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Explanatory Notes Relating to the Income Tax Act, the Excise Tax Act and Related Legislation

Part 5 
Other Amendments to the Income Tax Act and Related Legislation and Regulations

Income Tax Act

Clause 169

Income or Loss from a Source or from Sources in a Place – Deductions Applicable

ITA
4(3)(a)

Subsection 4(2) of the Income Tax Act (the Act) provides that, in determining the income or loss from a source, no deductions are permitted under sections 60 to 64 of the Act. Subsection 4(3) provides that this rule does not apply, with the exception of certain deductions, in determining the foreign source income designated by a trust to a beneficiary under subsections 104(22) and 104(22.1), in determining a taxpayer's taxable income earned in Canada under section 115 and in determining a taxpayer's foreign tax credit under section 126 of the Act. The exceptions are for deductions permitted by paragraphs 60(b) to (o), (p), (r) and (v) to (w).

Paragraph 4(3)(a) is amended to expand the list of exceptions to include deductions permitted by paragraph 60(x) (e.g., repayment of Canada Education Savings Grants).

This amendment applies to the 2002 and subsequent taxation years.

Clause 170

Employment Income

ITA
6

Section 6 of the Act provides for the inclusion in an employee's income of most employment-related benefits other than those specifically excluded.

Value of benefits

ITA
6(1)(a)

Paragraph 6(1)(a) of the Act provides for the inclusion in an employee's income of benefits in respect of employment, with a number of specified exceptions in subparagraph 6(1)(a)(i) to (v).

Paragraph 6(1)(a) is amended to clarify that all employment benefits received by a person who does not deal at arm's length with the employee are included in the employee's income, other than those benefits specifically excluded (subject to the specified exceptions).

New subparagraph 6(1)(a)(vi) is added to exclude any benefit received or enjoyed by a person who is not the employee, under a program provided by the employer that is designed to assist individuals to further their education. This exception applies if the benefit is not a substitution for salary, wages or other remuneration of the employee, and only if the employee deals at arm's length with the employer.

This amendment applies to employment benefits received or enjoyed on or after October 31, 2011.

Automobile Operating Expense Benefit

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6(1)(l)

Paragraph 6(1)(l) of the Act includes in income the value of any benefit received by an employee for automobile operating expenses attributable to personal use.

Paragraph 6(1)(l) is amended to clarify that benefits for operating expenses received by a person who is related to an employee, are included in the employee's income.

This amendment applies to employment benefits received or enjoyed on or after October 31, 2011.

Deeming Rule – Amount Received

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6(1.2)

Paragraph 6(1)(g) of the Act requires the inclusion in the computation of a taxpayer's income from an office or employment of amounts received from an employee benefit plan (or from the disposition of an interest in an employee benefit plan), subject to the exceptions listed in subparagraphs 6(1)(g)(i) to (iv).

New subsection 6(1.2) of the Act is added to provide that for the purposes of paragraph 6(1)(g), an amount is deemed to have been received by a taxpayer and not by the individual who received the amount if the individual does not deal at arm's length with the taxpayer, the amount is received in respect of an office or employment of the taxpayer, and the taxpayer is living at the time the amount is received by the individual.

This amendment applies to employment benefits received or enjoyed on or after October 31, 2011.

Amounts Receivable for Covenant

ITA
6(3.1)

New subsection 6(3.1) of the Act provides that an employee is – if certain circumstances exist – required to include in the employee's income from employment for a taxation year an amount that is receivable at the end of a taxation year in respect of a covenant as to what the employee is, or is not, to do. Subsection 6(3.1) is added consequential to new section 56.4 of the Act which concerns the tax treatment of amounts received or receivable in respect of a restrictive covenant (additional commentary is provided in the explanatory notes accompanying new section 56.4). In contrast, amounts related to covenants made in the context of an office or employment are generally included in income on a "received" basis.

New subsection 6(3.1) applies to a receivable of an employee in respect of a covenant if

If applicable, subsection 6(3.1) provides that the amount receivable is deemed to be received by the taxpayer at the end of the taxation year for services rendered as an officer or during the period of employment, and that the amount is deemed not to be received at any other time (thereby precluding an inclusion because of the receipt).

In cases where subsection 6(3.1) deems an amount that is receivable to be received, new paragraph 60(f) provides a deduction in a subsequent taxation year if the amount becomes a bad debt.

Subsection 6(3.1) applies to amounts receivable in respect of a covenant agreed to after October 7, 2003.

Forgiven Amount

ITA
6(15.1)

Subsection 6(15) of the Act provides that, for the purpose of paragraph 6(1)(a), the value of the benefit derived from the forgiveness of a debt is the forgiven amount in respect of the obligation. Subsection 6(15.1) of the Act provides that, for the purpose of subsection 6(15), the expression "forgiven amount" in respect of an obligation has the meaning that would be assigned by subsection 80(1) of the Act if certain assumptions were made.

Subsection 6(15.1) of the French version of the Act refers to conditions that must be met in order for the provision to apply. This statement could be interpreted as requiring that the obligation referred to in the preamble of subsection 6(15.1) be a commercial obligation. In order to avoid this interpretation, the French version of subsection 6(15.1) is amended to clarify that the statements made in paragraphs (a) to (d) are assumptions and not conditions.

This amendment applies to taxation years that end after February 21, 1994.

Clause 171

Employee Stock Options – Definitions

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7(7)

Section 7 of the Act deals with agreements (generally referred to as stock options) under which employees of a corporation or mutual fund trust acquire rights to acquire securities of the employer (or a person with whom the employer does not deal at arm's length).

Subsection 7(7) of the Act defines the expressions "qualifying person" and "security" for the purposes of section 7 and certain other provisions of the Act relating to those agreements. "Qualifying person" is defined as a corporation or a mutual fund trust. "Security" is defined as a share issued by a corporation or a unit of a mutual fund trust.

Subsection 7(7) is amended to have these definitions also apply for the purposes of new subsections 110(1.7) and (1.8) of the Act. New subsection 110(1.7) ensures that a reduction in the exercise price under an employee stock option will not disqualify the employee from claiming the stock option deduction under paragraph 110(1)(d), provided certain conditions are met. New subsection 110(1.8) sets out the conditions that must be met in order for new subsection 110(1.7) to apply.

This amendment, which applies after 1998, is consequential to the enactment of new subsections 110(1.7) and (1.8). For additional information, see the commentary to those subsections.

Clause 172

Income from Office or Employment – Deductions

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8

Section 8 of the Act provides for the deduction of various amounts in computing income from an office or employment.

Legal Expenses of Employee

ITA
8(1)(b)

Paragraph 8(1)(b) of the Act allows the deduction of amounts paid by the taxpayer to collect or establish a right to salary or wages owed to the taxpayer by the taxpayer's employer or former employer.

Concern has been expressed that where an amount is not owed to the employee directly by the employer, any legal expenses incurred by the taxpayer would not be deductible under paragraph 8(1)(b), even though the amount, when received, would be taxable as employment income. This would be the case, for example, with respect to legal fees incurred by a taxpayer to collect insurance benefits under a sickness or accident insurance policy provided through an employer.

Paragraph 8(1)(b) is amended, effective for amounts paid after 2000, to allow a deduction for legal expenses incurred by a taxpayer to collect, or establish a right to collect, an amount that, if received, would be included in computing the taxpayer's employment income.

Dues and Other Expenses of Performing Duties

ITA
8(1)(i)

Paragraph 8(1)(i) of the Act permits an employee to deduct certain dues and other employment expenses that are paid by the employee. Paragraph 8(1)(i) is amended, applicable on Royal Assent, to clarify that an expense described in that paragraph that is paid on an employee's behalf is deductible by the employee if the amount paid is required to be included in computing the employee's income.

Quebec Parental Insurance Plan Premium

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8(1)(l.2)

New paragraph 8(1)(l.2) of the Act permits a taxpayer to deduct, in computing income for a taxation year, an amount paid by the taxpayer in the year as an employer’s premium under the Quebec Parental Insurance Plan in respect of salary, wages or other remuneration, including gratuities, paid to an individual employed by the taxpayer as an assistant or substitute to perform the duties of the taxpayer’s office or employement if an amount is deductible by the taxpayer for the year under subparagraph 8(1)(i)(ii) in respect of that individual.

This amendment applies to the 2006 and subsequent taxation years and is consequential to the introduction of the Quebec Parental Insurance Plan on January 1, 2006.

Clause 173

Income Inclusions

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12

Section 12 of the Act provides for the inclusion of various amounts in computing the income of a taxpayer from a business or property.

Dividends from Resident Corporations

ITA
12(1)(j)

Paragraph 12(1)(j) of the Act provides for the inclusion in computing a taxpayer's income in a taxation year of dividends required by Subdivision h of Division B of Part I to be included in the taxpayer's income for the year in respect of a dividend paid by a corporation resident in Canada on a share of its capital stock.

Paragraph 12(1)(j) is reworded to refer to any amount of a dividend in respect of a share of the capital stock of a corporation resident in Canada that is required by subdivision h to be included in computing the taxpayer's income for the year. This change makes the wording of paragraph 12(1)(j) consistent with the proposed wording of paragraph 12(1)(k), which applies to dividends required by subdivision i to be included in computing a taxpayer's income for a taxation year.

This amendment applies after November 5, 2010.

Reinsurance Commission

ITA
12(1)(s)

Paragraphs 12(1)(s) and 20(1)(jj) of the Act apply in the context of reinsurance. Paragraph 12(1)(s) requires that a reinsurer include in income the maximum amount that a primary insurer was entitled to claim as a reserve under paragraph 20(7)(c) in respect of unearned reinsurance commissions. Paragraph 20(1)(jj) then permits the reinsurer to deduct in the following year the amount included in its income under paragraph 12(1)(s). This has the effect of matching acquisition costs of a reinsurer with premium income under a policy.

Subsection 18(9.02) of the Act was introduced to apply to taxation years that begin after 1999. It requires both an insurer and a reinsurer to treat acquisition costs incurred by the insurer in respect of an insurance policy, or reinsurance commissions paid by a reinsurer in respect of a reinsurance policy, as if they were incurred as consideration for services that are to be rendered consistently throughout the period of coverage under the policy. The introduction of subsection 18(9.02) renders it unnecessary to apply paragraphs 12(1)(s) and 20(1)(jj) to a reinsurer.

Paragraphs 12(1)(s) and 20(1)(jj) are repealed, effective for reinsurance commissions paid after 1999.

Inducements, Reimbursements, etc.

ITA
12(1)(x)(v.1)

Paragraph 12(1)(x) of the Act provides that certain inducements, reimbursements, contributions, allowances and assistance received by a taxpayer in the course of earning income from a business or property must be included in income "to the extent that" the particular amounts have not otherwise been included in income or reduced the cost of a property or the amount of an outlay or expense. Paragraph 12(1)(x) is amended consequential to the restrictive covenant rules in new section 56.4 of the Act (additional commentary is provided in the explanatory notes accompanying new section 56.4).

New subparagraph 12(1)(x)(v.1) provides that the income inclusion referred to in paragraph (x) does not apply to the extent the amount in respect of a restrictive covenant (as defined by new subsection 56.4(1)) was included under subsection 56.4(2) in computing the income of a person related to the taxpayer. In other words, to the extent that a taxpayer receives an amount for a restrictive covenant that a person related to the taxpayer is required under subsection 56.4(2) to include in computing income, paragraph 12(1)(x) will not apply to require the taxpayer to include the amount in computing the taxpayer's income.

New subparagraph 12(1)(x)(v.1) applies after October 7, 2003.

No Deferral of Section 9 Under Paragraph (1)(g)

ITA
12(2.01)

New subsection 12(2.01) of the Act, which comes into force on Royal Assent, provides that paragraph 12(1)(g) of the Act does not defer the inclusion in a taxpayer's income of an amount that would otherwise be so included at an earlier time in accordance with section 9 of the Act. Accordingly, where an amount based on production or use would be included in computing a taxpayer's income from a business or property (if section 12 were read without reference to paragraph 12(1)(g)) at a time when the amount is accrued but not yet received, subsection 12(2.01) clarifies that paragraph 12(1)(g) does not apply to defer the inclusion of the amount in income until the time of receipt.

Clause 174

Unpaid Claims Reserves

ITA
12.3

Section 12.3 of the Act provides a transitional rule relating to the introduction of the requirement that insurers fully discount their unpaid claims reserves for tax purposes.

Section 12.3 applies where an insurer has deducted, for its taxation year that includes February 23, 1994, an amount in respect of its unpaid claims reserve adjustment under subsection 20(26). This section requires the insurer to include in income for that taxation year, and in each of its subsequent taxation years beginning before 2004, a prescribed portion (as determined under Part LXXXI of the Income Tax Regulations) of the amount so deducted.

This section is obsolete and is repealed for taxation years that begin after October 31, 2011. For further information, see the commentary on subsection 20(26) and Part LXXXI of the Income Tax Regulations.

Clause 175

Depreciable Property

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13

Section 13 of the Act provides a number of special rules related to the treatment of depreciable property. Generally, these rules apply for the purposes of sections 13 and 20 of the Act and the capital cost allowance regulations.

Recaptured Depreciation

ITA
13(1)

Subsection 13(1) of the Act provides for the inclusion in a taxpayer's income of recaptured capital cost allowance when the taxpayer's proceeds of disposition of depreciable property of a prescribed class exceeds the undepreciated capital cost (UCC) of the property.

Subsection 13(1) is amended to add a reference to the new descriptions of D.1 and K of the definition "undepreciated capital cost" in subsection 13(21). Those descriptions provide for an addition to the UCC of a class of certain countervailing duties paid in respect of property of the class ("D.1") and a corresponding reduction for any refunds of those amounts ("K").

This amendment applies to taxation years that end after February 23, 1998, and corrects a technical deficiency.

Exchanges of Property

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13(4)(c)(ii)

Subsection 13(4) of the Act allows a taxpayer, who is required under subsection 13(1) to include in income recaptured depreciation resulting from the disposition of certain depreciable property, to elect to defer tax on the recapture to the extent that the taxpayer reinvests the proceeds of disposition in a replacement property within a certain period of time, namely

Subparagraph 13(4)(c)(ii) is amended to accommodate taxation years that are shorter than 12 months, by providing that the periods for acquiring replacement property end at the later of the times mentioned above and

These amendments apply, in the case of involuntary dispositions, in respect of dispositions that occur in taxation years that end on or after December 20, 2000, and in any other case, in respect of dispositions that occur in taxation years that end on or after December 20, 2001.

Election – Limited Period Franchise, Concession or License

ITA
13(4.2) and (4.3)

Subsection 14(6) of the Act permits a taxpayer to defer tax otherwise arising on the disposition of an eligible capital property, to the extent that the taxpayer reinvests the proceeds of disposition in a replacement property within a certain period of time. A franchise, concession or license with an indefinite term may be such an eligible capital property. However, such a property with a defined term will generally be a depreciable property included in Class 14 of Schedule II of the Income Tax Regulations ("the Regulations") and will not be eligible for similar replacement treatment under subsection 13(4) of the Act because such a property is not a "former business property" as defined in subsection 248(1) of the Act. Further, the replacement property provisions for depreciable property generally apply only to immoveable property.

New subsections 13(4.2) and (4.3) of the Act are added, concurrent with the amendment of the definition "former business property", to allow a taxpayer (the "transferor") to use the replacement property rules under subsection 13(4) in respect of the disposition or termination of a property that is the subject of a joint election with the purchaser (the "transferee") of the property.

New subsection 13(4.2) describes the circumstances under which the transferor and the transferee may make a joint election. Property eligible for the election is a "former property" described in subsection 13(4) that is a franchise, concession or license for a limited period that is wholly attributable to the carrying on of a business at a fixed place. The election may be made where the property is disposed of directly by the transferor to the transferee or where the property of the transferor is terminated and the transferee acquires a similar property in respect of the same fixed place from another person. Both parties must elect in their returns of income for their respective taxation years that include the year of the disposition or termination.

New subsection 13(4.3) provides rules that apply when an election has been made under subsection 13(4.2). If the transferee acquires the property disposed of by the transferor (the "former property"), the transferee is deemed to own that property until such time as the transferee owns neither the former property nor a similar property in respect of the same fixed place to which the former property related. If the transferee instead acquires a similar property in respect of the same fixed place (i.e., the life of the former property was terminated), the transferee is deemed to have also acquired the former property and to continue to own it until the transferee no longer owns the similar property.

In either case, for the purpose of claiming a deduction by the transferee under paragraph 20(1)(a) of the Act, the life of the former property in the hands of the transferee is deemed to be the term remaining at the time the transferor originally acquired the property. For instance, a license with a 20-year life when it was originally acquired by the transferor, but with 5 years remaining at the time of the transfer, would be considered to have a 20-year life in the hands of the transferee for the purposes of claiming a deduction under paragraph 20(1)(a).

There may be circumstances where, but for an election under subsection 13(4.2), a portion of the consideration given by a transferee upon the sale of a limited period franchise, license or concession might reasonably be considered to be an eligible capital amount to the transferor and an eligible capital expenditure to the transferee. For instance, a portion of the consideration may reasonably relate to the preferred status that the transferee may receive in obtaining a new property at the end of the term. Where an election under subsection 13(4.2) is made, subsection 13(4.3) provides that such an amount will be neither an eligible capital amount to the transferor, nor an eligible capital expenditure to the transferee, but will instead be included in the cost to the transferee and proceeds of disposition of the transferor of the former property.

In this regard, section 1101 of the Income Tax Regulations is amended, applicable after December 20, 2002, to provide that if more than one property of a taxpayer is described in the same class in Schedule II, and one or more of the properties is a property in respect of which the taxpayer is a transferee that has elected under subsection 13(4.2) of the Act, a separate class is prescribed for each such property of the taxpayer that would otherwise be included in the same class.

If, subsequent to the acquisition of the former property by the transferee, the life of the former property expires and a similar property in respect of the same fixed place is not acquired by the transferee, the transferee may, under subsection 20(16) of the Act, be entitled to a terminal loss in respect of the former property. Refer to the commentary to new paragraph 20(16.1)(b) of the Act regarding limitations in respect of the deduction of such a terminal loss.

New subsections 13(4.2) and (4.3) apply in respect of dispositions and terminations that occur after December 20, 2002.

Example 1

Ms. Patel is a franchisee with 5 years remaining of a 20-year agreement. The original cost was $60,000, and the undepreciated capital cost (“UCC”) is $15,000. The agreement is transferable, so she agrees to sell the franchise to Mr. Grando at its fair market value of $85,000. Ms. Patel will, in the same taxation year, purchase from Ms. Vincent a replacement franchise that has 15 years remaining of a 20-year term, for $100,000.

But for the making of an election under subsection 13(4.2), Ms. Patel would have a capital gain of $25,000 (i.e., $85,000 - $60,000) and a UCC balance of $55,000 (i.e., $15,000 + $100,000 - $60,000) before deducting any capital cost allowance for the year. The adjusted cost base (“ACB”) of her replacement franchise would be $100,000. Mr. Grando would have acquired a Class 14 property with an ACB and capital cost of $85,000, depreciable over 5 years.

If Ms. Patel and Mr. Grando jointly elect under subsection 13(4.2), Ms. Patel may elect under subsections 13(4) and 44(1) to defer the capital gain, such that the ACB and capital cost of the replacement franchise will be deemed to be $75,000 (i.e., $100,000 less the $25,000 deferred capital gain). Furthermore, Ms. Patel’s UCC balance for Class 14 will be $30,000 (i.e., an increase equivalent to the $100,000 cost of the replacement franchise less the $85,000 proceeds from the former property), to be amortized over the remaining 15-year term. In this regard, note that the term for amortizing Ms. Patel’s replacement franchise is unaffected by her and Mr. Grando’s joint election in respect of the former property. Mr. Grando, on the other hand, will be required to amortize his $85,000 cost of the former property over 20 years, which was the term of the former property when it was first acquired by Ms. Patel.

If Mr. Grando does not enter into a new agreement with the franchisor after the 5-year period, he will be eligible for a terminal loss (even if there are other Class 14 assets, because the $85,000 property will be in a “separate class”). However, a terminal loss will not be available if a person dealing non‑arm’s length with Mr. Grando, at any time before the time that is 24 months after the expiry of the old agreement, enters into a new franchise agreement in respect of the same fixed place.

 

Example 2

Consider the same example, except that the original franchise agreement of Ms. Patel (the former property) is not transferable, but instead must be terminated and renewed with the franchisor. Suppose that it is renewed by Mr. Grando for a period of 12 years, with an additional amount of $120,000 paid by Mr. Grando to the franchisor for the new agreement.

In this case it is arguable that, for Mr. Grando, the $85,000 payment to Ms. Patel is, absent an election under subsection 13(4.2), an eligible capital expenditure by Mr. Grando. That is, Mr. Grando will pay a separate amount of $120,000 to the franchisor for a Class 14 asset, but the $85,000 payment to Ms. Patel is, in effect, incurred to acquire the right to renew the franchise, not to acquire a Class 14 property. Ms. Patel has likewise received proceeds of disposition of an eligible capital property (i.e., an "eligible capital amount", 3/4 of which would reduce her Cumulative Eligible Capital balance), not proceeds of disposition of a Class 14 property. Absent an election under subsection 13(4.2), Ms. Patel would not be entitled to acquire a replacement eligible capital property, but could be entitled to claim a terminal loss on the termination of the original franchise agreement (if she had no other Class 14 assets on hand at the end of the taxation year of disposition). Subsection 14(1) would apply to the eligible capital amount received by Ms. Patel.

The $120,000 cost of the new agreement to Mr. Grando, paid to the franchisor, could be written off by Mr. Grando over its 12-year term.

If Ms. Patel and Mr. Grando jointly elect under subsection 13(4.2), no part of the proceeds of disposition for the former property will be an eligible capital amount or an eligible capital expenditure. The results are the same as in Example 1, except that Mr. Grando will now have two Class 14 properties:

  • the new franchise agreement, the $120,000 cost of which may be written off by him over its 12-year term; and
  • the former property, deemed to have been acquired by him and included in a separate class, the $85,000 cost of which may be written off by him over its deemed 20-year term.

 

Example 3

Consider again Example 1, but suppose that the replacement franchise, purchased by Ms. Patel from Ms. Vincent, is itself the subject of a joint election by them under subsection 13(4.2). Ms. Patel is required to amortize her $30,000 UCC (see Example 1) over the original 20-year term of Ms. Vincent, not over its remaining 15 years.

Recaptured Depreciation

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13(21)

"undepreciated capital cost"

Subsection 13(21) of the Act contains a number of definitions, including the definition "undepreciated capital cost", that apply for purposes of section 13. The definition "undepreciated capital cost" in that subsection also applies for purposes of the Act by operation of subsection 248(1).

The undepreciated capital cost to a taxpayer of depreciable property of a prescribed class as of any time means the amount determined by the formula in that definition.

The description of E in the definition is amended consequential on the repeal of subsections 13(22) and (23) of the Act. This amendment ensures that the amounts described in those repealed subsections (i.e., certain amounts deemed to have been allowed by insurers as deductions for depreciation for certain past taxation years) continue to be included in determining an insurer's undepreciated capital cost despite the repeal of those subsections.

For further information, see the commentary on subsections 13(22) to (23.1).

ITA
13(22) to (23.1)

Subsections 13(22) and (23) of the Act deem certain amounts to have been allowed as a deduction to an insurer for its last taxation year before its 1977 and 1978 taxation years in respect of depreciable property. Subsection 13(22) deems an insurer who has made a branch accounting election for the 1975 taxation year, and has had a 1975 branch accounting election deficiency, to have claimed capital cost allowance for taxation years prior to 1977 in excess of what it claimed on its tax return.

Subsection 13(23) is a part of the transitional rules for purposes of changing to the method of taxing life insurers that commenced in the 1978 taxation year and deems an insurer to have been allowed a certain deduction for depreciation for property of a prescribed class under paragraph 20(1)(a) in computing its income for taxation years before its 1978 taxation year.

These subsections are being repealed, although a consequential amendment to the definition "undepreciated capital cost" in subsection 13(21) ensures that amounts determined under subsections 13(22) and (23) continue to be included in determining an insurer's undepreciated capital cost.

Subsection 13(23.1) of the Act provides that the definitions in subsection 138(12) apply to section 13. Specifically, certain expressions defined in subsection 138(12) are relevant to the application of subsection 13(22), including the definitions "1975-76 excess capital cost allowance" and "1975 branch accounting election deficiency". Subsection 13(23.1) is repealed consequential on the repeal of subsection 13(22).

These amendments apply to taxation years that begin after October 31, 2011.

Clause 176

Eligible Capital Property

ITA
14

Section 14 of the Act provides rules concerning the tax treatment of expenditures and receipts of a taxpayer in respect of eligible capital properties and operates on a pooling basis. Annual deductions, which are calculated as a percentage of this pool, may be claimed under paragraph 20(1)(b) of the Act. "Eligible capital property" includes goodwill, customer lists, farm quotas and licenses of unlimited duration.

Acquisition of Eligible Capital Property

ITA
14(3)

Subsection 14(3) of the Act provides rules regarding non-arm's length transfers of eligible capital property. The provision prevents the deduction, under paragraph 20(1)(b) of the Act, of the portion of the purchaser's cost that is reflected in a capital gains exemption claimed by the vendor under section 110.6 of the Act. Absent any claim by the vendor of a capital gains exemption under subsection 110.6, the eligible capital expenditure to the purchaser generally equals the proceeds of disposition of the vendor. That is, the eligible capital expenditure of the purchaser equals 4/3 of the amount determined in respect of the vendor under the description of E in the formula in the definition "cumulative eligible capital" in subsection 14(5) of the Act.

Paragraph 14(3)(a) is amended, for taxation years that end after February 27, 2000, to ensure that, if the eligible capital property is the subject of an election by the vendor under subsection 14(1.01) or (1.02) of the Act, the eligible capital expenditure of the purchaser will, subject to the adjustments in subsection 14(3) for deductions under section 110.6, equal the actual proceeds of disposition to the vendor.

Definitions

ITA
14(5)

"adjustment time"

Section 14 of the Act provides rules concerning the treatment of expenditures and receipts in respect of eligible capital property. Subsection 14(5) contains definitions that apply for the purposes of section 14.

Subsection 14(5) defines "adjustment time", which applies for the purpose of determining the time at which the three-quarters inclusion rate in respect of expenditures and receipts relating to eligible capital property applies to a taxpayer in calculating the taxpayer's cumulative eligible capital.

In the case of a corporation, the adjustment time is generally the time immediately after the beginning of the corporation's first taxation year that begins after June 30, 1988. In the case of any other taxpayer, the adjustment time is the time immediately after the beginning of the taxpayer's first fiscal period that begins after 1987.

The definition "adjustment time" in subsection 14(5) is amended to repeal paragraph (a) of the definition. Existing paragraph (a) provides that the adjustment time in respect of a corporation formed as a result of an amalgamation occurring after June 30, 1988 is the time immediately before the amalgamation. Existing paragraphs (b) and (c) of the definition are renumbered as paragraphs (a) and (b), respectively.

This amendment is consequential on the amendment of paragraph 87(2)(f) of the Act and the concurrent repeal of paragraph 87(2)(f.1) in 1994. Subsection 87(2) provides rules relating to the amalgamation of two or more corporations. Paragraph 87(2)(f) is intended to treat the cumulative eligible capital of a predecessor corporation in respect of a business as forming part of the cumulative eligible capital of the new corporation where the new corporation carries on the business. Paragraph 87(2)(f) provides that, for the purposes of determining the amount of the new corporation's cumulative eligible capital, the new corporation is deemed to be the same corporation as, and a continuation of, each predecessor corporation.

Prior to the enactment of the current paragraph 87(2)(f), former paragraphs 87(2)(f) and 87(2)(f.1) provided generally that the cumulative eligible capital of a new corporation was the sum of the cumulative eligible capital of the predecessor corporations. Paragraph 87(2)(f) was amended and paragraph 87(2)(f.1) was repealed, by S.C. 1994, c. 7, to ensure that the new corporation is placed in the same position as the predecessor corporations with regard to eligible capital property of a business carried on by a predecessor corporation before the amalgamation. As a result of the amendment to paragraph 87(2)(f) and the repeal of paragraph 87(2)(f.1), a new corporation formed by an amalgamation does not require a new adjustment time with respect to the cumulative eligible capital of the predecessor corporations.

This amendment applies after October 31, 2011.

"cumulative eligible capital"

The definition "cumulative eligible capital" in subsection 14(5) of the Act provides for the calculation of a taxpayer's cumulative eligible capital property pool for the purpose of determining the taxpayer's allowable deduction in respect of eligible capital property (ECP) for the year.

Variable A in the definition "cumulative eligible capital" represents 3/4 of the eligible capital expenditures of a taxpayer as the result of the acquisition of an eligible capital property after the taxpayer's "adjustment time" (generally since 1987). Variable A is amended to ensure that the taxpayer's pool includes only the taxable portion of the gain realized by the non-arm's length transferor on the disposition after December 20, 2002 of eligible capital property.

Variable A is generally reduced by 1/2 of the gain of the transferor in respect of the property under paragraph 14(1)(b) or 38(a) of the Act. (Where the transferor has claimed a capital gains exemption in respect of the transfer under subsection 110.6 of the Act, subsection 14(3) of the Act reduces the taxpayer's eligible capital expenditure accordingly. The reduction in Variable A will therefore not include 1/2 of the amount of that claim.) Where the transferor has realized such a gain in a taxation year in respect of more than one property, the amount of the gain of the transferor for the purposes of this calculation is that proportion of the gain that the proceeds of disposition of the eligible capital property acquired by the taxpayer is of the total proceeds of disposition of all such property disposed of in the transferor's taxation year.

The reduction to Variable A does not apply where the eligible capital property has previously been disposed of by the taxpayer or was acquired on or before December 20, 2002.

Example 1

Mr. X purchased a farm production quota several years ago for $300,000 and claimed no cumulative eligible capital amounts, such that his cumulative eligible capital at the end of his previous taxation year was $225,000. This year he sold the production quota to his sister, Mrs. Y, for its fair market value of $1,200,000. Mr. X reported income of $450,000 under paragraph 14(1)(b) of the Act, and did not claim a capital gains exemption under section 110.6 of the Act. (Alternatively, Mr. X could have made an election under subsection 14(1.01) of the Act to report a taxable capital gain under paragraph 38(a) of the Act.)

Because Mrs. Y purchased the production quota in a non‑arm’s length transaction, the amount included in Variable A of her cumulative eligible capital balance at the end of the year of acquisition would be $675,000 (i.e., 3/4 of $1,200,000, less 1/2 of the taxable gain of Mr. X of $450,000). This result may also be illustrated as the total of the taxable gain of Mr. X of $450,000 and 3/4 of his eligible capital expenditure of $300,000.

 

Example 2

Assume the same facts as Example 1, except that Mr. X claimed a capital gains exemption of $250,000 in respect of his $450,000 taxable gain under paragraph 14(1)(b) of the Act.

Mrs. Y's eligible capital expenditure under subsection 14(3) of the Act is deemed to be $700,000, calculated as 4/3 of the excess of

  • 3/4 of the actual proceeds of disposition of $1,200,000 (i.e., $900,000)

over

  • 3/2 of the $250,000 capital gains exemption claimed by Mr. X (i.e., $375,000)

The amount included in Variable A of Mrs. Y's cumulative eligible capital balance is calculated as follows:

Cumulative eligible capital balance calculation
  Subtotals Totals
  • 3/4 of her deemed eligible capital expenditure
     of $700,000
    less 1/2 of the amount by which
  $525,000
  • the taxable gain of Mr. X exceeds
$450,000  
  • the capital gains exemption claimed by Mr. X
250,000  
Subtotal 200,000  
Rate x 1/2  
Reduction   100,000
Amount included in Variable A   $425,000

 

The calculation of "cumulative eligible capital" is designed so that the pool cannot be negative immediately after the end of the year. In this regard, variable F in the calculation generally reduces the pool by the total amount of ECP deductions claimed in prior years (generally, variable P), net of amounts included in income in prior years (variable R) under subsection 14(1) of the Act as recapture of ECP deductions or as deemed capital gains.

Variable R in the definition "cumulative eligible capital" is amended to ensure that amounts included in the income of a corporation under former paragraph 14(1)(b) of the Act (as it applied to taxation years that ended before February 28, 2000) continue to be included in the calculation of variable F.

The amendments generally apply to taxation years that end after February 27, 2000.

Restrictive Covenant Amount

ITA
14(5.1)

New subsection 14(5.1) of the Act provides that the description E of the definition "cumulative eligible capital" in subsection 14(5) does not apply to an amount if the amount is required to be included in the taxpayer's income because of subsection 56.4(2). However, subsection 56.4(2) does not apply to an amount if paragraph 56.4(3)(b) applies to the amount, in which case the amount may be a cumulative eligible capital receipt for the purposes of applying section 14. As well, if new subparagraph 56.4(7)(b)(i) or clause 56.4(7)(c)(i)(A) applies, consideration that could reasonably be regarded as being for the restrictive covenant granted by a taxpayer for nil proceeds may be – depending on the circumstances – a goodwill amount (as defined by new subsection 56.4(1)) that is to be included in computing the cumulative eligible capital of the taxpayer, or the taxpayer's eligible corporation (as defined by new subsection 56.4(1)). New section 56.4 is more fully described below in the notes accompanying that provision.

New subsection 14(5.1) is consequential to the rules for restrictive covenant amounts as set out in new section 56.4, and applies after October 7, 2003.

Exchange of Property

ITA
14(6)

Where a taxpayer has disposed of an eligible capital property in a taxation year and has acquired a replacement eligible capital property before the end of the subsequent taxation year, subsection 14(6) of the Act allows the taxpayer to elect to defer the inclusion of an amount in income under subsection 14(1) of the Act that would normally result from a negative balance in the taxpayer's cumulative eligible capital account at the end of the year of disposition.

