Explanatory Notes Relating to the Air Travellers Security Charge, the First Nations Goods and Services Tax, Income Tax and Other Related Measures : 2
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Clause 37

Refunds

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164(1)(a)(i)

Subsection 164(1) of the Act provides rules governing refunds of overpayments of tax.

Paragraph 164(1)(a) of the Act authorizes the Minister of National Revenue, on or after mailing the notice of assessment for a year, to refund any overpayment of tax for the year. Subparagraph 164(1)(a)(i) of the Act is amended consequential to the addition of new subsection 127.1(2.2), which is described in the explanatory note to that provision.

This amendment applies to taxation years that end after March 22, 2004.

Late Refund of Overpayment

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164(1.5)

Subsection 164(1.5) of the Act gives the Minister of National Revenue discretion to refund all or any portion of an overpayment of tax for a taxation year to which an individual or testamentary trust may be entitled even where the tax return for the taxation year was filed later than three years after the end of the taxation year.

Subsection 164(1.5) is amended to provide that the Minister may not refund any portion of an overpayment of tax in respect of a taxation year under this authority unless the return is filed within ten calendar years after the end of that taxation year.

This amendment applies to returns filed after 2004.

Clause 38

Registered Charities

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168

Section 168 of the Act deals with the circumstances in which the Minister of National Revenue may revoke the registration of a charity or a registered Canadian amateur athletic association.

Charities Registration (Security Information) Act

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168(3)

Subsection 168(3) of the Act provides that, notwithstanding a notice of intention from the Minister of National Revenue to revoke the registration of a charity, or an application from a person to the Federal Court of Appeal for a stay of publication of such a notice, the registration of the charity is revoked as of the time that a certificate issued under the Charities Registration (Security Information) Act is determined to be reasonable. Subsection 168(3) is amended consequential to the introduction of subsection 168(4) of the Act, in respect of notices issued by the Minister after the day that is 30 days after Royal Assent, such that the registration of the person as a charity is also revoked as of the time that a certificate issued under the Charities Registration (Security Information) Act is determined to be reasonable notwithstanding that the person may have filed a notice of objection under subsection 168(4).

Objection to Proposal or Designation

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168(4)

New subsection 168(4) of the Act extends the application of the existing objection review process of the Minister of National Revenue to notices of decisions regarding charities, including

• applications for registration that have been denied;

• revocations or annulments of a charity's registration; and

• designations relating to whether a registered charity is a private or public foundation or one that is directly involved with charitable programs and services.

Filing of a notice of objection is a required step before an appeal to the Federal Court of Appeal may be made under subsection 172(3) of the Act. New subsection 168(4) applies in respect of notices issued by the Minister after the day that is 30 days after Royal Assent.

Subsection 168(2) of the Act is unchanged, with the result that the Minister retains the option to publish, in the Canada Gazette, a copy of a notice of intention to revoke the registration of a charity, if at least 30 days have elapsed since the notice was issued. After the time of publication, the registration of a charity is revoked, along with its authority to issue official income tax receipts in respect of gifts that it receives, notwithstanding that an objection may have been filed. The opportunity remains under paragraph 168(2)(b) for the Federal Court of Appeal, in response to an application by the charity, to have the 30-day period extended.

Clause 39

Appeal From Refusal to Register, Revocation of Registration, etc.

ITA
172(3)(a) and (a.1)

Subsection 172(3) of the Act provides a person with a right to appeal to the Federal Court of Appeal against a decision of the Minister of National Revenue to, among other things, refuse the person's registration as a charity. An appeal is also available in respect of a notice of intention to revoke the registration of a charity or a refusal to designate a charity as a charitable organization, public foundation or private foundation.

Paragraphs 172(3)(a) and (a.1) are amended concurrently with the introduction of new subsection 168(4) of the Act, applicable in respect of notices issued by the Minister after the day that is 30 days after Royal Assent. The right to appeal against a decision of the Minister, in respect of a notice issued under any of subsections 149.1(2) to (4.1), (6.3), (22) or (23) or 168(1), will then apply in respect of the confirmation of the Minister of such a decision, in response to a notice of objection filed under subsection 168(4). A person who has filed such an objection has the option to appeal against the decision after 90 days have elapsed from the day that the objection was filed.

Deemed Refusal to Register

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172(4)

Subsection 172(4) of the Act provides a deadline of 180 days for a person to appeal certain decisions of the Minister of National Revenue to the Federal Court of Appeal. Subsection 172(4) is amended, concurrently with the introduction of subsection 168(4) and the amendment of subsection 172(3), to remove references to certain decisions of the Minister in respect of registered charities. Rules in respect of the objection to or appeal from such decisions are provided for in those other provisions.

Amended subsection 172(4) applies in respect of notices issued by the Minister after the day that is 30 days after Royal Assent.

Clause 40

Appeals to Federal Court of Appeal

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180(1)

Subsection 180(1) of the Act provides that an appeal to the Federal Court of Appeal under subsection 172(3) of the Act may not be filed after 30 days from the time that notice of the Minister of National Revenue's decision was mailed, unless this time limit is extended by the Court. Subsection 180(1) is amended concurrently with the introduction of subsection 168(4) of the Act and the amendment of subsection 172(3) to provide that, for decisions of the Minister in respect of charities and applicants for status as a registered charity, this period begins from the day on which the Minister responds to a notice of objection filed under new subsection 168(4).

Amended subsection 180(1) applies in respect of notices issued by the Minister after the day that is 30 days after Royal Assent.

Clause 41

Carry-Forward Period for Business Losses

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186(1)(d)(i)

Under existing subparagraph 186(1)(d)(i) of the Act, private corporations and subject corporations may carry forward non-capital losses seven taxation years to reduce their tax under Part IV of the Act. This subparagraph is amended to allow losses that arise in taxation years that end after March 22, 2004 to be carried forward ten taxation years.

Clause 42

Tax and Penalties in Respect of Registered Charities

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Part V

The heading to Part V is amended to include a reference to penalties.

Clause 43

Revocation Tax

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188(1) and (1.1)

Subsection 188(1) of the Act imposes a tax on charities in respect of which the Minister of National Revenue has revoked registration. A revoked charity has one year from the date of that revocation to file a return that discloses the extent to which the charity has divested itself of its assets to registered charities or other qualified donees. The balance of the net assets of a revoked charity, after this divestiture, must be paid to the Crown as a revocation tax.

Subsection 188(1) is amended, and new subsection 188(1.1) added, effectively to provide that the one-year period for divestiture (the "winding-up period", described in new subsection 188(1.2)) begins on the day that the Minister issues a notice of intention to revoke the registration of a charity, or on the day that a certificate issued under the Charities Registration (Security Information) Act is determined to be reasonable. This period may be extended, as discussed in the commentary to subsection 188(1.2). Amended subsection 189(8) of the Act continues to provide for assessment by the Minister of the tax in a manner similar to that for taxpayers liable under Part I of the Act, such that collection of the tax after the winding-up period may, in certain circumstances, be further deferred if the liability of the charity is the subject of a notice of objection by the charity.

In particular, subsection 188(1) deems a taxation year of the charity to end on the day that the certificate or notice of intention to revoke is issued. Subsection 188(1.1) provides that the charity is liable, for that taxation year, for a revocation tax that is equal, generally, to the value of the net assets of the charity on that day, adjusted for income earned and eligible disbursements made during the subsequent winding-up period. Income during the period includes all gifts received and any income that would be subject to tax under section 3 of the Act if the charity were taxable. Eligible disbursements during the period include, generally, expenditures made on charitable activities and gifts made to eligible donees. However, if the charity does not file a notice objection in respect of an assessment of the revocation tax, the time for making such a gift to an eligible donee is limited to one year from the date on which the taxation year is deemed to end.

