(2) of Part 2 of the First Nations Goods and Services Tax Act provides that, if a council of the band listed in schedule 2 to that Act enacts a band law imposing a sales tax within its reserves in Quebec, an agent of the band administering the tax will be able to make seizures in cases of non-compliance with the band law. This ensures that band laws can be administered and enforced effectively.

Not subject to Statutory Instruments Act

FNGSTA
19

Section 19 provides that a band law enacted under the authority of subsection 23(1) is not subject to the Statutory Instruments Act. Accordingly, a band law would not have to be published in the Canada Gazette.

Application of section 23

FNGSTA
20

Section 20 clarifies that, even where other federal legislation provides a limitation on the tax powers of a council of the band, the council of the band may, if it is listed in schedule 2 to the First Nations Goods and Services Tax Act, enact a law to impose a sales tax within its reserves in Quebec under the authority of subsection 23(1) of Part 2 of that enactment.

Application of other Acts of Parliament

FNGSTA
21

Section 21 ensures that where a law of Quebec specifies that one or more laws of Quebec apply as if the tax imposed under a band law were imposed under a particular law of Quebec, all Acts of Parliament apply as if the tax imposed under the band law were imposed under that particular law of Quebec.

The purpose of this section is to ensure that, where there is a cross-reference in federal legislation to Quebec legislation and where Quebec legislation provides that a tax imposed under the band law is to apply as if it were imposed under a law of Quebec, the federal legislation that refers to that Quebec legislation is to be applied as if a reference to a tax imposed under the law of Quebec includes a reference to the tax imposed under that band law.

For example, subsection 4(1) of the federal Tax Rebate Discounting Act makes references to tax required to be paid under An Act respecting the Quebec sales tax. If a law of Quebec specifies that a tax imposed under a specific band law applies as if it was imposed under the An Act respecting the Quebec sales tax, for purposes of administering subsection 4(1) of the federal Tax Rebate Discounting Act, the tax imposed under that specific band law would automatically be considered as if it was imposed by the An Act respecting the Quebec sales tax.

Authority to enter into agreement

FNGSTA
22

Section 22 enables the council of the band to enter into an administration agreement with the Government of Quebec in respect of the administration of the band laws.

Authority to impose a direct sales tax

FNGSTA
23(1)

Subsection 23(1) is the delegating provision whereby a council of the band is provided with the authority to impose a direct sales tax within its reserves located in Quebec.

Parallel Quebec law

FNGSTA
23(2)

Subsection 23(2) requires that each law enacted by a council of the band must have only one parallel Quebec law and shall identify it. For example, if a council of the band would like to impose a direct fuel sales tax within its reserves that is similar to the tax levied by the government of Quebec under its Fuel tax act and a direct tobacco sales tax that is similar to the tax levied by the government of Quebec under its Tobacco tax act, the council of the band would be required to enact two distinct laws: one for the fuel tax, and one for the tobacco tax.

Force of law

FNGSTA
23(3)

Subsections 23(3) stipulates the conditions that a council of the band must follow in order for its laws related to direct sales tax be valid.

Paragraph 23(3)(a) requires that the council of the band enter into an administration agreement with the government of Quebec in respect of band laws enacted by the council of the band.

Paragraph 23(3)(b) requires the band law to be administered, enforced and collected in accordance with an administration agreement entered between the council of the band and the government of Quebec.

Paragraph 23(3)(c) requires that the council of the band, the band and its reserves be listed in schedule 2.

Paragraph 23(3)(d) stipulates that the band law ceases to be in effect if the parallel Quebec law ceases to be in force.

Conformity with Indian Act

FNGSTA
23(4)

Subsection 23(4) provides that a band law is valid if the power of the council of the band to enact the law is exercised in conformity with paragraph 2(3)(b) of the Indian Act.

Criminal law exclusion

FNGSTA
23(5)

Subsection 23(5) confirms that band councils have not been provided with an authority to make enactments in respect of criminal law.

Coming into force - law under section 23

FNGSTA
24

Section 24 provides that a band law enacted under subsection 23(1) comes into force on the date specified in the administration agreement entered into between the council of the band and the government of Quebec in respect of that law.

Proof of law

FNGSTA
25

Section 25 concerns the certification of copies of a band law as being true copies that can be relied on by a court. Section 25 provides that, in the case of a law enacted under subsection 23(1), such a certification can be provided by the Minister of Finance or a person authorized by that Minister.

Publication of law

FNGSTA
26

Section 26 specifies requirements for publishing band laws. A copy of each such law is required to be published in a newspaper that has general circulation on the reserves where the law applies and in the First Nations Gazette.

Expenditures

FNGSTA
27

Section 27 outlines requirements related to the expenditure of revenues by the council of the band that has enacted a band law under the authority of subsection 23(1). The decision made by a council of the band to expend moneys received by the council of the band pursuant to an administration agreement with the government of Quebec in respect of that band law is validly exercised only if it is exercised in conformity with paragraph 2(3)(b) of the Indian Act.

Indian moneys

FNGSTA
28

Section 28 provides that moneys raised from a band law enacted under the authority of subsection 23(1) do not constitute "Indian moneys" as that term is defined in the Indian Act. Under the Indian Act, Indian moneys are collected, received or held by Her Majesty in right of Canada for the use and benefit of Indians or bands.

Amendment of schedule 2

FNGSTA
29

Section 29 allows the Governor in Council to amend schedule 2 to the First Nations Goods and Services Tax Act by adding, deleting or varying the name of a band, the council of the band in Quebec or the description of the reserves in Quebec.

Clause 11

Amendment to schedule 1

FNGSTA
Schedule 1

The existing schedule to First Nations Goods and Services Tax Act is renumbered as schedule 1 and the names of two new first nations are added to that schedule in alphabetical order.

Clause 12

Schedule 2

FNGSTA
Schedule 2

Schedule 2 is added to the First Nations Goods and Services Tax Act and the name of an Indian Act band is added to that schedule.

Part 3

Income Tax Act

Clause 13

Estate Loss Carryback

ITA
40(3.61)

Section 40 of the Act provides rules for determining a taxpayer's gain or loss from the disposition of a property. The Act contains a number of rules that defer recognition of a loss in certain circumstances, such as the rules set out in subsections 40(3.4) and (3.6). In broad terms these defer a taxpayer's loss where, despite a disposition by the taxpayer, the loss property remains within - or an identical property is acquired by - the population of persons who are affiliated with the taxpayer.