Subsection 14(6) is amended to accommodate taxation years that are shorter than 12 months, by providing that the period for acquiring a replacement property ends at the later of the end of the subsequent taxation year and the time that is 12 months after the end of the taxation year in which the property was disposed of. This amendment applies in respect of dispositions of eligible capital property that occur in taxation years that end on or after December 20, 2001.

Clause 177

Shareholder Benefits

ITA
15

Section 15 of the Act requires the inclusion in income of certain benefits received or enjoyed by a shareholder of a corporation.

Benefit conferred on shareholder

ITA
15(1)

Subsection 15(1) of the Act requires a shareholder of a corporation to include in computing income for a taxation year the amount or value of a benefit conferred in the year by the corporation on the shareholder. The provision also applies to benefits conferred on a person in contemplation of the person becoming a shareholder of the corporation.

Subsection 15(1) is amended in conjunction with the introduction of new subsection 15(1.4) of the Act, which provides several new rules for applying subsection 15(1). Subsection 15(1) is amended in a number of respects.

The wording of subsection 15(1) is revised to remove the postambles currently found at the end of subparagraph (c)(i) and at the end of the subsection. Paragraph 15(1)(c) is reworded and, in the case of the postamble at the end of subsection 15(1), its substance is moved to the preamble of the revised subsection: (1) the requirement that the benefit be included in computing income of the shareholder for the year; and (2) the exception that applies to the extent a benefit is deemed by section 84 to be a dividend. No substantive change is made to the wording of paragraphs 15(1)(b) to (d).

Subsection 15(1) is clarified to apply to a benefit conferred by a corporation on a member of a partnership that is a shareholder.

The reference to "contemplated shareholder" in subsection 15(1) is clarified and expanded by new paragraph 15(1.4)(a). Further information is provided in the commentary on that new paragraph.

The application of subsection 15(1) in the context of multiple tiers of partnerships is clarified by the rule in new paragraph 15(1.4)(b). Further information is provided in the commentary on that new paragraph.

The exception in current paragraph 15(1)(a) – that applies to reductions of a corporation's paid-up capital, the redemption, cancellation or acquisition of its shares or on the winding up, discontinuance or reorganization of its business, or otherwise by way of a transaction to which section 88 applies – is narrowed so that it applies only if the corporation is a resident of Canada. This amendment, along with the introduction of paragraph 15(1)(a.1) and the addition of paragraph 15(1.4)(e), responds to the decision of the Tax Court of Canada in Morasse [2004 DTC 2435, [2004] 2 CTC 3085]. The Morasse decision indicated that current paragraph 15(1)(a) may apply where a non-resident corporation confers a benefit in the course of a reorganization. As noted below under paragraph 15(1)(a.1), this exception is no longer available to a non-resident corporation.

Finally, new paragraph 15(1)(a.1) sets out the exceptions from subsection 15(1) for a non-resident corporation that confers a benefit on a shareholder of the corporation in any of the following ways:

These amendments apply in respect of benefits conferred on or after October 31, 2011.

Forgiven Amount

ITA
15(1.21)

Subsection 15(1.2) of the Act provides that, for the purpose of subsection 15(1), the value of the benefit where an obligation issued by a debtor is settled or extinguished is deemed to be the forgiven amount in respect of the obligation. Subsection 15(1.21) of the Act provides that, for the purpose of subsection 15(1.2), the expression "forgiven amount" in respect of an obligation has the meaning that would be assigned by subsection 80(1) of the Act if certain assumptions were made.

Subsection 15(1.21) of the French version of the Act refers to conditions that must be met in order for the provision to apply. This statement could be interpreted as requiring that the obligation referred to in the preamble of subsection 15(1.21) be a commercial obligation. In order to avoid this interpretation, the French version of subsection 15(1.21) is amended to clarify that the statements made in paragraphs 15(1.21)(a) to (d) are assumptions and not conditions.

This amendment applies to taxation years that end after February 21, 1994.

Interpretation – subsection (1)

ITA
15(1.4)

New subsection 15(1.4) of the Act provides rules of interpretation that apply for the purposes of applying the shareholder benefit income inclusion rule in subsection 15(1).

New paragraph 15(1.4)(a) clarifies that subsection 15(1) applies not only where a benefit is conferred by a corporation on a person in contemplation of the person becoming a shareholder, but also where the benefit is conferred on a partnership in contemplation of the partnership becoming a shareholder of the corporation.

Further, a "contemplated shareholder" includes a member of a partnership on whom a benefit is conferred by the corporation in contemplation of the partnership becoming a shareholder of the corporation. This clarifies that subsection 15(1) applies where the benefit is conferred on a member of a partnership in contemplation of the partnership becoming a shareholder of the corporation.

New paragraph 15(1.4)(b) provides that a "person or partnership" that is (or is treated by the paragraph as being) a member of a particular partnership that is a member of another partnership, is deemed to be a member of the other partnership. In general, this provides a partnership look-through rule when considering if a person or partnership is a member of a partnership that is a shareholder of a corporation or that is a contemplated shareholder of the corporation.

New paragraph 15(1.4)(c) provides a rule that applies, in general, if a benefit is conferred on an individual (other than an excluded trust, which is defined in paragraph 15(1.4)(d)) who does not deal at arm's length with, or is affiliated with, a shareholder of the corporation, a member of a partnership that is a shareholder of the corporation or a contemplated shareholder of the corporation. In such cases, new paragraph 15(1.4)(c) provides that – for the purposes of subsection 15(1) – the benefit is conferred on the shareholder, the member of the partnership or the contemplated shareholder, as the case may be. This rule does not apply to the extent that the benefit is conferred on an individual who is required to include the value of the benefit in computing the income of the individual or any other person.

New paragraph 15(1.4)(d) provides that, for the purposes of the rule in paragraph 15(1.4)(c), an excluded trust is a trust in which no individual who does not deal at arm's length with a shareholder of the corporation is beneficially interested.

New paragraph 15(1.4)(e) deems a non-resident corporation (the original corporation) to have conferred a benefit on its shareholder if the original corporation is divided under the laws of the foreign jurisdiction that govern the original corporation and the shareholder acquires a share of another corporation as a consequence of the division of the original corporation. An example of a foreign law that allows for the division of a corporation is the Mexican law that results in an "escision" of the corporation. However, no benefit is deemed to be conferred to the extent that any of subparagraphs 15(1)(a.1)(i) to (iii) and paragraph 15(1)(b) apply to the acquisition of the share. Those exceptions are more fully described above in the commentary on the amendments to subsection 15(1). As well, subsection 52(1) provides, in general, that the cost of the share to the shareholder is equal to the amount of the benefit included in the shareholder's income.

New paragraphs 15(1.4)(a) to (d) apply in respect of benefits conferred on or after October 31, 2011. New paragraph 15(1.4)(e) applies in respect of divisions of non-resident corporations that occur on or after Announcement Date.

Shareholder Debt

ITA
15(2.1)

Subsection 15(2) of the Act generally requires that certain indebtedness be included in the income of the debtor in the year in which the indebtedness arose. This subsection is intended to prevent a person, that is directly or indirectly a shareholder of a particular corporation or that is connected with a shareholder of the particular corporation, from avoiding tax by receiving property from the corporation through an otherwise non-taxable loan, rather than as a dividend or other taxable amount. Paragraphs 15(2)(a) to (c) describe the debtors to which section 15(2) applies in terms of their relationships with the particular corporation. In this regard, paragraph 15(2)(b) provides that subsection 15(2) may apply to a debtor if the debtor is connected with a shareholder of the particular corporation.

Section 15(2.1) of the Act generally provides, for the purposes of subsection 15(2), that a person is connected with a shareholder of a particular corporation if the person does not deal at arm's length with the shareholder. Subsection 15(2.1) is amended to clarify that a partnership can be connected with a shareholder of a particular corporation if that partnership does not deal at arm's length with, or is affiliated with, the shareholder.

This amendment applies in respect of loans made and indebtedness arising after October 31, 2011.

Clause 178

Prohibited Deductions

ITA
18

Section 18 of the Act prohibits the deduction of certain outlays and expenses in computing a taxpayer's income from a business or property.

Securities Lending Arrangement Compensation Payments

ITA
18(1)(w)

Section 260 of the Act provides special rules relating to securities lending arrangements. Former subsection 260(6) prohibited a borrower, except in certain circumstances, from deducting in computing its income an amount paid as a compensation payment pursuant to a securities lending arrangement.

As part of the restructuring of section 260, particularly subsection 260(6), new paragraph 18(1)(w) is enacted to prohibit a borrower from deducting a compensation payment, except where expressly permitted by the Act. This new paragraph, therefore, continues the function of the former subsection 260(6).

This amendment applies after 2001.

Losses – Adventurers in Trade

ITA
18(14)

Subsection 18(14) of the Act describes the circumstances in which the loss-deferral rule in subsection 18(15) applies to dispositions of property that is described in an inventory of a business that is an adventure or concern in the nature of trade. Paragraph 18(14)(c) excludes from the application of the rule dispositions under specified provisions of the Act. As a consequence of the restructuring of section 132.2 of the Act, the reference in paragraph 18(14)(c) to paragraph 132.2(1)(f) is replaced by references to paragraphs 132.2(3)(a) and (c).

This amendment applies to dispositions that occur after 1998.

Clause 179

Non-application of Section 18.1

ITA
18.1(15), (16) and (17)

Section 18.1 of the Act provides rules that restrict the deductibility of a taxpayer's cost of a "right to receive production", by prorating the deductibility of the amount of the investment over the economic life of the right. In the transactions that are subject to these rules, investors undertake to pay expenditures that would otherwise be expenses payable by the "vendor" (e.g., payroll, selling commissions) in exchange for a right to receive future income (a "right to receive production"), usually from the vendor's business operations. Such an expenditure by the taxpayer, referred to as a "matchable expenditure", is defined in subsection 18.1(1) of the Act.

Subsection 18.1(15) of the Act provides two general exceptions to the application of the matchable expenditure rules. One such exception, in paragraph 18.1(15)(b), generally applies where the matchable expenditure relates to the issuance of an insurance policy for which all or a portion of a risk has been ceded to the taxpayer. This exception remains unchanged other than changes in numbering.

Paragraph 18.1(15)(a) provides the other exception to the matchable expenditure rules, applicable only if no part of the expenditure of the taxpayer can reasonably considered to have been paid to another person to acquire the right to receive production from that person. If this condition is met, the expenditures must meet one of two further criteria. Subparagraph 18.1(15)(a)(i) allows the exception if the taxpayer's expenditure cannot reasonably be considered to relate to a tax shelter investment and none of the main purposes of making the expenditure is to obtain a tax benefit. Alternatively, subparagraph 18.1(15)(a)(ii) allows the exception if, in the same year as the matchable expenditure is made, the total revenues of the taxpayer from the right to receive production exceed 80% of the expenditure. If this 80% revenue threshold is met, the portion of the expenditure that is deductible is limited only by general rules that apply to all business expenditures.

Subparagraph 18.1(15)(a)(i) is renumbered as new subsection 18.1(16) and remains unchanged. The alternative exception in subparagraph 18.1(15)(a)(ii) (the 80% revenue threshold) is renumbered as new subsection 18.1(17) and no longer provides a general exception to the application of the matchable expenditure rules. This amended rule provides that if any portion of the matchable expenditure can reasonably be considered to relate to a tax shelter or a tax shelter investment, subsection 18.1(4), which requires the amortization of the expenditure (subject to an income limit), will apply without reference to paragraph 18.1(4)(a). The result is that the cumulative amount deducted in respect of a matchable expenditure may not exceed the taxpayer's cumulative revenue from the associated right to receive production.

The amendments to section 18.1 generally apply in respect of expenditures made by a taxpayer on or after September 18, 2001.

Clause 180

Deductions

ITA
20

Section 20 of the Act provides rules relating to the deductibility of certain outlays, expenses and other amounts in computing a taxpayer's income for a taxation year from business or property.

Fees Paid to Investment Counsel

ITA
20(1)(bb)

Paragraph 20(1)(bb) generally allows a taxpayer to deduct fees, other than commissions, paid for advice on buying or selling a specific share or security of the taxpayer or for the administration or management of the shares or securities of the taxpayer. The fees must be paid to a person whose principal business is advising on the buying or selling of specific shares or securities or whose principal business includes the administration or management of shares or securities.

The definition "person" in subsection 248(1) of the Act does not include a partnership. Paragraph 20(1)(bb) is amended to allow for the deduction of fees paid to a person or partnership if the other conditions in paragraph 20(1)(bb) are met.

This amendment applies to amounts paid after June 30, 2005.

Reinsurance Commission

ITA
20(1)(jj)

For information on the repeal of paragraph 20(1)(jj), see the commentary on paragraph 12(1)(s) above. This amendment applies to reinsurance commissions paid after 1999.

Reserve Not Available

ITA
20(8)

Paragraph 20(1)(n) of the Act allows a taxpayer to claim a reserve in respect of the taxpayer's profit from the sale of certain property, where all or part of the proceeds of the sale are not due until at least two years after the time of sale. However, subsection 20(8) of the Act provides that this reserve is limited to taxation years that end less than 36 months after the time of the sale. For example, where the taxation year is 12 months, the reserve is available in the taxation year in which the sale occurred and the two subsequent taxation years.

New paragraphs 20(8)(c) and (d) generally apply, in respect of dispositions of property that occur after December 20, 2002, to provide that the reserve under paragraph 20(1)(n) is not available to a taxpayer where the purchaser of the property is a corporation controlled by the taxpayer or is a partnership of which the taxpayer is a majority interest partner.

Deduction for Foreign Tax

ITA
20(12)

Subsection 20(12) of the Act allows a taxpayer to deduct, in computing income for a taxation year from a business or property, non-business income taxes paid to a foreign government in respect of the income. The subsection is amended to make explicit the requirement that the taxpayer claiming the deduction be resident in Canada during all or part of the year for which the claim is made. This amendment is clarifying only, and applicable after December 20, 2002. (Accordingly, the amendment is effective for any application of the Act after that date.)

Terminal Loss

ITA
20(16)

Subsection 20(16) of the Act permits a taxpayer to deduct, in computing the taxpayer's income for a year, the terminal loss of the taxpayer in respect of a class of depreciable property at the end of the year. That subsection is amended to add a reference to the new descriptions of D.1 and K of the definition "undepreciated capital cost" in subsection 13(21) of the Act. For information about those new descriptions, see the commentary to subsection 13(1).

This amendment applies to taxation years that end after February 23, 1998, and corrects a technical deficiency.

Non-Application of Subsection (16)

ITA
20(16.1)

Subsection 20(16.1) of the Act provides that a terminal loss under subsection 20(16) in respect of a depreciable property that is a "passenger vehicle" costing more than a prescribed amount (currently set at $30,000) is not deductible in computing income. That rule is renumbered as paragraph 20(16.1)(a) and new paragraph 20(16.1)(b) is added, applicable to taxation years that end after December 20, 2002. These amendments are made concurrently with the addition of subsections 13(4.2) and (4.3) of the Act and with the amendment of the definition "former business property" in subsection 248(1) of the Act.

New paragraph 20(16.1)(b) provides that a terminal loss is not available in respect of another person's former business property that was deemed under paragraph 13(4.3)(a) or (b) (as the result of a joint election under subsection 13(4.2) by the taxpayer and the other person) to be owned by the taxpayer. For further information, refer to the commentary to subsections 13(4.2) and (4.3).

Reduction of Inventory Allowance Deduction

ITA
20(17) and (18)

Subsections 20(17) and (18) are repealed, as the provision to which they relate has been repealed.

Unpaid Claims Reserves

ITA
20(26)

Subsection 20(26) of the Act provides a transitional rule relating to the introduction of the requirement that insurers fully discount their unpaid claims reserves for tax purposes.

This subsection permits an insurer to deduct, in calculating its income for its taxation year that includes February 23, 1994, an amount not exceeding the amount prescribed (under part LXXXI of the Income Tax Regulations) to be the insurer's unpaid claims reserve adjustment.

Subsection 20(26) is now obsolete and is repealed for taxation years that begin after October 31, 2011. For further information, see the commentary on section 12.3 and Part LXXXI of the Income Tax Regulations.

Clause 181

Scientific Research and Experimental Development

ITA
37

Section 37 of the Act sets out the rules governing the deductibility of expenditures incurred by a taxpayer for scientific research and experimental development (SR&ED).

ITA
37(8)(a)(ii)(B)(V)

Paragraph 37(8)(a) of the Act provides rules for interpreting the expression "expenditures on or in respect of scientific research and experimental development" which is used in subsections 37(1), (2) and (5).

Clause 37(8)(a)(ii)(B) provides for the alternative "proxy" method for determining SR&ED expenditures. Subclause 37(8)(a)(ii)(B)(V) provides that, in the context of the proxy method for determining SR&ED expenditures, the references to expenditures on or in respect of SR&ED (other than in subsection 37(2)) include only, among things listed in clause 37(8)(a)(ii)(B), the cost of "materials consumed" in the prosecution of SR&ED in Canada.

Subclause 37(8)(a)(ii)(B)(V) is amended for costs incurred after February 23, 1998 in two respects. First, the phrase "materials consumed" is changed to "materials consumed or transformed". Second, the reference in the French version of the subclause to "matières" is changed to "matériaux".

Clause 182

Allocation of Gain on Gifts to Qualified Donees

ITA
38.2

Paragraphs 38(a.1) and (a.2) of the Act provide a special inclusion rate for capital gains arising as a result of a gift to qualified donees of certain securities or of environmentally sensitive land. This inclusion rate is one-half of the normal inclusion rate.

Section 38.2 of the Act is added consequential to the addition of new subsections 248(31) to (33) of the Act, for gifts made after December 20, 2002. New section 38.2 provides that, where a taxpayer is entitled to an advantage or benefit in respect of a gift, only part of the taxpayer's capital gain will be entitled to the special inclusion rate. The Part entitled to the special inclusion rate is that proportion of the gain that the eligible amount of the gift is of the taxpayer's total proceeds of disposition in respect of the property.

For additional details, see the commentary to new subsections 248(31) and (32) regarding the eligible amount of a gift and the amount of the advantage in respect of a gift.

Clause 183

Gains and Losses – General Rules

ITA
40

Section 40 of the Act provides rules for determining a taxpayer's gain or loss from the disposition of a capital property.

Gift of Non-qualifying Security

ITA
40(1.01)(c)

Subsection 40(1.01) of the Act allows a taxpayer to claim a reserve in respect of any gain realized from the making of a gift of a "non-qualifying security", as defined for the purposes of sections 110.1 and 118.1 of the Act. The gift is not recognized as a gift for the purposes of those sections until a subsequent time when the security ceases to be a non-qualifying security or it is disposed of by the donee. The reserve available in subsection 40(1.01) allows the resulting inclusion in income to be deferred until the year that includes the subsequent time, unless the taxpayer first becomes non-resident or tax-exempt.

Paragraph 40(1.01)(c) is amended consequential to the addition of new subsections 248(30) to (33) of the Act, for gifts made after December 20, 2002, to provide that the reserve claimed by the taxpayer may not exceed the eligible amount of the gift. For additional details, see the commentary to subsection 248(31) of the Act regarding the eligible amount of a gift.

Reserve on Property Sold to a Controlled Partnership

ITA
40(2)(a)

Paragraph 40(2)(a) of the Act generally restricts a taxpayer's ability to claim a capital gains reserve in respect of properties disposed of to a non-resident or to a corporation that controlled the taxpayer or was controlled by the taxpayer. Paragraph 40(2)(a) is amended in respect of dispositions of property that occur after December 20, 2002, to provide that a capital gains reserve will also not be allowed to a taxpayer where the purchaser of the property is a partnership of which the taxpayer is a majority interest partner.

Deemed Gain for Certain Partners

ITA
40(3.11)

Subsection 40(3.11) of the Act provides a formula to determine the gain of a member of a partnership for the purposes of subsection 40(3.1). The amount determined by the formula equals any "negative" balance in the adjusted cost base of the member's interest in the partnership at the end of a fiscal period of the partnership.

The formula is amended to include in this calculation the income or loss, as the case may be, for the particular fiscal period, if the partnership is a "professional partnership" as defined in new subsection 40(3.111) of the Act.

New paragraph (b) of the description of variable A in subsection 40(3.11) provides that, if the partnership is a professional partnership, a taxpayer's share of any loss referred to in subparagraph 53(2)(c)(i) of the Act for the fiscal period will be added when calculating the amount under subsection 40(3.11).

New paragraph (c) of the description of variable B in subsection 40(3.11) provides that, if the partnership is a professional partnership, a taxpayer's share of any income referred to in subparagraph 53(1)(e)(i) of the Act for the fiscal period will be deducted when calculating the amount under subsection 40(3.11).

This amendment applies to fiscal periods that end after November 2001.

Professional Partnership

ITA
40(3.111)

New subsection 40(3.111) of the Act defines the term "professional partnership" for the purposes of the rules relating to deemed gains under subsection 40(3.1). "Professional partnership" means a partnership through which one or more persons carry on the practice of a profession that is governed or regulated under a law of Canada or a province.

This amendment applies to fiscal periods that end after November 2001.

Limited Partner

ITA
40(3.14)(a)

Subsection 40(3.1) of the Act provides that a member of a partnership is considered to realize a capital gain from the disposition, at the end of a fiscal period of the partnership, of the member's interest in the partnership where, at the end of the fiscal period, the member is a limited partner or was, since becoming a partner, a "specified member" of the partnership and the member's adjusted cost base of the interest is negative at that time.

Subsection 40(3.14) of the Act provides an extended definition of "limited partner" for the purpose of determining whether a member's interest in a partnership is subject to the negative adjusted cost base rule in subsection 40(3.1).

Paragraph 40(3.14)(a) provides that a member of a partnership is a "limited partner" if, by operation of law governing the partnership agreement, the liability of the member as a member is limited. However, paragraph 40(3.14)(a) does not apply in cases where a member's liability is limited by operation of a statutory provision of Canada (or of a province) that limits the member's liability only for the debts, obligations and liabilities of a limited liability partnership (or of any member of the partnership) arising from negligent acts or omissions of another member of the partnership (or of an employee, agent or representative of the partnership) in the course of the partnership business and while the partnership is a limited liability partnership.

The Province of Quebec has amended its legislation concerning partnerships to allow partners to carry on their activities within a limited liability partnership. That legislation refers to the civil law concept of "fault/fautes". Paragraph 40(3.14)(a) of the English version does not currently refer to the civil law concept of "fault" and is amended to do so, effective after June 20, 2001.

Deemed Identical Property

ITA
40(3.5)

Subsections 40(3.3) and (3.4) of the Act set out rules under which losses on certain dispositions of non-depreciable capital property are deferred. In some cases, the application of these rules is contingent upon whether one property is identical to the disposed of non-depreciable capital property.

Current paragraph 40(3.5)(b) treats a share that is acquired in exchange for another share under any of a number of sections as being identical to that other share. One of the effects of this deeming rule is to ensure that a deferred loss is not inappropriately realized through a transaction under one of those sections.

For example, assume that a taxpayer, who on Day 1 disposed of a share for proceeds that were less than the taxpayer's adjusted cost base of the share, reacquired an identical share on Day 15. Under the loss-deferral rules, the taxpayer's loss on the disposition will be deferred until, generally, neither the taxpayer nor an affiliated person owns such a share. If the taxpayer then exchanged that share for another, under for example an exchange under section 86 of the Act, it would be appropriate to continue to defer recognition of the deferred loss until that substituted share is disposed of. This is accomplished by treating the share acquired on the exchange as identical to the share given up.

However, paragraph 40(3.5)(b) can have an inappropriate effect where a taxpayer uses the share-for-share exchange rule in section 85.1 of the Act. Provided certain criteria are satisfied, that section permits a share-for-share exchange to take place on a tax-deferred basis, but it also allows the exchanging shareholder to realize a loss. A shareholder who chooses to do so may find that paragraph 40(3.5)(b) forces a deferral of that loss – even though the loss arises from the section 85.1 exchange itself, not from a previous disposition as in the above example.

Paragraph 40(3.5)(b) is amended to deem a share that is acquired in exchange for another share under section 85.1 to be identical to that other share only if the loss in respect of the exchanged share is suspended at the time of the exchange by virtue of subsections 40(3.3) and (3.4).

This amendment to paragraph 40(3.5)(b) applies to dispositions of property that occur after April 26, 1995, subject to the coming-into-force provisions that originally enacted subsection 40(3.5).

Clause 184

Consideration for Warranties, Covenants or Other Obligations

ITA
42

Section 42 of the Act provides rules governing warranties, covenants, and other conditional or contingent obligations given by a taxpayer in respect of a disposition of property (the "subject property").

The provision provides generally that consideration for a warranty, covenant or other conditional or contingent obligation, given or incurred in respect of the disposition of the subject property, shall be treated as a gain from the disposition of a property, and not as consideration for the obligation.

The provision also provides generally that an outlay or expense under a warranty, covenant or other conditional or contingent obligation, given or incurred in respect of the disposition of the subject property, shall be treated as a loss from the disposition of a property, and not as an outlay or expense under the obligation.

Section 42 is amended to clarify the timing of the inclusion of gains and losses.

New paragraph 42(1)(a) provides generally that an amount received or receivable as consideration for an obligation is deemed to be a capital gain from the disposition of a property that occurs when the consideration is received or receivable. However, if the consideration is received or receivable on or before a "specified date", the amount is to be included in computing the proceeds of disposition of the subject property in the year in which the disposition occurred.

New subsection 42(2) of the Act defines "specified date" to mean generally the taxpayer's filing due-date for the taxation year in which the property was disposed of, except that, for partnerships, the specified date is the end of the partnership's fiscal period in which the subject property was disposed of.

New paragraph 42(1)(b) provides generally that an outlay or expense paid or payable under an obligation is deemed to be a capital loss from the disposition of a property that occurs when the outlay or expense is paid or payable. However, if the outlay or expense is paid or payable on or before the specified date, the amount is to be deducted in computing the proceeds of disposition of the subject property in the year in which the disposition occurred.

The amendment to section 42 generally applies to taxation years and fiscal periods that end on or after November 5, 2010. For taxation years and fiscal periods that end after February 27, 2004 and before November 5, 2010, section 42 of the Act will be read as proposed on February 27, 2004. The amendment applicable to taxation years and fiscal periods that end on or after November 5, 2010 is consistent with the amendment applicable to the earlier period but clarifies the timing of the inclusion of gains and losses in respect of partnerships.

Clause 185

Part Dispositions

ITA
43

Section 43 of the Act provides rules governing the disposition of part of a property. For the purpose of computing a taxpayer's gain or loss from the disposition of a part of a property, a portion of the adjusted cost base must be allocated to the Part on a reasonable basis.

Ecological Gifts

ITA
43(2)

Subsection 43(2) of the Act applies where the part of a property donated as an ecological gift is a covenant, easement or servitude established under common law, the civil law of the province of Quebec, or the law of other provinces allowing for their establishment. Subsection 43(2) ensures that a portion of the adjusted cost base ("ACB") of the land to which the covenant, easement or servitude relates is allocated to the donated covenant, easement or servitude. For this purpose, the allocation of the ACB of the land to the gift is calculated in proportion to the percentage decrease in the value of the land as a result of the donation.

Subsection 43(2) is amended to clarify its application to "real servitudes" under the Civil Code of Quebec. This amendment applies to gifts made after December 20, 2002.

Clause 186

Exchanges of Property

ITA
44(1)(c) and (d)

Subsection 44(1) of the Act allows a taxpayer who incurs a capital gain on the disposition of certain capital property to elect to defer tax on the gain to the extent that the taxpayer reinvests the proceeds in a replacement property within a certain period of time, namely

Paragraphs 44(1)(c) and (d) are amended to accommodate taxation years that are shorter than 12 months, by providing that the periods for acquiring replacement property end at the later of the times mentioned above and

These amendments apply, in the case of involuntary dispositions, in respect of dispositions that occur in taxation years that end on or after December 20, 2000 and, in any other case, in respect of dispositions that occur in taxation years that end on or after December 20, 2001.

Where Subparagraph 44(1)(e)(iii) Does Not Apply

ITA
44(7)

Subsection 44(7) of the Act restricts a taxpayer from claiming a capital gains reserve under subparagraph 44(1)(e)(iii) where the former property of the taxpayer was disposed of to a non-resident or a corporation that, immediately after the disposition, controlled the taxpayer or was controlled by the taxpayer or by a person or group of persons who controlled the taxpayer. Subsection 44(7) is amended, generally in respect of dispositions of property that occur after December 20, 2002, to provide that the capital gains reserve is also not allowed to a taxpayer where the purchaser of the property is a partnership of which the taxpayer is a majority interest partner.

Clause 187

Capital Gains Deferral – Eligible Small Business Investments

ITA
44.1

Section 44.1 of the Act permits an individual to defer, in certain circumstances, the recognition for income tax purposes of all or a portion of a capital gain arising on a disposition of an eligible small business investment.

Special Rule - Eligible Small Business Corporation Share Exchanges

ITA
44.1(6)

Subsection 44.1(6) of the Act provides rules that apply where an individual exchanges an eligible small business corporation share for new eligible small business corporation share. Subsection 44.1(6) is amended to substitute the reference to subsection 85.1(3) with a reference to subsection 85.1(1) and to add a reference to sections 51 and 86. These changes apply to dispositions of shares made after February 27, 2000.

Special Rule - Active Business Corporation Share Exchanges

ITA
44.1(7)

Subsection 44.1(7) of the Act provides rules that apply where an individual, in the course of a qualifying disposition, disposes of common shares of an active business corporation for consideration consisting only of new common shares of another active business corporation issued to the individual. Subsection 44.1(7) is amended to substitute the reference to subsection 85.1(3) with a reference to subsection 85.1(1) and to add a reference to sections 51 and 86.

These changes apply to dispositions of shares made after February 27, 2000.

Anti-avoidance Rule

ITA
44.1(12)

Subsection 44.1(12) of the Act is an anti-avoidance rule. It applies where an individual or persons related to the individual dispose of shares of a particular corporation (which would normally result in the use of the corporate reorganization rules or a return of paid-up capital of shares of the corporation) and acquire new shares of the particular corporation or a corporation that does not deal at arm's length with the particular corporation principally for the purpose of increasing the total amount of permitted deferrals with respect to qualifying dispositions of the individual and the related persons. Where the rule applies, the permitted deferral with respect to qualifying dispositions of the new shares is deemed to be nil.

Subsection 44.1(12) is amended to apply to the following circumstances:

This amendment applies to dispositions that occur after February 27, 2004.

Order of Disposition of Shares

ITA
44.1(13)

New subsection 44.1(13) of the Act is a provision that applies when an individual disposes of a share that is identical to other shares owned by the individual. The provision deems, for the purposes of section 44.1, the shares to have been disposed of in the same order in which the individual acquired them.

New subsection 44.1(13) applies to dispositions that occur after December 20, 2002 or, if the individual so elects in writing and files the election with the Minister of National Revenue, to dispositions made after February 27, 2000.

Clause 188

Where Option Expires

ITA
49(2) and (2.1)

Section 49 of the Act provides rules relating to the granting, exercise and expiration of options. Subsection 49(2) applies where an option expires that was granted by a corporation to permit the holder to acquire shares of the corporation's capital stock. Subsection 49(2) generally provides that when such an option expires, the corporation is deemed to have disposed of a capital property, with an adjusted cost base of nil, for proceeds of disposition equal to the consideration received by the corporation when the option was issued. (The holder of such an option would typically incur a loss at that time equal to its cost or adjusted cost base of the option.) Subsection 49(2.1) provides for a similar result in respect of the granting of an option by a trust to acquire units to be issued by the trust.

Subsections 49(2) and (2.1) are amended consequential to the introduction of subsection 143.3(2) of the Act, which effectively deems that the value of an option, to acquire an interest in a taxpayer, granted by the taxpayer, is not considered to be an expenditure for income tax purposes. In effect, no expense nor any cost or cost amount is recognized for tax purposes for property or services received as consideration for the granting of an option in respect of which subsection 143.3(2) applies. Subsections 49(2) and (2.1) are amended so as not to apply, in addition to the exceptions already provided for, in situations where either the grantee of the option, or the holder of the option when it expires, are not dealing at arm's length with the corporation or trust.

The amendment of subsections 49(2) and (2.1) should not be interpreted as suggesting that the creation of artificial losses though the issuance of options is not contrary to the object and spirit of the income tax law.

These amendments apply in respect of options issued after Announcement Date.

Clause 189

Cost of Certain Property

ITA
52

Section 52 of the Act sets out rules for determining the cost of certain property for the purposes of measuring any gain or loss on its disposition.

Cost of Certain Property

ITA
52(1)

Subsection 52(1), which applies where a taxpayer acquires property and a particular amount in respect of its value was included in computing the taxpayer's income for a taxation year, is amended to update its structure to conform to modern drafting standards.

Cost of Stock Dividend

ITA
52(3)(a)

Subsection 52(3) of the Act establishes the cost of a share received as a stock dividend by a shareholder of a corporation.

If the stock dividend is a dividend under the Act, paragraph 52(3)(a) provides that the cost of a stock dividend received by a shareholder is the amount of the dividend. Paragraph 52(3)(a) is amended to provide that the cost of a stock dividend to a shareholder that is a corporation does not include the amount, if any, of a dividend that the corporation may deduct under subsection 112(1) of the Act in computing the corporation's taxable income (except the portion of the dividend that is not a capital gain under subsection 55(2) because it is attributable to the corporation's safe income). Essentially, this change is meant to ensure that the cost of a stock dividend does not include an amount that is not taxable income to the recipient corporation unless it represents safe income to it.

For related amendments, see the commentary accompanying amended paragraph 53(1)(b) and amended definition "capital dividend account" in subsection 89(1) of the Act.

This amendment is consequential to changes made to the expenditure limitation proposals in new section 143.3, which were first released for consultation on November 17, 2005 (Department of Finance release 2005-080).

This amendment applies in respect of amounts received on or after November 9, 2006.

Clause 190

Adjustments to Cost Base

ITA
53

Section 53 of the Act sets out rules for determining the adjusted cost base (ACB) of property. Certain adjustments are made under this section. Subsection 53(1) provides for additions in computing the ACB of a property, and subsection 53(2) provides for deductions in computing the ACB of a property.