While an expenditure in respect of charitable activities or by way of gift to an eligible donee may reduce the liability of a charity for the revocation tax under subsection 188(1.1), the excess amount of such expenditures over the amount required to satisfy the liability does not result in a refundable amount to the charity.

Added to the amount for which a charity is liable under subsection 188(1.1) are any appropriations from the property of the charity made within 120 days before the date on which the taxation year is deemed to end, to a person who is jointly and severally, or solidarily, liable with the charity for the amounts under amended subsection 188(2) of the Act.

For more information on the winding-up period and what is an eligible donee, refer to the commentary for subsections 188(1.2) and (1.3).

These amendments apply in respect of notices of intention to revoke issued by the Minister after the day that is 30 days after Royal Assent.

Winding-Up Period

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188(1.2)

New subsection 188(1.2) of the Act applies for the purpose of calculating the revocation tax under new subsection 188(1.1) of the Act, in respect of certificates issued under the Charities Registration (Security Information) Act and notices of intention to revoke the registration of a charity that are issued by the Minster of National Revenue, after the day that is 30 days after Royal Assent. The winding-up period of a charity begins immediately after the notice or certificate is issued and ends at the latest of three times:

• the day on which the charity files a return in respect of the revocation tax, but not later than one year after the notice or certificate was issued;

• the day of the last assessment of revocation tax by the Minister; and

• if the charity has objected to or appealed from an assessment by the Minister of the revocation tax, the day on which the Minister may take action to collect the tax under amended section 225.1 of the Act. For more information regarding collection restrictions on revocation tax, refer to the commentary for that section.

Generally, the results are as follows:

• As the Minister would not normally assess a charity for the revocation tax before the time that the charity is required, under new subsection 189(6.1) of the Act, to file a return, if a charity has not filed a return at the time of an assessment by the Minister, the winding-up period would generally end at that time. The Minister will compute the liability for revocation tax up to the date of assessment. Under new subsection 189(6.2), the charity may continue to reduce that liability, such as by gifts to eligible donees, up to the time that is one year from the day that the certificate or notice of intention to revoke was issued. For more information, refer to the commentary for subsection 189(6.2).

• If a charity files a return calculating the amount for which it is liable under subsection 188(1.1), the charity will include in the calculation its income and disbursements in the period up to the date of filing, but not later than one year from the day that the certificate or notice of intention to revoke was issued. This period will apply notwithstanding that the Minister may have previously assessed the charity. The Minister would normally be expected to assess the liability based on the information reported by the charity, unless the Minister disputed the calculation or other information relevant to the assessment became available to the Minister.

• If, at any time after an assessment of the liability of the charity, the Minister reassesses that liability, the Minister will consider in the calculation the income and disbursements of the charity up to the date of that reassessment. The Minister could initiate such a reassessment, or could reassess in response to a direction from a court resulting from an appeal of the amount of tax by the charity.

• If a charity files a notice of objection to an amount assessed under subsection 188(1.1), the time at which the Minister may begin to collect the liability is deferred by amended section 225.1, generally until any objection or appeal by the charity has been disposed of. At that time the Minister may be expected to reassess the charity to include in the calculation the income and disbursements of the charity up to the date of that reassessment.

The Minister would not normally be expected to assess a charity for the revocation tax before the time that the charity is required, under new subsection 189(6.1) of the Act, to file a return. However, there may be circumstances where the Minister becomes aware that a charity's assets are being diverted or directed for private benefit. In such a case, the Minister may consider issuing an assessment notice without waiting for the charity to file the required return. Such a charity will, for one year from the notice of intention to revoke its registration, retain the opportunity to satisfy the liability under subsection 189(6.2).

Eligible Donee

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188(1.3)

New subsection 188(1.3) of the Act applies for the purpose of calculating the revocation tax under new subsection 188(1.1) of the Act, in respect of certificates issued under the Charities Registration (Security Information) Act and notices of intention to revoke the registration of a charity that are issued by the Minster of National Revenue, after the day that is 30 days after Royal Assent. A revoked charity has one year from the date of that notice or certificate to file a return that discloses the extent to which the charity has divested itself of its assets to eligible donees.

For these purposes, an eligible donee in respect of a particular charity is a registered charity

• that is not the subject of a suspension under new subsection 188.2(1) of the Act;

• that has no unpaid liabilities under the Act or the Excise Tax Act;

• that is not subject to a certificate under the Charities Registration (Security Information) Act; and

• more than 50% of the members of the board of directors or trustees of which deal at arms' length with each member of the board of directors or trustees of the particular charity.

For more information regarding subsection 188.2(1), refer to the commentary for that subsection.

Shared Liability - Revocation Tax

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188(2)

Subsection 188(2) of the Act imposes a liability for the revocation tax payable under subsection 188(1) by a deregistered charity, jointly with persons, other than qualified donees, who receive property from the charity. Subsection 188(2) is amended consequential to the amendments to section 188, to apply in respect of property appropriated after the time that is 120 days before the end of the taxation year of the charity that is deemed by amended subsection 188(1).

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

Non-Application of Revocation Tax

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188(2.1)

New subsection 188(2.1) of the Act applies consequential to amendments to the revocation tax payable under subsection 188(1) by a deregistered charity, in respect of certificates issued under the Charities Registration (Security Information) Act and notices of intention to revoke the registration of a charity that are issued by the Minister of National Revenue after the day that is 30 days after Royal Assent. Subsection 188(2.1) provides that the revocation tax does not apply where the Minister notifies the charity that the intention to revoke has been abandoned. Such a decision could be taken, for example, upon the review of a notice of objection of a charity in respect of a notice of intention to revoke its registration.

Subsection 188(2.1) also applies if, after the revocation of the registration of the charity and within one year from the day of the notice of intention to revoke, the Minister has accepted a subsequent application from the charity for registration. In such a case, the revocation tax does not apply if the charity has, before the new registration, paid all other amounts owing under the Act or the Excise Tax Act and filed all information returns required to be filed under the Act before that time.

Non-Application of Tax on Transfer of Foundation Property

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188(3.1)

Subsection 188(3) of the Act generally applies where a charitable foundation transfers property to a charitable organization, the total "net value" of which is greater than 50% of the "net asset amount" of the foundation, if the main purpose of the transfer is to reduce disbursement quota of the foundation. In such a circumstance the foundation is liable to pay a tax of 25% of the net value of the property transferred. The net value of a property is defined in subsection 188(5) of the Act as the fair market value of the property less any consideration given to the foundation on the transfer. The net asset amount of a foundation is defined in subsection 188(5) as, generally, the excess of the value of all property of the foundation over the total debt of the foundation.

New subsection 188(3.1) of the Act is introduced concurrently with the introduction of new subsection 188.1(11) of the Act, which applies a penalty upon a registered charity where the charity makes a gift of property to another charity for the purpose of delaying the expenditure of amounts on charitable activities. Subsection 188(3.1) precludes the application of subsection 188(3) to a transfer of property in respect of which subsection 188.1(11) applies, for taxation years that begin after March 22, 2004.

Clause 44

Penalties Applicable to Charities

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188.1

New section 188.1 of the Act introduces penalties on registered charities that are more appropriate than revocation for unintended or incidental breaches of the Act. The penalties generally apply in respect of activities that charities are not permitted to undertake. Some penalties are progressive, increasing in severity for repeat infractions within a period of 5 years (errata:  text corrected from "10 years" to "5 years", March 8, 2005). Penalties may apply in respect of the activities of a charity notwithstanding the discretion of the Minister of National Revenue to revoke the registration of a charity in respect of the same activities. Section 188.1 is introduced concurrently with amendments to section 189 of the Act, which introduces a process for assessment and dispute resolution, applicable for taxation years that begin after March 22, 2004.