Proposed amendments to subsection 251.1 (1) of the Act, concerning when a person is affiliated with a trust, could in some typical estate and post-mortem arrangements cause these loss-deferral rules to apply. For example, an individual who is the majority interest beneficiary of the estate of a deceased taxpayer will be affiliated with the estate under the proposed amendments, as would be the estate and a corporation controlled by that individual. As a result, a loss arising, for instance, from a redemption by the corporation of a share held by the estate would be deemed to be nil by subsection 40(3.6). This would include a loss arising in the course of administering the estate that would otherwise be capable of being carried back under subsection 164(6) of the Act. That subsection allows a deceased taxpayer's legal representative to elect to treat certain losses of the taxpayer's estate for its first taxation year as losses of the taxpayer for the taxpayer's last taxation year.

New subsection 40(3.61) will ensure that subsections 40(3.4) and (3.6) do not apply to any portion of an estate's capital loss carried back under subsection 164(6), and applies in respect of dispositions occurring after March 22, 2004.

Clause 14

Amounts to be Deducted in Computing ACB

ITA
53(2)(h)(i.1)

Under paragraph 53(2)(h) of the Act, certain amounts are generally deducted in computing the adjusted cost base (ACB) to a beneficiary of the beneficiary's capital interest in a trust. Subparagraph 53(2)(h)(i.1) is amended, as a consequence of the addition of new Part XIII.2, to ensure that the ACB to a non-resident investor of the non-resident investor's Canadian property mutual fund investment is not reduced by the amount of an assessable distribution.

This amendment applies after 2004.

Clause 15

Disability Supports Deduction

ITA
64

Section 64 of the Act permits the deduction, in computing the income of an individual who has a severe and prolonged mental or physical impairment, of expenses (subject to certain limits) paid to an attendant (other than the individual's spouse or common-law partner) who is at least 18 years of age that are incurred to enable the individual to work, or to attend a designated educational institution.

Section 64 is amended to replace the attendant care deduction with a disability supports deduction which includes attendant care expenses as well as other disability supports expenses incurred to enable the taxpayer to work, to attend secondary school or to attend a designated educational institution, unless they have been reimbursed by a non-taxable payment.

Amounts paid for sign-language interpretation services and real-time captioning services used by individuals who have a speech or hearing impairment (and paid to persons engaged in the business of providing such services) are eligible for the disability supports deduction. In addition, where a medical practitioner certifies that the taxpayer is an individual who requires the particular service or device, amounts paid for the following services and devices will be eligible for this deduction:

• Teletypewriters or similar devices that enable deaf or mute individuals to make and receive phone calls.
• Devices or equipment designed exclusively to be used by blind individuals in the operation of a computer (e.g. a Braille printer or a large-print on-screen device).
• Optical scanners or similar devices designed to be used by blind individuals to enable them to read print.
• Electronic speech synthesizers that enable mute individuals to communicate by use of a porable keyboard.
• Note-taking services used by individuals with mental or physical impairments (and paid to persons engaged in the business of providing such services).
• Voice-recognition software used by individuals with a physical impairment.
• Tutoring services used by individuals with a learning disability or a mental impairment (and paid to persons engaged in the business of providing such services) that are supplementary to the primary education of the taxpayer.
• Talking textbooks used by individuals with a perceptual disability in connection with the individual's enrolment at a secondary school in Canada or designated educational institution.
• Attendant care services provided in Canada used by individuals with a mental or physical infirmity (and paid to persons who are not the taxpayer's spouse or common-law partner or under 18 years of age). Individuals in respect of whom an amount may be deducted under section 118.3 of the Act continue to be eligible for this deduction.

The maximum amount of the deduction allowed for the year to such an individual for all eligible expenses is the lesser of:

(a) the eligible disability supports expenses paid in the year minus any reimbursements or any form of assistance received in respect of those eligible expenses, and

(b) the total of

(i) the individual's earned income for the year, and

(ii) where the individual is a student at a designated educational institution or a secondary school, the least of

(A) the amount by which the individual's income otherwise determined for the year exceeds the individual's earned income for the year,

(B) $15,000, and

(C) $375 multiplied by the number of weeks in the year during which the individual attends the institution or school.

Expenses claimed under this provision may not be claimed for the medical expense tax credit.

This amendment applies to the 2004 and subsequent taxation years.

Clause 16

Non-Deductibility of Fines and Penalties

ITA
67.6

In calculating the income of a taxpayer from a business or property, the Income Tax Act generally permits the deduction of reasonable expenses incurred in the ordinary course of earning that income. This includes fines and penalties incurred in respect of business activities, unless the underlying action or omission by the taxpayer is so egregious or repulsive that the resulting fine or penalty could not reasonably be considered to have had an income-earning purpose.

New section 67.6 of theAct prohibits the deduction of any amount that is in respect of a fine or penalty imposed under the law of a country or a political subdivision of a country (including a state, province or territory) by any person or public body that has authority to impose the fine or penalty.

This prohibition on deductibility does not extend to prescribed fines or penalties. It is proposed that the following will be prescribed for this purpose: penalty interest imposed under any of paragraphs 280(1)(a), 280 (1.1)(a) and 280(2)(a) of the Excise Tax Act, paragraph 110.1(a) of the Excise Act and subsection 53(1) of the Air Travellers Security Charge Act.

New section 67.6 applies in respect of fines and penalties imposed after March 22, 2004.

Clause 17

Designation in Respect of Taxable Capital Gains

ITA
104(21)

Subsection 104(21) of the Act permits a trust to designate, in respect of a beneficiary under the trust, a portion of its net taxable capital gains. Where the designation is made, the amount designated is deemed, for the purposes of sections 3 and 111 (except as they apply for the purposes of determining whether a beneficiary is entitled to claim a capital gains exemption under 110.6), to be a taxable capital gain for the year of the beneficiary from the disposition of capital property.

Subsection 104(21) is amended as a consequence of the addition of new subsection 132(5.1) to ensure that the designation is subject to new paragraph 132(5.1)(b). Paragraph 132(5.1)(b) provides that if a mutual fund trust designates an amount under subsection 104(21) for a taxation year of the trust in respect of a trust beneficiary who is a non-resident person or a partnership that is not a Canadian partnership, for the purposes of Part I and Part XIII, the amount designated is deemed by subsection 104(21) to be a taxable capital gain of the beneficiary only to the extent that it exceeds the amount of the TCP gains distribution. In addition, one-half of the TCP gains distribution is to be added to the amount otherwise included under subsection 104(13) in computing the income of the beneficiary, and is deemed to be an amount to which paragraph 212(1)(c) applies.

This amendment applies after March 22, 2004.

Clause 18

Canadian Forces Personnel and Police

ITA
110(1)(f)

Paragraph 110(1)(f) of the Act allows the deduction of certain amounts in computing taxable income. The result is that such amounts are not taxed, but because they are included in income, they are relevant in calculating family net income for purposes of the Canada Child Tax Benefit and the Goods and Services Tax Credit, as well as in determining whether the recipient may be claimed as a dependant by another taxpayer.