Adjustments to Cost Base - Deemed Dividend

ITA
53(1)(b)

Paragraph 53(1)(b) of the Act provides an addition to cost base – where the taxpayer's property is a share of the capital stock of a corporation resident in Canada – equal to the amount of any dividend on the share deemed by the anti-avoidance rule in subsection 84(1) of the Act to have been received by the taxpayer before that time.

Paragraph 53(1)(b) is amended to exclude from this addition certain amounts received by a recipient shareholder that is a corporation. The amount excluded from the cost base addition is the portion, if any, of the dividend that the corporate shareholder is permitted to deduct under subsection 112(1) of the Act in computing the corporation's taxable income, except the portion of the dividend that is not a capital gain under subsection 55(2) because it is attributable to the corporation's safe income.

Essentially, this amendment to paragraph 53(1)(b), as well as to paragraph 52(3)(a) and to paragraph (a) of the definition "capital dividend account" in subsection 89(1) of the Act, addresses circumstances in which increases in a corporation's paid-up capital result in dividends that may be deducted under subsection 112(1) by a recipient corporate shareholder in computing its taxable income (if the dividend is not safe income to the corporation under section 55).

This amendment also relates to changes made to the expenditure limitation proposals in new section 143.3 of the Act, which were originally released for consultations on November 17, 2005 (Department of Finance release 2005-080). Under the original proposal, the amount by which the fair market value of shares issued by a corporation exceeded the increase in the issuing corporation's paid-up capital could not be treated as an expenditure. One outcome of this approach would have been to preclude certain increases in the adjusted cost base of shares in the issuing corporation where the issuing corporation subsequently increased its paid-up capital by all or a portion of the excess. That proposal has been revised to remove the reference to paid-up capital.

This amendment applies in respect of dividends received on or after November 9, 2006.

Adjustments to Cost Base – Interest in a Partnership

ITA
53(1)(e)

Paragraph 53(1)(e) of the Act provides for additions to the adjusted cost base of a taxpayer's partnership interest.

ITA
53(1)(e)(i)(A.1)

Existing clause 53(1)(e)(i)(A.1) of the Act is repealed consequential to the repeal of paragraph 18(1)(l.1) of the Act. This amendment applies to amounts that became payable after December 20, 2002.

New clause 53(1)(e)(i)(A.1) provides that a gain from a disposition of an object that is certified cultural property, by a partnership to a designated institution, will generally result in a corresponding adjustment to the adjusted cost base of the partners' interests in the partnership. That is, a partner's adjusted cost base will now be computed as if the Act were read without reference to subparagraph 39(1)(a)(i.1) of the Act, where the object referred to in that subparagraph is not the subject of a gifting arrangement, nor a property that is a tax shelter, for the purpose of section 237.1 of the Act.

New clause 53(1)(e)(i)(A.1) applies to the disposition of an object made after 2003.

ITA
53(1)(e)(iv.1)

Paragraph 53(1)(e) of the Act is being amended, by adding new subparagraph (iv.1), effective for payments made in taxation years that end after 2002. New subparagraph 53(1)(e)(iv.1) provides for an addition to the taxpayer's adjusted cost base in circumstances where the taxpayer makes a payment to a partnership that is described in subsection 80.2(1). The addition to the adjusted cost base is equal to the amount of the payment that is not deductible in computing the income of the taxpayer.

ITA
53(1)(e)(viii.1)

New subparagraph 53(1)(e)(viii.1) provides for an addition in computing the adjusted cost base of a taxpayer's partnership interest, where the taxpayer is a member of the partnership, equal to the member's share of proceeds of disposition receivable by the member in respect of a disposition of a foreign resource property by the partnership. This amendment ensures that, on disposition of a foreign resource property by the partnership, the proceeds of the disposition that are deemed by subsection 59(1.1) of the Act to become receivable by a member of the partnership and that are excluded in computing the income of the partnership because of paragraph 96(1)(d) of the Act are added to the adjusted cost base of the member's partnership interest.

This amendment applies to fiscal periods of a partnership that begin after 2000.

Adjustments to Cost Base – Interest in a Partnership

ITA
53(2)(c)

Paragraph 53(2)(c) of the Act provides deductions from a taxpayer's adjusted cost base ("ACB") of a partnership interest for the purpose of determining its adjusted cost base.

ITA
53(2)(c)(i)(A.1)

Clause 53(2)(c)(i)(A.1) is repealed consequential to the repeal of paragraph 18(1)(l.1) of the Act.

This amendment applies to amounts that became payable after December 20, 2002.

ITA
53(2)(c)(iii)

Subparagraph 53(2)(c)(iii) provides for the deduction from the ACB of a partnership interest of an amount deemed by subsection 110.1(4), 118.1(8) or 127(4.2) of the Act to have been a charitable donation or a political party contribution because of the taxpayer's membership in the partnership.

Subparagraph 53(2)(c)(iii) is amended, consequential to the amendment of subsections 110.1(4), 118.1(8) and 127(4.2) and the addition of new subsection 248(31) of the Act, for gifts made after December 20, 2002. Amended subparagraph 53(2)(c)(iii) refers to the "eligible amount" of a gift or contribution made because of the taxpayer's membership in the partnership. For additional information about eligible amounts, see the commentary to new subsections 248(31) and (32).

Recomputation of Adjusted Cost Base on Transfers and Deemed Dispositions

ITA
53(4)

Subsection 53(4) of the Act provides rules that affect the computation of the adjusted cost base (ACB) to a taxpayer of any "specified property". As defined in section 54, "specified property" is capital property that is a share, a capital interest in a trust, a partnership interest or an option to acquire any such property. The rules in subsection 53(4) apply where the proceeds of disposition of a specified property are determined under any one of a number of specified provisions in the Act set out in the subsection.

Subsection 53(4) is amended to reflect amendments to a number of those specified provisions; namely, subsections 107(2.1), (4) and (5) of the Act. The references in subsection 53(4) to subsections 107(4) and (5) are removed because those provisions no longer provide for a deemed disposition of trust property. Instead, where subsection 107(4) or (5) applies, a disposition of property will result under paragraph 107(2.1)(a). Therefore, the reference to paragraph 107(2.1)(a) in subsection 53(4) is sufficient.

This amendment applies after February 27, 2004.

Clause 191

Definitions – Capital Gains and Losses

ITA
54

"superficial loss"

Section 54 of the Act defines various terms for the purposes of the rules relating to taxable capital gains and allowable capital losses. The definition "superficial loss" in section 54 excludes losses on dispositions listed in paragraphs (c) to (h) of the definition from being superficial losses. As a consequence of the restructuring of section 132.2 of the Act, the reference in paragraph (c) of the definition to paragraph 132.2(1)(f) is replaced by references to paragraphs 132.2(3)(a) and (c).

This amendment, which modifies both the current and former enactment of paragraph (c) of that definition, applies to dispositions that occur after 1998.

Clause 192

Exception to Principal Residence Rules

ITA
54.1(1)

Section 54.1 of the Act sets out an exception to the principal residence rules. Under the rules in section 54 of the Act, if a housing unit is not ordinarily inhabited in a year and is rented out, it can continue to qualify as a principal residence for up to 4 years if the taxpayer so elects under subsection 45(2) of the Act. However, under section 54.1 it can continue to so qualify indefinitely provided that, as a consequence of a relocation of employment of the taxpayer or the taxpayer's spouse or common-law partner, the property is not ordinarily inhabited by the taxpayer. The amendments to add references in the Act to a common-law partner were not made to the English version of section 54.1. The current amendment adds the required reference and corrects that oversight and generally applies to the 2001 and subsequent taxation years. However, it may apply as early as 1998 where common-law partners have jointly elected to be treated as such under the Act, starting in that year.

Clause 193

Tax Avoidance – Dividends

ITA
55

Section 55 of the Act deals with certain tax avoidance transactions.

Definitions

ITA
55(1)

Subsection 55(1) of the Act sets out a number of definitions for the purpose of section 55.

"qualified person"

The definition "qualified person" is added to subsection 55(1), in conjunction with amendments to clause 55(3.1)(b)(i)(B) and paragraph 55(3.2)(h) of the Act. As a result of these amendments, a person or partnership may exchange shares of a distributing corporation ("old shares") for new shares of the distributing corporation and, where the conditions set out in the definition are satisfied, the ownership of the old shares will not affect the tax treatment of dividends received in the course of a reorganization to which paragraph 55(3)(b) applies. In general terms, a qualified person is a person or partnership that exchanges all of the old shares that caused that person or partnership to be a specified shareholder of the distributing corporation for consideration consisting solely of shares of a specified class. The definition also provides that the old shares must not be shares of a specified class solely because they were convertible into a class of shares that was not a specified class and that every holder of old shares must participate in the exchange. In addition, a person or partnership will not be a qualified person unless the old shares and the new shares are non-voting in respect of the election of the board of directors (or have voting rights only in the event of failure or default under the terms of the shares).

The addition of the definition "qualified person", applicable in respect of dividends received after 1999, is made concurrently with the addition of new subsection 55(3.4) of the Act. New subsection 55(3.4) provides that shares of a specified class are not taken into consideration in determining if a person is a specified shareholder for the purpose of subparagraph 55(3.1)(b)(i) and for the purpose of paragraph 55(3.2)(h), as that paragraph applies for the purpose of subparagraph 55(3.1)(b)(iii).

"specified class"

The definition "specified class" is relevant in determining whether an exchange of shares of the capital stock of a distributing corporation for shares of the capital stock of another corporation constitutes a permitted exchange, which, in turn, is relevant for the purpose of paragraph 55(3.1)(b) of the Act. The definition "specified class" is also relevant in determining if a redemption of shares by the distributing corporation prior to a distribution is a permitted redemption.

The rules applicable to shares of a specified class are based on the premise that such shares are equivalent to debt. Thus, to ensure that these shares more closely resemble debt, the definition is amended, for shares issued after December 20, 2002, to include a requirement that they be non-voting with respect to the election of the directors of the corporation (or have voting rights only in the event of failure or default under the terms of the shares).

Exempt Dividends

ITA
55(3)(a)

Paragraph 55(3)(a) provides an exemption from the application of subsection 55(2) of the Act for dividends received in the course of certain related-party transactions. More specifically, paragraph 55(3)(a) exempts a dividend received by a corporation if, as part of a transaction or event or a series of transactions or events that includes the receipt of the dividend, there was not, at any particular time, a disposition of property or a significant increase in the total direct interest in a corporation in the circumstances described in subparagraphs 55(3)(a)(i) to (v).

ITA
55(3)(a)(iii)(B)

Clause 55(3)(a)(iii)(B) of the Act describes a disposition, to a person or partnership that was unrelated to the dividend recipient, of property more than 10% of the fair market value of which was derived from shares of the capital stock of the dividend payer. Clause 55(3)(a)(iii)(B) is amended, for dividends received after February 21, 1994, to exclude a disposition of property that is a share of the capital stock of the dividend recipient. This amendment ensures that subsection 55(2) of the Act does not apply to the dividend received in the circumstances described in the following example involving the disposition of the shares of the dividend recipient:

A corporation (BuyerCo) owns all the shares of another corporation (SubCo). BuyerCo acquires all the shares of a third corporation (Target) in an arm's length transaction for fair market value. Target owns all the shares of two corporations – T1Subco and T2Subco. Target transfers, on a tax-deferred basis under section 85, all the shares of T2SubCo to SubCo in consideration for High/Low Shares of SubCo. SubCo subsequently redeems the High/Low Shares with the result that Target receives a deemed dividend.

Interpretation for Paragraph 55(3)(a)

ITA
55(3.01)(d)

Paragraphs 55(3.01)(a) to (e) of the Act contain various interpretive rules for the purpose of paragraph 55(3)(a) of the Act. Paragraph 55(3.01)(d) provides that proceeds of disposition are to be determined without reference to the application of paragraph 55(2)(a) of the Act. This rule is intended to ensure that proceeds of disposition do not include a dividend or deemed dividend that is subject to subsection 55(2).

Section 93 of the Act permits a corporation resident in Canada to elect to treat the proceeds of disposition of a share of a foreign affiliate as a dividend in certain circumstances. Where such an election is made, the proceeds of disposition of the share are reduced accordingly. The reduction in the proceeds of disposition under section 93 is not intended to affect the application of paragraph 55(3)(a). Thus, paragraph 55(3.01)(d) is amended, for dividends received after February 21, 1994, to ensure that, for the purpose of paragraph 55(3)(a), proceeds of disposition are determined without reference to section 93.

Where Paragraph (3)(b) not Applicable

ITA
55(3.1)(b)(i)(B)

Paragraph 55(3.1)(b) of the Act provides that a dividend received in the course of a reorganization to which paragraph 55(3)(b) applies is not excluded from the application of subsection 55(2) of the Act if one of the transactions or events described in paragraph 55(3.1)(b) occurs as part of the series of transactions or events that includes the receipt of the dividend. Subparagraph 55(3.1)(b)(i) deals with a disposition of property in circumstances described in clauses 55(3.1)(b)(i)(A) to (C). Clause 55(3.1)(b)(i)(A) describes the type of property (i.e., shares of the distributing or transferee corporation or property whose value is derived from such shares), clause 55(3.1)(b)(i)(B) describes the type of vendor (i.e., a specified shareholder of the distributing or transferee corporation) and clause 55(3.1)(b)(i)(C) describes the type of acquirer (i.e., a person unrelated to the vendor or a partnership).

Clause 55(3.1)(b)(i)(B) is amended, for dividends received after 1999, to exclude a vendor that is a qualified person in relation to the distribution. "Qualified person" is a new expression defined in subsection 55(1) of the Act. For additional information, see the commentary to "qualified person" under subsection 55(1).

Interpretation

ITA
55(3.2)(h)

Subsection 55(3.2) of the Act sets out a number of interpretative rules for the purpose of paragraph 55(3.1)(b). Paragraph 55(3.2)(h) provides that each corporation that is a shareholder and specified shareholder of the distributing corporation at any time during the course of the series of transactions or events that includes a distribution is deemed to be a transferee corporation in relation to the distributing corporation. Paragraph 55(3.2)(h) is amended, for dividends received after 1999, to ensure that a "qualified person" as defined in subsection 55(1) is not deemed by this provision to be a transferee corporation in relation to the distributing corporation. For additional information, see the comments in the explanatory note to "qualified person" under subsection 55(1).

Specified Shareholder

ITA
55(3.4)

New subsection 55(3.4) of the Act is added to provide that shares of a specified class are not to be considered in determining whether a person is a specified shareholder for the purposes of subparagraph 55(3.1)(b)(i) and paragraph 55(3.2)(h) (as it applies for the purpose of subparagraph 55(3.1)(b)(iii)) and for the purpose of the definition "qualified person" in subsection 55(1) of the Act. New subsection 55(3.4), which applies to dividends received after 1999, ensures that a person or partnership that would not, but for the ownership of shares of a specified class, be a specified shareholder, will not be subject to the restrictions on the disposition of property described in subparagraph 55(3.1)(b)(i) and will not be deemed to be a transferee corporation for the purpose of subparagraph 55(3.1)(b)(iii).

Amalgamations – Related Corporations

ITA
55(3.5)

Subsection 55(3.5) of the Act is a new provision that applies for the purposes of paragraphs 55(3.1)(c) and (d) of the Act. Paragraphs 55(3.1)(c) and (d) provide that a dividend arising in the course of a reorganization to which paragraph 55(3)(b) applies is not exempt from the application of subsection 55(2) of the Act where, as Part of the series of transactions or events that includes the receipt of the dividend, property described therein is acquired by a particular person or partnership. In the case of paragraph 55(3.1)(c), the particular person is a person who is not related to the transferee corporation (or ceases to be related to the transferee corporation). In the case of paragraph 55(3.1)(d), the particular person is a person who is not related to the distributing corporation (or ceases to be related to the distributing corporation). Property described in paragraph 55(3.1)(c) does not include a share of the capital stock of the transferee corporation. Similarly, property described in paragraph 55(3.1)(d) does not include a share of the capital stock of the distributing corporation.

New subsection 55(3.5), which applies to dividends received after April 26, 1995, deems an amalgamated corporation to be the same corporation as, and a continuation of, each of its predecessor corporations provided each of the predecessor corporations was related to each other immediately before the amalgamation. As a result, the references in paragraphs 55(3.1)(c) and (d) to a share of the capital stock of the transferee or distributing corporation include a share of the capital stock of a new corporation formed on an amalgamation where the new corporation is deemed by new subsection 55(3.5) to be the same corporation as, and a continuation of, the transferee or distributing corporation, as the case may be.

Unlisted Shares of Public Corporation Deemed to be Listed

ITA
55(6)

New subsection 55(6) of the Act, which applies to shares issued after April 26, 1995, treats a taxpayer’s unlisted shares of a public corporation (“reorganization shares”) – that were issued to the taxpayer and redeemed in the course of a tax-deferred reorganization spin-off by the public corporation – to be listed on a designated (or for certain earlier periods, prescribed) stock exchange. This subsection ensures that the shares are listed on a designated stock exchange for the purposes of the clearance certificate rule in subsection 116(1) and the definition “taxable Canadian property” in subsection 248(1) of the Act. However, for this treatment to apply, the following conditions must be met:

Clause 194

Other Sources of Income

ITA
56

Sections 56 to 59.1 of the Act list some of the types of "other income" that are required by paragraph 3(a) of the Act to be included in computing the income of a taxpayer for a taxation year from sources of income (these sources are sources other than the taxpayer's income for the year from each office, employment, business and property).

Amounts to be Included in Income for Year

ITA
56(1)(a)

Paragraph 56(1)(a) includes in the income of a taxpayer certain amounts received in a taxation year. Subparagraph 56(1)(a)(iv) is amended, consequential to the enactment of the Fairness for the Self-Employed Act, to include in the income of a self-employed taxpayer the amount of benefits received under Part VII.1 of the Employment Insurance Act.

This amendment applies to the 2011 and subsequent taxation years.

This paragraph is also amended by adding new subparagraph 56(1)(a)(vii) to include in the income of a taxpayer the amount of a benefit received under the Quebec Parental Insurance Plan.

This amendment applies to the 2006 and subsequent taxation years and is consequential to the introduction of the Quebec Parental Insurance Plan on January 1, 2006.

Restrictive Covenant - Bad Debt Recovered

ITA
56(1)(m)

New paragraph 56(1)(m) of the Act is added to provide that a taxpayer is required to include in income any amount received in a taxation year on account of a debt in respect of which a bad debt deduction was made under new paragraph 60(f) of the Act in computing the taxpayer's income for a preceding taxation year. In other words, if a taxpayer makes a bad debt deduction for an amount receivable in respect of a restrictive covenant that was previously included in computing the taxpayer's income because of new section 56.4 (or new subsection 6(3.1)) of the Act, and the taxpayer (or a person not dealing at arm's length with the taxpayer) subsequently receives the amount, the amount so received is to be included in computing the taxpayer's income.

Apprenticeship grants

ITA
56(1)(n.1)

Paragraph 56(1)(n.1) of the Act requires a taxpayer to include in computing income for a taxation year amounts received in the year under the Apprenticeship Incentive Grant program administered by the Department of Human Resources and Skills Development.

This paragraph is amended to provide that a taxpayer must also include in computing income for a taxation year amounts received in the year under the Apprenticeship Completion Grant program administered by the Department of Human Resources and Skills Development.

This paragraph is also amended to update the reference to the Department of Human Resources and Skills Development.

This amendment applies for the 2007 and subsequent taxation years.

Universal Child Care Benefit

ITA
56(9.1)

Subsection 56(6) of the Act generally provides that the Universal Child Care Benefit ("UCCB") is to be reported by the spouse or common-law partner with the lower income for a taxation year. Other provisions in the Act similarly apply to include amounts in the income of, or to allow deductions to, the spouse or common-law partner with the higher or lower net income in the year.

New subsection 56(9.1) defines "income" for the purpose of determining the income of each spouse or common-law partner for the purposes of subsection 56(6). The new rule requires that, in calculating for these purposes the income of the taxpayer and the taxpayer's spouse or common-law partner, the following amounts will not be considered:

This amendment applies to the 2006 and subsequent taxation years.

Foreign Retirement Arrangement

ITA
56(12)

Clause 56(1)(a)(i)(C.1) of the Act generally requires that payments received by a taxpayer from a foreign retirement arrangement (FRA) be included in computing the taxpayer's income as a superannuation or pension benefit. An FRA is defined in subsection 248(1) of the Act as a prescribed plan or arrangement. Presently, the only arrangements prescribed to be an FRA under Regulation 6803 are individual retirement accounts and annuities (IRAs) established pursuant to section 408(a), (b) or (h) of the United States' Internal Revenue Code of 1986 (referred to as the "Code").

New subsection 56(12) is introduced to require Canadian residents who hold IRAs to include in income any amount treated under the Code as a distribution from an IRA, to the extent that the amount is required to be included in income for U.S. tax purposes. New subsection 56(12), among other things, gives effect to a proposal that was announced in Finance Canada News Release 1998-129, dated December 18, 1998.

In certain circumstances, the Code provides that an amount is to be treated as a distribution from an IRA even though no distribution has in fact been made. For example, if an individual converts an IRA into a Roth IRA (which is an individual retirement plan established pursuant to section 408A(b) of the Code) simply by amending the plan terms, section 408A(d)(3)(C) of the Code treats the converted amount as a distribution from the regular IRA and, thus, includible in income for U.S. tax purposes. For Canadian tax purposes, however, the converted amount might not be considered to have been received by the individual and, thus, could escape taxation in Canada. Other circumstances in which the Code treats a distribution to have occurred include borrowing money from an IRA and using an IRA as security for a loan. New subsection 56(12) clarifies that such "deemed" distributions under the Code are to be treated as distributions for Canadian income tax purposes.

More specifically, subsection 56(12) provides that, for the purpose of paragraph 56(1)(a), an individual is deemed to have received an amount as a payment from an FRA where, as a result of a transaction, event or circumstance, the income tax laws of the foreign country in which the FRA is established treats the amount as having been distributed from the FRA to the individual. The taxation year in which the individual is deemed to have received the amount is the taxation year that includes the time of the transaction, event or circumstance.

Subsection 56(12) applies to the 1998 and subsequent taxation years except that, in its application to the 1998 to 2001 taxation years, two modifications are made. First, its application is limited to circumstances involving the conversion of an IRA into a Roth IRA. Second, for conversions of IRAs into Roth IRAs that occurred in 1998, the amount and timing of the income inclusion in Canada will match the amount and timing in the U.S. Under the Code, individuals who converted an IRA into a Roth IRA in 1998 were entitled to spread the income inclusion over a four-year period. Subsection 56(12) provides for the same treatment. However, if an individual became resident in Canada after having converted an IRA into a Roth IRA in 1998, the individual will not be subject to taxation in Canada on any amounts relating to the conversion that remain taxable for U.S. tax purposes.

Clause 195

Restrictive Covenants

ITA
56.4

New section 56.4 of the Act sets out rules with respect to amounts that are received or receivable in respect of a restrictive covenant. In addition to new section 56.4, there are consequential changes to other provisions of the Act, including section 6 (employment income), subsection 14(5.1) (restrictive covenant amount), section 56 (amounts to be included in income), section 60 (other deductions), section 68 (allocation of consideration) and section 212 (Part XIII tax, non-resident withholding tax) of the Act. The notes accompanying those consequential changes contain additional details about each change.

Definitions

ITA
56.4(1)

New subsection 56.4(1) defines an “eligible corporation”, an “eligible individual”, an “eligible interest”, a “goodwill amount”, a “permanent establishment”, a “restrictive covenant” and a “taxpayer”. These definitions are relevant for the purpose of computing the amount, if any, that a taxpayer is required to include in income, or in proceeds of disposition in respect of certain capital property, in respect of amounts received or receivable for a restrictive covenant.

eligible corporation

“Eligible corporation” of a taxpayer means a taxable Canadian corporation of which the taxpayer holds, directly or indirectly, shares of the capital stock.

This definition is relevant for the purpose of determining whether new subsections 56.4(5) and (7) apply (also see subsection (8)) to provide an exception from the rule in section 68 that may deem a person who grants a restrictive covenant to receive an amount for the restrictive covenant.

“eligible individual”

“Eligible individual” in respect of a vendor at any time means an individual (other than a trust) who is related to the vendor and who has attained the age of 18 years at that time or before.  This definition is relevant for the purpose of applying new subsection 56.4(7).

eligible interest

“Eligible interest”, of a taxpayer, means capital property of the taxpayer that is

This definition is relevant for the purpose of applying new paragraphs 56.4(3)(c) and (4)(c).

goodwill amount

“Goodwill amount”, of a taxpayer, is an amount that the taxpayer has or may become entitled to receive that is required by the description of E in the definition “cumulative eligible capital” in subsection 14(5) to be included in computing the cumulative eligible capital of a business carried on through a permanent establishment located in Canada. This definition is relevant for the purpose of applying new subsection 56.4(7).

“permanent establishment”

 “Permanent establishment” means a permanent establishment as defined for the purpose of subsection 16.1(1) of the Act – see Income Tax Regulation 8201. This definition is relevant for the purpose of applying the definition “goodwill amount”.

“restrictive covenant”

“Restrictive covenant”, of a taxpayer, means an agreement entered into, an undertaking made, or a waiver of an advantage or right by a taxpayer that affects, in any way whatever, the acquisition or provision of property or services by a taxpayer or by another taxpayer that does not deal at arm’s length with the taxpayer, other than an agreement or undertaking

(a) that disposes of the taxpayer's property, or

(b) that is in satisfaction of an obligation described in section 49.1 that is not a disposition except where the obligation being satisfied is in respect of a right to property or services that the taxpayer acquired for less than fair market value.

“taxpayer”

“Taxpayer” includes a partnership.

Income - Restrictive Covenants

ITA
56.4(2)

New subsection 56.4(2) of the Act provides that there is to be included in computing a taxpayer's income for a taxation year amounts in respect of a restrictive covenant that are received or receivable in the taxation year by the taxpayer (or by another taxpayer with whom the taxpayer does not deal at arm's length). If an amount that is receivable is included because of subsection 56.4(2) in computing a taxpayer's income, or the taxpayer's eligible corporation's income, in a taxation year, the amount will not be included in computing the taxpayer's income in a subsequent year. Subsection 56.4(2) does not apply in certain circumstances described in subsection (3). Also, subsection 56.4(11) provides a clarifying rule in respect of amounts included in income under subsection 56.4(2).

Non-application of Subsection (2)

ITA
56.4(3)

New subsection 56.4(3) provides three exceptions to the income inclusion rule in subsection 56.4(2) of the Act for amounts received or receivable in respect of a restrictive covenant granted by a taxpayer to a person with whom the taxpayer deals at arm’s length (the “purchaser”).

First, subsection 56.4(2) does not apply to an amount if section 5 or 6 of the Act applies to include the amount in computing the taxpayer's employment income for the year or would have so applied if the amount had been received in the taxation year.

Second, subsection 56.4(2) does not apply to an amount that would, if the Act were read without reference to section 56.4, be required by the description of E in the definition “cumulative eligible capital” in subsection 14(5) of the Act to be included in computing the taxpayer’s cumulative eligible capital in respect of the business to which the restrictive covenant relates. The taxpayer (and the purchaser if the purchaser carries on business in Canada) is required to elect jointly in prescribed form to apply this exception. The note accompanying new subsection 56.4(13) provides further details with respect to filing an election.

Third, subsection 56.4(2) does not apply to an amount to the extent that the amount is additional “proceeds of disposition” from the disposition of an eligible interest (see the definition “eligible interest” in subsection 56.4(1)) of the taxpayer if certain conditions are met. All of the following conditions must be met:

New paragraph 56.4(3)(c) is, however, subject to new subsection 56.4(9) – discussed below in the accompanying note – which provides an anti-avoidance rule that, if applicable, results in the non application of paragraph 56.3(3)(c).

Treatment of Purchaser

ITA
56.4(4)

New subsection 56.4(4) of the Act provides rules that apply to an amount paid or payable by a purchaser of a restrictive covenant in certain circumstances.

If the amount paid or payable by a purchaser of a restrictive covenant is employment income of an employee of the purchaser, the amount is considered to be wages paid or payable by the purchaser to the employee.

If an election has been made under paragraph 56.4(3)(b) in respect of the amount, the amount is to be considered to be an outlay incurred by the purchaser on account of capital for the purpose of applying the definition “eligible capital expenditure” in subsection 14(5) and not to be an amount paid or payable for all other purposes of the Act.

If an election has been made under paragraph 56.4(3)(c) in respect of the amount and the amount relates to the purchaser’s acquisition of property that is immediately after the acquisition of an eligible interest of the purchaser, the amount is to be included in computing the cost to the purchaser of that interest and is considered not to be an amount paid or payable for all other purposes of the Act.

Non-application of Section 68

ITA
56.4(5)

New subsection 56.4(5) of the Act provides that, in respect of a restrictive covenant granted by a taxpayer, section 68 does not apply to deem consideration to be received or receivable by the taxpayer for the restrictive covenant. The circumstances in which subsection 56.4(5) may apply are more fully described below in the notes accompanying new subsections 56.4(6) and (7).

Application of Subsection (5) – If Employee Provides Covenant

ITA
56.4(6)

New subsection 56.4(6) of the Act provides a set of conditions that, if met, result in subsection 56.4(5) applying with respect to a restrictive covenant granted by an individual – with the result that section 68 does not apply to deem consideration to be received or receivable by the individual for granting the restrictive covenant. This is the case if all of the following conditions exist:

Application of Subsection (5) – Realization of "goodwill amount" and Disposition of Property

ITA
56.4(7)

New subsection 56.4(7) of the Act provides a set of conditions that, if met, result in subsection 56.4(5) applying with respect to a restrictive covenant granted by a taxpayer – with the result that section 68 does not apply to deem consideration to be received or receivable by a taxpayer for granting the restrictive covenant. In general, for subsection 56.4(7) to apply a grant of a restrictive covenant that is a non-compete agreement is required to be made in conjunction with a realization of a "goodwill amount" or the disposition of property. The conditions that must be satisfied differ depending on whether the vendor's grant of the restrictive covenant is made to a person who deals with the vendor on an arm's length basis or is made to an eligible individual (i.e., a related individual who has attained the age of 18 years). The following describes the conditions that are required to be met, first in respect of grants of a restrictive covenant made on an arm's length basis and second where the grant is made on a non-arm's length basis.

(a) Grant of a restrictive covenant to an arm's length party:

The conditions are as follows:

For this exception to apply, a joint election in prescribed form is required to be made by the vendor (or the vendor's eligible corporation if it receives the goodwill amount) and the purchaser (or the purchaser's eligible corporation if it incurs the expenditure that is the goodwill amount to the recipient). See paragraph (g). However, no joint election is required under subsection (7) in respect of a restrictive covenant granted on or before Announcement Date.

(b) Grant of restrictive covenant to an eligible individual:

The conditions are as follows:

For this exception to apply, a joint election in prescribed form is required to be made by the vendor (or the vendor's eligible corporation if it receives the goodwill amount) and the eligible individual (or the eligible individual's eligible corporation if it incurs the expenditure that is the goodwill amount to the recipient). See paragraph (g). However, no joint election is required under subsection (7) in respect of a restrictive covenant granted on or before Announcement Date.

New subsection 56.4(7) is subject to new subsection 56.4(10) – discussed below in the accompanying note – which provides an anti-avoidance rule that, if applicable, results in the non application of new subsection (7).

Application of Subsection (7) and Section 69 – Special Rules

ITA
56.4(8)

New subsection 56.4(8) provides two special rules.

New paragraph (8)(a) provides that, in determining whether the requirements for the application of subsection (7) are satisfied in respect of a disposition of a property (other than shares of a target corporation or a family corporation), clause 7(b)(ii)(A) and subclause 7(c)(i)(B)(I) will be considered to be satisfied only if the consideration that can reasonably be regarded as being in part for a restrictive covenant is received by the vendor or the vendor's eligible corporation and subsection (2), paragraph (3)(b) and subparagraph 7(b)(i) or clause 7(c)(i)(A) applies to all or any part of the consideration that can reasonably be regarded as being for a goodwill amount.

New paragraph (8)(b) provides that, for the purpose of determining if the conditions in subsection (7)(c) have been met, and for the purpose of applying section 69, in respect of a restrictive covenant, the fair market value of a property is the amount that can reasonably be regarded as being the fair market value of the property determined as if the restrictive covenant were part of the property.

Anti-avoidance – Non-Application of Paragraph 56.4(3)(c)

ITA
56.4(9)

New subsection 56.4(9) of the Act provides an anti-avoidance rule that, if applicable, denies an election under paragraph 56.4(3)(c) that would have allowed a taxpayer to treat certain amounts that can reasonably be regarded as being for granting a restrictive covenant as proceeds of disposition in respect of an eligible interest. Subsection (9) applies – and paragraph 56.4(3)(c) does not apply – to an amount received by a taxpayer for granting a restrictive covenant if the amount would, if the Act were read without reference to section 56.4 (other than the definitions in subsection 56.4(1)), be included in computing a taxpayer's income from a source that is an office or employment or a business or property.

New subsection 56.4(9) is meant to preclude elections under paragraph 56.4(3)(c) from applying to consideration in respect of a restrictive covenant that is taxable as ordinary income. For example, paragraph 56.4(3)(c) does not apply to consideration receivable by an employee/shareholder that can reasonably be regarded under section 68 to be receivable for a covenant to which subsection 6(3) applies.

Anti-avoidance – Non Application of Subsection (7)

ITA
56.4(10)

New subsection 56.4(10) provides an anti-avoidance rule that overrides the exception to the application of section 68 that is found in subsections 56.4(7). Subsection 56.4(10) applies, and as a result section 68 applies, to consideration that can reasonably be regarded as being for a restrictive covenant if one of the results of not applying section 68 to the consideration would be that the consideration would not be included in computing a taxpayer's income from a source that is an office or employment or a business or property.