Business Activities

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188.1(1) and (2)

New subsection 188.1(1) of the Act introduces a penalty equal to 5% of the gross income of a charitable organization or a public foundation from a business not related to the charitable activities of the charity, or 5% of the gross income from any business carried on by a private foundation. Subsection 188.1(2) increases the penalty for a repeat infraction to 100% if the Minister of National Revenue has, for a previous taxation year and less than 5 years (errata:  text corrected from "10 years" to "5 years", March 8, 2005) before the time of the repeat infraction, assessed the 5% or this 100% penalty.

Control of a Corporation by a Charitable Foundation

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188.1(3)

New subsection 188.1(3) of the Act introduces a penalty equal to 5% of the amount of a dividend received by a charitable foundation from a corporation of which the foundation has acquired control. The penalty is increased to 100% of the amount of the dividend if, less than 5 years (errata:  text corrected from "10 years" to "5 years", March 8, 2005). after the assessment of the 5% or this 100% penalty, the charity continues to control the corporation or has again acquired control of a corporation.

Undue Benefits

ITA
188.1(4) and (5)

New subsection 188.1(4) of the Act introduces a penalty on a registered charity equal to 105% of the amount of any undue benefit that the charity confers on any person. The penalty is increased to 110% of the amount for a repeat infraction if the Minister of National Revenue has, for a previous taxation year and less than 5 years (errata:  text corrected from "10 years" to "5 years", March 8, 2005) before the repeat infraction, assessed the 105% or this 110% penalty.

New subsection 188.1(5) of the Act describes an undue benefit as not including a benefit conferred by a charitable act in the ordinary course of the charitable activities of a charity, unless it can reasonably be considered that the eligibility of the beneficiary relates solely to the relationship of that person to the charity. Nor does an undue benefit include reasonable consideration or remuneration for property acquired by the charity or for services it receives.

Subject to the foregoing, however, an undue benefit will generally include

• a disbursement by way of a gift (other than a gift to a qualified donee); and

• the amount of any part of the income, rights, property or resources of the charity that is paid, payable, assigned or otherwise made available for the personal benefit of any person

(a) who is a proprietor, member, shareholder, trustee or settlor of the charity,

(b) who has contributed or otherwise paid into the charity more than 50% of the capital of the charity, or

(c) who does not deal at arm's length with a person in (a) or (b), or with the charity.

The amount of an undue benefit may be conferred by the charity, or may be received by the beneficiary from a third party, at the direction or with the consent of the charity, if the charity otherwise would have had a right to that amount.

Failure to File Information Returns

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188.1(6)

New subsection 188.1(6) of the Act introduces a penalty of $500 on a registered charity that fails to file the annual information returns required under subsection 149.1(14) of the Act, or that files a return after the time that it is required to be filed.

Incorrect Information

ITA
188.1(7) and (8)

New subsection 188.1(7) of the Act introduces a penalty equal to 5% of the amount reported on an official receipt, issued by a registered charity, as the amount eligible for a charitable donations deduction or charitable donations tax credit, if the receipt includes incorrect information or is missing information that is required by the Act or the Income Tax Regulations to be included on the receipt. New subsection 188.1(8) increases the penalty for a repeat infraction to 10% if the Minister of National Revenue has, for a previous taxation year and less than 5 years (errata:  text corrected from "10 years" to "5 years", March 8, 2005) before the time of the repeat infraction, assessed the 5% or this 10% penalty.

Concurrent with the introduction of section 188.1 of the Act, it is proposed that sections 3501 and 3502 of the Income Tax Regulations be amended to provide that official receipts include the name and current internet address of the Canada Revenue Agency. Unlike the introduction of section 188.1 of the Act, it is proposed that this amendment to the Income Tax Regulations apply for receipts issued after 2004.

False Information

ITA
188.1(9) and (10)

New subsection 188.1(9) of the Act introduces a penalty equal to 125% of the amount reported on a receipt, issued by a charity or any other person, as the amount eligible for a charitable donations deduction or charitable donations tax credit, if the receipt includes a false statement that is made under circumstances amounting to culpable conduct. The penalty may be applied to a registered charity where the person making the false statement is an officer, employee, official or agent of the charity.

If both section 163.2 of the Act and subsection 188.1(9) apply in respect of a false statement by a person, new subsection 188.1(10) limits the liability of the person to the greater of the two penalties.

For more information about "culpable conduct" and a "false statement", refer to commentary previously released for section 163.2.

Delay of Expenditure

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188.1(11)

New subsection 188.1(9) of the Act introduces a penalty equal to 110% of the fair market value of property transferred by way of gift from one registered charity to another registered charity, if it may reasonably be considered that the reason for the transfer was to unduly delay the expenditure of amounts on charitable activities. Both the transferor and transferee are jointly and severally, or solidarily, liable for the penalty.

Suspension of Authority to Issue Tax Receipts

ITA
188.2

New section 188.2 of the Act provides for the suspension of a registered charity's tax-receipting privileges concurrently with the assessment of certain penalties under section 188.1 of the Act by the Minister of National Revenue. For the one-year period that begins seven days after the assessment date, a suspended charity is prohibited from issuing official receipts, and other registered charities are not permitted to provide them with gifts. Section 188.2 applies to taxation years that begin after March 22, 2004.

Notice of Suspension

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188.2(1) and (2)

New subsection 188.2(1) of the Act requires the Minister of National Revenue to issue a notice to a registered charity that its authority to issue official tax receipts has been suspended, if the charity is being assessed a penalty

• under subsection 188.1(2) of the Act, for repeatedly carrying on an unrelated business or, in the case of a private foundation, any business;

• under paragraph 188.1(4)(b) of the Act, for repeatedly conferring undue benefits on certain persons; or

• under subsection 188.1(9) of the Act, for making false statements on receipts that report, in total for a taxation year, more than $20,000 in respect of which a person may claim a charitable donations deduction or charitable donations tax credit.

New subsection 188.2(2) of the Act provides that the Minister may suspend a registered charity that

• fails to comply with certain provisions of the Act relating to administration and enforcement, such as the requirement to keep proper books and records; or

• assists another charity in avoiding the effect of a suspension by accepting gifts or transfers of property on behalf of the suspended charity.

Effect of Suspension

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188.2(3)

New subsection 188.2(3) of the Act generally provides that, for a one-year period beginning seven days after the Minister issues a notice of suspension, a registered charity is deemed not to be a qualified donee for the purposes of the Act, such that no charitable donations deduction or tax credit may be claimed by any person who makes a gift to the charity during that period. (Official receipts may continue to be issued in respect of gifts made before that period.) If a charity is offered a gift while under suspension, the charity must inform the potential donor of the suspension, that it is not a qualified donee while under suspension and that, if the gift is made during the suspension, no charitable donations deduction or tax credit may be claimed by the donor in respect of the gift.

Postponement of Suspension

ITA
188.2(4) and (5)

New subsection 188.2(4) of the Act allows for the postponement of the period for suspension of a registered charity under subsection 188.2(1) or (2) of the Act, if the charity has filed a notice of objection in respect of the suspension. The charity must file an application for the postponement to the Tax Court of Canada. New subsection 188.2(5) of the Act allows the Court to grant the application only if it would be just and equitable to do so. The portion of the suspension that has not elapsed will recommence at such time as is determined by the Court.