New subparagraph 110(1)(f)(v) extends this taxable income deduction to employment income earned by members of the Canadian Forces or a police force serving on a deployed operational mission that is assessed for risk allowance 3 or higher (as determined by the Department of National Defence) or a prescribed mission. The deduction will be limited to the lesser of the employment income earned while serving on the mission and the maximum rate of pay earned by a non-commissioned member of the Canadian Forces to the extent that the employment income is included in computing the taxpayer's income for the year.

Two types of missions will be prescribed. Selected Canadian Forces missions assessed for risk allowance 2 (as determined by the Department of National Defence) will be prescribed missions. Provision is also made to extend this deduction to income earned by members of a police force serving on a prescribed mission that is not conducted by the Canadian Forces and, thus, may not have a current DND risk assessment.

This deduction is applicable to the 2004 and subsequent taxation years.

Clause 19

Charitable Donations Deduction Where Control Acquired

ITA
110.1(1.2)

Section 110.1 of the Act provides a deduction in computing taxable income in respect of gifts made by corporations to registered charities and to certain other entities. It is not intended that the tax benefit from this deduction be made available, indirectly, to a person who could not otherwise use the resulting deduction. New subsection 110.1(1.2) of the Act provides that unused charitable donation deductions of a corporation are deductible only for taxation years that end before the time that control of the corporation is acquired by a person or group of persons.

New subsection 110.1(1.2) also denies a charitable donations deduction in respect of a gift in circumstances where control of a corporation is acquired before a donation of property by the corporation, but in contemplation of that gift being made. This rule does not apply where the person who acquires control is a registered charity or other qualified donee.

New subsection 110.1(1.2) applies in respect of gifts made after March 22, 2004.

Clause 20

Carry-Forward Period for Non-Capital Losses

ITA
111(1)(a)

Under existing paragraph 111(1)(a) of the Act, taxpayers may carry forward non-capital losses seven taxation years. This paragraph is amended to allow losses that arise in taxation years that end after March 22, 2004 to be carried forward ten taxation years.

ITA
111(8) "net capital loss"

Under the definition "non-capital loss" in subsection 111(8) of the Act, a taxpayer's "non-capital loss" for a year includes the taxpayer's allowable business investment loss (ABIL) for the year. Currently, ABILs that have not been used within seven taxation years following the year (i.e., during the existing carry forward period for non-capital losses) become net capital losses. This is accomplished under the definition "net capital loss" in subsection 111(8).

Consequential to the extension of the carry forward period of non-capital losses from seven to ten taxation years (see note in respect of paragraph 111(1)(a)), the definition "net capital loss" is amended to ensure that ABILs that have not been used ten, rather than seven, taxation years after the year will be included in taxpayers' net capital losses.

To this end, paragraphs (a) and (b) in the description of C in the formula in the definition "net capital loss" are amended. Paragraph (c) in the description of C, which applies to reduce to nil a corporate taxpayer's inclusion under C in the event the taxpayer has undergone a change in control, is also amended to reflect the proposed extension of the non-capital loss carry forward period.

These amendments to the definition "net capital loss" generally apply to losses that arise in taxation years that end after March 22, 2004. In computing a net capital loss for a taxation year that ends before the taxpayer's eighth taxation year that ends after that date, however, paragraph (c) in the description of C is still to be read with reference to the taxpayer's seventh preceding taxation year. This will ensure that the limit imposed in that paragraph is not invoked by an acquisition of control that took place before the ABIL in question arose.

Clause 21

Non-Resident's Taxable Income in Canada

ITA
115(1)(b)

Paragraph 115(1)(b) of the Act describes the taxable capital gains and allowable capital losses of a non-resident that are included in computing the non-resident's taxable income earned in Canada. Paragraph 115(1)(b) is amended, as a consequence of the addition of new Part XIII.2, to ensure that any gain or loss realized by a non-resident investor on a Canadian property mutual fund investment (as defined in new subsection 218.3(1)) is not included in computing the non-resident investor's taxable income earned in Canada.

This amendment applies after 2004.

Clause 22

Indexation - Annual Adjustment

ITA
117.1(1)

Subsection 117.1 of the Act provides for the indexing of various amounts, including the amounts on which the personal tax credits are based. The indexing is based on annual increases in the Consumer Price Index.

Subsection 117.1 is amended as a consequence of the amendment to subsection 118.2(1) that provides for a transfer of medical expenses from a dependant to a maximum of $5,000 in excess of the dependant's medical expense threshold. The amendment ensures that the medical expense threshold continues to be indexed, however, the amount available for transfer from a dependant is not indexed.

This amendment applies to the 2004 and subsequent taxation years.

Clause 23

Direct Designations - Insurance Proceeds, RRSPs and RRIFs

ITA
118.1(5.2) and (5.3)

Under certain conditions, subsection 118.1(5.2) of the Act extends the charitable donations tax credit to a transfer made under a life insurance policy to a qualified donee on an individual's death. Similarly, subsection 118.1(5.3) of the Act allows the charitable donations tax credit to a transfer of money from a registered retirement savings plan or registered retirement income fund under certain conditions, where the transfer is made as a consequence of a qualified donee being named a beneficiary under the plan or fund.

Subsections 118.1(5.2) and (5.3) are amended consequential to the addition of the definition "enduring property", and the amendment of the definition "disbursement quota", in subsection 149.1(1) of the Act, applicable in respect of deaths of individuals that occur after 1998.

Clause 24

Medical Expense Credit

ITA
118.2

Section 118.2 of the Act provides rules for determining the amount that may be claimed as a tax credit in respect of an individual's medical expenses.

Subsection 118.2(1) provides the calculation of an individual's medical expense tax credit. Where an individual claims medical expenses in respect of a dependant (other than an individual's spouse or common-law partner) whose income is in excess of the basic personal amount ($8,012 for 2004), the amount of eligible medical expenses is reduced by 68% of the excess. This constraint is removed, and replaced with a new factor "D" in the formula in subsection 118.2(1) for calculating an individual's medical expense tax credit as described below.

The description of B in that subsection is also amended to include in the individual's medical expenses amounts paid on behalf of the individual's child who has not reached the age of 18 years before the end of the taxation year. These expenses will be included in the pool of family medical expenses without reference to the child's income.

As indicated above, the formula in subsection 118.2(1) and the description of D in that subsection are also amended to include in the individual's medical expenses amounts paid by the individual in respect of a dependant (other than an individual's spouse, the individual's common-law partner or child of the individual who has not attained the age of 18 years) to the lesser of $5,000 and the amount by which the expenses paid by the individual on behalf of the dependant exceed the dependant's medical expense threshold (maximum $1,813 for 2004, indexed) or 3% of net income.

These amendments apply to the 2004 and subsequent taxation years.