New subsection 56.4(10) is meant to preclude subsection (7) from applying to consideration in respect of a restrictive covenant that is taxable as income under paragraph 3(a) of the Act. For example, if a taxpayer were to grant a restrictive covenant to a purchaser in circumstances where another taxpayer disposes of shares to the purchaser, section 68 would apply to the consideration that can reasonably be regarded as being for the restrictive covenant if that consideration would be income to the other taxpayer – which would be the case, for example, if those shares were held by the other taxpayer on income account. As a result, the taxpayer granting the restrictive covenant would be required to apply subsection 56.4(2) to the consideration deemed by section 68 to have been received by the taxpayer for the covenant when computing income.

Clarification if Subsection (2) Applies – Where Another Person Received the Amount

ITA
56.4(11)

New subsection 56.4(11) provides that, for greater certainty, if subsection (2) applies to include in computing a taxpayer's income an amount received or receivable by another taxpayer, that amount is not to be included in computing the income of that other taxpayer.

Clarification if Subsection (5) Applies

ITA
56.4(12)

New subsection 56.4(12) of the Act provides that, if subsection 56.4(5) applies in respect of restrictive covenant granted by a taxpayer (that is, section 68 does not apply to allocate consideration to the taxpayer's grant of a restrictive covenant), for greater certainty

Filing of Prescribed Form

ITA
56.4(13)

New subsection 56.4(13) of the Act provides that a joint election in prescribed form filed under paragraph 56.4(3)(b) and (c) and subsection (7) is to include a copy of the restrictive covenant, and be filed

However, an election is not required to be filed under subsection (7) if it concerns a restrictive covenant granted on or before Announcement Date. In the case of an election under subsection (3), such an election is deemed to be filed on a timely basis if it is filed on or before the day that is 180 days after the day this provision is assented to. A separate amendment is made to Income Tax Regulation 600, which prescribes elections under section 56.4 for the purpose of allowing the Minister of National Revenue to accept a late-filed election.

Non-application of Section 42

ITA
56.4(14)

New subsection 56.4(14) of the Act provides that section 42 of the Act does not apply to an amount received or receivable as consideration for a restrictive covenant.

Clause 196

Deductions in Computing Income

ITA
60

Section 60 of the Act provides for various deductions in computing income.

Restrictive Covenant - Bad Debt

ITA
60(f)

New paragraph 60(f) provides a taxpayer with a deduction for a bad debt in respect of an amount that was receivable on a restrictive covenant and previously included in computing the taxpayer's income because of new section 56.4 (or new subsection 6(3.1)) of the Act. This amendment applies after October 7, 2003.

Quebec Parental Insurance Plan – Self-Employed Premiums

ITA
60(g)

New paragraph 60(g) provides for a deduction in computing the income of a taxpayer for a taxation year equal to the amount by which the amounts payable by the taxpayer in respect of self-employed earnings for the taxation year as a premium under the Quebec Parental Insurance Plan exceeds the amounts that would be payable by the taxpayer as an employee’s premium under that Plan for the taxation year if those earnings were employment income of the taxpayer.

The other portion of the premiums paid may be claimed as a credit under section 118.7 at the lowest marginal rate.

This amendment applies to the 2006 and subsequent taxation years and is consequential to the introduction of the Quebec Parental Insurance Plan on January 1, 2006.

Transfers of Refund of Premiums under RRSP

ITA
60(l)

In circumstances where an individual has received (or is deemed to have received) certain taxable lump sum amounts from a registered retirement savings plan, a registered retirement income fund or a registered pension plan, paragraph 60(l) of the Act allows the individual to claim an offsetting deduction for qualifying payments (not exceeding the amounts so received) made by or on behalf of the individual.

If the individual is a minor and the taxable amount is received as a consequence of the death of a parent or grandparent on whom the minor was financially dependent, a payment made to acquire an immediate annuity payable for a fixed term not exceeding 18 years minus the age of the minor at the time of acquisition is a qualifying payment for the purpose of paragraph 60(l). Clause 60(l)(ii)(B) requires that the annuitant under the annuity be either the minor or a trust under which the minor is the sole person beneficially interested in amounts payable under the annuity.

Clause 60(l)(ii)(B) is amended to require that the minor be the annuitant under the annuity. This is consequential to the introduction of new section 60.011 of the Act which, among other things, allows this requirement in paragraph 60(l) to be disregarded, if the annuitant under the term annuity is a trust under which the minor is the sole person beneficially interested in amounts payable under the annuity. Section 60.011 also provides that, in determining if the minor is the sole person beneficially interested in amounts payable under the annuity, any right of a person to receive an amount from the trust only on or after the death of the minor is to be disregarded. Section 60.011 also introduces a requirement, applicable with respect to annuities acquired after 2005, that the annuity provide for commutation on the death of the minor. (Refer to the explanatory notes to new section 60.011 for further details.)

This amendment applies after 1988, which reflects the effective date of the amendment to paragraph 60(l) allowing a trust to be named as the annuitant.

Repayment of Pension or Benefits

ITA
60(n)

Paragraph 60(n) of the Act provides a deduction for repayments of certain benefits included in income. This paragraph is amended, consequential to the introduction of the Quebec Parental Insurance Plan on January 1, 2006, to provide for a deduction for repayments made under that Plan. This amendment applies to the 2006 and subsequent taxation years.

Deduction – Pension Repayments

ITA
60(n.1)

Section 60 provides for various deductions in computing income, including deductions in respect of certain repayments. New paragraph 60(n.1) provides a deduction to an individual who repays to a registered pension plan (RPP) an overpayment of an amount received from the RPP that was included in the individual’s income for the year or a preceding year.  The repayment must relate to an amount that may reasonably be considered to have been paid from the RPP in error or that was previously paid to the RPP member from the RPP but to which, as part of a settlement of an employment-related dispute (e.g., a reinstatement of employment), it was determined that the RPP member was not entitled.  An individual cannot claim a deduction under new paragraph 60(n.1) if the individual is claiming a deduction for the amount under paragraph 8(1)(m) as a contribution to the RPP.

A deductible repayment under section 60(n.1) is not a contribution for purposes of the prescribed registration conditions for RPPs. Accordingly, paragraph 8502(b) of the Regulations is not being amended to include the repayments in the list of "permissible contributions" to RPPs.

This amendment applies to the 2009 and subsequent taxation years.

Repayment of Apprenticeship Grants

ITA
60(p)

Paragraph 60(p) of the Act provides that a taxpayer may deduct a repayment made under the Apprenticeship Incentive Grant program.

This paragraph is amended to also allow a taxpayer to deduct a repayment made under the Apprenticeship Completion Grant program.

This amendment applies to the 2009 and subsequent taxation years.

Clause 197

Application of Paragraph 60(l) to Annuity with Trust as Annuitant

ITA
60.011

New section 60.011 of the Act contains special rules relating to the application of paragraph 60(l) of the Act.

In circumstances where a taxpayer has received (or is deemed to have received), as a consequence of the death of a spouse or common-law partner or of a parent or a grandparent on whom the taxpayer was financially dependent, certain taxable lump sum amounts from a registered retirement savings plan (RRSP), registered retirement income fund (RRIF) or registered pension plan (RPP), paragraph 60(l) allows the taxpayer to claim an offsetting deduction for, among other things, a payment made by or on behalf of the taxpayer to acquire an immediate annuity that satisfies the requirements set out in that paragraph.

A taxpayer is deemed to have received an amount from an RRSP, RRIF or RPP when the amount is paid to the deceased individual's estate and an election in respect of the amount is made jointly by the taxpayer and the deceased individual's legal representative. These deeming provisions are found in subsections 104(27), 146(8.1) and 146.3(6.1) for RPPs, RRSPs and RRIFs respectively.

There are two types of annuity for which an offsetting deduction may be provided under paragraph 60(l).

(Refer to subparagraph 60(l)(ii) of the Act for a complete description of the conditions applicable to these annuities.)

New section 60.011 contains provisions dealing with the application of paragraph 60(l) to a taxpayer in circumstances where a trust (under which the taxpayer is a beneficiary) is named as the annuitant under an annuity acquired with funds paid out of an RRSP, RRIF or RPP as a consequence of the death of a spouse, common-law partner, parent or grandparent of the taxpayer and included in the taxpayer's income. Section 60.011 incorporates the existing provision of paragraph 60(l) that allows a trust to be named the annuitant under a minor term annuity, and it allows a trust to be named the annuitant under a life annuity, if certain conditions are met. It ensures that the taxpayer is not denied the deduction under paragraph 60(l) by reason only of the fact that the taxpayer is not the annuitant under the annuity, or the fact that the annuity is acquired by the trust or the estate of the deceased individual rather than "by or on behalf of the taxpayer". The provisions of section 60.011 are explained in greater detail below.

Consequential changes to reflect the introduction of section 60.011 are also made. Specifically, new section 75.2 attributes to the taxpayer amounts payable under such an annuity, with corresponding changes to section 160.2 making the annuitant and the policyholder jointly and severally, or solidarily, liable with the taxpayer for any tax payable in connection with amounts attributed to the taxpayer. Paragraph 148(1)(e) is amended to ensure that such annuities are considered to be prescribed annuity contracts and treated in the same manner as other prescribed annuity contracts, the purchase price of which is deductible under paragraph 60(l). Lastly, subsection 146(8.1) is amended to ensure that the election provided for thereunder can be made if the taxpayer is "beneficially interested" in the deceased individual's estate (as defined in subsection 248(25) of the Act), but not a beneficiary under the estate (as is currently required under subsection 146(8.1)). See the explanatory notes to these provisions for further details.

New section 60.011 applies after 1988, which reflects the effective date of the amendment to paragraph 60(l) allowing a trust to be named as the annuitant under a minor term annuity.

Meaning of "lifetime benefit trust"

ITA
60.011(1)

New subsection 60.011(1) of the Act defines "lifetime benefit trust" with respect to a taxpayer and the estate of a deceased individual for the purposes of new subsection 60.011(2). Subsection 60.011(2) defines "qualifying trust annuity" with respect to a taxpayer and includes, under paragraph 60.011(2)(a), a life annuity acquired after 2005 under which the annuitant is, at the time the annuity is acquired, a lifetime benefit trust with respect to the taxpayer and the estate of a deceased individual. Subsection 60.011(2) is relevant for new subsection 60.011(3), the provisions of which ensure that the eligibility requirements for a taxpayer to deduct the purchase price of an annuity under paragraph 60(l) can be met where the annuity is a qualifying trust annuity with respect to the taxpayer.

Subsection 60.011(1) defines a trust to be, at a particular time, a lifetime benefit trust with respect to a taxpayer and the estate of a deceased individual, if two conditions are satisfied. First, the taxpayer must be, immediately before the death of the deceased individual, a mentally infirm spouse or common-law partner of the deceased individual, or a mentally infirm child or grandchild of the deceased individual who was dependent on the deceased individual by reason of that infirmity. Second, the trust must be, at the particular time, a personal trust under which

Meaning of "qualifying trust annuity"

ITA
60.011(2)

New subsection 60.011(2) of the Act defines "qualifying trust annuity" with respect to a taxpayer. Subsection 60.011(2) is relevant for new subsection 60.011(3), the provisions of which ensure that the eligibility requirements for a taxpayer to deduct the purchase price of an annuity under paragraph 60(l) can be met where the annuity is a qualifying trust annuity with respect to the taxpayer. It is also relevant for the purposes of new section 75.2, amended section 160.2 and amended paragraph 148(1)(e). Also, subsection 248(1) of the Act is amended to define the expression "qualifying trust annuity" as having the meaning assigned by subsection 60.011(2), thus ensuring that the definition in subsection 60.011(2) applies whenever the expression is used in the Act.

Subsection 60.011(2) defines three types of qualifying trust annuities with respect to a taxpayer, all of which have, as the annuitant thereunder, a trust under which the taxpayer is a beneficiary.

Application of Paragraph 60(l) to "Qualifying Trust Annuity"

ITA
60.011(3)

New subsection 60.011(3) of the Act contains provisions which ensure that the eligibility requirements for a taxpayer to deduct the purchase price of an annuity under paragraph 60(l) can be met where the annuity is a "qualifying trust annuity" with respect to the taxpayer (as defined in new subsection 60.011(2)). A distinguishing feature of a qualifying trust annuity with respect to a taxpayer is that the annuitant thereunder is a trust under which the taxpayer is a beneficiary.

Paragraph 60(l) requires that the taxpayer claiming a deduction for the purchase price of an annuity be the annuitant under the annuity. New paragraph 60.011(3)(a) provides for this requirement to be disregarded in the case of a qualifying trust annuity.

Paragraph 60(l) allows a taxpayer to deduct the purchase price of an annuity only if the amount paid to acquire the annuity was paid "by or on behalf of" the taxpayer. If a qualifying trust annuity with respect to a taxpayer is acquired either by the trust that is the annuitant, or by the estate of a deceased individual who was a spouse or common-law partner of the taxpayer or a parent or grandparent of the taxpayer on whom the taxpayer was dependent for support, and the purchase price would not otherwise be considered to have been paid "by or on behalf of the taxpayer", paragraph 60.011(3)(b) deems the amount to have been paid on behalf of the taxpayer. For this deeming rule to apply, the taxpayer must so elect in the taxpayer's return of income for the year in which the amount would have been deductible under paragraph 60(l) had the purchase price been paid by the taxpayer. (A taxpayer is deemed to have made the election required under paragraph 60.011(3)(b) with respect to any amount claimed by the taxpayer as a deduction under paragraph 60(l) in computing income for a taxation year ending before 2005.)

Clause 198

Child Care Expenses

ITA
63(2)(b)

Section 63 of the Act provides rules concerning the deductibility of child care expenses in computing an individual's income. When more than one taxpayer contributes to the support of an eligible child, the child care expense deduction must generally be claimed by the taxpayer with the lower income for the year. One of the exceptions to this rule is where a medical doctor certifies that the lower-income supporting individual is incapable of caring for children because of that individual's mental or physical infirmity. This amendment clarifies that such a certification has to be in writing.

This amendment applies to certifications made after December 20, 2002.

Clause 199

Resource Expenses

ITA
66

Section 66 of the Act provides rules in respect of resource expenses.

Canadian Exploration Expenses to Flow-Through Shareholder

ITA
66(12.6)

Subsection 66(12.6) of the Act permits a principal-business corporation to renounce Canadian exploration expenses ("CEE") to its flow-through shareholders. To be eligible for flow-through treatment, CEE must be incurred in the 24-month period that begins on the day on which the relevant flow-through share agreement is entered into and must be incurred, or deemed to be incurred, on or before the effective date of the renunciation.

Subsection 66.1(9) of the Act provides for the reclassification of certain Canadian development expenses as CEE ("reclassified CDE"). The reclassified CDE is deemed, for the purposes of the Act, to be incurred by the taxpayer at the time of the reclassification and not at the time the reclassified CDE was actually incurred. To ensure that expenses actually incurred before a flow-through share agreement is entered into cannot be renounced under a flow-through share agreement, subsection 66(12.6) is amended, applicable to renunciations made after December 20, 2002, to exclude reclassified CDE from CEE that may be renounced by a corporation to its flow-through shareholders.

Effect of Renunciation

ITA
66(12.63)

Subsection 66(12.63) of the Act provides that Canadian development expenses renounced under subsection 66(12.62) of the Act by a corporation to a person are considered to have been incurred by that person on the effective date of the renunciation and not to have been incurred by the corporation.

Subsection 66(12.63) currently provides that it is subject to subsections 66(12.691) to (12.702) of the Act. Subsection 66(12.63) is amended, applicable to renunciations made after December 20, 2002, to provide that it is subject to subsections 66(12.69) to (12.702).

Expenses in the First 60 Days of the Year

ITA
66(12.66)

Subsection 66(12.66) of the Act permits a corporation to renounce Canadian exploration expenses ("CEE") and Canadian development expenses ("CDE") to a flow-through shareholder within defined limits. Where the conditions described in subsection 66(12.66) are met, the corporation may renounce in January, February or March of a particular calendar year, effective as of the end of the preceding calendar year, the expenses described in subsection 66(12.66) that the corporation has incurred, or plans to incur, in the particular year. In other words, subsection 66(12.66) provides a "look-back" period of one year.

The French version of subsection 66(12.66) is amended to insert paragraph (a.1), which was inadvertently omitted when the subsection was amended by subsection 104(5) of S.C. 1998, c. 19 (formerly Bill C-28), and to correct certain grammatical errors.

The closing words of subsection 66(12.66) currently refer to "the last day of the year". The closing words are amended, effective upon Royal Assent, to clarify that the reference to "the year" means the preceding year referred to in paragraphs 66(12.66)(a.1), (c) and (e).

Definitions

ITA
66(15)

Subsection 66(15) of the Act contains various definitions for the purposes of section 66.

"flow-through share"

A flow-through share is a share of the capital stock of a principal-business corporation, or a right to such a share, that is issued to a person pursuant to an agreement in writing under which the corporation agrees to incur resource expenses and renounce those expenses to that person.

The definition is amended to exclude a prescribed right from the class of rights that qualifies as flow-through shares. A "prescribed right" is proposed to be defined in new subsections 6202.1(1.1) and (2.1) of the Regulations. This amendment ensures that restrictions on the type of shares that may qualify as flow-through shares, currently found in subsections 6202.1(1) and (2) of the Regulations, also apply to rights to acquire shares.

The amended definition "flow-through share", which applies to agreements made after December 20, 2002, no longer includes the phrase, "any interest acquired in such a share by a person pursuant to such an agreement". This phrase is being deleted because the amended definition is sufficiently comprehensive to include any interest in property that qualifies as a flow-through share.

Members of Partnerships

ITA
66(18)

Subsection 66(18) provides that, for the purposes of most of the resource taxation rules, a partner's share of resource expenditures incurred in a fiscal period is considered to have been incurred by the partner at the end of the fiscal period.

Subsection 66(18) is amended by adding a reference to the “pre-production mining expenditure”, consequential to the introduction of subparagraph (b)(ii) in the definition in subsection 127(9) of the Act.  A taxable Canadian corporation that is a member of a partnership could under certain circumstances earn investment tax credits in respect of the corporation’s “pre-production mining expenditure”.  For more information, refer to commentary following the amendments to the definition of pre-production mining expenditure in subsection 127(9) of the Act.

This amendment applies to expenses incurred in fiscal periods that begin after 2001.

Clause 200

Canadian Exploration Expense

ITA
66.1

Section 66.1 of the Act provides the rules relating to the deduction of "Canadian exploration expense."

Definitions

ITA
66.1(6)

Subsection 66.1(6) of the Act provides definitions for the purpose of section 66.1.

"cumulative Canadian exploration expense"

A taxpayer's "cumulative Canadian exploration expense" (CCEE) includes the taxpayer's undeducted pool of Canadian exploration expenses. A taxpayer is permitted a deduction under either subsection 66.1(2) or (3) with respect to a positive CCEE. A "negative" CCEE is included in a taxpayer's income under subsection 66.2(1).

The description of B, in the formula in the definition of CCEE, adds negative CCEE amounts that are required to be included in a taxpayer's income during previous taxation years. The description of B is amended to ensure that only amounts that were included in a taxpayer's income during previous taxation years are added to the taxpayer's CCEE pool.

This amendment applies to taxation years that end after November 5, 2010.

Deductible expense

ITA
66.1(6.2)

New subsection 66.1(6.2) is added consequential to the rewording of paragraphs (f) and (g) and repeal of paragraph (k.2), of the definition Canadian exploration expense in subsection (6). New subsection 66.1(6.2) provides that expenditures that are not considered as a Canadian exploration expense will not be considered non-deductible merely because they are an outlay or a payment described in paragraph 18(1)(b) of the Act.

Consistent with the changes to the wording of paragraphs (f) and (g) and repeal of paragraph (k.2) of the definition Canadian exploration expense in subsection (6), this amendment applies in respect of expenses incurred after November 5, 2010.

Clause 201

Canadian Development Expense

ITA
66.2

Section 66.2 of the Act provides the rules relating to the deduction of “Canadian development expense”.

Definitions

ITA
66.2(5)

Subsection 66.2(5) contains the definitions "Canadian development expense" and "cumulative Canadian development expense" of a taxpayer.

“Canadian development expense”

The cost of property described in paragraph (b), (e) or (f) of the definition “Canadian resource property” in subsection 66(15) or any right to or interest in such property is referenced in paragraph (e) of the definition “Canadian development expense”. Paragraph (e) of the definition is reworded to reflect both the common law and civil law concept of a right by ensuring that the reference to any right to a property includes, for civil law purposes, any right in or to the property.

This amendment generally applies to taxation years that begin after 2006. However, since paragraph 18(1)(m) may apply to taxation years that begin in 2007, the coming-into-force provision for this amendment provides that paragraph (e) of the definition "Canadian development expense" is to be read with reference to paragraph 18(1)(m) for taxation years that begin in 2007.

“cumulative Canadian development expense”

A taxpayer's "cumulative Canadian development expense" (CCDE) includes the taxpayer's undeducted pool of Canadian development expenses. A taxpayer is permitted a deduction under subsection 66.2(2) with respect to a positive CCDE. A "negative" CCDE is included in a taxpayer's income under subsection 66.2(1).

The description of B, in the formula in the definition of CCDE, adds negative CCDE amounts that are required to be included in a taxpayer's income during previous taxation years. The description of B is amended to ensure that only amounts that were included in a taxpayer's income during previous taxation years are added to the taxpayer's CCDE pool.

This amendment applies to taxation years ending after November 5, 2010.

Clause 202

Foreign Resource Expense

ITA
66.21

Section 66.21 of the Act sets out the rules governing foreign resource expenses of a taxpayer.

Definitions

ITA
66.21(1)

Subsection 66.21(1) of the Act sets out a number of definitions that apply for the purposes of rules governing the foreign resource expenses of a taxpayer.

"cumulative foreign resource expense"

A taxpayer's "cumulative foreign resource expense" (CFRE) in respect of a country other than Canada includes the taxpayer's undeducted pool of foreign resource expenses in respect of the country. A taxpayer is generally permitted a deduction on a country-by-country basis under subsection 66.21(4) in respect of a positive CFRE. A "negative" CFRE is included in a taxpayer's income under subsection 66.21(3).

The description of B, in the formula in the definition of CFRE, adds negative CFRE amounts that are required to be included in a taxpayer's income during previous taxation years. The description of B is amended to ensure that only amounts that were included in a taxpayer's income during previous taxation years are added to the taxpayer's CFRE pool.

This amendment applies to taxation years ending after November 5, 2010.

The formula in the definition of CFRE is also amended by adding new element A.1. Element A.1 adds the cost of foreign resource property deemed to have been acquired when the taxpayer last became resident in Canada to the taxpayer's CFRE.

This amendment applies after 2004.

Clause 203

Canadian Oil and Gas Property Expense

ITA
66.4

Section 66.4 of the Act provides rules relating to the deduction of “Canadian oil and gas property expense”. 

Definitions

ITA
66.4(5)

Subsection 66.4(5) contains definition of “Canadian oil and gas property expense”. 

“Canadian oil and gas property expense

The cost of property described in paragraph (a), (c) or (d) of the definition “Canadian resource property” in subsection 66(15) or a right to or interest in such property is referenced in paragraph (a) of the definition “Canadian oil and gas property expense”.  Paragraph (a) of the definition is reworded to reflect both the common law and civil law concept of a right by ensuring that the reference to any right to a property includes, for civil law purposes, any right in or to the property.

This amendment generally applies to taxation years that begin after 2006. However, since paragraph 18(1)(m) may apply to taxation years that begin in 2007, the coming-into-force provision for this amendment provides that paragraph (a) of the definition "Canadian oil and gas property expense" is to be read with reference to paragraph 18(1)(m) for taxation years that begin in 2007.

Clause 204

Successor Rules – Resource Expenses

ITA
66.7

Section 66.7 of the Act provides rules (commonly known as the "successor rules") in respect of foreign exploration and development expenses, foreign resource expenses, Canadian exploration expenses, Canadian development expenses and Canadian oil and gas property expenses. The successor rules establish the parameters within which unused resource expenses of an "original owner" may be deducted by a corporation ("successor corporation") following an acquisition of resource properties by the successor corporation in certain circumstances.

Amalgamation – Partnership Property

ITA
66.7(10.1)

Subsection 66.7(10) of the Act treats a corporation as a successor corporation for the purposes of the successor rules in section 66.7 following an acquisition of control (or a change in the tax-exempt status) of the corporation. A rule in paragraph 66.7(10)(j) deems the corporation to own its percentage share of the properties owned by a partnership of which it was a member at the time of the acquisition of control. This "look-through rule" permits the deduction of resource expenses against income from, and proceeds of disposition of, the properties owned by the partnership at the time of the acquisition of control. No similar rule currently exists which would allow a new corporation formed on an amalgamation (other than an amalgamation to which subsection 87(2.1) applies) to deduct resource expenses against income from properties owned by a partnership in which a predecessor corporation was a member at the time of the amalgamation.

New subsection 66.7(10.1) of the Act applies to an amalgamation to which subsection 87(1.2) does not apply and provides a look-through rule similar to the rule in paragraph 66.7(10)(j) of the Act. It does so by deeming the predecessor corporation to have owned a portion of the properties owned by a partnership immediately before the amalgamation and to have disposed of them to the new corporation formed on the amalgamation. Thus, subsection 66.7(10.1) allows a new corporation, to the extent permitted under subsections 66.7(1) to (5), to deduct from the resource pools of the predecessor corporation, amounts relating to the new corporation's share of the income from properties owned by a partnership in which a predecessor corporation was a member at the time of the amalgamation. New subsection 66.7(10.1) applies to amalgamations that occur after 1996.

Non-successor Acquisitions

ITA
66.7(16)

Subsection 66.7(16) provides that where a particular Canadian resource property or foreign resource property is acquired by a person in circumstances in which the successor rules do not apply, every person who was an original owner or predecessor owner of the property by reason of having previously disposed of the property shall, for the purposes of applying the successor rules to future owners of the property, be treated as never having been an original owner or predecessor owner of the property. Thus, the income from such properties thereafter will not qualify any expenses of a predecessor or original owner for a deduction in the hands of a successor.

The subsection is amended by removing the phrase “by reason of having previously disposed of the property”, to ensure that the rule applies to all dispositions of resource properties.   As well, the reference to “shall be deemed” is replaced by “is deemed” to reflect the current drafting style. 

This amendment applies to property acquired after November 5, 2010.

Clause 205

Limited Partners – Resource Expenses

ITA
66.8

Section 66.8 of the Act provides for the rules regarding the deduction of a taxpayer's share of a partnership's resource expenditures incurred in a fiscal period in certain cases where the taxpayer's share of such resource expenditures exceeds the taxpayer's "at-risk amount" at the end of the fiscal period in respect of the partnership.

Interpretation

ITA
66.8(3)(a) and (a.1)

Paragraph 66.8(3)(a) currently provides the meaning for two expressions for the purpose of section 66.8. The expression "at-risk amount" of a taxpayer in respect of a partnership, has the meaning assigned by subsection 96(2.2), and the expression "limited partner" of a partnership (subject to certain date references in the definition of "exempt interest" in subsection 96(2.5)) has the meaning assigned by subsection 96(2.4).

Paragraph 66.8(3)(a) is amended so that it no longer provides the meaning of the expression “at-risk amount” – now in new paragraph 66.8(3)(a.1).  It continues to provide for the meaning of the expression “limited partner”, which meaning remains unchanged.  

New paragraph 66.8(3)(a.1), which provides for the meaning of the expression “at-risk amount”, is amended to provide that, for the purposes of deducting resource expenses of a limited partner under section 66.8, the “at-risk amount” of a taxpayer will not be adjusted for any amount owing by the taxpayer to a person in respect of which the taxpayer is a wholly-owned subsidiary or, if the taxpayer is a trust, to a person that is the sole beneficiary of the taxpayer.

These amendments apply to fiscal periods ending after 2003.

Clause 206

Expenses for Food, etc.

ITA
67.1

Section 67.1 of the Act provides a general limitation on the amount that may be deducted in respect of the human consumption of food or beverages or the enjoyment of entertainment, limiting an otherwise deductible amount to 50% of the expense.

Expenses for food and beverage of long-haul truck drivers

ITA
67.1(1.1)

Subsection 67.1(1.1) provides that the amount paid or payable by a long-haul truck driver during an eligible travel period is deemed to be a specified percentage of the amount instead of the 50% of the amount otherwise deemed in subsection 67.1(1). The specified percentage is 70% in 2009, 75% in 2010 and 80% after 2010.

The preamble to subsection 67.1(1.1) is amended to ensure that the subsection applies to expenses in respect of the consumption of food or beverages by a long-haul truck driver, whether or not the expenses are paid or payable by the driver. This ensures that the subsection applies in respect of deductibility of such expenses by an employer who may have paid the expenses.

This amendment applies to amounts that are paid, or become payable after March 18, 2007.

Clause 207

Allocation of Amounts in Consideration for Property, Services or Restrictive Covenants

ITA
68

Section 68 of the Act applies where an amount received or receivable from a person can reasonably be regarded as being in part consideration for the disposition of a particular property of a taxpayer or as being in part consideration for the provision of particular services by a taxpayer. If the amount is in part consideration for the disposition of property, that part of the consideration that can reasonably be regarded as being for the disposition of property is deemed to be the proceeds of disposition of that property and, reciprocally, the cost of the property for the acquirer. If the amount is in part consideration for the provision of particular services, that part of the consideration that can reasonably be regarded as being for the provision of particular services is deemed to be an amount received or receivable by the taxpayer in respect of those services and, reciprocally, an amount paid or payable by the person to whom the services are rendered.

Section 68 is amended to apply in circumstances where consideration received or receivable from a person is in part for a restrictive covenant (as defined by new subsection 56.4(1) of the Act) granted by a taxpayer. However, exceptions to the application of section 68 to a restrictive covenant are provided in new subsections 56.4(5) to (7). If section 68 applies, the part of the consideration that can reasonably be regarded as being for the restrictive covenant is considered to be an amount that is received or receivable by the taxpayer in respect of the restrictive covenant, and that part is also considered to be paid or payable to the taxpayer by the person to whom the restrictive covenant was granted.

This change applies on and after February 27, 2004, other than to a taxpayer's grant of a restrictive covenant made in writing before February 27, 2004 between the taxpayer and a person with whom the taxpayer deals at arm's length.

Clause 208

Inadequate Consideration

ITA
69

Section 69 of the Act provides a series of rules dealing primarily with transactions between non-arm's length persons or between persons on non-arm's length terms.

ITA
69(1)(b)(iii)

Subsection 69(1) of the Act provides rules that deal with gifts and non-arm's length dispositions of property, except where such transactions are expressly covered by other provisions in the Act that apply to the gift or other disposition. The English version of subparagraph 69(1)(b)(iii) is amended to correct an editorial error, by deleting the word "and" at the end of the subparagraph.

This amendment applies to dispositions that occur after December 23, 1998.

Clause 209

Death of a Taxpayer

ITA
70

Section 70 of the Act deals in particular with the transfer or distribution of property at the time of the death of a taxpayer. The French version of subsections 70(3), (6), (6.1) and (7) is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the taxpayer's beneficiaries and not simply set aside for them. Stylistic changes have also been made to these subsections. The amendments will come into force on Royal Assent.

ITA
70(5.2)

Subsection 70(5.2) of the Act provides rules with respect to the disposition of resource properties and land inventories on the death of an individual. It is amended to update its structure to conform to modern drafting standards.

Paragraph 70(5.2)(b) is amended to provide that properties in respect of which a deemed disposition occurs under paragraph 70(5.2)(a) are deemed to have been acquired, by the person who as a consequence of the individual's death acquires the property, at a cost equal to its fair market value immediately before that death.

Where certain resource properties and land inventories held by an individual immediately before death are deemed, under paragraph 70(5.2)(a) and (b), to have been disposed of by the individual and acquired at a particular cost by another person, new paragraph 70(5.2)(c) sets out the conditions under which it will apply, instead of paragraphs 70(5.2)(a) and (b), to determine the proceeds of disposition and cost of acquisition resulting from that deemed disposition and that acquisition. In particular, where the conditions in paragraph (c) are met, subparagraph 70(5.2)(c)(i) applies to determine the deceased individual's proceeds from the deemed disposition under paragraph (a) of a land inventory or resource property. In turn, subparagraph 70(5.2)(c)(ii) deems the land inventory or resource property to have been acquired at the time of the individual's death at a cost equal to the amount determined under subparagraph (i) in respect of the deemed disposition of the property under paragraph 70(5.2)(a).

This amendment applies to taxation years that begin after 2006.

Clause 210

Election by Legal Representative and Transferee re Reserves

ITA
72(2)

Subsection 72(2) of the Act sets out the rules that apply in instances where the property of a deceased taxpayer that has a right to receive any amount is transferred or distributed to the taxpayer's spouse or common-law partner or to a trust. The French version of this subsection is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. Stylistic changes have also been made to the French version of this subsection. The amendments will come into force on Royal Assent.

Clause 211

Inter Vivos Transfers by Individuals

ITA
73

Section 73 of the Act provides rules for the tax treatment of certain inter vivos transfers of property.

Capital Cost and Amount Deemed Allowed

ITA
73(2)

Subsection 73(2) of the Act applies where a person ("transferor") transfers depreciable capital property ("DCP") of a prescribed class to a taxpayer ("transferee") in circumstances in which subsection 73(1) applies. If the capital cost to the transferor of the DCP is greater than the amount at which the transferee is deemed under subsection 73(1) to have acquired the DCP, subsection 73(2) ensures that the proper amount of capital cost allowance allowed to the transferor is available for recapture on a subsequent disposition of the DCP by the transferee.

Subsection 73(2) of the Act is amended to replace the reference to paragraph 73(1)(e) with a reference to paragraph 73(1)(b). Paragraph 73(1)(b) now provides for the amount at which the transferee is deemed to acquire property on a transfer to which subsection 73(1) applies.

This amendment applies to transfers that occur after 1999.