Clause 45

Revoked Charity to File Returns

ITA
189(6.1)

New subsection 189(6.1) of the Act is introduced concurrently with amendments to subsection 188(1) of the Act, applicable in respect of certificates issued under the Charities Registration (Security Information) Act and notices of intention to revoke the registration of a charity that are issued by the Minister of National Revenue, after the day that is 30 days after Royal Assent. Subsection 189(6.1) requires a person that is liable for a revocation tax under new subsection 188(1.1) to file a return within one year from the date of the certificate or notice, without notice or demand, and to estimate and pay tax payable. The person must also file any information returns required to be filed under subsection 149.1(14) of the Act.

Reduction of Liability

ITA
189(6.2) and (6.3)

New subsection 189(6.2) of the Act is introduced concurrently with the amendment to section 188 of the Act in respect of the revocation tax payable by a charity that has been issued a certificate under the Charities Registration (Security Information) Act or a notice by the Minster of National Revenue of an intention to revoke the registration of the charity. Subsection 189(6.2) applies if the Minister assesses revocation tax in excess of $1,000 at a time that is less than one year after the day that the notice or certificate is issued.

When this provision applies, the charity may reduce the liability for the revocation tax during the balance of the one-year period, also known as the "post-assessment period", by the amount by which the value of property transferred to an "eligible donee" in that period exceeds the consideration given to the charity. (For information on the description of an "eligible donee", refer to the commentary for new subsection 188(1.3) of the Act.) In addition, the liability is reduced by the amount by which the charity's expenditures in the post-assessment period in respect of charitable activities exceed its net income for that period (including any gifts received).

Subsection 189(6.2) is nullified if, after the one-year period, the Minister issues an assessment of the revocation tax under new subsection 188(1.1) of the Act, and any reduction in liability by such transfers and expenditures is incorporated into that assessment.

Similarly, new subsection 189(6.3) of the Act applies to a registered charity that the Minister assesses for penalties under section 188.2 for a taxation year in excess of $1,000. The charity may reduce the liability by the amount by which the value of property transferred to an "eligible donee", in the one-year period following the assessment date, exceeds the consideration given to the charity.

Subsections 189(6.2) and (6.3) apply in respect of notices issued by the Minister after the day that is 30 days after Royal Assent.

Minister May Assess

ITA
189(7)

Subsection 189(7) of the Act, which applies in respect of interest applicable to liabilities under Part V of the Act, is replaced with subsection 189(9) of the Act. New subsection 189(7) applies in respect of notices issued by the Minister after the day that is 30 days after Royal Assent, to clarify that the assessment of any amount under Part V does not preclude the Minister of National Revenue from revoking the registration of a charity.

Provisions Applicable to Part V

ITA
189(8) and (8.1)

Subsection 189(8) of the Act provides that certain provisions of Part I relating to returns, assessments, payments and appeals are applicable to the taxes payable under Part V in respect of registered charities. Subsection 189(8) is amended consequential to amendments to the revocation tax under section 188 and the introduction of penalties and suspension under new sections 188.1 and 188.2, applicable in respect of notices issued by the Minister of National Revenue after the day that is 30 days after Royal Assent.

The process for judicial review of the assessment of amounts payable under Part V is different from the process for appealing certain decisions of the Minister, such as to revoke the registration of a charity. In this regard, subsection 189(8.1) clarifies that a taxpayer may not appeal to the Tax Court of Canada in respect of an issue that could be the subject of a notice of objection filed under new subsection 168(4) of the Act. For more information on objecting to and appealing from such decisions, refer to the commentary for subsections 168(4), 172(3) and 180(1) of the Act.

Interest

ITA
189(9)

Amended subsection 189(8) of the Act provides, in part, that interest accrues on an amount assessed under Part V of the Act pursuant to subsection 161(11) of the Act. Paragraph 161(11)(c) instructs that interest accrues from the day of mailing of an original notice of assessment by the Minister of National Revenue. New subsection 189(9) of the Act modifies subsection 161(11) for the purpose of liabilities under Part V. Interest on the revocation tax payable by a person under subsection 188(1.1) of the Act accrues only on the balance remaining at the time that is one year after the day on which the person was issued a certificate under the Charities Registration (Security Information) Act or a notice by the Minister of National Revenue of an intention to revoke the registration of the charity. Similarly, interest on penalties under section 188.1 of the Act accrues only on the balance remaining one year after the liability was first assessed.

Subsection 189(9) applies in respect of notices issued by the Minister after the day that is 30 days after Royal Assent.

Clause 46

Carry-Forward Period for "taxable Canadian life investment losses"

ITA
211.1(2)

Under existing subsection 211.1(2) of the Act, life insurers may carry forward "taxable Canadian life investment losses" seven taxation years to reduce their tax under Part XII.3 of the Act. This subsection is amended to allow losses that arise in taxation years that end after March 22, 2004 to be carried forward ten taxation years.

Clause 47

Non-Resident Investors in Canadian Mutual Funds

ITA
Part XIII.2 - 218.3

New Part XIII.2 of the Act applies a 15 per cent income tax, as a tax on gains, to distributions that are not otherwise subject to tax under Part I or Part XIII (defined as an "assessable distribution" in new subsection 218.3(1)), paid or credited by certain mutual funds to their non-resident investors. Where the non-resident investor realizes a loss (defined as a "Canadian property mutual fund loss" in subsection 218.3(1)) on the disposition of the mutual fund investment, the loss may in certain circumstances be applied against the gain on similar investments. In general, the loss may be carried back three taxation years and forward indefinitely.

Definitions

ITA
218.3(1)

New subsection 218.3(1) of the Act defines a number of terms for the purposes of new Part XIII.2 of the Act.

"Assessable distribution"

"Assessable distribution" is defined, in respect of a Canadian property mutual fund investment, as the portion of any amount that is paid or credited by the mutual fund to a non-resident investor who holds the investment, and that is not otherwise subject to tax under Part I or Part XIII.

"Canadian property mutual fund investment"

"Canadian property mutual fund investment" is defined to mean a share of a mutual fund corporation, or a unit of a mutual fund trust, if the share or unit is listed on a prescribed stock exchange and more than 50 per cent of the value of the share or unit is attributable to one or more properties each of which is real property in Canada, a Canadian resource property, or a timber resource property.

"Canadian property mutual fund loss"

A non-resident investor's "Canadian property mutual fund loss" for a taxation year is defined to mean the non-resident investor's loss for the taxation year from the disposition of a Canadian property mutual fund investment, but only to the extent that the loss does not exceed the total of all assessable distributions that were paid or credited on the Canadian property mutual fund investment after the non-resident investor last acquired the investment and at or before the time of the disposition. For greater certainty, the non-resident investor's loss is determined under section 40 of the Act. A non-resident investor has a Canadian property mutual loss for a taxation year only if the non-resident investor files a return of income under Part XIII.2 for the taxation year. The Canadian property mutual fund loss of a non-resident investor is calculated on an investment-by-investment basis. A non-resident investor may therefore have more than one Canadian property mutual fund loss for the same taxation year.

"Non-resident investor"

"Non-resident investor" is defined to mean a non-resident person or a partnership other than a Canadian partnership. (It should be noted that if the non-resident person is a partnership, for the purposes of Part XIII.2, the tax under this Part is paid and calculated at the partnership level.)

"Unused Canadian property mutual fund loss"

"Unused Canadian property mutual fund loss", of a non-resident investor for a taxation year, is defined to mean the portion of the total of the non-resident investor's Canadian mutual fund property losses for preceding taxation years that has neither reduced under new subsection 218.3(3) the amount of tax payable, nor increased under new subsection 218.3(5) the amount of a refund of tax paid, under Part XIII.2 for any preceding taxation year.