Clause 25

Education Tax Credit

ITA

118.6(1)

Subsection 118.6 of the Act contains rules governing the education tax credit.

Subsection 118.6(1) of the Act provides for various education-related definitions for the purposes of the child care expenses deduction, the new disability supports deduction (formerly the attendant care deduction) and the tuition and education tax credits. The education tax credit cannot currently be claimed by students who pursue post-secondary education that is related to their current employment. The definition "qualifying educational program" in subsection 118.6(1) is amended to remove this restriction, provided that no part of the cost of education is reimbursed by the employer.

This amendment applies to the 2004 and subsequent taxation years.

Clause 26

Refundable Medical Expense Supplement

ITA
122.51

Section 122.51 of the Act provides a refundable medical expense supplement equal to the lesser of $562 (for 2004) and 25% of allowable expenses claimed under the medical expense tax credit by an eligible individual for the year. The supplement is reduced by 5% of the individual's "adjusted income" in excess of an indexed threshold ($21,301 for 2004).

Section 122.51 is amended, consequential to the introduction of the disability supports deduction in section 64, to include 25 per cent of the new disability supports deduction, in addition to 25 per cent of allowable expenses claimed under the medical expense tax credit. This ensures that individuals who previously claimed the cost of disability supports under the medical expense tax credit will not see the amount of their refundable medical expense supplement reduced if they claim the expenses under the new disability supports deduction.

This amendment applies to the 2004 and subsequent tax years.

Clause 27

Carry-Forward Period for Unused Foreign Tax Credits

ITA
126(2)(a)

Under existing paragraph 126(2)(a) of the Act, taxpayers may carry forward unused foreign tax credits seven taxation years. This paragraph is amended to allow unused foreign credits that are computed for taxation years that end after March 22, 2004 to be carried forward ten taxation years.

Clause 28

Flow-Through Mining Expenditure

ITA
127(9)

The definition "flow-through mining expenditure" in subsection 127(9) of the Act defines expenditures that qualify for the 15% investment tax credit in respect of specified surface "grass-roots" mineral exploration expenses.

Paragraph (a) of the definition "flow-through mining expenditure" requires that qualifying expenses be incurred by a corporation after October 17, 2000 and before 2005. The amendment provides that the expense may be incurred by a corporation after October 17, 2000 and before 2006.

Expenditure Limits - Associated CCPCs

ITA
127(10.22)

Scientific research and experimental development (SR&ED) investment tax credits (ITCs) are available at an enhanced rate of 35% in the case of certain SR&ED expenditures made by small Canadian-controlled private corporations (CCPCs). This is in contrast to the general 20% ITC rate for SR&ED expenditures. This result is accomplished by subsection 127(10.1) of the Act, which provides an addition to a CCPC's ITC at the end of a taxation year of 15% of the least of three amounts, of which the third amount is the corporation's "expenditure limit" for the year. A CCPC's expenditure limit for a taxation year is calculated under subsection 127(10.2) of the Act, and is generally $2 million, subject to certain reductions.

CCPCs that are controlled (in law or in fact) by the same person or group of persons are considered to be associated corporations. Associated corporations must share the annual $2 million expenditure limit for the purposes of computing the 15% addition to their ITCs. The phase out of the expenditure limit is also based on the combined taxable income and taxable capital of a group of associated corporations.

Common investors in a CCPC that do not form a "group of persons" under the jurisprudence may nevertheless be considered to be a group of persons under the extended definition of that phrase in paragraph 256(1.2)(a) of the Act, which provides that a group of persons in respect of a corporation means any two or more persons each of whom own shares of the capital stock of a corporation.

New subsection 127(10.22) provides a special relieving rule that can apply for the purpose of calculating a corporation's expenditure limit for a particular taxation year under subsection 127(10.2). New subsection 127(10.22) will apply to a particular corporation if the following three conditions are met:

• The particular corporation is associated with another corporation, but would not be so associated if the Act were read without reference to paragraph 256(1.2)(a).
• The particular corporation has issued shares to one or more persons who were also issued shares by the other corporation.
• There is at least one shareholder of the particular corporation who is not a shareholder of the other corporation, or one shareholder of the other corporation that is not a shareholder of the particular corporation.

If new subsection 127(10.22) applies to a particular corporation in respect of another corporation, the particular corporation will not be considered to be associated with the other corporation for the purpose of determining the particular corporation's expenditure limit under subsection 127(10.2), and for the purpose of determining the particular corporation's business limit under section 125 (as applied for the purpose only of determining the particular corporation's expenditure limit under subsection 127(10.2)). This relief from the application of paragraph 256(1.2)(a) for the particular corporation vis-à-vis its association with another corporation for these purposes is to be determined on a corporation-by-corporation basis.

The purpose underlying new subsection 127(10.22) does not extend to shareholding structures that are intended to multiply the expenditure limit of corporations. Consequently, the application of subsection 127(10.22) is reserved for those cases where the Minister of National Revenue is satisfied of certain matters more fully described in the explanatory notes to new subsections 127(10.23) and 127.1(2.3).

New subsection 127(10.22) applies to taxation years that end after March 22, 2004.

Application of Subsection 127(10.22)

ITA
127(10.23)

New subsection 127(10.23) of the Act provides that the relieving rule in subsection 127(10.22) applies only if the following two conditions are met:

• The Minister of National Revenue is satisfied that the particular corporation and the other corporation are not otherwise associated under the Act. In general, the Minister must be satisfied that the corporations seeking relief under subsection 127(10.22) are not otherwise associated because of the application of other provisions in section 256 (determined on a corporation-by-corporation basis). For example, the Minister must be satisfied that paragraph 256(1)(b) of the associated corporations rules does not apply. That paragraph provides, in general, that a particular corporation is associated with another corporation if the same person or group of persons controls them both, in law or in fact. In the absence of subsection 256(2.1)(a), the reference in section 256 to a "group of persons" would take its meaning from the jurisprudence and other applicable provisions of the Income Tax Act. Therefore, in the context of applying paragraph 256(1)(b), the Minister must be satisfied that there is no person or group of persons that controls in law or in fact the particular corporation and the other corporation. For a different Ministerial consideration, see the note to the analogous rule in new subsection 127.1(2.3) of the Act.

• The Minister is satisfied that the existence of one or more shareholders of the particular corporation who is not a shareholder of the other corporation is not for the purpose of satisfying the requirements of subsection 127(10.22) or the refundable investment tax credit rule in new subsection 127.1(2.2).

New subsection 127(10.23) applies to taxation years that end after March 22, 2004.