Inter Vivos Transfer of Farm or Fishing Property to a Child

ITA
73(3)

Subsection 73(3) provides a tax-deferral for an inter vivos transfer of farm or fishing property by a taxpayer to a child of the taxpayer. Paragraph 73(3)(a) is amended to remove the word "immediately", such that the property need not be used in the farming or fishing business immediately before the transfer in order to qualify for this rollover.

This amendment applies to transfers of property that occur after May 1, 2006, other than a transfer in respect of which a taxpayer has made a valid election under subsection 11(5) of Budget Implementation Act, 2006, No. 2.

Clause 212

Exceptions to Subsection 75(2)

ITA
75(3)(b)

Subsection 75(3) of the Act exempts property held by certain trusts from the application of subsection 75(2). Absent subsection 75(3), income or losses from property is in certain circumstances attributed for income tax purposes to the person from whom the property was received by the trust.

Paragraph 75(3)(b) is amended to apply to property held by a trust that is a private foundation and a registered charity.

This amendment applies to taxation years that begin after October 31, 2011.

Clause 213

Rules Applicable With Respect to "qualifying trust annuity"

ITA
75.2

New section 75.2 of the Act provides attribution rules in respect of a "qualifying trust annuity" with respect to a taxpayer (as defined in new subsection 60.011(2) of the Act), the purchase price of which is deductible by the taxpayer under paragraph 60(l). A distinguishing feature of such an annuity is that the annuitant thereunder is a qualifying trust under which the taxpayer is a beneficiary.

Paragraph 75.2(a) deems any amount paid out of or under such an annuity at any time after 2005 and before the taxpayer's death to have been received at that time by the taxpayer. The taxpayer is required, by paragraph 56(1)(d.2) of the Act, to include this amount in computing the taxpayer's income for the year in which they are deemed to have received the amount, as would be the case if the taxpayer were the annuitant under the annuity. Paragraph 75.2(a) also deems the amount not to have been received by any other taxpayer, thus ensuring that the amount, although payable to the trust that is the annuitant under the annuity, is disregarded in determining the trust's income for tax purposes.

Paragraph 75.2(b) contains special provisions that apply where a taxpayer who was entitled to a deduction under paragraph 60(l) for the purchase price of a qualifying trust annuity with respect to the taxpayer dies after 2005. Subparagraph 75.2(b)(i) deems the taxpayer to have received, immediately before death, an amount out of or under the annuity equal to the fair market value of the annuity at that time. This amount is included, also under paragraph 56(1)(d.2), in computing the taxpayer's income for the taxation year that includes that time.

Subparagraph 75.2(b)(ii) provides for the annuity to be disregarded in determining, for the purpose of subsection 70(5) of the Act, the fair market value of the taxpayer's interest in the trust that is the annuitant under the annuity. Subsection 70(5) deems a deceased taxpayer to have disposed of each capital property owned by the taxpayer immediately before death for proceeds equal to the fair market value of the property at that time. To the extent that subsection 70(5) deems a taxpayer who dies after 2005 to have disposed of an interest in a trust that is the annuitant under a qualifying trust annuity with respect to the taxpayer, subparagraph 75.2(b)(ii) ensures – by disregarding the annuity in determining the fair market value of the taxpayer's interest in the trust – that the taxpayer is not subject to double taxation with respect to the annuity.

Clause 214

Debt Forgiveness

ITA
80 to 80.04

Sections 80 to 80.04 of the Act set out the rules that apply when an obligation is settled or extinguished for less than its principal amount or the amount for which it was issued. When such a commercial debt obligation is settled or extinguished, it gives rise to a "forgiven amount" as defined in subsection 80(1). A forgiven amount in respect of a commercial debt obligation issued by a debtor is required to be applied against certain tax pools of the debtor, in a specified order, as provided in subsections 80(3) to (12). In general, subsection 80(13) requires that one half of any remaining unapplied portion of the forgiven amount be included in computing the debtor's income, unless it can be transferred to another taxpayer under section 80.04.

ITA
80.04(6)(a)

Section 80.04 of the Act allows a debtor to enter into an agreement with an eligible transferee (generally a person related to the debtor) to transfer a portion of any unapplied forgiven amount, as specified in the agreement, to the transferee. The transferred amount reduces the amount that the debtor is required to include in income under subsection 80(13), while the eligible transferee is required to reduce its tax pools as provided in subsection 80(3) to (12) by the transferred amount.

Manner of filing agreement

Subsection 80.04(6) of the Act sets out the conditions that must be satisfied in filing an agreement under section 80.04. If the requirements are not satisfied, the agreement is not considered valid.

Subparagraph 80.04(6)(a)(ii) provides that the agreement, which has to be in prescribed form, must be filed with the debtor's or the transferee's notice of objection to an assessment of tax payable for the taxation year in which the settlement arose.

Subparagraph 80.04(6)(a)(ii) is amended to take into account situations where no tax is payable for the taxation year in which the settlement arose by either the debtor or the transferee. In particular, subparagraph 80.04(6)(a)(ii) is amended to provide that an agreement may be filed on or before the later of:

This amendment applies for taxation years that end after February 21, 1994.

Clause 215

Reimbursement of Crown Charges

ITA
80.2

Section 80.2 of the Act is a special rule that applies where a taxpayer pays an amount to another person as a reimbursement, contribution or allowance (collectively referred to herein as a "reimbursement") in respect of a Crown charge described in paragraph 12(1)(o) or 18(1)(m) of the Act. If applicable, section 80.2 deems the taxpayer to have paid an amount described in paragraph 18(1)(m) and deems the other person (the "recipient") neither to have received nor to have become entitled to receive the reimbursement. In effect, section 80.2 provides for the transfer of non-deductible Crown charges from the recipient to the taxpayer. Normally, the taxpayer is entitled to a share of the production or the income from production from the property that is subject to the Crown charge. Therefore, although section 80.2 treats the taxpayer as having incurred a non-deductible Crown charge, the taxpayer would be entitled to a deduction under paragraph 20(1)(v.1) of the Act (resource allowance) calculated by reference to the taxpayer's income from the property.

Section 80.2 operates to deem the taxpayer making the reimbursement to have paid an amount described in paragraph 18(1)(m) only to the extent that the reimbursed Crown charge was either included in the recipient's income or was denied as a deduction in computing the recipient's income. With the phasing out of the income inclusion in paragraph 12(1)(o) and the prohibition against the deduction of Crown charges in paragraph 18(1)(m), section 80.2 may no longer apply to the entire amount of a reimbursement. In addition, section 80.2 does not explicitly preclude the recipient from taking a deduction (or reducing an income inclusion) in respect of a reimbursed Crown charge. As well, since section 80.2 does not deem the taxpayer to have made the reimbursement at the time the obligation to pay the Crown charge arose, a taxpayer may seek to increase the percentage of the reimbursement that is not subject to paragraph 18(1)(m) by delaying the reimbursement. For these reasons, the total amount deductible in computing the income of the taxpayer and the recipient may, in certain circumstances, exceed the amount that was intended to be deductible.

Accordingly, section 80.2 of the Act is amended:

(a) to eliminate any excess deductions that may be available as a result of a reimbursement of a Crown charge;

(b) to preclude a taxpayer who makes a reimbursement of a Crown charge from increasing the amount deductible by delaying the time of the reimbursement; and

(c) to ensure that a taxpayer who makes a reimbursement of a Crown charge is deemed to have paid an amount described in paragraph 18(1)(m) only to the extent that the reimbursed Crown charge can reasonably be considered to relate to the taxpayer's share of the production, or the income from production, from the property to which the Crown charge relates.

New section 80.2 of the Act applies to reimbursements made after 2001, except that, the rule described in paragraph (c) above, applies only to reimbursements made on or after September 17, 2004.

The ability to claim excess deductions in respect of reimbursed Crown charges is eliminated by treating the eligible portion of the reimbursement (in most cases, the full amount of the reimbursement) as a payment described in paragraph 18(1)(m) (subsection 80.2(2)) and by reversing the benefit of any deduction in respect of a reimbursed Crown charge claimed by the recipient (subsection 80.2(6)). The eligible portion of the reimbursement is referred to in new section 80.2 as the "eligible portion of the specified amount" (see discussion below under subsections 80.2(11) and (12)). The amount of a reimbursement that exceeds the eligible portion of the specified amount is included in the income of the recipient (subsection 80.2(8)) and, subject to paragraphs 18(1)(a) and (b), is deductible in computing the income of the taxpayer (subsection 80.2(9)). In addition, new subsection 80.2(3) of the Act precludes a taxpayer from increasing the deductible portion of a reimbursement by delaying the time of the reimbursement. It does this by ensuring that the amount deductible is determined by reference to the time that the reimbursed Crown charge was imposed (i.e., became payable to, or receivable by, the Crown or an emanation of the Crown). It should be noted that new subsection 80.2(3) does not apply to a reimbursement paid to a partnership if the reimbursement meets the conditions described in new subsection 80.2(4) of the Act. These conditions, which are set out in paragraphs 80.2(4)(a) to (d), are discussed in the commentary to new subsection 80.2(4).

Application

ITA
80.2(1)

New subsection 80.2(1) of the Act provides that subsections 80.2(2) to (13) apply if a taxpayer (either resident in Canada or carrying on business in Canada) pays an amount, under the terms of a contract, that may reasonably be considered to have been received by the recipient as a reimbursement in respect of a Crown charge described by paragraph 12(1)(o) or 18(1)(m) of the Act. The Crown charge is referred to in new section 80.2 as the “original amount”. By referring to an original amount “described” by paragraphs 12(1)(o) or 18(1)(m) (and not the amount either included in income or denied as a deduction under these provisions), subsection 80.2(1) ensures that section 80.2 applies to the full amount of the reimbursement. The full amount of the reimbursement is referred to in new section 80.2 as the “specified amount”.

New paragraph 80.2(1)(b) of the Act provides that the reimbursed Crown charge must be paid or payable by the recipient or receivable by a person described in paragraph 12(1)(o) in a taxation year or fiscal period of the recipient that begins before 2007. As a result, section 80.2 will only apply to a reimbursement if the recipient is subject to restrictions on the deductibility of the reimbursed Crown charge (i.e., the Crown charge is described in paragraph 18(1)(m)) or is required to include some portion of the Crown charge in income (i.e., the Crown charge is described in paragraph 12(1)(o)).

Rules Relating to Time of Payment

ITA
80.2(2)

New subsection 80.2(2) of the Act provides that if the specified amount is paid in a taxation year of the taxpayer that begins before 2008, the eligible portion of the specified amount is deemed to be an amount described by paragraph 18(1)(m). It also provides that, if the specified amount is paid in a taxation year of the taxpayer that begins after 2007, the specified amount is deemed, for the purpose of applying section 80.2 to the taxpayer, to be nil.

For payments made before September 17, 2004, the eligible portion of the specified amount is equal to the specified amount. For reimbursements made on or after September 17, 2004, the eligible portion of the specified amount may be less than the specified amount. The rules for determining the eligible portion of the specified amount are described in the commentary to subsections 80.2(11) and (12).

To accommodate the payment of a reimbursement in a taxation year of the taxpayer that begins after 2006 and before 2008 (the eligible portion of which is deemed to be described by paragraph 18(1)(m)), paragraph 18(1)(m), which was originally repealed effective for taxation years that begin after 2006, will be repealed for taxation years that begin after 2007. If, however, a reimbursement described in subsection 80.2(1) is delayed to a taxation year of the taxpayer that begins after 2007, the specified amount is deemed, for the purpose of applying section 80.2 to the taxpayer, to be nil and no deduction will be available to the taxpayer in respect of the reimbursement.

Applying Paragraph 18(1)(m)

ITA
80.2(3)

To ensure that the taxpayer does not benefit (i.e., increase the percentage of the reimbursement that is deductible in computing income) by delaying the reimbursement of a Crown charge, new subsection 80.2(3) of the Act provides that paragraph 18(1)(m) applies as if the reimbursement were made at the time the Crown charge was imposed (i.e., became payable or receivable). If the taxpayer did not exist at the time the Crown charge was imposed (e.g., a new corporation created on an amalgamation), the percentage of the reimbursement that is subject to paragraph 18(1)(m) is computed as if the taxpayer were in existence at that time and had a calendar year-end. In either case, the percentage of the reimbursement that is subject to paragraph 18(1)(m) and, accordingly, the amount that is not deductible in the taxation year in which the reimbursement is paid, is determined by reference to the percentages described in the transitional rules to the repeal of paragraph 18(1)(m), as if the taxpayer paid the reimbursement at the time the reimbursed Crown charge was imposed.

Exception for Certain Partnership Reimbursements

ITA
80.2(4)

New subsection 80.2(4) of the Act provides that subsection 80.2(3) does not apply to certain partnership reimbursements if the conditions, set out in new paragraphs 80.2(4)(a) to (d), are met. Those conditions require the taxpayer to be a member of the partnership at the end of the particular fiscal period in which the Crown charge became payable or receivable and require the reimbursement to be paid before the end of the taxation year of the taxpayer in which the particular fiscal period of the partnership ends. The purpose of new subsection 80.2(4) is to permit a member of a partnership to determine the amount deductible in respect of a reimbursed Crown charge by reference to the same taxation year as the profit from the partnership's production (on which the reimbursed Crown charge was imposed) is allocated to the member.

Specified Amount Deemed to be Paid at End of Taxation Year

ITA
80.2(5)

New subsection 80.2(5) of the Act is a special rule that applies to a taxpayer that made a reimbursement payment to a partnership before September 17, 2004 ("initial reimbursement"). If the conditions set out in new subsection 80.2(5) are met, the taxpayer may make a supplemental reimbursement ("top-up reimbursement") that is deemed to have been paid at the end of the taxation year in which the initial reimbursement was made. New subsection 80.2(5) only applies if the taxpayer's share of the original amount in respect of the initial reimbursement is greater than the initial reimbursement (i.e., the taxpayer reimbursed the partnership for less than the taxpayer's share of the Crown charges). In addition, the top-up reimbursement must be paid before 2006 and cannot exceed the difference between the taxpayer's share of the original amount in respect of the initial reimbursement and the initial reimbursement. The rules for determining a taxpayer's share of the original amount in respect of the initial reimbursement are set out in new subsection 80.2(12).

The purpose of new subsection 80.2(5) is to permit a taxpayer to make a retroactive top-up reimbursement if the initial reimbursement was less than the taxpayer's share of the Crown charges. This provision recognizes that: 1) a taxpayer may have made a partial reimbursement prior to September 17, 2004 (the date of the press release announcing the amendments to section 80.2) in the expectation of obtaining a deduction in respect of reimbursed Crown charges that was proportionate to the reduction in the taxpayer's resource allowance; and 2) the deduction anticipated by the taxpayer may have been diminished by new section 80.2. Thus, new subsection 80.2(5) affords the taxpayer the opportunity to correct for unanticipated tax consequences relating to the application of new section 80.2 to the initial reimbursement.

Inclusion in Recipient's Income

ITA
80.2(6)

New subsection 80.2(6) of the Act requires the recipient to include in income, for the taxation year or fiscal period in which the original amount was paid or became payable or receivable, the amount by which the eligible portion of the specified amount exceeds the portion of the original amount that was included in the income of the recipient (if the reimbursement relates to a paragraph 12(1)(o) amount) or was not allowed as a deduction (if the reimbursement relates to a paragraph 18(1)(m) amount). The purpose of this provision is to offset any reduction in income available to the recipient in respect of a reimbursed Crown charge.

Interpretation – Portion of the Original Amount

ITA
80.2(7)

New subsection 80.2(7) of the Act provides that, in determining the amount included in the income of the recipient under subsection 80.2(6), the portion of the original amount that was included in computing the income of the recipient or that was not deductible in computing the income of the recipient is determined as if the original amount were equal to the eligible portion of the specified amount. For example, assume that, in its taxation year ending on December 31, 2003, a recipient was entitled to a deduction of $500 in respect of $5,000 of Crown charges described in paragraph 18(1)(m) (10% of $5,000) and that one-half of the Crown charges ($2,500) were reimbursed in that year. In this case, the recipient would be required to include $250 in its income (10% of $2,500 – the amount deductible by the recipient if the original amount were equal to the eligible portion of the specified amount). As a further example, assume that the recipient receives a reimbursement of $3,000 after September 17, 2004 in respect of $5,000 of Crown charges incurred in its taxation year ending December 31, 2004. It is further determined that the eligible portion of the specified amount is $2,000. In this case, the recipient would be required to include $500 in its income under this provision (25% of $2,000 – the amount deductible by the recipient if the original amount were equal to the eligible portion of the specified amount). The portion of the reimbursement that exceeds the eligible portion of the specified amount ($1,000) would be included in the recipient's 2004 income under new subsection 80.2(8).

Inclusion in Recipient's Income

ITA
80.2(8)

New subsection 80.2(8) of the Act requires the recipient to include, in computing the recipient's income for its taxation year or fiscal period in which the original amount was paid or became payable or receivable, the amount, if any, by which the specified amount exceeds the eligible portion of the specified amount. The amount included in the income of the recipient under this subsection is equal to the amount that may be deductible by the taxpayer under subsection 80.2(9).

Deduction by Taxpayer

ITA
80.2(9)

New subsection 80.2(9) of the Act provides that the taxpayer may deduct, subject to paragraphs 18(1)(a) and (b), in computing the taxpayer's income for the taxpayer's taxation year in which the specified amount was paid, the amount, if any, by which the specified amount exceeds the eligible portion of the specified amount. The amount described in this subsection is that portion of a reimbursement that is not treated as a payment described by paragraph 18(1)(m).

Specified Amount Deemed Not to be Payable or Receivable

ITA
80.2(10)

New paragraphs 80.2(10)(a) and (b) of the Act, provide that, except for the purposes of section 80.2 and subparagraph 53(1)(e)(iv.1), the taxpayer is deemed not to have paid and not to have been obligated to pay, the specified amount and the recipient is deemed not to have received and not to have been entitled to receive, the specified amount. This subsection ensures that the tax implications of payments described in subsection 80.2(1) are dealt with entirely within section 80.2.

Eligible Portion of a Specified Amount

ITA
80.2(11)

The amount of a reimbursement that is deemed by new subsection 80.2(2) of the Act to be a payment described by paragraph 18(1)(m) is the “eligible portion of the specified amount”. The eligible portion of the specified amount is defined in paragraph 80.2(11)(b), subject to certain exceptions enumerated in paragraph 80.2(11)(a), as the taxpayer’s share of the original amount. The taxpayer’s share of the original amount is described in new subsection 80.2(12).

Paragraph 80.2(11)(a) provides that the eligible portion of the specified amount is equal to the specified amount if

(a) the specified amount was paid before September 17, 2004;

(b) the original amount is a tax imposed under a law of a province on freehold minerals; or

(c) the specified amount does not exceed the taxpayer's share the original amount.

The specified amount of a reimbursement, in future, may also be prescribed by regulation, to be equal to the eligible portion of the specified amount.

Taxpayer's Share of Original Amount

ITA
80.2(12)

New subsection 80.2(12) of the Act provides that the taxpayer's share of the original amount is the amount that may reasonably be considered to be the taxpayer's share of the Crown charges in respect of a particular property. More specifically, this subsection provides that the taxpayer's share of the Crown charges may not exceed the total of the amounts described in paragraphs 80.2(12)(a) and (b) of the Act.

New paragraph 80.2(12)(a) of the Act provides that the taxpayer's share of the Crown charges in respect of a property upon which the taxpayer has an overriding royalty (a royalty calculated without reference to the cost of exploration or production) is the proportion of those Crown charges that is equal to the taxpayer's proportionate share of the production from the property.

New paragraph 80.2(12)(b) of the Act provides that the taxpayer's share of the Crown charges in respect of a property (excluding any Crown charges that were reimbursed under the terms of an overriding royalty) is equal to the taxpayer's share of the income from the property.

The requirement that the taxpayer be entitled to a share of the production, or the income, from the property to which the reimbursed Crown charge relates is intended to ensure that a reimbursement paid by a taxpayer will be deemed to be an amount described by paragraph 18(1)(m) only to the extent that the taxpayer is entitled to an appropriate share of the production, or the income, from the property. This, in turn, is intended to ensure that section 80.2 is not used to separate the Crown charges (through a reimbursement) from the resource profits generated by a particular property for the purpose of increasing the deduction that may be available in respect of the Crown charges.

Reduction in Original Amount for Part XII of the Income Tax Regulations

ITA
80.2(13)

New subsection 80.2(13) of the Act clarifies that, in computing the resource profits under Part XII of the Regulations, the Crown charges that were paid or became payable by the recipient, or that were receivable in respect of the recipient, are reduced by the eligible portion of the specified amount. For example, if a recipient had an amount described in paragraph 12(1)(o) equal to $1,000 and $700 of this amount was reimbursed (and the $700 did not exceed the eligible portion of the specified amount) in circumstances described in subsection 80.2(1), the recipient would be treated, for the purpose of computing the recipient's resource profits, as having a paragraph 12(1)(o) amount equal to $300.

Payment of Tax

In circumstances where a taxpayer or recipient is required to pay any income tax that the taxpayer or recipient would not be so liable but for the amendments to section 80.2, such taxes will be deemed to have been paid on the balance-due day for the relevant year if the balance-due day was before September 17, 2004 and the tax is paid to the Receiver General for Canada before March 2005.

Examples

Assume that each of the recipient and the taxpayer is a resident taxable Canadian corporation and that each has a calendar taxation year. The recipient acquires a lease on Crown lands, which gives it the right to explore for and produce oil and natural gas from a particular property. Under the terms of the lease, the recipient is subject to a provincial Crown royalty based on the production from the property. The recipient enters into a contract with the taxpayer under which it sells a royalty interest on the property to the taxpayer equal to 50% of the production from the property free of all costs of development and operation. During each of 2003, 2004 and 2005, the production from the property is $2.4 million, the royalty payable to the taxpayer is $1.2 million and the Crown royalty on the production from the property is $600,000.

 

Example 1

Assume that the Crown royalty is described in paragraph 18(1)(m) and that, under the terms of the contract, the taxpayer agreed to reimburse the recipient for the portion of the Crown royalty relating to its share of production ($300,000). During 2003, the taxpayer reimburses the recipient on a monthly basis at the same time that the Crown royalty became payable to the provincial government. Although the recipient receives the reimbursement, it claims a deduction in respect of the reimbursed Crown royalty equal to $30,000. In this case, new section 80.2 would apply as follows:

Application of Section 80.2
  Recipient (2003) Taxpayer (2003)
80.2(2)   ($30,000)*
80.2(6) $30,000  
Penalty/Interest Nil** Nil**
*Note that if the taxpayer had claimed a deduction that exceeded $30,000, the "excess" deduction would be disallowed. Note also that () indicates a negative number.
**Assuming that any tax resulting from the application of proposed section 80.2 is paid before March 2005.

The taxpayer is deemed by subsection 80.2(2) to have paid an amount under paragraph 18(1)(m) equal to the specified amount (the amount of the reimbursement), 90% of which is denied as a deduction in computing the taxpayer's income by paragraph 18(1)(m). In addition, the deduction taken by the recipient in respect of the reimbursed Crown royalty is reversed by subsection 80.2(6). Pursuant to subsection 80.2(13), the recipient would not include in computing its resource profits under Part XII of the Regulations any portion of the Crown royalty that was reimbursed by the taxpayer. Accordingly, for the purpose of computing its resource profits, the recipient would be treated as having a Crown royalty equal to $300,000.

 

Example 2

Assume that the Crown royalty is described by paragraph 12(1)(o) and that, under the terms of the contract, the taxpayer reimburses the recipient on January 1, 2004 for its share of the Crown royalty that became receivable in 2003. Although the recipient is entitled to the reimbursement, it includes, under paragraph 12(1)(o), only $270,000 in its income in respect of the reimbursed Crown royalties (90% of $300,000). In this case, new section 80.2 would apply as follows:

Application of Section 80.2
  Recipient (2003) Taxpayer (2004)
80.2(2)/(3)   ($30,000)*
80.2(6) $30,000  
Penalty/Interest Nil**  
*(10% of $300,000). Note that if the taxpayer had claimed a total deduction that exceeded $30,000, the "excess" deduction would be disallowed. Note also that () indicates a negative number.
**Assuming that any tax resulting from the application of proposed section 80.2 is paid before March 2005.

As in Example 1, the recipient has a $30,000 income inclusion under new subsection 80.2(6). The result is that the total amount included in the income of the recipient in 2003 under paragraph 12(1)(o) and subsection 80.2(6) in respect of the reimbursed Crown royalty is equal to $300,000. In addition, new subsections 80.2(2) and (3) ensure that the entire amount of the reimbursement is an amount described in paragraph 18(1)(m) and that the percentage of the reimbursement that is not deductible by the taxpayer is determined as if the reimbursement were paid at the time the Crown royalty became receivable (i.e., 2003 percentages apply). Pursuant to subsection 80.2(13), the recipient would not include in computing its resource profits under Part XII of the Regulations any portion of the Crown royalty that was reimbursed by the taxpayer. Accordingly, for the purpose of computing its resource profits, the recipient would be treated as having a Crown royalty equal to $300,000.

 

Example 3

Assume that, under the terms of the contract, the taxpayer reimburses the recipient $400,000 on January 31, 2005 in respect of Crown royalties described in paragraph 12(1)(o), all of which became receivable by the province during 2004. In this situation, the reimbursement exceeds the eligible portion of the specified amount by $100,000. In computing its income for 2004, the recipient includes $300,000 (75% of $400,000) in respect of the reimbursed Crown royalty. Assuming that a deduction by the taxpayer for any portion of the reimbursement would not be denied by either paragraph 18(1)(a) or (b), new section 80.2 would apply as follows:

Application of Section 80.2
  Recipient (2004) Taxpayer (2005)
80.2(2)/(3)   ($75,000)*
80.2(6) $75,000**  
80.2(8) $100,000***  
80.2(9)   ($100,000)
*The deduction for the eligible portion of the specified amount is based on the percentage that applies in the taxpayer's 2004 taxation year (25% of $300,000). Note also that () indicates a negative number.
**Subsection 80.2(6) requires the recipient to include in its income, the amount by which the eligible portion of the specified amount ($300,000) exceeds the portion of the original amount that was included in the recipient's income ($225,000 or 75% of $300,000).
***Subsection 80.2(8) requires the recipient to include in income, in the taxation year in which the Crown royalty became receivable, an amount equal to the difference between the specified amount ($400,000) and the eligible portion of the specified amount ($300,000).

Clause 216

Shareholder Debt

ITA
80.4(8)

Subsection 80.4(2) of the Act generally deems a debtor to have received a benefit in respect of certain low-interest or non-interest bearing shareholder indebtedness. This subsection is intended to prevent a person, that is directly or indirectly a shareholder of a particular corporation or that is connected with a shareholder of the particular corporation, from avoiding tax by receiving the benefit of a non-taxable low interest or interest-free loan from the corporation, rather than as a dividend or other taxable amount. The benefit is generally calculated with reference to a prescribed interest rate prevailing during the term of the loan. Paragraphs 80.4(2)(a) to (c) describe the debtors to which subsection 80.4(2) will apply in terms of their relationships with the particular corporation. In this regard, paragraph 80.4(2)(b) provides that subsection 80.4(2) may apply to a debtor if the debtor is connected with a shareholder of the particular corporation.

Section 80.4(8) of the Act generally provides, for the purposes of subsection 80.4(2), that a person is connected with a shareholder of a corporation if the person does not deal at arm's length with the shareholder. Subsection 80.4(8) is amended to clarify that a partnership can be connected with a shareholder of a particular corporation if that partnership does not deal at arm's length with, or is affiliated with, the shareholder.

This amendment applies in respect of loans made and indebtedness arising after October 31, 2011.

Clause 217

Amounts Not Included in Income

ITA
81

Section 81 of the Act lists various amounts that are not included in computing a taxpayer's income.

Hepatitis C and Indian Residential School Trusts

ITA
81(1)(g.3)

Paragraph 81(1)(g.3) of the Act applies to the trust established under the 1986-1990 Hepatitis C Settlement Agreement, an agreement executed by the federal, provincial and territorial governments in order to provide compensation for certain individuals infected with the Hepatitis C virus. As long as no contribution to the trust, other than contributions provided for under the Agreement, is made before the end of a taxation year of the trust, the effect of paragraph 81(1)(g.3) is to completely exempt the trust's income from income taxation for that taxation year.

Paragraph 81(1)(g.3) of the Act is amended to add references to two additional trusts. The first is the trust created under the Pre-1986/Post-1990 Hepatitis C Settlement Agreement, and the second is the trust created under the Indian Residential Schools Settlement Agreement. These trusts are funded with contributions from the federal government. As a result of these amendments, as long as no contribution, other than contributions provided for under each of those Agreements, is made to the relevant trust, before the end of a taxation year of the trust, the trust's income will effectively be exempt from income taxation for that taxation year.

This amendment applies to the 2006 and subsequent taxation years for the pre-1986/post-1990 Hepatitis C Settlement Agreement trust, and to the 2007 and subsequent taxation years for the Indian Residential Schools Settlement Agreement trust.

Exempt Amounts – Leave of Absence Plans

ITA
81(1)(s)

New paragraph 81(1)(s) provides a tax exemption in respect of already-taxed amounts received from a leave of absence plan if that plan is excepted from the salary deferral arrangement rules by reason of paragraph 6801(a) of the Income Tax Regulations.

Paragraph 6801(a) of the Income Tax Regulations requires, in subparagraph (iv), that income accruing to the benefit of an employee in the year under the plan be paid to the employee in that year. Some plans are structured so that the employee recognizes the income in the year for tax purposes, but then immediately re-contributes that income to the plan. New paragraph 81(1)(s) provides that a subsequent distribution of a re-contributed amount that was taxed in an earlier year is not included in income.

This amendment applies to the 2000 and subsequent taxation years.

Clause 218

Taxable dividends received

ITA
82(1)

Subsection 82(1) of the Act applies for the purpose of computing the income of a taxpayer from dividends received from corporations resident in Canada. The subsection is amended to reflect changes to the securities lending arrangement rules. These amendments are made, firstly, to subsection 82(1) as it read prior to the Budget Implementation Act, 2006 No.2, S.C. 2007, c.2, s.44(1). They are also made to subsection 82(1) as it has read since it was amended by that Act.

In particular, former clause 82(1)(a)(ii)(B) of the Act, as it read immediately before it was amended by the Budget Implementation Act, 2006 No.2, allowed an individual who has entered into a securities lending arrangement to deduct, to the extent of the individual's dividend income, the dividend compensation payment paid by the individual.

Due to the amendments made to the securities lending arrangement rules in section 260 of the Act, former clause 82(1)(a)(ii)(B) is amended in two ways. First, it is amended to apply in respect of an individual's specified proportion of a dividend compensation payment made by a partnership of which the individual is a member. Secondly, since new subsection 260(5.1) of the Act now sets out the treatment of dividend compensation payments, the clause is amended to replace the reference to "subsection 260(5)" with a reference to "subsection 260(5.1)".

Whether this amendment applies in respect of a particular securities lending arrangement depends on when the arrangement is made and, in the case of an arrangement made after November 2, 1998 and before December 21, 2002, whether the parties to the arrangement have elected to have the amended definition of "dividend rental arrangement" in subsection 248(1) of the Act apply. The following table shows these alternative results.

Results of Making or not Making an Election
  Date Arrangement Was Made
  Before
November 3, 1998
After November 2, 1998 and before 2002 After 2001 and before December 21, 2002 After
December 20, 2002
Election made Election not available. Amendment does not apply Amendment applies, but read reference to 260(5.1) as a reference to 260(5) Amendment applies Election not available. Amendment applies
Election not made Election not available. Amendment does not apply Amendment does not apply Amendment applies, but ignore reference to 260(12)(b) Election not available. Amendment applies

Secondly, existing subparagraphs 82(1)(a)(ii) and 82(1)(a.1)(ii) (as amended by the Budget Implementation Act, 2006 No.2) are amended to include references to new paragraph 260(12)(b) and new subsection 260(5.1) in order to account for compensation payments paid by a partnership to a taxpayer. New paragraph 260(12)(b) deems an individual taxpayer who is a partner in a partnership to have paid a specified proportion of a dividend compensation payment that is paid by the partnership. New subsection 260(5.1) provides for the deemed receipt and characterization of compensation payments paid to taxpayers. These amendments apply to amounts paid or received after the 2005 taxation year.

Clause 82(1)(b)(ii)(A) is amended to provide that the prescribed 45% gross-up rate for eligible dividends will apply for taxation years after 2005 and before 2010.

Limitation as to paragraph (1)(c)

ITA
82(1.1)

Subsection 82(1.1) of the Act generally provides that amounts received in respect of a taxable dividend received as part of a dividend rental arrangement shall be included in computing the income of a taxpayer only where the dividend was received on a share acquired after April, 1989.

Subsection 82(1.1) is amended to replace the reference to “subparagraph 82(1)(a)(i)” with a reference to “paragraph 82(1)(c)”, consequential to amendments to subsection 82(1). 

This amendment applies to amounts received or paid after 2005.

Clause 219

Deemed Dividend

ITA
84(4.1)

Subsection 84(4.1) of the Act treats a payment on a reduction of paid-up capital by a public corporation as a dividend, except where the payment is made by way of a redemption, acquisition or cancellation of a share or in the course of a transaction described in subsection 84(2) or section 86 of the Act.

Subsection 84(4.1) is amended to introduce a new exception. Generally, this exception will apply where the amount paid on a reduction of paid-up capital may reasonably be considered to be a distribution of proceeds of disposition realized from a transaction that did not occur in the ordinary course of the corporation's business and those proceeds were derived from a transaction that occurred no more than 24 months before the return of the paid-up capital.