The definition unused Canadian property mutual fund loss allows a non-resident investor's Canadian property mutual fund loss to be carried forward indefinitely. Unlike Canadian property mutual fund losses which are calculated on an investment-by-investment basis, unused Canadian property mutual fund loss is calculated as a pool of Canadian property mutual fund losses.

Tax Payable

ITA
218.3(2)

New paragraph 218.3(2)(a) of the Act provides that if at any time a person (referred to as the "payer") pays or credits, to a non-resident investor who holds a Canadian property mutual fund investment, an amount as, on account of, in lieu of payment of or in satisfaction of, an assessable distribution, the non-resident investor is deemed for the purposes of the Act, other than section 150, to have disposed at that time of a property that is taxable Canadian property, the proceeds of which are equal to the amount of the assessable distribution. The adjusted cost base of the property to the non-resident investor immediately before that time is also deemed to be nil. The property that is deemed to have been disposed of is in all other respects identical to the Canadian property mutual fund investment.

As mentioned, the deemed disposition does not apply for the purpose of section 150. This ensures that a non-resident investor is not required to file a return of income solely because of the deemed disposition in paragraph (2)(a). As described in more detail below, the non-resident investor will be required to file a return of income under Part XIII.2 only if the investor chooses to apply their Canadian property mutual fund losses or unused Canadian property mutual fund loss to reduce the amount of tax payable under subsection (3) or to obtain a refund under subsection (5).

New paragraph 218.3(2)(b) provides that the non-resident investor is liable to pay an income tax of 15 per cent on the amount of the gain that results from the deemed disposition described in paragraph (a). For greater certainty, the non-resident investor's gain is determined under section 40 of the Act.

New paragraph 218.3(2)(c) provides that, if a payer pays or credits, to a non-resident investor who holds a Canadian property mutual fund investment, an amount as, on account of, in lieu of payment of or in satisfaction of, an assessable distribution, the payer is required to withhold 15 per cent from the amount and remit it to the Receiver General on behalf of the non-resident investor on account of the tax.

Use of Losses

ITA
218.3(3)

New subsection 218.3(3) of the Act provides that if a non-resident investor files, on or before their filing-due date for a taxation year, a return of income under Part XIII.2, the non-resident investor is liable, instead of paying the fixed and final tax under paragraph (2)(b), to pay an income tax that takes losses into account. Specifically, a non-resident investor who files a return under this provision will pay a tax of 15 per cent for the taxation year on the amount, if any, by which the total of the non-resident investor's gains under subsection (2) for the taxation year exceeds the total of the non-resident investor's Canadian property mutual fund losses and unused Canadian property mutual fund loss for the taxation year.

Deemed Tax Paid

ITA
218.3(4)

New subsection 218.3(4) of the Act provides that if a non-resident investor files, on or before their filing-due date for a taxation year, a return of income under Part XIII.2, any amount that is remitted to the Receiver General in respect of an assessable distribution paid or credited to the non-resident investor in the taxation year is deemed to have been paid on account of the non-resident investor's tax under subsection (3) for the taxation year.

Refund

ITA
218.3(5)

New subsection 218.3(5) of the Act entitles a non-resident investor to a refund of excessive tax withholding. That refund is equal to the amount, if any, by which the total of all amounts paid on account of a non-resident investor's tax under subsection (3) for a taxation year exceeds the non-resident investor's liability for tax under Part XIII.2 for the taxation year.

Excess Loss: Carryback

ITA
218.3(6)

New subsection 218.3(6) of the Act provides a mechanism that in effect allows Canadian property mutual fund losses to be carried back. To use this mechanism, the non-resident investor must file, on or before their filing-due date for a taxation year, a return of income under Part XIII.2. The non-resident investor may then be entitled to a refund if the total of the non-resident investor's Canadian property mutual fund losses for the taxation year and the non-resident investor's unused Canadian property mutual fund loss for the taxation year exceeds the total of all assessable distributions paid or credited to the non-resident in the taxation year.

If the non-resident investor is entitled to a refund, the Minister shall refund to the non-resident investor an amount equal to the lesser of

• the total amount of tax under Part XIII.2 paid by the non-resident investor in each of the three preceding taxation years, to the extent that the Minister has not previously refunded that tax, and

• 15 per cent of the amount, if any, by which the total of the non-resident investor's Canadian property mutual fund losses for the taxation year and the non-resident investor's unused Canadian property mutual fund loss for the taxation year exceeds the total of all assessable distributions paid or credited to the non-resident investor in the taxation year.

Subsection (6) has the effect of allowing a non-resident investor's Canadian property mutual fund loss to be carried back three taxation years. However, it requires that the non-resident investor first apply their Canadian property mutual fund losses and unused Canadian property mutual fund loss for a particular taxation year to assessable distributions paid or credited in that taxation year, before they are eligible to be carried back. It should be noted that the limits on refund interest under subsection 164(5) apply for the purposes of Part XIII.2.

Ordering

ITA
218.3(7)

New subsection 218.3(7) of the Act provides that, in applying subsection (6), amounts of tax are considered to be refunded in the order in which they were paid.

Partnership Filing-due Date

ITA
218.3(8)

New subsection 218.3(8) of the Act provides that for the purposes of Part XIII.2, the taxation year of a partnership is its fiscal period and the filing-due date for the taxation year is to be determined as if the partnership were a corporation.

Partnership - Member Resident in Canada

ITA
218.3(9)

New subsection 218.3(9) of the Act provides for the allocation of tax paid by a partnership under Part XIII.2 (in respect of an assessable distribution paid or credited to the partnership) to its members resident in Canada. The amount allocated must reasonably be considered to be the resident member's share of the tax paid. The tax so allocated will be treated as an amount paid on account of the member's liability for tax under Part I and as neither a tax paid on account of the partnership's tax under this Part nor a tax paid by the partnership. This will enable a Canadian-resident partner to recover the partner's share of the tax (assuming it is not required to satisfy another liability).

Provisions Applicable

ITA
218.3(10)

Under new subsection 218.3(10), various administrative provisions of the Act are made applicable to Part XIII.2. It is expected that sections 202 and 210 of the Regulations will be amended to make reference to Part XIII.2.

New Part XIII.2 applies to distributions paid or credited after 2004.

Clause 48

Waiver of Penalty or Interest

ITA
220(3.1)

Subsection 220(3.1) of the Act gives the Minister of National Revenue discretion to waive or cancel a penalty or interest payable under the Act.

Subsection 220(3.1) is amended to provide that the Minister may not waive or cancel a penalty or interest payable in respect of a taxation year of the taxpayer (or, in the case of a partnership, a fiscal period of the partnership) unless the taxpayer or partnership has made application therefore on or before the day that is ten calendar years after the end of that taxation year or fiscal period. Provision is also made to give the Minister discretion to waive or cancel a penalty or interest payable without application where extraordinary circumstances, such as a natural disaster, prevent taxpayers from meeting their income tax obligations.

This amendment applies after 2004.

Late, Amended or Revoked Elections

ITA
220(3.2)

Subsection 220(3.2) of the Act gives the Minister of National Revenue discretion to allow a taxpayer or partnership to make a late election or to amend or revoke a valid election previously made.

Subsection 220(3.2) is amended to provide that a taxpayer or partnership may not make a late election, or amend or revoke a valid election previously made in respect of a taxation year of the taxpayer (or in the case of a partnership, a fiscal period of the partnership), more than ten calendar years after the end of that taxation year or fiscal period.

This amendment applies to applications made after 2004.