Clause 29

Refundable Investment Tax Credit - Associated CCPCs

ITA
127.1(2.2)

New subsection 127.1(2.2) of the Act provides a special relieving rule that can apply for the purpose of calculating a corporation's refundable investment tax credits (ITCs). New subsection 127.1(2.2) will apply to a particular corporation if the following three conditions are met:

• The particular corporation is associated with another corporation, but would not be so associated if the Act were read without reference to paragraph 256(1.2)(a).

• The particular corporation has issued shares to one or more persons who were also issued shares by the other corporation.

• There is at least one shareholder of the particular corporation who is not a shareholder of the other corporation, or one shareholder of the other corporation that is not a shareholder of the particular corporation.

If new subsection 127.1(2.2) applies to a particular corporation, it will not be considered to be associated with the other corporation for the purpose of applying the definitions "qualifying corporation" and "refundable investment tax credit" in subsection 127.1(2) of the Act in respect of the particular corporation's "qualified expenditures".

The purpose underlying new subsection 127.1(2.2) does not extend to shareholding structures that are intended to multiply the expenditure limit of corporations. Consequently, the application of subsection 127.1(2.2) is reserved for those cases where the Minister on National Revenue is satisfied of certain matters more fully described in the explanatory notes to new subsections 127(10.23) and 127.1(2.3).

New subsection 127.1(2.2) applies to taxation years that end after March 22, 2004.

Application of Subsection 127.1(2.2)

ITA
127.1(2.3)

New subsection 127.1(2.3) of the Act provides that the relieving rule in subsection 127.1(2.2) will apply only if the following two conditions are met:

• The Minister of National Revenue is satisfied that the particular corporation and the other corporation are not otherwise associated under the Act. In general, the Minister must be satisfied that the particular corporation seeking relief under subsection 127.1(2.2) is not otherwise associated with the other corporation because of the application of other provisions in section 256 (determined on a corporation-by corporation basis). For example, the Minister must be satisfied that paragraph 256(1)(e) of the associated corporations rules does not apply. That paragraph provides, in general, that a particular corporation is associated with another corporation if each of those corporations is controlled, in law or in fact, by a related group, each of the members of one of the related groups is related to each member of the other related group, and one or more persons who are members of both related groups own (either alone or together), in respect of each corporation, not less than 25% of its issued shares. For a different Ministerial consideration, see the note accompanying the analogous rule in new subsection 127(10.23).

It should also be noted that a "related group" is defined in subsection 251(4) to be a group of persons each member of which is related to every other member.

• The Minister is satisfied that the existence of one or more shareholders of the particular corporation who is not a shareholder of the other corporation is not for the purpose of satisfying the requirements of subsection 127(10.22) or the refundable investment tax credit rule in new subsection 127.1(2.2).

New subsection 127.1(2.3) applies to taxation years that end after March 22, 2004.

Clause 30

Mutual Fund Corporations

ITA
131

Section 131 of the Act sets out rules relating to the taxation of mutual fund corporations and their shareholders.

Election re Capital Gains Dividend

ITA
131(1)(b)

Subsection 131(1) of the Act deems an election made by a mutual fund corporation in respect of a dividend to be a capital gains dividend to the extent that it does not exceed the corporation's capital gains dividend account. Further, the dividend recipient is deemed to have a capital gain, for the taxation year in which the dividend is received, from the disposition of property in the year.

Paragraph 131(1)(b) is amended, as a consequence of the addition of new subsection 131(5.1) to ensure that paragraph 131(1)(b) is subject to new paragraph 131(5.1)(b). As a result, the portion of a capital gains dividend that is a TCP gains distribution (as defined in subsection 131(6)) is not deemed to be a capital gain of the recipient.

This amendment applies after March 22, 2004.

TCP Gains Distribution

ITA
131(5.1)

New subsection 131(5.1) of the Act treats a distribution that a Canadian mutual fund corporation pays out of its gains on taxable Canadian property as a taxable dividend (not a capital gains dividend), and thus ensures that it is subject to non-resident withholding tax under subsection 212(2).

New paragraph 131(5.1)(a) provides that if a mutual fund corporation elects under subsection 131(1) to treat a dividend as a capital gains dividend, for the purposes of Part I and Part XIII, each shareholder to whom the dividend is paid is deemed to receive, from the corporation, a TCP gains distribution equal to the lesser of the amount of the dividend and the shareholder's pro rata portion of the mutual fund corporation's TCP gains balance.

The tax consequences of this characterization depend on the residence and status of the shareholder. If the shareholder is not resident in Canada, the tax consequences are described in paragraph 131(5.1)(b). In general, a shareholder resident in Canada will be unaffected: the shareholder will continue to be taxed on the amount as a capital gains dividend. If the shareholder is another mutual fund corporation or a mutual fund trust, the amount of the TCP gains distribution must be added to its own TCP gains balance.

New paragraph 131(5.1)(b) provides that if a mutual fund corporation elects under subsection 131(1) to treat a dividend as a capital gains dividend, for the purposes of Part I and Part XIII, where the dividend is paid to a shareholder who is a non-resident person or a partnership that is not a Canadian partnership, subparagraph 131(1)(b)(vii) does not apply to the dividend, to the extent of the TCP gains distribution. In addition, the TCP gains distribution is treated as a taxable dividend that, except for the purpose of the definition of "capital gains dividend account" in subsection (6), is not a capital gains dividend.

As a result, the portion of a capital gains dividend that is a TCP gains distribution (as defined in subsection 131(6)) is not deemed to be a capital gain for most purposes. Instead, the TCP gains distribution will be treated as a taxable dividend (not a capital gains dividend) and therefore be subject to non-resident withholding tax under subsection 212(2). The TCP gains distribution is still considered to be a capital gains dividend for the purpose of the definition of "capital gains dividend account" so that the balance in the capital gains dividend account is decreased by the capital gains dividend that became payable by the corporation.

This amendment applies after March 22, 2004.

Application of Subsection 131(5.1)

ITA
131(5.2)

New subsection 131(5.2) of the Act provides that new subsection 131(5.1) applies to a dividend paid by a mutual fund corporation in a taxation year only if more than five per cent of the dividend is received by or on behalf of shareholders each of whom is a non-resident person or is a partnership that is not a Canadian partnership.

This amendment applies after March 22, 2004.

Definitions

ITA
131(6)

Subsection 131(6) of the Act sets out a number of definitions that apply in section 131. Three additional definitions are added to the subsection.

"pro rata portion"

A shareholder's "pro rata portion", at any time, of a mutual fund corporation's TCP gains balance, is defined in respect of a dividend paid by the mutual fund corporation on a class of shares, to mean the amount determined by the formula A x B/C. For this purpose, A is the mutual fund corporation's TCP gains balance immediately before that time; B is the amount received in respect of the dividend by the shareholder; and C is the total amount of the dividend.