In the case of a transaction that funds the payment, generally relief from the deemed dividend rule in subsection 84(4.1) will apply if the paid-up capital distribution can be traced to proceeds of disposition realized in connection with a transaction that may reasonably be considered to be derived from a transaction that occurs outside of the ordinary course of the corporation's business. For example, a paid-up capital distribution paid out of proceeds realized on the sale of a business unit of a corporation, where the proceeds were not required for reinvestment, would generally not be considered to be a distribution from amounts realized in the ordinary course of the corporation's business. In general terms, this aspect of the amendment to subsection 84(4.1) is intended to ensure that only a return of corporate capital, as opposed to a distribution of earnings, is subject to the new exception to subsection 84(4.1).

In order to ensure that the proceeds from an extraordinary transaction are not used to fund a stream of regular or periodic distributions, only one return of paid-up capital will be permitted in respect of any particular extraordinary transaction and that return must occur within 24 months of the proceeds being realized. However, this one-time return rule and 24-month limitation will not apply to distributions of paid-up capital made after 1996 and before February 27, 2004.

When Dividend Payable

ITA
84(7)

Subsection 84(7) of the Act provides that a dividend deemed under sections 84, 128.1 or 212.1 to have been paid at a particular time as a dividend is also regarded, for the purposes of Subdivision h of Division B in Part I and sections 131 and 133, to have become payable at that time. Subsection 84(7) is amended to replace the reference to subsection 84(7) with a reference to section 84.

This amendment applies to dividends deemed to have been paid after February 23, 1998.

Clause 220

Transfer of Property to Corporation by Shareholders

ITA
85

Section 85 of the Act provides rules for tax-deferred transfers of certain types of properties by a taxpayer to a taxable Canadian corporation in exchange for shares.

Transfer of Property to a Corporation By Shareholders

ITA
85(1)(d.1), (d.11) and (d.12)

Subsection 85(1) of the Act provides a tax deferral for the transfer of various types of property by a taxpayer to a taxable Canadian corporation for consideration that includes shares of the corporation's capital stock. In general, tax deferral may be achieved if the taxpayer and the corporation jointly elect that the proceeds of disposition of the taxpayer and the eligible capital expenditure of, or cost to, the corporation are deemed to be less than the fair market value of the property transferred.

Paragraph 85(1)(d.1) generally reduces, for the corporation that has acquired an eligible capital property (ECP), the gain that would be included in income under paragraph 14(1)(b) of the Act on a subsequent disposition of the property. Paragraph 85(1)(d.1) adjusts the gain, in order to take into account the 1988 change of the rate of income inclusion and expenditure deductibility from 1/2 to 3/4, by adjusting the calculation of variable Q in the definition "cumulative eligible capital" in subsection 14(5) of the Act. Variable Q generally represents, for the period prior to the taxpayer's "adjustment time", the difference between ECP deductions claimed under paragraph 20(1)(b) of the Act and the total of recapture and gains from prior dispositions of eligible capital property by the taxpayer. Paragraph 85(1)(d.1) adjusts variable Q only for the purposes of calculating the amount to be included in a corporation's income under paragraph 14(1)(b), but not for the purpose of calculating the corporation's cumulative eligible capital balance for other purposes, such as the claiming of ECP deductions. Specifically, the adjustment of variable Q adjusts the value of variables A, B and C in the formula in paragraph 14(1)(b). Variables A and B are affected indirectly, since variable Q affects variable F in the calculation of the cumulative eligible capital balance.

Paragraph 85(1)(d.1) is amended concurrently with the addition of new paragraph 85(1)(d.11) of the Act. New paragraph 85(1)(d.11) generally applies to ensure that an amount that would have been recaptured ECP deductions to the taxpayer under subsection 14(1), if the taxpayer had disposed of the eligible capital property for an amount greater than the taxpayer's cumulative eligible capital at the time of the disposition, is subject to recapture in the hands of the corporation upon a subsequent sale of the property. This result is achieved by adding an allocation of the potential recapture to the taxpayer (i.e., variable F of the taxpayer) simultaneously to the corporation's eligible capital expenditures and aggregate ECP deductions (i.e., variables A and F respectively in the definition "cumulative eligible capital" of the corporation). This adjustment applies only for the purpose of calculating the amount to be included in income of the corporation under subsection 14(1) upon the subsequent disposition of eligible capital property. In this regard, variable F of the taxpayer is determined at the beginning of the taxpayer's following taxation year if the taxpayer's taxation year that included the transfer had ended immediately after the disposition time, determined without reference to new paragraph (d.12). Variable F of the taxpayer is apportioned to the corporation, by means of the quotient B/C in paragraph 85(1)(d.11), in the same proportion as the fair market value of the property transferred is to the fair market values of all such property transferred before that transfer and the fair market value of the total eligible capital property of the taxpayer immediately before the transfer.

Because new paragraph 85(1)(d.11) now accommodates variable F of the corporation, paragraph 85(1)(d.1) is amended to add 1/2 of the taxpayer's variable Q amount directly to the corporation's variable C amount in paragraph 14(1)(b), rather than adjusting variable Q of the corporation (and thus variable F as well). The quotient B/C in paragraph 85(1)(d.1) provides that this adjustment to the corporation is in the same proportion as the fair market value of the property transferred at a particular time is to the total of the fair market values of all such property transferred before that transfer and the fair market value of the total eligible capital property of the taxpayer immediately before the transfer.

New variables F and G of paragraph 85(1)(d.1) provide that the adjustments under this paragraph, and similar earlier adjustments to the taxpayer under paragraph 88(1)(c.1) of the Act, are not lost on a subsequent rollover.

New paragraph 85(1)(d.12) of the Act is added, concurrently with new paragraph 85(1)(d.11), to ensure that a subsequent disposition of other ECP by the taxpayer does not result in recapture of depreciation under paragraph 14(1)(a) when the resulting gain from that disposition should have been taxed at a lower rate under paragraph 14(1)(b). This could happen, for instance, if the taxpayer were to defer all of the recapture to the corporation, such that the taxpayer's cumulative eligible capital balance at the end of the taxation year that includes the rollover is nil. In this case, if in the next taxation year the taxpayer were to make another disposition of ECP, paragraph 85(1)(d.12) would reduce to nil the amounts that would be determined for the taxpayer by subparagraph 14(1)(a) and variable B of paragraph 14(1)(b).

These amendments generally apply in respect of dispositions by a corporation that occur after December 20, 2002.

Example of 85(1)(d.1) and (d.11)

Mr. X purchased an eligible capital property in 1984 (when the income inclusion rate for eligible capital property was one half) at a cost of $300,000. This was the first and only eligible capital property held in respect of his business. Mr. X claimed deductions of $40,650 under paragraph 20(1)(b) of the Act before his "adjustment time" (in the case of Mr. X, January 1, 1988), and of $11,482 subsequent to that time. Mr. X now transfers the property to a corporation in circumstances to which subsection 85(1) applies. Immediately before the time of the transfer, the fair market value of the property is $500,000. Mr. X and the corporation agree that the proceeds of disposition to Mr. X will be $203,391, which is 4/3 of the cumulative eligible capital balance of $152,543. The balance is calculated as follows:

Cumulative Eligible Capital Balance Calculation
  Amount
Eligible capital expenditure $300,000
Rate applicable in 1984 50%
Portion of eligible capital expenditure added 150,000
Depreciation before 1988 <40,650>
Cumulative eligible capital at adjustment time 109,350
"C" amount: 3/2 of 109,350 164,025
"D" amount: depreciation before 1988 40,650
"P" amount: depreciation after 1987 <11,482>
"Q" amount: depreciation before 1988 <40,650>
Cumulative eligible capital of Mr. X $152,543
Note: <> indicates a negative number.
Upon the subsequent sale of the property by the corporation for actual proceeds of disposition of $500,000, the amount included in the corporation's income under subsection 14(1) is calculated as follows:
Cumulative Eligible Capital Balance Calculation
  Amount
Agreed amount of eligible capital expenditure
 (4/3 of $152,543)
$203,391
Eligible capital expenditure rate 75%
"A" amount in cumulative eligible capital balance
 of corporation
152,543
14(1)(a) calculation for corporation:
  Amount Amount Amount
Proceeds $500,000    
Rate applicable 75%    
"E" amount in cumulative eligible capital
 balance of corporation
  375,000  
Excess   222,457  
"F" for corporation: bumped by 85(1)(d.11)
 ($40,650 + $11,482)
  52,132  
14(1)(a) income: lesser of "F" and excess     $52,132
14(1)(b) calculation for corporation:
  Amount Amount
Excess (as above) $222,457  
Less: "B" amount: amount "F", as bumped by 85(1)(d.11) <52,132>  
"C" amount: ½ of "Q" (above), as bumped by 85(1)(d.1) <20,325>  
Net 150,000  
Multiply by 2/3 2/3  
14(1)(b) income   $100,000
     
Total 14(1) income inclusion to corporation   $152,132
Note: <> indicates a negative number.

Clause 221

Share for Share Exchange

ITA
85.1

Section 85.1 of the Act permits a tax-deferred rollover for shareholders who exchange shares of a corporation for shares of a purchaser corporation in the course of an arm's length sale of the acquired corporation's shares. Under this rule, the exchanged shares must both be shares of a taxable Canadian corporation, or both be shares of a foreign corporation. In either case, the purchaser corporation is required to "issue" its shares on the exchange.

Deemed Issuance

ITA
85.1(2.2)

New subsection 85.1(2.2) of the Act provides a deeming rule for the purpose of subsection 85.1(1) under which certain share issues made by a taxable Canadian corporation (the purchaser corporation) to a trust under a court-approved plan of arrangement are deemed to be issued to a person (the vendor) who exchanges the vendor's shares of a taxable Canadian corporation for the shares issued by the purchaser corporation. For this deeming rule to apply, the vendor must dispose of the vendor's shares to the purchaser corporation solely for the shares issued by the purchaser corporation. As well, the vendor's shares must trade on a designated stock exchange and be disposed of for shares of the purchaser corporation that are widely traded on a designated stock exchange immediately after and as part of completion of the plan of arrangement.

Generally, this amendment applies to share exchanges made after June 2005.

Deemed Issuance

ITA
85.1(6.1)

New subsection 85.1(6.1) of the Act provides a deeming rule for the purpose of subsection 85.1(5) under which certain share issues made by a foreign corporation (the foreign purchaser corporation) to a trust under a court-approved plan of arrangement are deemed to be issued to a person (the vendor) who exchanges the vendor's shares of a foreign corporation for the shares issued by the foreign purchaser corporation. For this deeming rule to apply, the vendor must dispose of the vendor's shares to the foreign purchaser corporation solely for the shares issued by the foreign purchaser corporation. As well, the vendor's shares must trade on a designated stock exchange and be disposed of for shares of the foreign purchaser corporation that are widely traded on a designated stock exchange immediately after and as part of completion of the plan of arrangement.

Generally, this amendment applies to share exchanges made after June 2005.

Rollover on SIFT Unit for Share Exchange

ITA
85.1(7)

Subsections 85.1(7) and (8) of the Act are part of a set of rules that provide for the income tax effects on a reorganization into corporate form of a SIFT wind-up entity. Subsection 85.1(7) sets out the conditions that must be met in order for the rules in subsection 85.1(8) of the Act to apply to a taxpayer's disposition of equity in a SIFT wind-up entity to a corporation in exchange for a share of the corporation.

The opening words of subsection 85.1(7) are amended to correct a typographical error in the reference in subsection 85.1(8) to the term "particular unit".

This amendment comes into force on Royal Assent.

ITA
85.1(8)

Subsection 85.1(8) of the Act provides a number of the tax consequences to a taxpayer from a disposition described in subsection 85.1(7).

The opening words of paragraph 85.1(8)(f) are amended to correct a typographical error in the term "paid-up capital".

This amendment comes into force on Royal Assent.

Clause 222

Eligible Distribution Not Included in Income

ITA
86.1(2)

Subsection 86.1(2) of the Act defines an "eligible distribution" for the purposes of the tax-deferral that applies with respect to distributions to Canadian resident shareholders of spin-off shares by a foreign corporation. Subsection 86.1(2) is amended in three respects.

First, subparagraph 86.1(2)(c)(ii) requires that a taxpayer's original shares be included in a class that is widely held and actively traded on a designated (or for certain earlier periods, prescribed) stock exchange ("designated stock exchange" is defined in subsection 248(1) of the Act) in the United States at the time of the distribution (section 3201 of the Regulations prescribes certain U.S. stock exchanges). The condition that the share be actively traded on a U.S. stock exchange is amended effective after 1999 to require that the taxpayer's original shares of the foreign corporation be, at the time of the distribution, widely held and

In general, a class of shares of a U.S. corporation must be registered under the Securities Exchange Act of 1934 with the Securities and Exchange Commission ("SEC") if more than 500 shareholders own shares of the class, the corporation has more than $10 million in assets and shares of the class will be traded on a national securities exchange. Thus this SEC registration requirement applies if it is expected that the shares will trade on a national securities exchange, with the SEC filing and public disclosure requirements thereafter applying to the corporation regardless of whether any of its issued shares trade in the future on the exchange.

Second, the references in subparagraphs 86.1(2)(c)(iii) and 86.1(2)(e)(vi) to the United States Internal Revenue Code are replaced by "the Internal Revenue Code of 1986 of the United States, as amended from time to time".

Third, subparagraph 86.1(2)(e)(i) is amended consequential to the amendment to subparagraph 86.1(2)(c)(ii) described above.

Clause 223

Amalgamations

ITA
87

Section 87 of the Act provides rules that apply in the case of a qualifying amalgamation or merger of taxable Canadian corporations.

Continuation and Financial Institution Rules

ITA
87(2)(g.2)

Paragraph 87(2)(g.2) provides that, for the purposes of a number of the rules for financial institutions in sections 142.4 to 142.6, the new corporation formed on an amalgamation is deemed to be the same corporation as, and a continuation of, each predecessor corporation.

Paragraph 87(2)(g.2) is amended for taxation years that begin after October 31, 2011 to reflect the repeal of subsections 142.5(5) and (7).

Patronage Dividends

ITA
87(2)(g.5)

New paragraph 87(2)(g.5) of the Act deems a new corporation formed on an amalgamation to be the same corporation as and a continuation of each of the predecessor corporations for the purpose of section 135 of the Act. This paragraph, which applies to amalgamations that occur after 1997, ensures that the rules in section 135 concerning the deduction for and inclusion in income of patronage dividends continue to apply where a cooperative corporation or a customer of a cooperative corporation amalgamates with one or more other corporations between the time a cooperative corporation makes an allocation in proportion to patronage and the time that the patronage dividend is paid. This amendment ensures that payments made under subsection 135(1) by the new corporation in satisfaction of allocations made by a predecessor corporation will be deductible by the new corporation. In addition, new paragraph 87(2)(g.5) ensures that the deductibility of an amount paid to a new corporation formed on the amalgamation of the cooperative corporation's customer and another corporation will not be affected by the amalgamation.

Part I.3 and Part VI Tax

ITA
87(2)(j.9)

Paragraph 87(2)(j.9) of the Act provides that a new corporation formed on an amalgamation is treated as a continuation of its predecessor corporations for the purposes of determining the new corporation's claim under section 125.2 or 125.3 in respect of the carry-forward of the predecessors' unused Part VI and Part I.3 tax credits.

Paragraph 87(2)(j.9) is amended to remove reference to section 125.2 of the Act consequential on the repeal of that section. For further information, see the commentary on section 125.2.

This amendment applies to taxation years that begin after October 31, 2011.

ITA
87(2)(j.91)

Subsection 88(1) of the Act sets out rules relating to the winding-up of a subsidiary into a parent corporation that owns at least 90% of each class of shares of the subsidiary. A number of the rules that apply to amalgamations under subsection 87(2) of the Act also apply to windings-up under subsection 88(1).

Paragraph 87(2)(j.91) allows a new corporation, or, in the case of a winding-up under subsection 88(1), a parent corporation, to be considered as a continuation of its predecessors or subsidiary, as the case may be, for the purposes of determining an amount deductible under subsection 181.1(4) or 190.1(3) of the Act. Those provisions relate, respectively, to the deduction from a corporation's tax otherwise payable under Part I.3 of the Act of an amount in respect of its Canadian surtax, and the deduction from a financial institution's tax otherwise payable under Part VI of the Act of an amount in respect of its tax under Part I of the Act.

Paragraph 87(2)(j.91) is amended to clarify that it does not affect the fiscal period of, or tax payable by, any corporation for any taxation year that ends prior to an amalgamation, or, by virtue paragraph 88(1)(e.2), the commencement of a winding-up under subsection 88(1).

This amendment to paragraph 87(2)(j.91) applies to amalgamations that occur, and windings-up that begin, after December 20, 2002.

Subsection 13(4.2) Election

ITA
87(2)(l.4)

New paragraph 87(2)(l.4) of the Act is added to provide that, for the purposes of the rules in new subsection 13(4.3) and paragraph 20(16.1)(b) of the Act in respect of which an election is made under new subsection 13(4.2), the new corporation is deemed to be the same corporation as, and a continuation of, each predecessor corporation. This new provision also applies in respect of the winding up of a corporation to which section 88 of the Act applies, as a result of the application of paragraph 88(1)(e.2). New paragraph 87(2)(l.4) applies to amalgamations that occur, and windings up that begin, after December 20, 2002.

Contingent Amount – Section 143.4

ITA
87(2)(l.5)

New paragraph 87(2)(l.5) of the Act is added to provide that, for the purposes of the contingent amount rules in new section 143.4, the new corporation is deemed to be the same corporation as, and a continuation of, each predecessor corporation. New paragraph 87(2)(l.5) applies in respect of taxation years that end on or after March 16, 2011.

Gift of Predecessor's Property

ITA
87(2)(m.2)

New subsection 248(35) of the Act contains rules regarding the value, for tax purposes, of a gift of property acquired within a certain period. New paragraph 87(2)(m.2) of the Act provides that the period that would have applied to a predecessor corporation, if the predecessor had made the gift, will continue to apply after it has been wound up into the parent corporation. New paragraph 87(2)(m.2) applies in respect of gifts made after December 3, 2003.

Expiration of options previously granted

ITA
87(2)(o)

Paragraph 87(2)(o) generally applies where an option, that was granted by a predecessor corporation, expires after the amalgamation. Paragraph 87(2)(o) provides generally that, for the purposes of subsection 49(2), when such an option expires the new corporation will be treated as having granted the option and to have received the proceeds for the granting of that option that were received by the predecessor corporation. Subsection 49(2) generally provides that when an option expires, the grantor corporation is deemed to have disposed of a capital property, with an adjusted cost base of nil, for proceeds of disposition equal to the consideration received by the corporation when the option was issued. Subsection 49(2) does not apply in certain situations.

Subsection 87(2) is amended concurrently with the introduction of new paragraph 49(2)(a) of the Act. Paragraph 49(2)(a) provides an exception to the application of the general rule in subsection 49(2), in situations where both the grantee of the option and the holder of the option when it expires are dealing at arm's length with the corporation that granted the option.

New subparagraph 87(2)(o)(ii) provides that, for the purposes of subsection 49(2), if an option is granted by a predecessor corporation, to a person who was not dealing at arm's length with the predecessor corporation at that time, the person will be deemed to have not been dealing at arm's length with the new corporation.

Similarly, new subparagraph 87(2)(o)(iii) provides that, for the purposes of subsection 49(2), if an option is granted by a predecessor corporation, to a person who was dealing at arm's length with the predecessor corporation at that time, the person will be deemed to have been dealing at arm's length with the new corporation.

Subparagraphs 87(2)(o)(ii) and (iii) are intended to ensure that the rule in subsection 49(2) applies as if the new corporation were a continuation of the predecessor corporation that granted the option.

These amendments apply in respect of options issued after Announcement Date.

Employees Profit Sharing Plan

ITA
87(2)(r)

New paragraph 87(2)(r) of the Act preserves an election under subsection 144(10) in connection with an employees profit sharing plan that was made by a predecessor corporation before an amalgamation. Paragraph 88(1)(e.2) of the Act provides that this rule also applies, with appropriate modifications, for the purposes of the rules relating to the winding-up of a subsidiary corporation into its parent corporation.

This amendment applies to amalgamations that occur, and windings-up that begin, after 1994.

Tax Deferred Cooperative Shares

ITA
87(2)(s)

Paragraph 87(2)(s) of the Act is amended as a consequence of the addition of new subsection 135.1(10) of the Act relating to tax deferred cooperative shares held by an eligible member of an agricultural cooperative corporation. In particular, the existing rules in clauses 87(2)(s)(ii)(A) and (B) are replaced with a rule that provides that new subsection 135.1(10) applies. The rules in new subsection 135.1(10) are substantially the same as the rules under those clauses.

As a result of paragraph 88(1)(e.2) of the Act, the equivalent of revised paragraph 87(2)(s), applies to shares acquired on a winding-up to which subsection 88(2) applies.

This amendment applies after September 28, 2009.

UI Premium Tax Credit

ITA
87(2)(mm)

Paragraph 87(2)(mm) of the Act ensures that an amalgamated corporation will be treated as a continuation of, and the same corporation as, each of its predecessor corporations for the purposes of the provisions relating to UI premium tax credit. That paragraph is repealed as a consequence of the repeal of the provisions relating to the UI premium tax credit. For additional information, see the commentary to section 126.1.

This change applies in respect of amalgamations that occur, and to windings-up that begin, after March 20, 2003.

Quebec Credit Unions

ITA
87(2.3)

New subsection 87(2.3) of the Act provides a special rule that applies to an "investment deposit" of a Quebec credit union in another Quebec credit union (the "predecessor corporation"). This rule applies where the credit union's investment deposit in the predecessor corporation is disposed of because of an amalgamation of credit unions that includes the predecessor corporation with that amalgamation being governed by section 689 of the Act Respecting Financial Services Cooperatives, R.S.Q., 2001, c. C-67.3. The credit union's investment deposit will, if certain conditions are met, be deemed to be a share of the capital stock of the predecessor corporation having an adjusted cost base and paid up capital equal to the adjusted cost base of the investment deposit to the credit union. The conditions that must be met are that

This amendment applies to amalgamations that occur after June 2001.

Flow-Through Shares

ITA
87(4.4)

Subsection 87(4.4) of the Act applies where there is an amalgamation of two or more corporations and a predecessor corporation of the new corporation formed on the amalgamation had entered into a flow-through share agreement. The rules in subsection 87(4.4) generally enable the new corporation to renounce certain resource-related expenses incurred after the amalgamation to a flow-through shareholder.

Paragraph 87(4.4)(c) sets out certain conditions that must be satisfied for a new corporation to renounce expenses to a flow-through shareholder of a predecessor corporation. This paragraph is amended, effective for amalgamations that occur after 1997, to delete the unnecessary reference to the definition "flow-through share" in subsection 66(15) of the Act and to ensure that this paragraph is consistent with the amended definition "flow-through share" in subsection 66(15).

Paragraph 87(4.4)(d) sets out certain conditions that must be satisfied to qualify for the relief provided in subsection 87(4.4). Subparagraph 87(4.4)(d)(i) requires the new corporation to issue a new share to the flow-through share subscriber in consideration for the flow-through share. Current subparagraph 87(4.4)(d)(i) does not, however, contemplate the transfer of a flow-through share by the flow-through share subscriber ("original flow-through shareholder") prior to an amalgamation. Consequently, subsection 87(4.4) does not accommodate a renunciation by the new corporation to an original flow-through shareholder of expenses incurred by the new corporation if the original flow-through shareholder transferred those shares to another person. Subparagraph 87(4.4)(d)(i) is amended, effective for amalgamations that occur after 1997, to accommodate the issuance of a new share to a person other than the original flow-through shareholder. This amendment ensures that the new corporation may renounce resource expenses incurred after an amalgamation to an original flow-through shareholder on the same basis as if that person had owned the flow-through share at the time of the amalgamation.

Rules Applicable in Respect of Certain Mergers – "Triangular Amalgamations"

ITA
87(9)

Subsection 87(9) of the Act contains rules that apply on a "triangular amalgamation" – an amalgamation in which shares of the parent corporation are issued in exchange for shares of the amalgamating corporations.

New paragraph 87(9)(a.21), which is effective for amalgamations that occur after 1997, provides that a share of the parent issued to a shareholder on a triangular amalgamation is considered, for the purpose of paragraph 87(4.4)(d), to be a share issued by the new corporation and that a right to acquire a share of the parent issued to a person on a triangular amalgamation is deemed to be in consideration for a right to acquire a share of the new corporation. New paragraph 87(9)(a.21) therefore ensures that the requirements in subparagraphs 87(4.4)(d)(i) and (ii), that the new corporation issue a share or right to a person, are satisfied. As a result, a new corporation may renounce expenditures to a flow-through shareholder of a predecessor corporation in accordance with a flow-through share agreement concluded before the triangular amalgamation.

Clause 224

Winding-up of a Corporation

ITA
88(1)

Section 88 of the Act deals with the tax consequences arising from the winding-up of a corporation. Subsection 88(1) provides rules that apply where a subsidiary has been wound up into its parent corporation in circumstances where both the parent and the subsidiary are taxable Canadian corporations and the parent owns at least 90% of the issued shares of each class of the capital stock of the subsidiary.

ITA
88(1)(c.1)

Subparagraph 88(1)(a)(iii) of the Act generally provides that property of a subsidiary corporation is deemed to have been disposed of on its winding-up for proceeds of disposition equal to its cost amount to the subsidiary immediately before the winding-up. Under subparagraph 88(1)(c)(ii) of the Act, the cost of such property to the parent corporation is equal to such proceeds of disposition. Paragraph 88(1)(c.1) applies similarly in the case of a winding-up as paragraph 85(1)(d.1) applies to a rollover of eligible capital property from a shareholder to a corporation. That is, it generally reduces, for the parent that has acquired an eligible capital property, the gain that would be included in income under paragraph 14(1)(b) of the Act on a subsequent disposition of the property. This adjustment takes into account the 1988 change of the rate of income inclusion and expenditure deductibility from 1/2 to 3/4, by adjusting the calculation of variable Q in the definition "cumulative eligible capital" in subsection 14(5) of the Act.

Paragraph 88(1)(c.1) is renumbered as subparagraph 88(1)(c.1)(ii), and is further amended to ensure that the adjustment, or an earlier adjustment to the subsidiary under paragraph 85(1)(d.1), is not lost on a subsequent disposition by way of winding-up.

Paragraph 88(1)(c.1) is further amended by the addition of new subparagraph (i), which applies similarly to the application of paragraph 85(1)(d.11) of the Act to a shareholder in respect of a disposition of an eligible capital property to a corporation. That is, new subparagraph 88(1)(c.1)(i) ensures that an amount that would have been recaptured depreciation to the subsidiary under subsection 14(1) of the Act, if the subsidiary had instead disposed of the eligible capital property for fair market value proceeds, is subject to possible recapture in the hands of the parent upon a subsequent sale of the property. Amounts claimed under paragraph 20(1)(b) of the Act by the subsidiary after its "adjustment time" (as defined in subsection 14(5) of the Act, i.e., generally the beginning of the first taxation year of the subsidiary that starts after June 30, 1988) are included in the amount subject to potential recapture, by means of an adjustment to variables A and F in the definition "cumulative eligible capital" in subsection 14(5), as it applies to the subsidiary for the purposes only of calculating any income or gain under subsection 14(1).

New subparagraph 88(1)(c.1)(i) also applies to ensure that the adjustment, or an earlier adjustment to the subsidiary under paragraph 85(1)(d.11), is not lost on a subsequent disposition by way of winding-up.

For additional information, refer to the commentary to paragraphs 85(1)(d.1) and (d.11) of the Act.

Amended paragraph 88(1)(c.1) generally applies in respect of dispositions by a parent corporation that occur after December 20, 2002.

ITA
88(1)(c.3)(vi) and (vii)

Paragraph 88(1)(c) of the Act generally provides that the cost to the parent of each property distributed to it on the winding-up of a subsidiary is equal to the subsidiary's proceeds of disposition plus, where the property is a capital property and is not an ineligible property, an amount determined under paragraph 88(1)(d) in respect of the property. "Ineligible property" is described in subparagraphs 88(1)(c)(iii) to (vi). Pursuant to subparagraph 88(1)(c)(vi), ineligible property includes any property distributed to the parent on the winding-up if, as part of the series of transactions or events that includes the winding-up, the parent acquired control of the subsidiary and the property or property acquired in substitution for such property was acquired by a person or persons described in clause 88(1)(c)(vi)(B). Property acquired in substitution for property distributed on the winding-up ("substituted property") has its ordinary meaning and an extended meaning found in paragraph 88(1)(c.3) of the Act.

Paragraph 88(1)(c.3) of the Act provides that substituted property includes property described in subparagraphs 88(1)(c.3)(i) and (ii) but excludes property described in subparagraphs 88(1)(c.3)(iii) to (v). Subparagraph 88(1)(c.3)(i) provides that, for the purpose of clause 88(1)(c)(vi)(B), substituted property includes property (other than a "specified property") owned by a person after the acquisition of control of the subsidiary where the fair market value of the property is wholly or partly attributable to property distributed to the parent on the winding-up. Subparagraph 88(1)(c.3)(iv) ensures that property that would be substituted property under the ordinary meaning of the term will not be substituted property if it is not owned by the person after the acquisition of control.

Example 1 of the explanatory notes to the introduction of paragraph 88(1)(c.3) [see the explanatory notes to S.C. 1998, c.19 (formerly Bill C-28)] describes a scenario under the heading Safe Income Crystallization that illustrates the application of subparagraph 88(1)(c.3)(iv) to a situation involving a safe income crystallization prior to a takeover. In that example, Sco, a taxable Canadian corporation, owns 15% of Tco, a publicly traded taxable Canadian corporation. Another corporation ("Pco") makes a takeover offer for all the shares of Tco. In anticipation of the sale of the Tco shares, Sco incorporates Newco and transfers, on a tax-deferred basis under section 85 of the Act, all of its Tco shares to Newco in exchange for Newco shares. The adjusted cost base and the paid-up capital of the Newco shares are then increased by the amount equal to the so-called "safe income" attributable to the Tco shares. Immediately thereafter, Sco sells the Newco shares to Pco for cash and Newco is wound up into Pco.

In the example, subparagraph 88(1)(c.3)(iv) ensures that the Newco shares are not substituted property since Sco did not own the Newco shares after the acquisition of control of Newco by Pco. However, assuming that Tco is subsequently wound up into Pco, the non-depreciable capital property ("bump property") owned by Tco at the time of the acquisition of control of Tco would be ineligible property since, as part of the series of transactions or events that includes the winding up of Tco, property substituted for the bump property (i.e., the 15% of the Tco shares) would have been acquired by a specified shareholder of Tco (i.e., Newco) and would have been owned by Newco after the acquisition of control of Tco.

New subparagraphs 88(1)(c.3)(vi) and (vii) of the Act, which apply to windings-up that begin after 1997, are enacted to ensure that certain shares or debt will not be substituted property even if they are owned by a specified shareholder after the acquisition of control of the subsidiary. Subparagraph 88(1)(c.3)(vi) provides that shares or debt of the subsidiary will not be substituted property if such shares or debt are owned by the parent immediately before the winding-up of the subsidiary. Thus, in the example discussed above, the Tco shares, which are owned by Pco immediately before the winding-up of Tco, would not be substituted property.

Subparagraph 88(1)(c.3)(vii) provides that a share or debt of a corporation will not be substituted property if the fair market value of the share or debt is not attributable, at any time after the winding-up process begins, to property acquired by the parent on the winding-up. This exemption would apply, for example, if an individual ("Mr. S"), who is a specified shareholder of Tco, incorporates Newco in contemplation of the takeover of Tco and transfers the Tco shares to Newco. Mr. S then transfers the Newco shares to Sco. Immediately after the increase in the adjusted cost base of the shares of Newco (i.e., following the safe income crystallization) Sco sells the Newco shares to Pco. In this scenario, the Sco shares owned by Mr. S after the sale would not be substituted property by reason of new subparagraph 88(1)(c.3)(vii).

ITA
88(1)(c.4)(i)

Paragraph 88(1)(c.4) of the Act defines "specified property" for the purposes of subparagraphs 88(1)(c.3)(i) and (v) of the Act. Specified property is excluded from the extended meaning of a substituted property found in subparagraph 88(1)(c.3)(i). Subparagraph 88(1)(c.4)(i) is amended to include, within the definition "specified property", shares of the parent issued for consideration that consists solely of money. This amendment, which applies to windings-up that begin after 1997, ensures that a specified shareholder that participates in a takeover by acquiring shares of the parent for cash consideration will not be considered to have acquired substituted property within the meaning assigned by subparagraph 88(1)(c.3)(i).

ITA
88(1)(e.6)

Paragraph 88(1)(e.6) of the Act permits a parent corporation to deduct the amount of a subsidiary's charitable gifts, gifts to Her Majesty, gifts to certain cultural institutions and ecological gifts, to the extent that they were not deducted by the subsidiary prior to the time of its winding-up. Paragraph 88(1)(e.6) is amended, consequential to the addition of new subsection 248(31) of the Act, to allow the parent to deduct the eligible amount of a gift made after December 20, 2002 that was not deducted by the subsidiary. For additional details, see the commentary to new subsection 248(31).

Winding-up of a Corporation

ITA
88(1.1)(e)

Subsection 88(1.1) of the Act allows a parent corporation under certain circumstances to use losses of a subsidiary corporation that has been wound up. Paragraph 88(1.1)(e) limits the use that can be made of the former subsidiary's non-capital losses and farm losses where either the parent or the subsidiary has undergone an acquisition of control. In its current form, the paragraph applies these limits regardless of when the acquisition of control took place. This can produce results that are unnecessarily restrictive. If, for example, a newly-acquired corporation is made the parent of an existing subsidiary that has losses, but the subsidiary itself has not undergone an acquisition of control since it incurred those losses, there is no reason for paragraph 88(1.1)(e) to limit the use that the parent corporation can make of the subsidiary's losses after the winding-up.

To ensure that it applies more appropriately, paragraph 88(1.1)(e) is amended to distinguish between acquisitions of control of the parent corporation and acquisitions of control of the subsidiary. In respect of the parent, the limits imposed by the provision will apply only where a person or group of persons has acquired control after the commencement of the winding-up. In respect of the subsidiary, those limits will continue to apply if control has been acquired at any time.