Clause 49

Collection Restrictions

ITA
225.1(1) and (1.1)

Section 225.1 of the Act restricts the right of the Minister of National Revenue to collect unpaid amounts for which a taxpayer has been assessed under the Act. In general, collection actions are limited for 90 days after the date of assessment, or until any objection or appeal by the taxpayer has been disposed of.

Subsection 225.1(1) is amended concurrently with amendments to Part V of the Act in respect of registered charities, to replace the reference to the 90-day period with the term "collection-commencement day". New subsection 225.1(1.1) describes the collection-commencement day in respect of revocation tax assessed under subsection 188(1.1) of the Act as one year after the day on which the Minister has issued a notice of intention to revoke the registration of a charity. In respect of penalties assessed under section 188.1 of the Act, the collection-commencement day is one year from the day on which the notice of assessment was mailed. For amounts assessed under other Parts of the Act, the collection-commencement day remains 90 days after the date of assessment.

These amendments apply in respect of notices issued by the Minister after the day that is 30 days after Royal Assent.

Clause 50

Offences

ITA
239(5)

Subsection 120(2.2) allows individuals to reduce their federal tax payable under Part I by the amount of income tax payable to an Aboriginal government, where that Aboriginal government has entered into a tax sharing agreement with the Government of Canada. New subsection 239(5) ensures that, in determining whether a criminal offence under the Act has been committed, and in determining any punishment associated with such an offence, all individuals in Canada would be subject to the same sanctions even where Canada has entered into a tax sharing agreement with an Aboriginal Government.

Clause 51

Disclosure of Information - Registered Charities

ITA
241(3.2)

Subsection 241(3.2) of the Act permits a government official to release certain information relating to an organization that was at any time a registered charity under the Act, provided that the information relates to the period during which the organization was so registered.

Subsection 241(3.2) is amended to further enhance transparency and accessibility by making new information available on registered charities, the registration process, regulatory decisions, and compliance activities. This amendment does not compromise existing safeguards that are in place to protect the privacy of individuals. The following additional documents regarding registered charities may be released, if they are sent by the Minister of National Revenue, or are filed or required to be filed with that Minister, after the later of December 31, 2004 and Royal Assent:

• Financial statements that are filed with annual information returns.

• Letters sent by the Canada Revenue Agency ("CRA") to a charity relating to the grounds for revocation or annulment of the charity's registration.

• A letter or notice regarding the CRA's decision concerning a notice of objection to an assessment of tax or penalties.

• The information that a registered charity has filed in support of an application for special status or an exemption under the Act, as well as any response to such an application (e.g., a request for permission to accumulate assets).

• Identification of a registered charity on which a sanction has been imposed, the type of sanction imposed, and the letter sent to the charity relating to the grounds for the sanction.

Information Pertaining to Organizations Denied Registration

Currently, no information is made available to the public about organizations that have been denied registration as registered charities under the Act. However, paragraph 241(4)(g) permits a government official to use information to compile information in a form that does not directly or indirectly reveal the identity of the person to whom the information relates. Access to such information will assist the charitable sector and the public in understanding how the CRA determines whether an organization meets the criteria for registration as a registered charity. Accordingly, the CRA may make available its reasons for denying the registration of organizations, in such a manner as to withhold the identity of an applicant. Subject to this restriction on confidentiality, such information could include the following:

• The governing documents of an organization, including the organization's statement of purpose.

• Information disclosed by an organization in the course of making an application for registration as a charity.

• A copy of the notice of denial in respect of the organization.

• A copy of the decision, if any, of the Appeals Branch of the CRA regarding a notice of objection, if any, filed by the organization.

Clause 52

General Anti-Avoidance Rule

ITA
245(1)

The definition of "tax benefit" in subsection 245(1) of the Act is amended to clarify that a tax benefit includes a reduction, avoidance or deferral of tax or other amount that would be payable under the Act but for a tax treaty, or an increase in a refund of tax or other amount under the Act as a result of a tax treaty.

This amendment applies with respect to transactions entered into after September 12, 1988.

ITA
245(4)

Subsection 245(4) of the Act is amended to clarify that section 245 applies to a misuse or abuse of the provisions of the Income Tax Regulations, Income Tax Application Rules, a tax treaty, or any other enactment that is relevant in computing tax or other amount payable by or refundable to a person under the Act or any other amount that is relevant for the purposes of computing that amount.

This amendment applies with respect to transactions entered into after September 12, 1988.

ITA
245(5)

Subsection 245(5) is amended to clarify that tax consequences shall be determined notwithstanding any other enactment, that such determination includes the allowance or disallowance in whole or in part of any exemption or exclusion in computing income, taxable income, taxable income earned in Canada or tax payable or any part thereof, and that any such exemption or exclusion or part thereof may be allocated to any person.

This amendment applies with respect to transactions entered into after September 12, 1988.

Clause 53

Transfer Pricing

ITA
247(1)

The definition of "tax benefit" in subsection 247(1) of the Act is amended to clarify that a tax benefit includes a reduction, avoidance or deferral of tax or other amount that would be payable under the Act but for a tax treaty, or an increase in a refund of tax or other amount under the Act as a result of a tax treaty.

Clause 54

Affiliated Persons Rules and Trusts

ITA
251.1

Section 251.1 of the Act sets out rules for determining when persons are affiliated with one another, which is relevant to a number of provisions of the Act, most notably those restricting the realization of losses on certain transfers.

Existing section 251.1 does not specifically address when a trust is affiliated with another person. New paragraphs 251.1(1)(g) and (h) - in tandem with the new definitions "beneficiary", "contributor", "majority interest beneficiary", and "majority interest group of beneficiaries" in subsection 251.1(3), and interpretive rules in new paragraphs 251.1(4)(c) and (d) - expand the existing affiliated persons rules to expressly apply to trusts. It should be noted that new paragraphs 251.1(1)(g) and (h) are intended to complement, rather than to supplant, the existing rules as they apply to trusts. A trust may, therefore, be affiliated with another person otherwise than under new paragraphs (g) and (h). For example, a trust will continue to be affiliated under paragraph 251.1(1)(b) with a corporation that it controls.

New paragraph 251.1(1)(g) sets out certain circumstances in which a person and a trust are affiliated (as always under the Act, unless otherwise specified, a person includes a trust). This paragraph applies if a person is a majority interest beneficiary or is affiliated with a majority interest beneficiary of the trust otherwise than solely because of paragraph (g) itself. This exception - that in deciding whether a person is affiliated with a majority interest beneficiary, paragraph (g) is ignored - can have important effects.

The following are some of the important effects of these rules:

• A sole beneficiary of a trust is, by virtue of being a majority interest beneficiary of the trust, affiliated with the trust.

• Two trusts are affiliated where a corporation that is a majority interest beneficiary of one trust is controlled by the other trust.

• Two trusts are not affiliated under paragraph 251.1(1)(g) simply because they share a majority interest beneficiary.

Example

Situation:Trust B owns all of the shares of Canco, a corporation. Canco is also a majority interest beneficiary of Trust C.

Result:Trust B controls Canco, and thus is affiliated with it. Trust C is also affiliated with Canco, because Canco is a majority interest beneficiary of Trust C. Since Trust B and Canco are affiliated otherwise than solely because of paragraph 251.1(1)(g), their affiliation means that Trust B is affiliated with Trust C.

New paragraph 251.1(1)(h) sets out circumstances in which two trusts are affiliated. This paragraph applies where two conditions are met. First, a contributor to one of the trusts is affiliated with a contributor to the other trust. Second, a majority interest beneficiary of one of the trusts must be affiliated with either a majority interest beneficiary or each member of a majority interest group of beneficiaries of the other trust; or each member of a majority interest group of beneficiaries of each trust is affiliated with at least one member of majority interest group of beneficiaries of the other trust.