The definition of "pro rata portion" ensures that, if a mutual fund corporation's "TCP gains balance" is less than the total amount of a dividend paid by the corporation on a class of shares, each shareholder that is deemed under paragraph 131(5.1)(a) to have received a TCP gains distribution in respect of the dividend will be considered to receive only a proportionate share of the dividend as a TCP gains distribution.

"TCP gains balance"

"TCP gains balance" of a mutual fund corporation at any time, is defined to mean the amount, if any, by which

• the total of the mutual fund corporation's capital gains from dispositions, after March 22, 2004 and at or before that time, of taxable Canadian properties and any TCP gains distributions (including those defined in section 132) received by the mutual fund corporation at or before that time, exceeds

• the total of the mutual fund corporation's capital losses from dispositions, after March 22, 2004 and at or before that time, of taxable Canadian properties and the total of all amounts deemed, in respect of dividends paid by the mutual fund corporation before that time, to be TCP gains distributions received by shareholders from the mutual fund corporation.

"TCP gains distribution"

"TCP gains distribution" is defined in subsection 131(6) to mean a TCP gains distribution described in subsection 131(5.1).

These new definitions apply after March 22, 2004.

Clause 31

Mutual Fund Trusts

ITA
132

Section 132 of the Act sets out rules relating to the taxation of mutual fund trusts and their beneficiaries (unitholders).

Definitions

ITA
132(4)

Subsection 132(4) of the Act sets out a number of definitions that apply in section 132. Three additional definitions are added to the subsection.

"pro rata portion"

A beneficiary's "pro rata portion" of a mutual fund trust's TCP gains balance for a taxation year is defined, in respect of an amount designated under subsection 104(21) by the mutual fund trust for the taxation year, to mean the amount determined by the formula A x B/C. For this purpose, A is the mutual fund trust's TCP gains balance for the taxation year; B is the amount the mutual fund trust has designated under that subsection in respect of the beneficiary for the taxation year; and C is the total of all amounts designated under that subsection by the mutual fund trust for the taxation year.

The definition of "pro rata portion" ensures that, if a mutual fund trust's "TCP gains balance" is less than the total amount designated under subsection 104(21) by the mutual fund trust for the taxation year, each beneficiary that is deemed under paragraph 132(5.1)(a) to have received a TCP gains distribution in respect of the designation will only receive a proportionate share of the designation as a TCP gains distribution.

"TCP gains balance"

"TCP gains balance" of a mutual fund trust for a particular taxation year is defined to mean the amount, if any, by which

• the total of the mutual fund trust's capital gains from dispositions, after March 22, 2004 and at or before the end of the particular taxation year, of taxable Canadian properties and the TCP gains distributions (including those defined in section 131) received by the mutual fund trust at or before the end of the particular taxation year, exceeds

• the total of the mutual fund trust's capital losses from dispositions, after March 22, 2004 and at or before the end of the particular taxation year, of taxable Canadian properties and the total of all amounts deemed, in respect of amounts designated by the mutual fund trust under subsection 104(21) for earlier taxation years to be TCP gains distributions received by beneficiaries under the mutual fund trust.

"TCP gains distribution"

"TCP gains distribution" is defined in subsection 132(4) to mean a TCP gains distribution described in subsection 132(5.1).

These new definitions apply after March 22, 2004.

TCP Gains Distribution

ITA
132(5.1)

New subsection 132(5.1) of the Act treats a distribution that a Canadian mutual fund trust pays out of its gains on taxable Canadian property as Canadian-source trust income, and thus ensures that it is subject to non-resident withholding tax under paragraph 212(1)(c).

New paragraph 132(5.1)(a) provides that, if a mutual fund trust designates an amount under subsection 104(21) for a taxation year of the trust in respect of a beneficiary under the trust for the purposes of Part I and Part XIII, each beneficiary in respect of which the designation is made is deemed to have received from the trust, a TCP gains distribution equal to the lesser of twice the amount designated and the beneficiary's pro rata portion of the mutual fund trust's TCP gains balance for the taxation year.

The tax consequences of this characterization depend on the residence and status of the beneficiary. If the beneficiary is not resident in Canada, the tax consequences are described in paragraph (5.1)(b). In general, a beneficiary resident in Canada will be unaffected: the amount designated under subsection 104(21) will remain a taxable capital gain to the beneficiary from the disposition of a capital property. If the beneficiary is another mutual fund trust or a mutual fund corporation, the amount of the TCP gains distribution must be added to its own TCP gains balance.

New paragraph 132(5.1)(b) provides that, if a mutual fund trust designates an amount under subsection 104(21) for a taxation year of the trust in respect of a beneficiary under the trust, for the purposes of Part I and Part XIII, where the designation is made in respect of a beneficiary who is a non-resident person or a partnership that is not a Canadian partnership, the amount designated is deemed by subsection 104(21) to be a taxable capital gain of the beneficiary only to the extent that it exceeds one-half the amount of the TCP gains distribution. In addition, one-half of the TCP gains distribution is to be added to the amount otherwise included under subsection 104(13) in computing the income of the beneficiary, and is deemed to be an amount to which paragraph 212(1)(c) applies.

As a result, the full amount of the TCP gains distribution that the non-resident beneficiary is deemed to have received under paragraph (5.1)(a) is an amount to which paragraph 212(1)(c) applies.

This amendment applies after March 22, 2004.

Application of Subsection 132(5.1)

ITA
132(5.2)

New subsection 132(5.2) of the Act provides that new subsection 132(5.1) applies to an amount designated under subsection 104(21) by a mutual fund trust for a taxation year only if more than five per cent of the total of all amounts each of which is an amount designated in respect of beneficiaries under the mutual fund trust each of whom is a non-resident person or is a partnership that is not a Canadian partnership.

This amendment applies after March 22, 2004.

Clause 32

Patronage Dividends

ITA
135

Section 135 of the Act sets out conditions that must be met in order to deduct from income payments made to customers pursuant to allocations in proportion to patronage.

Deduction in Computing Income

ITA
135(1)

Subsection 135(1) of the Act allows a taxpayer to deduct from income payments made to customers pursuant to allocations in proportion to patronage. Subsection 135(1) is amended to clarify that subsection (1) is subject to new subsection (1.1) and to subsections (2) and (2.1).

This amendment applies in respect of payments made after March 22, 2004.

Limitation Where Non-arm's Length Customer

ITA
135(1.1)

New subsection 135(1.1) of the Act provides that subsection (1), which provides for the deduction of payments made to customers pursuant to allocations in proportion to patronage, does not generally apply to any payment made by a taxpayer to a customer with whom the taxpayer does not deal at arm's length. However such a non-arm's length payment will continue to be deductible under subsection 135(1) if it is made by a cooperative corporation as defined in subsection 136(2) or a credit union, or if it is a prescribed payment. The concept of a prescribed payment has been introduced in order to accommodate cooperative structures that would, but for non-substantive technical reasons, satisfy the definition of a cooperative corporation.