Amended paragraph 88(1.1)(e) applies to windings-up that begin after May 1996.

Clause 225

Taxable Canadian Corporation

ITA
89

Section 89 of the Act defines certain terms that apply to corporations and their shareholders.

Definitions

ITA
89(1)

Subsection 89(1) of the Act defines certain terms that apply to corporations and their shareholders.

"capital dividend account"

Where the appropriate elections have been made by a private corporation, dividends paid out of the capital dividend account of the corporation are received tax-free by the corporation's shareholders who are resident in Canada. A corporation's capital dividend account generally includes the untaxed portion of gains in respect of dispositions of capital property.

Clauses (a)(i)(A) and (a)(ii)(A)

Clauses (a)(i)(A) and (a)(ii)(A) of the definition "capital dividend account" are amended to provide that a corporation's capital gain or loss from the disposition of a property is computed for capital dividend account purposes without reference to subparagraph 52(3)(a)(ii) and 53(1)(b)(ii). In general, this amendment means that no capital dividend election may be made in respect of a corporation's capital gain from disposing of shares to the extent that gain arises because the cost of the shares does not include amounts described in those amended subparagraphs, which are more fully discussed in the commentary accompanying those amendments. Essentially, this amendment ensures that those subparagraphs cannot be used in conjunction with a capital dividend election to convert corporate surplus into capital gains upon which a capital dividend election could be made.

These amendments apply in respect of dispositions that occur on or after November 9, 2006.

Clauses (a)(i)(A) and (a)(ii)(A) of the definition "capital dividend account" in subsection 89(1) of the Act are amended so that it is computed without reference to dispositions that are deemed to occur under paragraph 40(3.1)(a) and subsection 40(3.12).

Subsection 40(3.1) is an anti-avoidance rule that deems a capital gain to arise if the adjusted cost base to a taxpayer of an interest as a limited partner in a partnership is negative. This can arise, for example, when partner drawings on equity are financed by partnership debt, rather than by net partnership income or gains or previous equity contributions. Subsection 40(3.12) allows a deemed capital loss in a subsequent year if the adjusted cost base of the partner's interest later becomes positive.

These amendments apply to dispositions that occur after October 31, 2011, other than dispositions under subsection 40(3.12) that relate to amounts deemed under subsection 40(3.1) to have been a gain from a disposition that occurred before November 1, 2011.

Paragraphs (f) and (g)

The French versions of paragraphs (f) and (g) of the definition "capital dividend account" in subsection 89(1) of the Act are amended to clarify that the amounts described in those paragraphs relate to distributions from a trust. This technical change does not represent a change in policy.

These amendments apply to elections in respect of capital dividends that became payable after 1997.

Clause (f)(i)(B)

Paragraph (f) of the definition "capital dividend account" provides for the inclusion in a corporation's capital dividend account of an amount in respect of the non-taxable portion of capital gains distributed by a trust to the corporation. The amount permitted to be included is equal to the lesser of two amounts.

The first of the two amounts is the amount by which the distribution exceeds the amount designated under subsection 104(21) of the Act by the trust (other than a designation to which subsection 104(21.4) of the Act applies) in respect of the corporation in respect of those capital gains. The exclusion from the first amount of a designated amount to which subsection 104(21.4) applies prevents a double addition to the corporation's capital dividend account. This is because subsection 104(21.4) already deems certain capital gains of a trust to be those of the beneficiary.

Subsection 104(21.4) provides a special rule that applies where a trust designates, for its taxation year that includes either February 28, 2000 or October 17, 2000, an amount in respect of a beneficiary. Consequential on the proposed repeal of subsection 104(21.4) of the Act as described below, clause (f)(i)(B) of the definition is amended to refer to a designation to which subsection 104(21.4) applied as it read in its application to the corporation's last taxation year that began on or before October 31, 2011.

This amendment applies to taxation years that begin after October 31, 2011.

"taxable Canadian corporation"

Paragraph (b) of the definition "taxable Canadian corporation" in subsection 89(1) of the Act is amended to clarify that a farming or fishing insurer to which paragraph 149(1)(t) of the Act applies is a taxable Canadian corporation. This amendment applies in respect of taxation years that end after 1999.

Clause 226

Amounts to be Included in Respect of Share of a Foreign Affiliate

ITA
91

Section 91 of the Act sets out rules for determining, among other things, amounts that a taxpayer resident in Canada is to include in computing its income for a particular year as income from a share of a controlled foreign affiliate of the taxpayer.

Amounts Deductible in Respect of Foreign Taxes

ITA
91(4)

Subsection 91(4) of the Act provides for a deduction in computing the income of a taxpayer resident in Canada. The deduction is available where the taxpayer has included an amount under subsection 91(1) in computing income in respect of a share of the capital stock of a controlled foreign affiliate of the taxpayer. The deduction is generally determined with reference to foreign taxes payable by the affiliate and a "relevant tax factor". The "relevant tax factor" of a taxpayer is designed to permit a deduction for the taxpayer that will result in tax relief that is a proxy for a foreign tax credit in respect of foreign taxes payable by a controlled foreign affiliate of the taxpayer.

Subsection 91(4) is amended to explicitly link the "relevant tax factor" to the taxpayer and the taxation year for which the deduction under subsection 91(4) is claimed. For more detail on the definition "relevant tax factor" in subsection 95(1), see the commentary on that provision.

This amendment applies to the 2002 and subsequent taxation years.

Denial of Foreign Accrual Tax

ITA
91(4.1) to (4.7)

New subsections 91(4.1) to (4.7) of the Act, together with new rules in section 126 of the Act and section 5907 of the Regulations, are intended to address tax schemes established by taxpayers with the intent of creating foreign tax credits and similar deductions for foreign tax the burden of which is not, in fact, borne by the taxpayer. The main thrust of all of these schemes is to exploit asymmetry as between the tax laws of Canada and those of a relevant foreign jurisdiction in the characterization of equity and debt instruments. These schemes clearly offend the policy underlying the foreign tax credit, foreign accrual tax and underlying foreign tax rules in the Act. Although the Government believes that these schemes can be successfully challenged under existing rules in the Act, including the General Anti-Avoidance Rule in section 245, the magnitude of the potential problem warrants greater assurance through specific and immediate legislative action.

New subsection 91(4.1) denies foreign accrual tax ("FAT") in respect of the foreign accrual property income ("FAPI") of a foreign affiliate of a taxpayer in certain circumstances that include an investment in either a partnership or a corporation that is characterized as an equity investment for the purposes of the Act but that is characterized as a debt instrument issued by that entity, or another entity, under the relevant foreign tax law. Such instruments are often referred to as "hybrid instruments".

More specifically, subparagraph 91(4.1)(a)(i) provides that this FAT denial rule will apply where the taxpayer (or certain other persons connected to the taxpayer, as set-out in the definition of "specified owner" in new subsection 91(4.2)), is considered to own less than all of the shares of the foreign affiliate, or certain other connected corporations (as set-out in the definition of "pertinent person or partnership" (or "PPOP") in new subsection 91(4.3)), under the relevant foreign tax law that are considered to be owned by the taxpayer (or specified owner) under the Act.

Subparagraph 91(4.1)(a)(ii) provides a similar rule for investments in partnerships. The reference to an "indirect" share is intended to address situations in which the taxpayer may, under foreign and Canadian tax law, be considered to have the same level of partnership interest in an upper-tier partnership, but a different level of interest in a partnership of which the upper-tier partnership is a member.

Paragraph 91(4.1)(b) is similar to subparagraph 91(4.1)(a)(ii), but it deals with situations in which the taxpayer itself is a partnership.

New subsection 91(4.2) defines the expression "specified owner", for the purposes of subsections 91(4.1) and (4.5), as being the taxpayer, a foreign affiliate of the taxpayer, or a partnership of which either is a member. This definition also includes persons and partnerships specified in paragraph 91(4.4)(a), as discussed below.

New subsection 91(4.3) defines PPOP for the purposes of subsection 91(4.1). A PPOP generally includes any foreign affiliate or partnership that is in the same chain of ownership as the particular affiliate (i.e. the one with the FAPI). However, by virtue of new subsection 91(4.4), a PPOP can also include corporations and partnerships that are outside the particular affiliate's chain of ownership, in certain circumstances.

New subsection 91(4.4) applies where the FAPI arises as part of a series of transactions or events in which funding (other than loans or other indebtedness that bear arm's length terms or share acquisitions) is provided by a particular person or partnership. The term "funding" is meant to include any means by which money is provided to the particular affiliate, including, but not limited to, loans, advances, asset purchases, dividends and share redemptions. Where the conditions of subsection 91(4.4) apply, both the specified owner and PPOP concepts can capture certain persons and partnerships that are outside of the particular affiliate's chain of ownership, and even some that are in the chain of ownership of a related Canadian taxpayer.

New subsection 91(4.5) applies for the purposes of subparagraph 91(4.1)(a)(i). It ensures that subsection 91(4.1) will not be invoked solely because an entity that is treated as a corporation under the Act but that is treated as a fiscally transparent entity under the relevant foreign tax law owns shares of a foreign corporation.

New subsection 91(4.6) applies for the purposes of subparagraph 91(4.1)(a)(ii) and paragraph 91(4.1)(b). It ensures that certain factors will not be taken into account in determining whether subsection 91(4.1) will apply to certain situations involving partnerships. This exception will apply where one or more of the enumerated factors could otherwise be interpreted as invoking its application and there are no other factors that would trigger the application of the rule. The enumerated factors are, essentially,

Subsections 91(4.5) and (4.6) taken together are intended to ensure, among other things, that so-called "hybrid entities" are not caught by the FAT denial rule where the sole reason for the application of the FAT denial rule would be that the entities are not characterized the same way under foreign and Canadian tax law.

New subsection 91(4.7) ensures that foreign affiliate shares that have the same substantive effect as debt in that the dividends on the shares are treated as tax deductible payments under the relevant foreign tax law are subject to new subsection 91(4.1) even where the relevant foreign tax law and Canadian tax law do not differ in their attribution of ownership of the shares or characterization of the shares.

New subsections 91(4.1), (4.5) and (4.6) generally apply in respect of the computation of foreign accrual tax applicable to an amount included in computing the taxpayer's income under subsection 91(1) of the Act for taxation years of the taxpayer that end after March 4, 2010, in respect of a foreign affiliate of the taxpayer. However, there are transitional rules for taxation years of the taxpayer that end on or before Announcement Date.

New subsections 91(4.2) to (4.4) and (4.7) apply to taxation years that end after Announcement Date.

Example 1:

Assumptions

1. Canco, a corporation resident in Canada, owns all the shares of FA1, a U.S. resident corporation.

2. FA1 owns all of the common and preferred shares of the capital stock of FA2, also a U.S. resident corporation.

3. FA2's common shares are worth $200 and its preferred shares are worth $100.

4. FA2 owns all the shares of FA3, also a U.S. resident corporation.

5. FA1 sells its preferred shares of FA2 to Canco for $100 cash and, at the same time, enters into an agreement to sell those shares back to FA1 at a fixed price and time in the future.

6. Under U.S. tax principles, Canco is considered to have loaned the $100 of cash to FA1 and is not considered to own the preferred shares of FA2.

Analysis

Since Canco is considered, under the relevant foreign tax law, to own less than all of the shares of FA2 that it is considered to own under Canadian tax law, subsection 91(4.1) can potentially apply. However, it will only have an effect where FA1, FA2 or FA3 has FAPI for which Canco wishes to claim a FAT deduction. Effectively these rules make it such that all FAPI in a chain of affiliates is presumed to have been funded by any funds relating to a hybrid instrument that exists in that chain.

Example 2:

Assumptions

1. Canco, a corporation resident in Canada, owns all the shares of FA1, a U.S. resident limited liability company that is treated as a disregarded entity under U.S. tax law.

2. FA1 owns all the shares of the capital stock of FA2, a U.S. resident corporation.

3. FA2 owns all the shares of FA3, also a U.S. resident corporation.

4. FA3 earns FAPI in respect of which it incurs U.S. tax.

Analysis

Absent subsection 91(4.5), subsection 91(4.1) could apply because under U.S. tax law Canco is not considered to own any shares of FA1, because FA1 is not considered to exist. However, provided there are no hybrid instruments in Canco's U.S. foreign affiliate group, subsection 91(4.5) should apply to prevent the application of the FAT denial rule in subsection 91(4.1).

Example 3:

Assumptions

1. Canco, a corporation resident in Canada, owns all the shares of FA1, a U.S. resident corporation.

2. FA1 owns all of the common and preferred shares of the capital stock of FA2, also a U.S. resident corporation.

3. FA2's common shares are worth $200 and its preferred shares are worth $100.

4. FA2 owns all the shares of FA3, also a U.S. resident corporation.

5. FA1 sells its preferred shares of FA2 to Canco for $100 cash and, at the same time, enters into an agreement to sell those shares back to FA1 at a fixed price and time in the future.

6. Under U.S. tax principles, Canco is considered to have loaned the $100 of cash to FA1 and is not considered to own the preferred shares of FA2.

7. Canco also owns all the shares of FA4, a U.S. resident corporation.

8. FA4 owns all of the shares of the capital stock of FA5, also a U.S. resident corporation.

Analysis

Since Canco is considered, under the relevant foreign tax law, to own less than all of the shares (the "hybrid instrument") of FA2 that it is considered to own under Canadian tax law, subsection 91(4.1) can potentially apply. However, it will only have an effect where FA1, FA2 or FA3 has FAPI for which Canco wishes to claim a FAT deduction. On the other hand, if FA4 or FA5 were to have FAPI in respect of which a FAT deduction is sought, and there has been no funding between the FA1/2/3 chain and the FA4/5 chain (as contemplated in subsection 91(4.4)), the hybrid instrument would not interfere with that FAT claim.

Example 4:

Assumptions

1. Canco 1, a corporation resident in Canada, owns all the shares of FA1, a U.S. resident corporation.

2. FA1 owns all of the common and preferred shares of the capital stock of FA2, also a U.S. resident corporation.

3. FA2's common shares are worth $200 and its preferred shares are worth $100.

4. FA2 owns all the shares of FA3, also a U.S. resident corporation.

5. FA1 sells its preferred shares of FA2 to Canco 1 for $100 cash and, at the same time, enters into an agreement to sell those shares back to FA1 at a fixed price and time in the future.

6. Under U.S. tax principles, Canco 1 is considered to have loaned the $100 of cash to FA1 and is not considered to own the preferred shares of FA2.

7. Canco 2, a corporation resident in Canada that is related to Canco 1, owns all the shares of FA4, a U.S. resident corporation.

8. As part of the same series of transactions that includes the purchase of FA2's shares by Canco 1 in step 5, FA1 makes a non-interest-bearing loan to FA4.

9. FA4, in turn, lends the funds received in step 8 to Canco 2 and realizes FAPI.

Analysis

Since Canco 1 is considered, under the relevant foreign tax law, to own less than all of the shares (the "hybrid instrument") of FA2 that it is considered to own under Canadian tax law, subsection 91(4.1) can potentially apply. In this case, there is no FAPI in FA2's chain of ownership. However, because of the cross-chain funding of FA4 by FA1, subsection 91(4.4) will make the hybrid instrument relevant in respect of FA4's FAPI and result in the denial of FAT.

Clause 227

Foreign Affiliates

ITA
95

Section 95 of the Act defines a number of terms and provides certain rules relating to the taxation of Canadian resident shareholders of foreign affiliates.

Definitions

ITA
95(1)

"foreign accrual tax"

The definition "foreign accrual tax" in subsection 95(1) of the Act is relevant for determining the amount of a deduction that a taxpayer may claim under subsection 91(4) in respect of taxes paid or deemed paid in respect of the foreign accrual property income of a foreign affiliate of a taxpayer.

This definition is being amended to provide that it is subject to the new rules in subsection 91(4.1) that deny FAT in certain circumstances. For more details about the new rules in subsection 91(4.1), see the commentary on that subsection.

The amendment to "foreign accrual tax" applies to taxation years that end after March 4, 2010.

"relevant tax factor"

The definition "relevant tax factor" in subsection 95(1) of the Act is used in determining the Canadian tax relief provided in respect of foreign taxes imposed on the earnings of a foreign affiliate of a taxpayer. The existing definition provides that the relevant tax factor for a corporation (or a partnership all the resident members of which are corporations) is the reciprocal of the basic corporate tax rate (i.e., 1/.38, or 2.63). The factor for individuals and other partnerships is 2.

As part of a series of amendments reflecting reductions in income tax rates, the definition "relevant tax factor" is amended. The relevant tax factor for a corporation (or a partnership all the resident members of which are corporations) will take account of the "general rate reduction percentage" provided in section 123.4 of the Act. For example, if a corporation's taxation year is the calendar year, its relevant tax factor for 2003 will be 1/(.38 – .05), or 3.03.

Similarly, to take account of decreasing personal income tax rates, the relevant tax factor for individuals and other partnerships is increased to 2.2.

The amendments to "relevant tax factor" apply to the 2002 and subsequent taxation years.

Clause 228

Partnerships and their Members

ITA
96

Section 96 of the Act provides general rules for determining the income or loss of a partnership and its members.

Income Allocation to Former Member

ITA
96(1.01)

New subsection 96(1.01) of the Act generally applies to the 1995 and subsequent taxation years. Paragraph 96(1.01)(a) deems a taxpayer who is a former member of a partnership to be a member at the end of the fiscal period in which the taxpayer ceased to be a member, for the purpose of allocating partnership income or loss for that period. This new provision clarifies that, although a taxpayer may have ceased to be a member of a partnership before the end of the partnership's fiscal period, an amount of the income or loss of the partnership is allocable to the taxpayer under subsection 96(1) of the Act. The amount so allocated is relevant to certain calculations relating to partnership income or loss, including the calculation of the adjusted cost base of the former member of the partnership immediately before the taxpayer ceased to be a member.

New subsection 96(1.01) applies notwithstanding the rule in paragraph 98.1(1)(d) of the Act that would otherwise deem a former partnership member with a residual interest not to be a member of the partnership for the purposes of certain provisions of the Act.

New paragraph 96(1.01)(a) does not require that partnership income or loss be calculated immediately after a member leaves the partnership. The income or loss allocation, including that of the former member, continues to be calculated after the end of the partnership's fiscal period. In some circumstances the fiscal period of a partnership may end in a taxation year of the former member that is after the taxation year in which the partnership interest was disposed of. It is, therefore, possible that a member will not be required to report a partnership income allocation until the taxation year following that in which a capital gain or loss on the disposition of the partnership interest is required to be reported.

New paragraph 96(1.01)(b) clarifies that an income or loss allocation for the "stub period" during which a taxpayer was a member is included in the calculation of the adjusted cost base of the partnership interest at the time the former member disposes of the interest or a residual interest. The income or loss allocation will affect the calculation of a capital loss under paragraph 98.1(1)(c) or subsection 100(2) of the Act. Subsection 96(1.01) may ameliorate certain situations where, under the existing provisions of the Act, a former member may have been required to report a capital gain in the year that the person left the partnership, only to be offset by a capital loss in a subsequent year.

Example

Ms. Brown was a partner in XYZ Partnership until June 30. The fiscal period of the partnership ends December 31. The adjusted cost base of her partnership interest on January 1 was Nil. From January to June 30 she withdrew $16,000 in capital.

Just before the end of the partnership's fiscal period, all the partners agree that Ms. Brown's share of income for the period was $20,000. On December 30 she was paid $4,000 in satisfaction of her residual interest.

A summary of Ms. Brown's adjusted cost base is as follows:

Adjusted Cost Base Calculations
  Adjusted Cost Base
 
  Change Balance
January 1, Year 1:   Nil
January 31, Drawings $ <16,000> <16,000>
Retirement of Ms. Brown, June 30    
December 30    
- Share of income for 6 months 20,000 4,000
- Payout of rights to equity <4,000> Nil
December 31 - Fiscal period ends    
Note: <> indicates a negative number.

In the result, Ms. Brown is allocated $20,000 income under subsection 96(1.01). The adjusted cost base of her interest immediately before she retired on June 30 was $4,000 (i.e., $20,000 less $16,000). She is deemed by paragraph 98.1(1)(b) to have disposed of her residual interest on December 31 for proceeds of disposition of $4,000, such that she has no capital gain or loss on the disposition.

 

Subparagraph 53(1)(e)(v) of the Act requires that "rights or things" (referred to in subsection 70(2) of the Act) in respect of the partnership interest of a deceased partner be included in the adjusted cost base of the partnership interest of the deceased. This provision is no longer relevant to income of the partnership to which a partner is entitled at the time of death, since new subsection 96(1.01) applies to the allocation of partnership income for the fiscal period in which the taxpayer dies. However, subparagraph 53(1)(e)(v) continues to apply in respect of other rights or things, if any, to which the deceased taxpayer is entitled through the partnership that are required to be included in the income of the deceased taxpayer under subsection 70(2).

New paragraph 96(1.01)(a) of the Act, as enacted above, is amended to remove the references to section 34.2 and to limit the reference to section 249.1 to paragraph 249.1(1)(b) consequential on the introduction of rules in Budget 2011 to limit the ability of corporations to defer income through partnerships. This amendment to paragraph 96(1.01)(a) applies in respect of a taxpayer to taxation years that end after March 22, 2011.

New paragraph 96(1.01)(b) of the Act, as enacted above, is amended to provide that, for the purposes of subsection 40(3.12) of the Act, if a taxpayer ceases to be a member of a partnership at any time, the fiscal period of the partnership is deemed to end immediately before the time that is immediately before the time that the taxpayer ceased to be a member of the partnership. This amendment is consequential to the amendment to clauses (a)(i)(A) and (a)(ii)(A) of the definition "capital dividend account" in subsection 89(1) of the Act to provide that the capital dividend account of a corporation is computed without reference to dispositions that are deemed to occur under paragraph 40(3.1)(a) and subsection 40(3.12).

A taxpayer can only have a deemed loss under subsection 40(3.12) at the end of the fiscal period of a partnership. This amendment to paragraph 96(1.01)(b) allows a taxpayer to elect to have a deemed loss under subsection 40(3.12) before the taxpayer disposes of its partnership interest if the adjusted cost base of the partner's interest is positive at that time.

This amendment to paragraph 96(1.01)(b) applies in respect of a taxpayer to taxation years that end after October 31, 2011.

Limited Partner

ITA
96(2.4)(a)

Subsection 96(2.4) of the Act provides an extended definition of "limited partner" for the purpose of applying the limited partnership at-risk rules in subsection 96(2.2).

Paragraph 96(2.4)(a) provides that a member of a partnership is a "limited partner" if, by operation of law governing the partnership agreement, the liability of the member as a member is limited. However, paragraph 96(2.4)(a) does not apply in cases where a member's liability is limited by operation of a statutory provision of Canada or of a province that limits the member's liability only for the debts, obligations and liabilities of a limited liability partnership (or of any member of the partnership) arising from negligent acts or omissions of another member of the partnership (or of an employee, agent or representative of the partnership) in the course of the partnership business and while the partnership is a limited liability partnership.

The Province of Quebec has amended its legislation concerning partnerships to allow partners to carry on their activities within a limited liability partnership. That legislation refers to the civil law concept of "fault/fautes". The English version of paragraph 96(2.4)(a) does not refer to the civil law concept of "fault" and is amended to do so, effective after June 20, 2001.

Election by Partnership Member for 2000 Taxation Year

ITA
96

The calculation of the capital gains inclusion rate of a taxpayer for the 2000 taxation year takes into account the net capital gains or losses of the taxpayer for the year 2000 other than those allocated by a partnership. It is the inclusion rate of the taxpayer, determined without reference to the allocated partnership gains, that is applied to the taxpayer's share of the partnership gains in determining the taxable capital gains of the taxpayer derived from the partnership capital gains. As a result, taxpayers with different inclusion rates report different amounts of taxable capital gains in respect of capital gains allocated to the taxpayer by a partnership.

Subclause 91(5) of the Income Tax Amendment Act, 2006 introduces a special transitional rule under which members of a partnership may elect to treat capital gains and losses allocated to them by a partnership as their own capital gains and losses for the purpose of calculating the taxpayer's capital gains inclusion rate for the year 2000. The gains and losses will be considered to have been realized by the taxpayer on the day on which the fiscal period of the partnership ends.

If a taxpayer so elects, subsection 96(1.7) of the Act will not apply. The taxpayer will be deemed to have realized (on the day on which the fiscal period of the partnership ends in the taxpayer's 2000 taxation year) a capital gain, a capital loss or a business investment loss in respect of the partnership equal to the amount of the taxable capital gain, the allowable capital loss or the allowable business investment loss, as the case may be, of the partnership allocated to the taxpayer, multiplied by the reciprocal of the fraction in paragraph 38(a) of the Act that applied to the partnership for the particular fiscal period. Where the inclusion rate for the partnership cannot be determined, the rules in subsection 96(1.7) apply to determine the inclusion rate of the partnership. This capital gain, capital loss or business investment loss is deemed to be a capital gain, capital loss or business investment loss, as the case may be, of the taxpayer from a disposition of a capital property on the day that the particular fiscal period ends.

Agreement or Election of Partnership Members

ITA
96(3)

Subsection 96(3) of the Act provides rules that apply if a member of a partnership makes an election under certain provisions of the Act for a purpose that is relevant to the computation of the member's income from the partnership. In such a case, the election will be valid only if it is made on behalf of all the members of the partnership and the member had authority to act for the partnership.

Subsection 96(3) is amended, generally for taxation years that end after February 27, 2000, to apply for the purposes of an election under subsections 14(1.01) and (1.02) of the Act in respect of the disposition of an eligible capital property.

Subsection 96(3) is also amended so that after December 20, 2002, it applies for the purposes of elections under subsection 13(4.2) of the Act.

Application of Foreign Partnership Rule

ITA
96(9)

Subsection 96(8) of the Act provides rules that apply where, at a particular time, a Canadian resident becomes a member of a partnership, or a person who is a member of such a partnership becomes a resident of Canada. Where, immediately before the particular time no member of the partnership was resident in Canada, these rules apply in computing the income of the partnership for fiscal periods ending after the particular time. In general terms, the rules in subsection 96(8) are designed to prevent losses accrued while a partnership had no Canadian resident partners from being used to reduce Canadian income tax liabilities.

Subsection 96(9) provides that, where one of the main reasons that there is a member of the partnership who is resident in Canada is to avoid the application of subsection 96(8), that member will, for the purpose of applying subsection 96(8), be considered not to be resident in Canada.

Subsection 96(9) is amended to provide an explicit look-through rule for the purposes of subsection 96(8) so that members of partnerships may be identified through one or more tiers of partnerships that are members of other partnerships.

This amendment applies to partnership fiscal periods that begin after June 22, 2000.

Clause 229

Fiscal Period of Terminated Partnership

ITA
99(1)

Subsection 99(1) of the Act provides that, generally, a fiscal period of a partnership is considered to end immediately before the particular time that the partnership ceases to exist. In order to accommodate the calculation of adjusted cost base immediately before the particular time, under section 53 of the Act, subsection 99(1) is amended to provide that fiscal period of a partnership is considered to end immediately before the time that is immediately before the particular time. This amendment applies on Royal Assent.

Clause 230

Replacement of Partnership Capital

ITA
100(5)

Section 100 of the Act contains rules relevant to the calculation of capital gains and losses in respect of an interest in a partnership. There may be circumstances under which a former member of a partnership or an heir of a deceased member is required to pay an amount to the partnership to cover a deficit in the former member's equity account. Such a situation could arise, for instance, where the partnership has a net loss for the partnership's fiscal period in which the taxpayer ceased to be a member. The former member may have been deemed to have realized a capital gain under subsection 100(2) of the Act upon disposition of the partnership interest, if the former member had at that time a "negative" adjusted cost base under section 54 of the Act (if such a negative balance were allowed under that section).

New subsection 100(5) of the Act, which generally applies to the 1995 and subsequent taxation years, deems a taxpayer to have a capital loss from the payment by the taxpayer of an amount after the time of disposition of the partnership interest, if that amount would have been a capital contribution to the partnership if the taxpayer had still been a member at the time of the payment. The loss is available to the former member or to an heir who has been deemed by subsection 100(3) of the Act to have acquired a right to acquire partnership property.

Example

Mr. Green was a partner in XYZ Partnership until June 30. The fiscal period end of the partnership was December 31. The adjusted cost base of his partnership interest on January 1 was Nil. From January to June 30 he withdrew $16,000 in capital.

Shortly after the fiscal period end, all the partners agree that Mr. Green's share of the partnership loss for the period was $20,000. During the following year he paid $36,000 owing by him to the partnership in satisfaction of his obligation.

A summary of Mr. Green's adjusted cost base is as follows:

Adjusted Cost Base Calculations
  Adjusted Cost Base
 
  Change Balance
January 1, Year 1:   Nil
January 31, Drawings $ <16,000> <16,000>
Retirement of Mr. Green, June 30    
December 31, Year 1,    
Share of loss for 6 months <20,000> <36,000>
March 31 - Repayment of partnership capital 36,000 Nil
Note: <> indicates a negative number.

Mr. Green is entitled to claim a partnership loss of $20,000 for the taxation year in which he retired ("Year 1"). He had a $36,000 "negative" adjusted cost base for his partnership interest as at the time that he left the partnership, giving rise to a deemed capital gain under subsection 100(2) of the Act for Year 1. However, he will be allowed a $36,000 capital loss under subsection 100(5) for the taxation year in which he repaid the deficit.

Clause 231

Trusts and their Beneficiaries

ITA
104

Section 104 of the Act provides rules governing the tax treatment of trusts and their beneficiaries.

Restricted Meaning of "beneficiary"

ITA
104(1.1)

Subsection 104(1.1) of the Act applies for the purpose of identifying beneficiaries under a trust for the purposes of subsection 104(1), subparagraph 73(1.02)(b)(ii) and paragraphs 104(4)(a.4) and 107.4(1)(e) of the Act.

Subsection 104(1.1) is amended to clarify that it applies notwithstanding subsection 248(25) of the Act. Subsection 248(25) of the Act describes, for other purposes of the Act, the circumstances in which a person or partnership is considered to be "beneficially interested" in a trust.

This amendment applies to the 1998 and subsequent taxation years.

Deemed Disposition and Election

ITA
104(4) and (5.3)

Subsection 104(4) sets out what is generally referred to as the "21-year deemed realization rule" for trusts. The purpose of subsection 104(4) is to prevent the use of trusts to defer indefinitely the recognition for tax purposes of gains accruing on capital property. Subsection 104(4) generally treats capital property of a trust (other than certain trusts for the benefit of a spouse or common-law partner) as having been disposed of and reacquired by the trust every 21 years at the property's fair market value.

Subparagraph 104(4)(a)(i.1) is amended to apply to a trust to which property is transferred in circumstances to which paragraph 70(5.2)(c) applied. It is also amended to ensure that it continues to apply to a trust to which property was transferred in circumstances to which paragraph 70(5.2)(b) or (d) applied as those paragraphs read in their application to taxation years that began before 2007. This amendment applies to trust taxation years that begin after 2006.

Paragraphs 104(4)(a.2) and (5.3)(b.1) of the Act deal with cases where a trust distributes property to a beneficiary. The French version of these paragraphs is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. These amendments will come into force on Royal Assent.

Deferral of Deemed Disposition for Trusts

ITA
104(5.3) to (5.7)

Subsections 104(4) to (5.2) of the Act set out what is generally referred to as the "21-year deemed realization rule" for trusts. Subsections 104(5.3) to (5.7) allow the deferral of the 21-year deemed disposition date for certain family trusts for taxation years that ended before 2000. Consequently, the last deemed disposition date that could be deferred was no later than January 1, 1999. Accordingly, subsections 104(5.3) to (5.7) are now obsolete and are repealed.

This amendment applies to taxation years that begin after October 31, 2011.

Where Property Owned for Non-residents

ITA
104(10) and (11)

Prior to the end of the non-resident owned investment corporation (NRO) system, a trust that received a dividend from an NRO and that did not in turn distribute the amount of the dividend to its non-resident beneficiaries was entitled to deduct that amount from its income under subsection 104(10) of the Act. Subsection 104(11) then deemed the amount deducted under subsection 104(10) to have been paid to a non-resident beneficiary, with the result that Part XIII withholding tax would typically be payable. As a consequence of the phasing out of section 133, subsection 104(10) and (11) are repealed.

This amendment applies to the 2005 and subsequent taxation years.

Amounts Deemed Not Paid

ITA
104(13.2)

Subsection 104(13.2) of the Act applies in instances where a trust has a non-capital loss carry forward from a prior taxation year and current taxable capital gains. In such circumstances, the trust may choose not to deduct the full amount to which it is entitled under subsection 104(6), in order create sufficient taxable income attributable to taxable capital gains against which the non-capital losses carried forward may be deducted. This is accomplished through a designation under subsection 104(13.2).

Subsection 104(13.2) is amended to replace the reference to "beneficiaries" in paragraph 104(13.2)(a) with "beneficiary", consistent with the wording of subsection 104(13.1).

This amendment comes into force on Royal Assent.

Designation in Respect of Taxable Dividends

ITA
104(19)

Subsection 104(19) of the Act permits a trust to designate a taxable dividend received by it in a taxation year on the share of a taxable Canadian corporation. Where the designation is made in respect of a beneficiary under the trust, the dividend is treated, for the purposes of the Act (other than Part XIII), as a taxable dividend received by the beneficiary from the corporation, and is treated, for the purposes of the dividend gross-up in paragraph 82(1)(b) and stop-loss rules in paragraphs 107(1)(c) and (d) and section 112, as not having been received by the trust.

Subsection 104(19) is amended to clarify that where a designation, in respect of a taxpayer, is made by a trust in respect of a taxable dividend received by the trust in a particular taxation year of the trust, on a share of the capital stock of a taxable Canadian corporation, the portion of the dividend in respect of which the designation is made is

These deeming rules do not apply, however, unless a number of conditions are met. One of these conditions – that a designated amount not be made in respect of more than one beneficiary under the trust – is replaced with a new requirement that the total of all amounts designated by the trust under subsection 104(19) for the particular taxation year of the trust not exceed the total of all amounts each of which is the amount of a taxable dividend received by the trust in the particular taxation year on a share of the capital stock of a taxable Canadian corporation.