Paragraphs 251.1(1)(g) and (h) apply in determining whether persons are, at any time after March 22, 2004, affiliated.

Definitions

ITA
251.1(3)

Subsection 251.1(3) of the Act defines a number of terms for the purpose of subsection 251.1. Several new definitions are added to this subsection. These new definitions apply in determining whether persons are, at any time after March 22, 2004, affiliated.

"beneficiary"

A person who is beneficially interested in a trust is a "beneficiary" under the trust. Existing subsection 248(25) of the Act, which applies for the purposes of the Act, sets out when a person is beneficially interested in a trust.

"contributor"

Broadly speaking, a "contributor" is a person who, at any time, has contributed property or transferred funds to the trust on a non-arm's length basis or for inadequate consideration. Note that, as a result of the interpretive rule in new subparagraph 251.1(4)(d)(ii) of the Act, a beneficiary of a trust will not be considered to deal on a non-arm's length basis with the trust for these purposes simply by virtue of being a beneficiary under the trust. However, a beneficiary who is considered for these purposes to deal at arm's length with the trust and who transfers property or funds to the trust for fair market value consideration will nonetheless be a contributor to the trust if, immediately after the transfer, the beneficiary is a majority interest beneficiary of the trust.

"majority interest beneficiary"

A person is a "majority interest beneficiary" of a trust at any time if their interest as a beneficiary, if any, in the income or capital of the trust together with the interests as a beneficiary in the income or capital of the trust of all persons with whom the person is affiliated is greater than half of the fair market value at that time of all such interests in the income or capital of the trust, as the case may be. Note that, in determining whether a person is a majority interest beneficiary, the interpretive rules in new subparagraphs 251.1(4)(d)(i), (iii) and (iv) of the Act must be taken into consideration.

Examples

Situation:Philip has no interest as a beneficiary in either the income or capital of Trust A, but his wife, Muriel, with whom he is affiliated, has an interest in the income of Trust A, the fair market value of which is more than half of the fair market value of all the interests as a beneficiary in the income of Trust A.

Result:Philip, as well as Muriel, is a majority interest beneficiary of Trust A because he is affiliated with a person who has an interest in the income of Trust A the fair market value of which is more than half of the fair market value of all the interests as a beneficiary in the income of Trust A.

Situation:Jacqueline is one of ten persons, each of whom would receive as a beneficiary up to 100% of either the income or capital of Trust B if a discretionary power were fully exercised in their favour.

Result:Jacqueline, along with the other nine persons, is a majority interest beneficiary of Trust B, since, by reason of the rule in subparagraph 251.1(4)(d)(i), the fair market value of Jacqueline's interest, as well as the interest of each of the other nine persons, as a beneficiary in either the income or the capital of the trust would be deemed to be 100% of the fair market value of all the interests in the income or capital, as the case may be, in Trust B.

"majority interest group of beneficiaries"

A group of persons is a "majority interest group of beneficiaries" of a trust at any time where two conditions are met: each member of the group is a beneficiary under the trust at that time such that if one member held all the interests as a beneficiary of the members of the group that person would be a majority interest beneficiary of the trust; and if any member were not a member of the group, then the former condition would not be met. For the purposes of this definition, only persons acting in concert are considered to be a group.

Example

Situation:Any of Gail, Richard and Debra would receive as a beneficiary up to 100% of the income and capital of Trust C if a discretionary power were fully exercised in their favour.

Result:Gail, Richard and Debra would not constitute a majority interest group of beneficiaries, given that, as a result of the interpretive rule in subparagraph 251.1(4)(d)(i) of the Act, each would be a majority interest beneficiary of Trust C, and thus in no case could the second condition of the majority interest group of beneficiaries definition be met.

Interpretation

ITA
251.1(4)(c) and (d)

Subsection 251.1(4) of the Act contains interpretive rules that apply for the purposes of section 251.1.

New paragraph 251.1(4)(c) clarifies that, notwithstanding subsection 104(1) of the Act, a reference to a trust does not include a reference to the trustee or other persons who own or control the trust property.

New paragraph 251.1(4)(d) introduces four rules that apply in determining whether a person is affiliated with a trust. New subparagraph 251.1(4)(d)(i) contains a special rule concerning discretionary powers and the amount of income or capital of a trust that a person may receive as a beneficiary under the trust. If the amount depends on the exercise or non-exercise of the power, subparagraph (i) deems the power to have been fully exercised or not exercised, as the case may be. The effect of this rule is to maximize, for the purposes of determining whether a person is affiliated with a trust, the amount of income or capital of the trust a person may receive as a result of a discretionary power.

Subparagraph 251.1(4)(d)(ii) introduces a rule to ensure that a beneficiary under a trust may transfer funds or property to the trust for fair market value consideration and not be considered in all cases to be a contributor to the trust. As a result of this rule, a person who is a beneficiary under a trust will not be considered, in determining whether a person is affiliated with a trust, to deal on a non-arm's length basis with the trust simply because the person is a beneficiary under the trust.

New subparagraph 251.1(4)(d)(iii) provides a special rule to be applied in determining whether a trust is a majority beneficiary of another trust. Under this rule, a trust is not a majority interest beneficiary of another trust unless the first trust has an interest as a beneficiary in the income or capital of the other trust. As a result, a trust that has no interest as a beneficiary in either the income or capital of another trust is in no case a majority interest beneficiary of the other trust, even if the first trust is affiliated with one or more persons who together have majority interests in either the income or capital of the other trust. Satisfying the condition created by this rule is necessary but not sufficient to cause a trust to be a majority interest beneficiary of another trust, since once it is met the person must nonetheless fall within the definition of a "majority interest beneficiary" in respect of the other trust.

New subparagraph 251.1(4)(d)(iv) expands, for the purposes of determining whether a contributor to one trust is affiliated with a contributor to another trust, the categories of individuals who are considered to be affiliated with one another. As a result, individuals who are connected by blood relationship, common-law partnership, or adoption will also be considered to be affiliated with one another for these purposes.

The following are some of the important effects of these rules:

• Two trusts are not affiliated simply because they share the same trustee.

• A person is not affiliated with a trust simply because that person is affiliated with the trustee of the trust.

• The spouse of the sole beneficiary of a trust is affiliated with the trust even if the spouse is not affiliated with the trustee of the trust.

• A trust that shares a majority interest beneficiary with another trust is not a majority interest beneficiary of the other trust unless the person has an interest as a beneficiary in either the income or capital of the other trust.

Examples

Situation:Melanie is the sole beneficiary of both Trust D and Trust E, while neither trust has an interest as a beneficiary in the other.

Result:Melanie is a majority interest beneficiary of both trusts, and thus both trusts are affiliated with Melanie. However, neither trust is a majority interest beneficiary of the other, despite their affiliation with a majority interest beneficiary of the other, since neither has an interest as a beneficiary in the other.

Situation:Two brothers, David and Eric, separately establish two trusts, and transfer property for less than fair market value consideration to their respective trusts. Both trusts are created for the benefit of the spouses of David and Eric, such that each spouse would receive as a beneficiary 100% of either the income or capital of either trust if a discretionary power were fully exercised in their favour.

Result:David and Eric are each contributors in respect of the trust to which they transferred property for less than fair market value consideration, and both spouses are majority interest beneficiaries in respect of both trusts, given the discretionary power and the deeming rule in subparagraph 251.1(4)(d)(i). Given the interpretive rule in subparagraph 251.1(4)(d)(iv), David and Eric are affiliated under paragraph 251(6)(a) of the Act. As a result, the trusts are affiliated with each other given that a contributor to one is affiliated with a contributor to the other, and a majority interest beneficiary of one is affiliated with a majority interest beneficiary of the other (persons are affiliated with themselves given the existing rule in paragraph 251.1(4)(a)).