New subsection 135(1.1) generally applies in respect of payments made after March 22, 2004.

Given the extended time during which section 135 allows a deductible payment to be made, a corporation may choose to calculate and pay its tax, for a given taxation year, in the expectation that a section 135 deduction will be available in respect of a later payment. Ordinarily, that decision is taken at the corporation's own risk: if it fails to make the payment or is otherwise prevented from deducting the payment, it will have underpaid its tax for that taxation year and will be liable for the consequences, including interest on the underpayment and, in some cases, instalment interest.

Recognizing this some transitional relief is provided. Interest and penalties will not be payable in respect of the portion of tax that is paid late or an instalment of tax that is deficient solely as a result of the introduction of new subsection 135(1.1).

Limitation Where Non-member Customer

ITA
135(2)

Subsection 135(2) of the Act is amended consequential to the amendment to subsection 135(1). The amendment to subsection 135(2) deletes the phrase "notwithstanding subsection (1)" which is redundant as the amendment to subsection (1) clarifies that subsection (1) is subject to subsection (2).

In addition, the preamble to the English version of subsection 135(2) of the Act is amended to conform with the French version of the Act.

These amendments apply in respect of payments made after March 22, 2004.

Clause 33

Lifelong Learning Plan

ITA
146.02(1)

Section 146.02 of the Act contains the rules governing the Lifelong Learning Plan (LLP). Under the LLP, individuals can withdraw amounts from their registered retirement savings plans on a tax-free basis to finance their education. The amounts withdrawn are repayable on a non-deductible basis over 10 years.

The definition "qualifying educational program" in subsection 146.02(1) defines the type of educational program in which an individual must be enrolled in order to withdraw an amount under the LLP. The definition imports the definition of that expression in subsection 118.6(1) that applies for purposes of the education tax credit, but with certain modifications.

As a consequence of an amendment to the definition "qualifying educational program" in subsection 118.6(1), the definition of that expression in subsection 146.02(1) is amended to incorporate the relevant requirements, rather than making reference to subsection 118.6(1). This amendment, which applies after 2003, does not represent any change in policy relating to the LLP.

Clause 34

Registered Education Savings Plans

ITA
146.1(1)

Section 146.1 of the Act contains rules governing registered education savings plans (RESPs). Paragraph 146.1(2)(g.1) provides, as a condition of registration, that an educational assistance payment can be made to an individual under an RESP only if the individual is enrolled as a full-time student in a qualifying educational program at a post-secondary educational institution.

The expression "qualifying educational program" is defined in subsection 146.1(1) by reference to the definition of that expression in subsection 118.6(1) that applies for purposes of the education tax credit. Because of paragraph (b) of that definition, educational assistance payments cannot be made to individuals who pursue post-secondary education that is related to their current employment.

As a consequence of an amendment to the definition "qualifying educational program" in subsection 118.6(1) to remove the condition in paragraph (b), the definition of that expression in subsection 146.1(1) is amended to incorporate the relevant requirements, rather than making reference to subsection 118.6(1). As a result of these amendments, the restriction on employment-related programs no longer applies when determining whether an educational program qualifies under the RESP rules.

Subsection 146.1(1) is also amended to add the definition "post-secondary school level". This is intended to clarify that educational assistance payments are permitted to be made in connection with occupational skills programs at educational institutions certified by the Minister of Human Resources and Skills Development.

These amendments apply after 2003.

Clause 35

Charities

ITA
149.1(1)

Section 149.1 of the Act provides the rules that must be met for charities to obtain and keep registered status. A registered charity is exempt from tax on its taxable income and can issue receipts which entitle its donors to claim tax relief for their donations.

Definitions

ITA
149.1(1)

Subsection 149.1(1) of the Act provides definitions that are relevant for the purposes of section 149.1. This subsection is amended to add the new definitions "capital gains pool" and "enduring property" and to amend the definition "disbursement quota".

"capital gains pool"

The new definition "capital gains pool" applies for the purpose of the definition "disbursement quota", applicable to taxation years that begin after March 22, 2004. Generally, the capital gains pool of a registered charity for a taxation year is the total of all declared capital gains of the charity from the disposition after March 22, 2004 of enduring properties, less ay claims by the charity (under paragraph (b) of variable A.1 of the definition "disbursement quota") that have reduced the disbursement requirements (under that variable) in respect of the expenditure of such properties for preceding taxation years that began after that date. The annual calculation of additions to and deductions from the capital gains pool is voluntary; however, it may be of benefit to a charity to make this calculation if it expects ever to claim a reduction of its disbursement quota in respect of the expenditure of enduring property. For more information, refer to the commentary for the definition "disbursement quota".

"disbursement quota"

In order to retain registered status, charities must fulfil a minimum annual disbursement requirement set out in the Act. This rule, known as the disbursement quota, ensures that a significant portion of a registered charity's resources are devoted to charitable programs and services, rather than, for example, fundraising, management, or administration. The disbursement quota may be met by a charity by expenditures on charitable activities and by gifts made to qualified donees.

The disbursement quota for a registered charity for a taxation year includes 80% of the previous year's receipted donations, other than testamentary gifts and gifts that are subject to a condition that the gift must be held by the charity for at least 10 years. Such an excepted gift, which is sometimes referred to as an "endowment", a "gift of capital" or a "10-year gift", received by a charity in a preceding year, is generally included in the disbursement quota to the extent of 80% of the amount of the gift that is expended by the charity in a taxation year.

A charity that is a public foundation must disburse, in addition, 80% of gifts received in the previous year from other charities, while a private foundation must disburse 100% of that amount. All foundations must also disburse 4.5% of the value of their investment assets, as determined under the Act. Charities are able to carry over excess disbursements in one year against any disbursement deficiencies in other years, and may apply to the Minister of National Revenue for a reduction of their disbursement quota where the circumstances warrant.

The definition "disbursement quota" in subsection 149.1(1) of the Act is amended, generally for taxation years beginning after March 22, 2004, to provide the following:

• The 4.5% disbursement quota rate on investment assets is reduced to 3.5%.

• This disbursement requirement now applies only if the value of investment assets of a charity exceeds $25,000. However, this requirement is extended to registered charities that are charitable organizations. Charitable organizations that were registered before March 23, 2004 will not be subject to this requirement until their taxation years that begin after 2008.

• The characteristics of a gift referred to above as an "endowment" or a "10-year gift" are generally incorporated into the new definition "enduring property". For more information on what is an "enduring property", refer to the commentary for that definition.

• A gift of an enduring property received from another registered charity is no longer subject to the disbursement quota in the year after the year in which it is received. Such gifts are now subject to the same requirements as those that apply to gifts of enduring property received from other persons. The exception for a "specified gift" continues to apply.

• The requirement to disburse 80% of the amount of an enduring property expended in the year is extended to such property received by way of gift in the same year.

• A different disbursement requirement applies for an enduring property that is expended by way of gift to a qualified donee. The charity must disburse 100% of such an amount (which requirement is satisfied by the gift itself).

• However, if the value of investment assets of a charity is greater than $25,000, the charity may claim a reduction to the disbursement requirements in respect of the expenditure of enduring property. The reduction is equal to the lesser of 3.5% of the investment assets of the charity and the "capital gains pool" of the charity. For this purpose, the calculation of investment assets is made without reference to variables E and F in the definition "disbursement quota". For more information on what is the "capital gains pool" of a charity, refer to the commentary for that new definition.

"enduring property"

The new definition "enduring property" applies for the purpose of the definition "disbursement quota", applicable to taxation years that begin after March 22, 2004. Generally, an enduring property of a registered charity is

• a gift received by way of bequest or inheritance,

• a transfer of property that is deemed to be a gift by subsection 118.1(5.2) or (5.3) of the Act,

• a gift received by a charitable organization from an another registered charity, the majority of directors and trustees of which deal at arm's length with those of the charitable organization, if the gift is subject to a trust or direction that, in general, the gift be utilized over a period not exceeding 5 years in the course of a program of charitable activities or for the purpose of acquiring a capital property to be used directly in such activities, or

• a gift received that is subject to a trust or direction that the gift is to be held by the charity for a term of not less than 10 years (sometimes referred to as a "10-year gift").

However, in the case of a 10-year gift, the trust or direction may permit the charity to substitute the gifted property, or to transfer the enduring property to another registered charity, subject to the same conditions and to the original term of the gift. It may also permit the charity, or the transferee charity, to expend such amount of the gift (or the substituted property) before the end of that term, to the extent necessary for the charity or the transferee charity to meet the requirement under the disbursement quota that it expend in the year 3.5% of its investment assets. For more information on the disbursement quota, refer to the commentary for that definition.

Exclusions of Expenditures as Qualifying Disbursements

ITA
149.1(1.1)

Subsection 149.1(1.1) of the Act provides that a gift or expenditure made by a registered charity will not be considered in determining whether it has met its annual disbursement quota if the gift is made by way of a specified gift or if the expenditure is on political activities. Subsection 149.1(1.1) is amended, consequential to the amendment of Part V of the Act in respect of taxes and penalties for which the charity is liable under subsection 188(1.1) or section 188.1 of the Act. New paragraph 149.1(1.1)(c) provides that a transfer to another registered charity that is an eligible donee, that reduces such a liability of the transferor charity under that Part, does not qualify as an expenditure for the purpose of calculating the transferor's disbursement quota. For more information on what is an eligible donee, refer to the commentary for subsection 188(1.3) of the Act.

This amendment applies in respect of notices of intention to revoke the registration of a charity, and to notices of assessment, issued by the Minister of National Revenue after the day that is 30 days after Royal Assent.

Revocation of registration of charitable organization

ITA
149.1(2)(b)

Subsection 149.1(2) of the Act describes reasons for which the Minister of National Revenue may revoke the registration of a charitable organization. Paragraph 149.1(2)(b) is amended, concurrently with the amendment of the definition of "disbursement quota" in subsection 149.1(1), to provide that the requirement of other charities to annually disburse 3.5% of their investment assets be extended to charitable organizations for taxation years beginning after March 22, 2004. Under the definition of "disbursement quota", this requirement applies if the value of investment assets of a charity exceeds $25,000. However, charitable organizations registered before March 23, 2004 will not be subject to this requirement until their taxation years that begin after 2008.

Revocation of registration of registered charity

ITA
149.1(4.1)

Subsection 149.1(4.1) allows the Minister of National Revenue to revoke the registration of a registered charity that has made a gift to another registered charity, if the Minister is satisfied that one of the main reasons for making the gift was to unduly delay the expenditure of amounts on charitable activities. The Minister may also revoke the registration of the recipient charity where it co-operated with the donor charity to achieve the delay.

Subsection 149.1(4.1) is amended to provide that registration may also be revoked if a false statement or omission was made, in circumstances amounting to culpable conduct, in the furnishing of information for the purpose of obtaining registration of the charity.

This amendment applies in respect of notices of intention to revoke the registration of a charity issued by the Minister of National Revenue after the the day that is 30 days after Royal Assent.

Definition of Disbursement Excess

ITA
149.1(21)

Subsection 149.1(21) of the Act defines "disbursement excess" for the purposes of subsection 149.1(20). The disbursement excess is the amount by which a registered charity's expenditures in the year exceeds its disbursement requirements for the year.

Subsection 149.1(21) is amended consequential to amendments to the disbursement requirements of charitable organizations in the definition of "disbursement quota" and in paragraph 149.1(2)(b), for taxation years beginning after March 22, 2004. However, charitable organizations registered before March 23, 2004 will not be subject to this requirement until their taxation years that begin after 2008.

Refusal to Register and Annulment of Registration

ITA
149.1(22), (23) and (24)

New subsections 149.1(22) and (23) of the Act are introduced concurrently with the introduction of new subsection 168(4) of the Act. Subsection 149.1(22) provides that the Minister of National Revenue may notify a person of the decision to refuse the application of the person for registration as a charity. Conversely, subsection 149.1(23) provides for notification that the registration of the person as a charity is annulled. The Minister may annul the registration of a charity if the person was registered in error or the person was a charity but has ceased to be a charity solely because of a change in law. A charity the registration of which has been annulled is deemed never to have been registered as a charity, but is not liable for the revocation tax under Part V of the Act.

New subsection 149.1(24) provides that an official receipt issued by a registered charity prior to the annulment of that charity will be accepted as valid notwithstanding that the charity is deemed never to have been registered, as long as the receipt would have otherwise been valid.

Subsection 168(4) provides a person a right to file a notice of objection in respect of the decision of the Minister. Subsections 149.1(22), (23) and (24) apply in respect of notices issued by the Minister after the day that is 30 days after Royal Assent.

Clause 36

Reassessment With Taxpayer's Consent

ITA
152(4.2)

Subsection 152(4.2) of the Act gives the Minister of National Revenue the discretion to make a reassessment or determination beyond the normal reassessment period when so requested by a taxpayer who is an individual or a testamentary trust. Currently such reassessments or determinations may be requested back to the 1985 taxation year.

Subsection 152(4.2) is amended to provide that the Minister may not make a reassessment or determination under this authority in respect of a taxation year unless the request is made to the Minister of National Revenue within ten calendar years after the end of that taxation year.

This amendment applies to requests made after 2004.

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