These new rules apply in determining whether persons are, at any time after March 22, 2004, affiliated, except subparagraph 251.1(4)(d)(iv) which applies in determining whether persons are, at any time on or after September 16, 2004, affiliated.

Clause 55

Acquisition of Control

ITA
256(7)

Subsection 256(7) of the Act sets out rules for determining whether there has been an acquisition of control for the purposes of certain provisions of the Act. Subsection 256(7) is amended, applicable in respect of gifts made after March 22, 2004, to include a reference to new subsection 110.1(1.2).

Budget Implementation Act, 2003

Clause 56

Small Business Deduction

BIA (2003)
79(3)

ITA
125(2)

Subsection 79(1) of the Budget Implementation Act, 2003 implemented the 2003 Budget proposal to phase in an increase of the business limit for the purposes of the "small business deduction" for Canadian-controlled private corporations in subsection 125 of the Income Tax Act to $300,000 from $200,000. Subsection 79(3) of the Budget Implementation Act, 2003 provided that this increase was to take effect over four years by increments of $25,000 each year, starting in 2003.

Subsection 79(3) of the Budget Implementation Act, 2003 is amended to implement the 2004 Budget proposal to accelerate access to the full $300,000 business limit one year earlier. As a result of this amendment, for any taxation year that begins after 2004, the business limit under subsection 125(2) (which is, it should be noted, subject to adjustment by other provisions of section 125) will be $300,000. For earlier taxation years, a corporation's business limit under subsection 125(2) will be the total of the following:

(a) that proportion of $200,000 that the number of days in the taxation year that fall before 2003 is of the number of days in the taxation year,

(b) that proportion of $225,000 that the number of days in the taxation year that fall in 2003 is of the number of days in the taxation year,

(c) that proportion of $250,000 that the number of days in the taxation year that fall in 2004 is of the number of days in the taxation year, and

(d) that proportion of $300,000 that the number of days in the taxation year that fall after 2004 is of the number of days in the taxation year.

Specified Partnership Income

BIA (2003)
79(4)

ITA
125(7)

Subsection 125(7) of the Income Tax Act provides definitions for the terms used in section 125, relating to the "small business deduction" for Canadian-controlled private corporations (CCPCs). The "specified partnership income" of a corporation is defined in this provision and is used in determining the small business deduction of a CCPC that carries on an active business through a specified partnership.

A CCPC's specified partnership income for a taxation year can be very broadly understood as the total of two amounts, A and B.

"A" is the lesser of: (a) the corporation's net partnership income for the partnership's fiscal period that ends in the year; and (b) that proportion of the (prorated) maximum business limit under section 125 that the corporation's share of the partnership's Canadian-source active business income for that fiscal period is of the partnership's total of such income for the period.

"B" is the lesser of: the corporation's Canadian source active business losses for the year plus its "specified partnership loss" for the year; and the amount, if any, by which the A (a) amount (the corporation's net partnership income for the partnership's fiscal period that ends in the year) exceeds the A (b) amount (that proportion of the maximum business limit under section 125 that the corporation's share of the partnership's Canadian-source active business income for that fiscal period is of the partnership's total of such income for the period).

In this computation, the prorated maximum business limit under section 125 is represented by the element M in a formula. As amended by the Budget Implementation Act, 2003, "M" is currently described as the lesser of the business limit for the calendar year ($225,000 for 2003; $250,000 for 2004; $275,000 for 2005 and $300,000 after 2005) and the amount determined when multiplying the number of fiscal days of the partnership in the calendar year by the per-day business limit for the calendar year (for 2003, $617; for 2004, $685; for 2005, $754 and after 2005, $822).

Subsection 79(4) of the Budget implementation Act is amended to reflect the increase in the business limit for 2005 to $300,000 from $275,000, such that the description of "M" is amended to be the lesser of the business limit for the calendar year ($225,000 for 2003; $250,000 for 2004; and $300,000 after 2004) and the amount determined when multiplying the number of fiscal days of the partnership in the calendar year by the per-day business limit for the calendar year (for 2003, $617; for 2004, $685; and after 2004, $822).

Bank Act

Clauses 57 and 58

Notices to Financial Institutions: Banks and Authorized Foreign Banks

Bank Act
462, 579

Section 462 of the Bank Act sets out the conditions that must be met in order for certain legal documents to have effect in respect of a bank customer's property in the possession of the bank, or money owing to the customer because of the customer's account at the bank. In general terms, the section requires that a document be sent to the particular branch where the account in question is recorded (the "branch of record" of the account) or where the property is held. In the case of enforcement notices for spousal or family support, however, it is not necessary to locate the particular branch. Instead, a bank is required to identify an office in each province in which the bank does business where notices may be sent.

New subsection (2.1) is added to the section to provide a special rule for documents relating to tax matters. The documents in question are those that relate to the Minister of National Revenue's administration of an Act of Parliament, or - where a tax collection agreement applies - to the administration of a provincial Act or aboriginal legislation.

These tax-related documents will no longer have to be sent to the branch of record (or the branch where property is held) in order to constitute notice to a bank, to fix the bank with knowledge of its contents and, where applicable, to be binding on the customer's property or amounts owing to the customer. They may be sent instead either to one of the offices that the bank has designated for support orders, or to another office agreed to by the bank and the Minister of National Revenue.

Section 579 of the Bank Act has the same effect, in respect of authorized foreign banks, as section 462 (described above). Section 579 is amended in the same manner as section 462.

These amendments apply when this Act is assented to.

Cooperative Credit Associations Act

Clause 59

Notices to Financial Institutions: Cooperative Credit Associations

Cooperative Credit Associations Act
385.32

Section 385.32 of the Cooperative Credit Associations Act sets out the conditions that must be met in order for certain legal documents to have effect in respect of a cooperative credit association customer's property in the possession of the association, or money owing to the customer because of the customer's account at the association. The section is comparable to section 462 of the Bank Act, and is being amended in the same way. Reference may be had to the notes to that amendment for a complete description.

This amendment applies when this Act is assented to.

Income Tax Conventions Interpretation Act

Clause 60

Application of Section 245 of the Income Tax Act

ITCIA
4.1

Section 245 of the Income Tax Act provides a statutory general anti-avoidance rule. This rule is intended to prevent abusive or artificial tax avoidance schemes, without interfering with legitimate commercial and family transactions. The Income Tax Conventions Interpretation Act is amended to add new section 4.1 to clarify that section 245 of the Income Tax Act applies to any benefit provided under a convention.

This amendment applies with respect to transactions entered into after September 12, 1988.

Tax Court of Canada Act

Clauses 61 to 63

Amendments to Tax Court of Canada Act

TCCA
12, 18, 18.29

Clauses 61 to 63 amend the Tax Court of Canada Act consequential to amendments to the Income Tax Act providing for the possibility of an appeal to that court by a Registered Charity. For further information see the commentary to the amendment to section 188.2 of the Income Tax Act.

Trust and Loan Companies Act

Clause 64

Notices to Financial Institutions: Trust and Loan Companies

Trust and Loan Companies Act
448

Section 448 of the Trust and Loan Companies Act sets out the conditions that must be met in order for certain legal documents to have effect in respect of property of a customer of a company to which the Act applies, or money owing to the customer because of the customer's account at the company. The section is comparable to section 462 of the Bank Act, and is being amended in the same way. Reference may be had to the notes to that amendment for a complete description.

This amendment applies when this Act is assented to.

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