The deeming rules under subsection 104(19) apply, in respect of a beneficiary under the trust, only to the portion of the amount, designated under that subsection, that may reasonably be considered (having regard to all the circumstances including the terms and conditions of the trust arrangement) to be part of the amount that, by reason of subsection 104(13) or (14) or section 105, as the case may be, was included in computing the income for a particular taxation year of a beneficiary under the trust. This condition is also amended and now provides that the portion of a taxable dividend designated by a trust is deemed to be a taxable dividend of a taxpayer who is a beneficiary of the trust (and not to be a dividend received by the trust) only if an amount equal to the amount of the designated portion may reasonably be considered (having regard to all the circumstances including the terms and conditions of the trust) to be part of the amount that, because of paragraph 104(13)(a) or subsection 104(14) or section 105, was included in computing the income of that taxpayer (i.e., the taxpayer in respect of whom the amount is designated).

The amended reference in the above rule to paragraph 104(13)(a), instead of subsection 104(13), applies to taxation years that end after July 18, 2005. This change clarifies that the deeming rules do not apply to taxable dividends received by a trust governed by an employee benefit plan and paid to an employer under the plan. This is intended to ensure the appropriate characterization of such amounts for purposes of the rules relating to employee benefit plans. For taxation years that end after February 27, 2004 and on or before July 18, 2005, the referenced provision is subsection 104(13).

Except as noted above, these amendments apply to taxation years that end after February 27, 2004.

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 section 110.6 and subject to paragraph 132(5.1)(b)), to be a taxable capital gain for the year of the beneficiary from the disposition of capital property.

Subsection 104(21) is amended to clarify that where a designation, in respect of a taxpayer, is made by a trust in respect of its net taxable capital gains for a particular taxation year of the trust, the designated amount is deemed to be a taxable capital gain, for the taxation year of the taxpayer in which the particular taxation year ends, from the disposition by the taxpayer of capital property.

The deeming rule does not apply, however, unless a number of conditions are met. One of these conditions – that a designated amount not be made in respect of more than one beneficiary under the trust – is replaced with a new requirement that the total amounts designated under subsection 104(21) by the trust for a particular taxation year of the trust not exceed the trust's net taxable capital gains for the particular taxation year.

The deeming rule under subsection 104(21) applies, in respect of a beneficiary under a trust, only to the portion of the net taxable gains of the trust that may reasonably be considered (having regard to all the circumstances including the terms and conditions of the trust arrangement) to be part of the amount that, by reason of subsection 104(13) or 104(14) or section 105, as the case may be, was included in computing the income of a beneficiary under the trust. This condition is also amended and now provides that an amount, in respect of the trust's net taxable capital gains, is deemed to be a taxable capital gain from the disposition by a taxpayer of capital property only if the amount may reasonably be considered (having regard to all the circumstances including the terms and conditions of the trust) to be part of the amount that, because of paragraph 104(13)(a) or subsection 104(14) or section 105, was included in computing the income of that taxpayer (i.e., the taxpayer in respect of whom the amount is designated).

The amended reference in the above rule to paragraph 104(13)(a), instead of subsection 104(13), applies to taxation years that end after July 18, 2005. This change clarifies that the deeming rule does not apply to employee benefit plan trusts and ensures consistency with amended subsection 104(19). For taxation years that end after February 27, 2004 and on or before July 18, 2005, the referenced provision is subsection 104(13).

Subsection 104(21) is also amended to clarify that the deeming rule does not apply to a designation made by a trust, for a particular taxation year of the trust, in respect of a non-resident beneficiary, unless the trust is a mutual fund trust throughout the particular taxation year.

Except as provided above, these amendments apply to taxation years that end after February 27, 2004.

Beneficiary's Taxable Capital Gain

ITA
104(21.1)

Subsection 104(21.1) of the Act sets out the appropriate income inclusion rate for capital gains realized before 1990 that were allocated to a beneficiary under a trust. As this subsection has no further application to any future taxation year, it is repealed with effect for taxation years that begin after October 31, 2011.

Net Taxable Capital Gains

ITA
104(21.3)

Subsection 104(21.3) of the Act defines the term "net taxable capital gains". The term is used in subsections 104(21) and (21.2) of the Act, which permit a trust, for certain purposes, to characterize, as taxable capital gains, income of the trust that flows through to a beneficiary under the trust. The trust can designate amounts for such treatment only to the extent of its net taxable capital gains for the year.

Under subsection 104(21.3), the amount of a trust's net taxable capital gains for a taxation year equals the amount, if any, by which its total taxable capital gains for the year exceeds the total of two amounts:

Subsection 104(21.3) is amended so that allowable business investment losses (ABILs) are disregarded for the purpose of the first of the two amounts. Accordingly, ABILs will not result in a reduction of taxable capital gains that may be flowed through to beneficiaries under trusts and against which allowable capital losses can be claimed.

This amendment applies to trust taxation years that begin after 2000.

Subsection 104(21.3) is also amended to confirm the result when such a flow through of income designated as taxable capital gains is made to a particular trust from another trust. In these circumstances, the particular trust will be permitted to in turn designate under subsection 104(21) those taxable capital gains in favour of its own beneficiaries, to the extent that the remaining legislative conditions for validly making such a designation are satisfied.

This result is achieved by amending subsection 104(21.3) to recast the computation under that subsection as a formula, and including as element B of the formula the total of all amounts each of which is deemed by subsection 104(21) to be a taxable capital gain of the trust for the year. Element A of the formula is the total of all amounts each of which is a taxable capital gain of the trust for the year from the disposition of a capital property that was held by the trust immediately before the disposition. The words "held by the trust" in element A are not strictly necessary, but are included to clarify that there is intended to be no overlap (i.e., double counting is unintended) in terms of including the same taxable capital gain in both elements A and B of the formula. Paragraphs (a) and (b) of former subsection 104(21.3) are elements C and D of the formula.

This amendment is intended to replace the Canada Revenue Agency's Technical Interpretation 9813685 on a prospective basis.

This amendment applies to taxation years that begin after October 31, 2011.

Deemed Gains - Subsection (21.4) Applies

ITA
104(21.6)

Subsection 104(21.6) of the Act provides rules for the determination of the inclusion rate to be used by a taxpayer for capital gains realized by a trust in 2000. This subsection applies to a taxpayer who has a taxation year that begins after October 17, 2000 and who is deemed by subsection 104(21.4) to have capital gains from the disposition of capital property in the year in respect of dispositions of property by a trust of which the taxpayer is a beneficiary.

This subsection ensures that the inclusion rate for capital gains realized on property disposed of by a trust prior to February 27, 2000 is 3/4, and is 2/3 in respect of property disposed of by a trust after February 27, 2000 and before October 18, 2000.

Subsection 104(21.6) is amended by adding new paragraph (f.1) to ensure that where the deemed gains are in respect of capital gains from dispositions of property by the trust that occurred after February 27, 2000 and before October 17, 2000 in circumstances where the taxation year of the taxpayer began after February 27, 2000 and ended after October 17, 2000, the gains are deemed to be a capital gain of the taxpayer from the disposition by the taxpayer of capital property in the taxpayer's taxation year and in the period that began after February 27, 2000 and ended before October 18, 2000. This amendment applies to taxation years that end after February 27, 2000.

Paragraph 104(21.6)(g) is amended to correct a technical deficiency in a reference to a date. The reference to “October 17, 2000” is changed to “October 18, 2000” which reflects the date on which the reduction of the capital gain inclusion rate from 2/3 to 1/2 was announced. This amendment applies to trust taxation years that end after December 20, 2002.

Deemed Gains

ITA
104(21.4) to (21.7)

Subsections 104(21.4) to 104(21.7) of the Act set out the appropriate capital gains inclusion rate for capital gains realized by a trust in the 2000 taxation year, including where those gains were allocated to a beneficiary of the trust. As these provisions have no further application, they are repealed with effect for taxation years that begin after October 31, 2011.

Designation in Respect of Foreign Income

ITA
104(22)

Subsection 104(22) of the Act permits a trust to designate, in respect of a beneficiary under the trust, an amount of its foreign income. Such a designation is made by the trust on a source-by-source basis. Where the designation is made, the amount designated is deemed, for the purpose of subsections 104(22) and (22.1) and section 126, to be the beneficiary's income for the year from that source.

Subsection 104(22) is amended to clarify that where an amount is designated, in respect of a taxpayer, by a trust in respect of the trust's income for a particular taxation year of the trust from a source in a country other than Canada, the designated amount is deemed to be income of the taxpayer, for the taxation year of the taxpayer in which the particular taxation year of the trust ends, from that source.

The deeming rule does not apply, however, unless a number of conditions are met. One of these conditions - that a designated amount not be made in respect of more than one beneficiary under the trust - is replaced with a new requirement that the total amounts designated, in respect of the trust's income from a particular foreign source, under subsection 104(22) by the trust for a particular taxation year of the trust not exceed the trust's income for the particular taxation year from that source.

The deeming rule under subsection 104(22) applies, in respect of a beneficiary under a trust, only to the portion of the trust's income, from a source in a country other than Canada, that may reasonably be considered (having regard to all the circumstances including the terms and conditions of the trust arrangement) to be part of the amount that, by reason of subsection 104(13) or 104(14) or section 105, as the case may be, was included in computing the income of a beneficiary under the trust. This condition is also amended and now provides that an amount, in respect of the trust's income from a source in a country other than Canada, is deemed to be income, from that source, only if the amount may reasonably be considered (having regard to all the circumstances including the terms and conditions of the trust) to be part of the amount that, because of paragraph 104(13)(a) or subsection 104(14) or section 105, was included in computing the income of that taxpayer (i.e., the taxpayer in respect of whom the amount is designated).

The amended reference in the above rule to paragraph 104(13)(a), instead of subsection 104(13), applies to taxation years that end after July 18, 2005. This change clarifies that the deeming rule does not apply to employee benefit plan trusts and ensures consistency with amended subsection 104(19). For taxation years that end after February 27, 2004 and on or before July 18, 2005, the referenced provision is subsection 104(13).

Except as provided above, these amendments apply to taxation years that end after February 27, 2004.

Testamentary Trusts

ITA
104(23)(a) and (b)

Subsection 104(23) of the Act provides special rules that apply to testamentary trusts. Paragraph 104(23)(a) defines the taxation year of a testamentary trust to be the period for which the accounts of the trust are made up for purposes of assessment under the Act. For this purpose, that paragraph also provides that no such period may exceed 12 months and no change in the time when such a period ends may be made for the purposes of the Act without the concurrence of the Minister of National Revenue. Paragraph 104(23)(b) provides that, in the case of a testamentary trust when a taxation year is referred to by reference to a calendar year, the reference is to the taxation year or years coinciding with, or ending in, that year.

Paragraphs 104(23)(a) and (b) are repealed.

This amendment applies after December 20, 2002. For a related set of amendments, see the commentary on section 249 and the definition "testamentary trust" in subsection 108(1).

Clause 232

Proceeds of Disposition of Income Interest

ITA
106(3)

Subsection 106(3) of the Act stipulates that a trust that distributes any property to a taxpayer who is a beneficiary under the trust in satisfaction of the taxpayer's interest in the income of the trust is deemed to have disposed of the property for proceeds of disposition equal to the fair market value of the property. The French version of this subsection is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Clause 233

Interests in Trusts

ITA
107

Section 107 of the Act provides certain rules relating to the acquisition and disposition of a capital interest in a trust.

Cost Reduction Rule

ITA
107(1)(e)

Subsection 107(1) of the Act contains special rules applicable to the disposition of an interest in a trust. A trust can distribute non-taxable amounts, such as returns of capital and the non-taxable portion of a capital gain, to the holders of interests in the trust. Currently, the Act requires a return of capital to be accounted for by reducing the recipient's adjusted cost base of the interest in the trust. While the effect of this general rule is clear where the interest is held as capital property, it is not as clear where the property is held as inventory.

New paragraph 107(1)(e) applies when a taxpayer disposes of an interest in a trust that is not held as capital property. The paragraph deems the taxpayer's cost amount of that interest to be the cost amount used for inventory valuation purposes less the total of all returns of capital and non-taxable capital gains payable to the taxpayer, in respect of the interest, prior to the disposition. This is to recognize that all receipts for a property held on income account should be treated as either income or a reduction in the cost of the property to the holder.

The new paragraph applies to dispositions after 2001 if the trust interest is a qualified security, as defined in subsection 260(1) of the Act, and an SLA compensation payment or a dealer compensation payment, as defined in subsection 260(1) of the Act has been paid in respect of the trust unit after 2001 and before February 27, 2004. Otherwise, the new rule applies to dispositions after February 27, 2004, except that it will not apply to a disposition that took place after February 27, 2004 and before 2005, if the taxpayer had on or before February 27, 2004 entered into an agreement in writing for the disposition of the interest.

There is a further exception to the application of the new paragraph. Distributions of the non-taxable portion of capital gains will reduce the cost amount of an interest in a trust only if those distributions took place after the new paragraph came into effect – that is, in the case of a trust interest that was the subject of a security lending arrangement (SLA) that was made between January 1, 2002 and February 27, 2004, after 2001, and, in all other cases, after February 27, 2004.

Inventory Valuation – Deemed Fair Market Value

ITA
107(1.2)

Where an interest in a trust is held as an inventory, the fair market value of the interest at valuation for the purpose of section 10 of the Act can be affected by non-taxable distributions from the trust, potentially producing a tax loss to the holder of the interest even though the holder had suffered no economic loss (due to the non-taxable distribution the holder has already received).

New subsection 107(1.2) requires that at any particular valuation time the fair market value of an interest in a trust be deemed to be the total of the fair market value otherwise determined and the sum of any returns of capital and non-taxable capital gains payable before that time.

The new subsection applies to valuations of trust interests that take place after February 27, 2004, and to valuations after 2001 if the trust interest in question is a qualified security, as defined in subsection 260(1) of the Act, and an SLA compensation payment or a dealer compensation payment, as defined in subsection 260(1) of the Act, has been paid in respect of the trust unit after 2001 and before February 27, 2004.

There is an exception to the application of the new subsection. Distributions of the non-taxable portion of capital gains will be added to the fair market value of an interest in a trust only if those distributions took place after the new subsection came into effect – that is, in the case of a trust interest that was the subject of a security lending arrangement (SLA) that was made between January 1, 2002 and February 27, 2004, after 2001, and, in all other cases, after February 27, 2004.

Distribution by Personal Trust

ITA
107(2)

Subsection 107(2) of the Act applies where a personal trust or a prescribed trust described in section 4800.1 of the Regulations distributes property to a beneficiary and there is a resulting disposition of part or all of the beneficiary's capital interest in the trust. Under paragraph 107(2)(a), the trust is deemed to have disposed of the property for proceeds of disposition equal to the property's cost amount. Under paragraph 107(2)(b), the property is deemed to have been acquired by the beneficiary for an amount equal to the total of the amount described in paragraph 107(2)(a) and a "bump" equal to the specified percentage of any excess of the adjusted cost base to the beneficiary of the capital interest over its cost amount (as defined by subsection 108(1) of the Act) to the beneficiary of the interest. Under subparagraph 107(2)(b.1)(iii), the specified percentage for property (other than non-depreciable capital property and eligible capital property) is 75%. Where subsection 107(2) applies, paragraph 107(2)(c) provides that the beneficiary is deemed to have disposed of all or part, as the case may be, of the capital interest for proceeds equal to the amount determined under that paragraph.

Subparagraph 107(2)(b.1)(iii) is amended to replace the reference to 75% with a reference to 50%, consistent with the current capital gains inclusion rate.

This amendment applies to distributions from a trust made after December 20, 2002.

Paragraph 107(2)(c) is amended to clarify that it applies to determine a taxpayer's proceeds of disposition of the capital interest in a trust (or of the part of it) disposed of by the taxpayer on a distribution, to which subsection 107(2) applies, of property by the trust.

This amendment applies to distributions from a trust made after 1999.

Gains Not Distributed to Beneficiaries

ITA
107(2.11)

Subsection 107(2.11) of the Act provides a special rule that, for the purposes of subsections 104(6) and (13), allows income of a trust for a taxation year (computed without reference to subsection 104(6)) to be computed without regard to the tax consequences under subsection 107(2.1) (and former subsection 107(5)) of property distributed in kind to beneficiaries. This ensures that the gains, if any, that might arguably flow-out in some circumstances to beneficiaries as a consequence of the operation of subsections 107(2.1) and former 107(5), will instead be included in income at the trust level.

Subsection 107(2.11) is amended to ensure that it does not apply to distributions of cash denominated in Canadian dollars. As a result, notwithstanding an election by a trust under subsection 107(2.11), income paid out of the trust in the form of a distribution of such cash, will be included in the beneficiary's income by operation of subsection 104(13).

This amendment applies to the 2002 and subsequent taxation years. It also applies to the 2000 and 2001 taxation years of a trust if a trust so elects in writing on or before the trust's filing due date for the taxation year that includes Royal Assent.

Trusts in Favour of Spouse, Common-law Partner or Self

ITA
107(4)

Subsection 107(4) of the Act applies to certain distributions of property by specified trusts. For this purpose, a specified trust is a post-1971 spousal or common-law partner trust, an alter ego trust or a joint spousal or common-law partner trust (as defined in subsection 248(1)). These trusts are all required to contain terms requiring that a specified beneficiary (e.g., in the case of a spousal trust, the beneficiary spouse or common-law partner referred to in paragraph 104(4)(a)) be entitled to receive all of the income of the trust that arises before specified beneficiary's death and that no person, except the specified beneficiary, receive or otherwise obtain the use of any of the income or capital of the trust before the specified beneficiary's death.

Subsection 107(4) applies in respect of a distribution from a specified trust if the trust distributes property to a beneficiary other than the trust's specified beneficiary and the specified beneficiary is alive on the day of the distribution. For example, such a distribution may occur on the day on which the specified beneficiary dies, but before the end of that day. Alternatively, and perhaps more rarely, such a distribution might be made before the day on which the specified beneficiary dies and, therefore, in breach of the terms of the trust. Subsection 107(4) recognizes that the making of such a distribution is inconsistent with the rationale (i.e., that the relevant property is for, or for the benefit of, the specified beneficiary during his or her lifetime) for the deferral of gains taxation in respect of the settlement of property on the specified trust.

Subsection 107(4) is amended to clarify that it applies on a distribution of property by a specified trust to a beneficiary (other than a specified beneficiary) under the trust if the distribution occurs on or before the earlier of the trust ceasing to exist and the reacquisition, by the trust of any property, determined under paragraph 104(4)(a) in respect of the trust.

This amendment applies to distributions made after October 31, 2011.

Where Subsection 75(2) Applicable to Trust

ITA
107(4.1)

Subsection 107(4.1) prevents the application of subsection 107(2) to a distribution of trust property to a beneficiary where, generally, subsection 75(2) was at any time applicable in respect of property of the trust. Subsection 107(4.1) is amended so that the determination, for purposes of subsection 107(4.1), of whether subsection 75(2) was at any time applicable in respect of property is made as though subsection 75(2) was applicable to attribute amounts in respect of property to non-resident persons.

This amendment applies to distributions made after October 31, 2011.

For further information on another amendment to subsection 107(4.1), see the commentary on the amendment to the Income Tax Amendments Act, 2000.

Distribution of Property Received on Qualifying Disposition

ITA
107(4.2)

New subsection 107(4.2) of the Act prevents a tax-deferred distribution of property after December 20, 2002 from a personal trust or a trust prescribed for the purpose of subsection 107(2) of the Act to a beneficiary of the trust if specified conditions are met. The specified conditions are that:

Where the specified conditions are met, subsection 107(2.1) will apply so that the trust is deemed to have disposed of the property for proceeds equal to the property's fair market value at the time of distribution.

This amendment applies to distributions, from a trust, that are made after December 20, 2002.

Distribution of Property to a Non-Resident Beneficiary

ITA
107(5)

Subsection 107(5) of the Act applies to the distribution of property (other than shares in non-resident-owned investment corporations or property described in any of subparagraphs 128.1(4)(b)(i) to (iii)) of the Act) by a trust resident in Canada to a non-resident beneficiary. In these circumstances, the rollover under subsection 107(2) is not available and instead subsection 107(2.1) of the Act will apply to determine the Canadian income tax consequences of the distribution to the trust and the beneficiary.

Subsection 107(5) is amended so that it applies whether the trust making the distribution is resident in Canada or not.

This amendment applies to distributions made after February 27, 2004.

Instalment Interest

ITA
107(5.1)

Subsection 107(5.1) of the Act is a rule that applies for the purposes of computing the instalment interest of a trust where paragraphs 107(2)(a) to (c) do not apply in respect of certain gains recognized on a distribution of property from the trust solely because of the application of subsection 107(5).

Subsection 107(5.1) is amended to remove cross-references to Part I.1, which was repealed by S.C. 2001, c. 17, and to subsection 156.1(4) to ensure consistency with a similar provision found in section 128.1.

This amendment applies to distributions made after October 31, 2011.

Loss Reduction

ITA
107(6)

Subsection 107(6) of the Act is an anti-avoidance rule designed to deal with an acquisition of a capital interest in a trust that has a property with an accrued loss. Where the property is distributed to the beneficiary in satisfaction of that interest, any loss realized on a subsequent disposition of the property by that beneficiary is denied to the extent that it can reasonably be considered to have accrued when the property was owned by the trust and at a time when neither the beneficiary nor certain affiliated persons had a capital interest in the trust.

Paragraph 107(6)(a) is amended to replace the word "owned" with the word "held". This change is strictly technical and is not intended to represent a change in policy.

Paragraph 107(6)(b) is amended to also apply to deny the loss realized by a beneficiary on a subsequent disposition of property to the extent that the loss can reasonably be considered to have accrued during a period in which the trust holding the property (or property for which it was substituted) was non-resident and the property (or property for which it was substituted) is not taxable Canadian property.

The following example illustrates the intended operation of this provision.

Example

Trust A distributes property to a beneficiary and subsection 107(2) applies in respect of the distribution. The adjusted cost base to Trust A of the property is $1,000 and its fair market value at the time of its distribution was $700 (an accrued loss to the trust, as of the time of distribution, of $300). Assume that the adjusted cost base to the beneficiary of the property is, as a result of the distribution, $1,000. Throughout the period that Trust A held the property it was non-resident. The property is at all times at which it was held by Trust A not taxable Canadian property of the trust. The beneficiary subsequently disposes of that property for proceeds of disposition of $500, resulting in a loss of $500. Subsection 107(6) would apply in these circumstances to deny the beneficiary recognition of the $300 portion of the beneficiary's loss that was attributable to the period during which the property was held by Trust A, resulting in a loss available to the beneficiary in respect of the disposition of the property of $200.

If, on the other hand, subsection 107(2.1), and not subsection 107(2), had applied to the distribution of the property to the beneficiary, the beneficiary's adjusted cost base of the property as of the time of the distribution would have been $700 and the beneficiary's loss on subsequent disposition of the property would have been $200. In that case, no part of the beneficiary's loss would be viewed as accruing during the period in which the trust held the property. Subsection 107(6) would not apply to restrict the amount of the beneficiary's loss on a subsequent disposition of the property.

This amendment applies to dispositions made after October 31, 2011.

Amendments to French Version of Section 107

ITA
107

Subsections 107(2), (2.001), (2.002), (2.01), (2.1), (2.11), (2.2), (4), (4.1), (5) and (5.1) of the Act deal with distributions by trusts. The French version of these subsections is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. Stylistic changes have also been made to the French versions of these subsections. The amendments will come into force on Royal Assent.

Clause 234

Distribution by a Retirement Compensation Arrangement

ITA
107.2

Section 107.2 of the Act prescribes the rules that apply where a trust governed by a retirement compensation arrangement distributes any property to its beneficiary in satisfaction of any part of the taxpayer's interest in the trust. The French version of this section is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. Stylistic changes have also been made to the French version of this section. The amendments will come into force on Royal Assent.

Clause 235

Qualifying Disposition

ITA
107.4(1)

Subsection 107.4(3) of the Act generally provides for a rollover of property to a trust where the property is transferred to the trust by way of a qualifying disposition. For this purpose, subsection 107.4(1) defines "qualifying disposition" to be a disposition of property to a trust that does not result in any change in the beneficial ownership of the property and that otherwise meets the conditions set out in that subsection. A change in beneficial ownership would occur if any person other than the taxpayer may receive or otherwise obtain the use of any income or capital of the trust during or after the taxpayer's lifetime otherwise than as a distribution from the taxpayer's estate. A partnership, corporation or individual (including a trust) are all qualified transferors for the purpose of applying the definition "qualifying disposition" in subsection 107.4(1). Where the transferee trust is a non-resident trust, a qualifying disposition will occur only where the conditions in paragraph 107.4(1)(c) are satisfied. Another condition that must be met for there to be a qualifying disposition is found in paragraph 107.4(1)(d), which requires that the disposition not be by a partnership, if the disposition is part of a series of transactions or events that begins after December 17, 1999 and includes the cessation of the partnership's existence and a subsequent distribution from a personal trust to a former member of the partnership in circumstances to which subsection 107(2) of the Act applies.

Subsection 107.4(1) is amended so that after December 20, 2002 only an individual (including a trust) may make a qualifying disposition to a trust. As a result, paragraph 107.4(1)(d) is repealed.

These amendments are deemed to come into force on December 20, 2002. For a related amendment, see the commentary to new subsection 107(4.2) of the Act.

In addition, paragraph 107.4(1)(c) is amended so that a qualifying disposition can only be made where the transferee trust is resident in Canada at the time of the transfer regardless of the residency of the transferor. This amendment applies to dispositions that occur after February 27, 2004.

ITA
107.4(1)(g)

The French version of paragraph 107.4(1)(g) of the Act has been amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Clause 236

Taxation of Trusts and their Beneficiaries

ITA
108

Section 108 of the Act sets out certain definitions and rules that apply for the purposes of subdivision k of Division B of Part I of the Act, which deals with the taxation of trusts and their beneficiaries.

Definitions

ITA
108(1)

"cost amount"

The definition "cost amount" in subsection 108(1) of the Act generally applies in determining the cost amount to a taxpayer of the taxpayer's capital interest in a trust. Paragraph (a.1) of that definition applies where the time of measurement of a taxpayer's cost amount of a capital interest in a trust is immediately before the time of death of the taxpayer and subsection 104(4) or (5) deems the trust to dispose of the property at the end of the day that includes the measurement time.

Paragraph (a.1) of the definition "cost amount" is amended to clarify the times in respect of which the rule operates. This amendment comes into force on Royal Assent.

"testamentary trust"

Subsection 108(1) of the Act defines "testamentary trust" generally as a trust or estate that arose on and in consequence of the death of an individual, and provides some exceptions to that definition.

Subsection 104(1) of the Act provides that references to a "trust" in subdivision k of Division B of Part I of the Act (i.e., sections 104 to 108) include a trust or estate. The definition "testamentary trust" in subsection 108(1) is therefore amended to remove the reference to "estate" because the references in that definition to a "trust" include an estate.

New paragraph (d) of the definition "testamentary trust" is an anti-avoidance rule. That new paragraph provides that a testamentary trust in a taxation year does not include a trust (in the commentary on this amendment, references to "trust" include an estate) that incurs, after December 20, 2002 and before the end of the taxation year, a debt or any other obligation to pay an amount to, or guaranteed by, a beneficiary or any other person or partnership (referred to in this commentary as the "specified party") with whom any beneficiary of the trust does not deal at arm's length. However, such a debt will not affect the status of the trust as a testamentary trust if it is a debt or other obligation owed to the specified party and

Note that under existing paragraphs (b) and (c) of that definition, contributions to the trust (including the forgiveness of a debt or obligation owed by the trust) can cause a loss of the trust's status as a testamentary trust.

These amendments apply to trust taxation years that end after December 20, 2002. However, a transfer that is required, by clause (d)(iii)(B) of the definition "testamentary trust" in subsection 108(1) to be made within 12 months after a payment was made, is deemed to have been made in a timely manner if it is made no later than 12 months after this amended definition receives Royal Assent. In effect, the deadline imposed by that clause for the full reimbursement of the specified party by the trust or estate is extended, without need for written application, provided that the full reimbursement is made within 12 months after Royal Assent.

In addition, for taxation years that end before Royal Assent, the exception from the arm's length condition for obligations owed by an estate (which condition and exception are set out in clause (d)(iii)(C) of the definition) will apply so that a payment that is made by a specified party for or on behalf of the estate and that is described in clause (d)(iii)(A) will not be subject to the arm's length requirement where the payment is made at any time after the individual's death and not later than 12 months after Royal Assent. For these taxation years, if such a qualifying payment is not made within 12 months after Royal Assent, then the Minister may grant a further extension of the period, beyond 12 months after Royal Assent, if written application is made to the Minister by the estate within 12 months after Royal Assent.

"trust"

For the purposes of the 21-year deemed disposition rule and other specified measures, subsection 108(1) of the Act defines "trust" to exclude certain listed trusts.

For these purposes, paragraph (f) of the definition excludes unit trusts (as defined in subsection 108(2) of the Act) and paragraph (g) excludes, except as specified, trusts all interests in which have vested indefeasibly.

This definition is amended so that section 106 of the Act is not a provision for the purposes of which paragraphs (f) and (g) of the definition apply. Section 106 provides rules in respect of an "income interest" (as defined in subsection 108(1) of the Act) in a "personal trust" (as defined in subsection 248(1) of the Act). As a result of this amendment, for the purpose of section 106, references to a trust will include a trust described in paragraph (g) of the definition "trust" in subsection 108(1). (As the definition "personal trust" expressly excludes a unit trust, paragraph (f) of the definition "trust" in subsection 108(1) is not relevant for this purpose.)

This amendment applies to the 1998 and subsequent taxation years.

Paragraph (g) of the definition "trust" refers to a trust in which all interests have vested indefeasibly but excludes certain trusts. Paragraph (g) of the definition "trust" is amended to remove one of those exclusions, specifically the exclusion for a trust that has made an election under subsection 104(5.3). Subsection 104(5.3), which provides a deferral of the 21-year deemed disposition date that would otherwise have applied to certain family trusts before 1999, is repealed for taxation years that begin after October 31, 2011, on the basis that the most recent deemed disposition date that could be deferred under that provision was January 1, 1999. Consequently, subparagraph (g)(ii) of the definition "trust" is also repealed.

This amendment applies to taxation years that begin after October 31, 2011.

Paragraph (a.1) of the definition is amended to clarify that its intended application should be limited to health and welfare trusts.

This amendment applies to trust taxation years that begin after 2006.

French Version of the Definitions "cost amount", "trust" and "eligible offset"

ITA
108(1)

The French version of the definitions of "cost amount", "trust" and "eligible offset" in subsection 108(1) of the Act is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. These amendments will come into force on Royal Assent.

Unit Trusts

ITA
108(2)

Subsection 108(2) of the Act sets out the requirements for a trust to be a “unit trust”.  To be a unit trust, if the issued units of a trust do not meet the conditions of paragraph 108(2)(a), the trust must at that time meet the requirements of paragraph 108(2)(b) or (c). For a trust that relies upon paragraph 108(2)(b), subparagraph 108(2)(b)(iii) imposes upon the trust the condition that at least 80% of the trust’s property consist of any combination of property described in clauses 108(2)(b)(iii)(A) to (G). Subparagraph 108(2)(b)(iv) requires, in general terms, that at least 95% of the trust’s income over certain periods of time be derived from investments, or dispositions of investments, in property described in subparagraph 108(2)(b)(iii).

Subsection 39(2) deems the net amount of certain gains and losses resulting from the fluctuation in value of foreign currency to be a capital gain or loss from the disposition of foreign currency.

Subparagraph 108(2)(b)(iv) is amended so that for the purposes of determining whether the conditions in paragraph 108(2)(b) have been met, the trust's income will be determined without regard to subsection 39(2).

This amendment applies to the 2003 and subsequent taxation years.

Clause 237

Taxable Income – Deductions

ITA
110

Section 110 of the Act provides various deductions that may be claimed in computing a taxpayer's taxable income.

Part VI.1 Tax

ITA
110(1)(k)

Paragraph 110(1)(k) provides a deduction in computing a corporation's taxable income. The amount of the deduction is equal to a multiple of the amount of any tax payable by the corporation for the year under Part VI.1 of the Act on dividends it pays on taxable preferred shares. This deduction approximates the income that would have generated an amount of income tax under Part I equal to the tax under Part VI.1. To produce that result, the multiple used for this deduction is based on the implied combined federal and provincial corporate income tax rate used for the purpose of Part VI.1. This amendment increases the multiple used in paragraph 110(1)(k) for the 2003 and subsequent taxation years in light of the changes made to Part VI.1 to reflect the reductions in the general federal corporate income tax rate.

Taxable Income – Employee Stock Options Deduction

ITA
110(1.7) and (1.8)

Subsection 110(1.7) of the Act provides that the definitions in subsection 7(7) of the Act relating to employee stock options also apply for the purposes of subsections 110(1.5) and 110(1.6) of the Act. Since subsection 7(7) also provides for the definitions to so apply, existing subsection 110(1.7) is unnecessary and is repealed.

A new subsection 110(1.7) is added that applies in circumstances where there is a reduction in the amount (referred to in these notes as the "exercise price") payable by an employee to acquire securities under an employee stock option and the conditions in new subsection 110(1.8) of the Act are satisfied.

This new subsection ensures that a reduction in the exercise price under an employee stock option does not disqualify the employee from claiming the stock option deduction under paragraph 110(1)(d) of the Act, if the reduction could have been effected by way of an exchange of options without jeopardizing the employee's eligibility for the deduction.

Paragraph 110(1)(d) of the Act provides a deduction in computing taxable income in circumstances where subsection 7(1) of the Act deems an employee to have received a benefit from employment in connection with the exercise, transfer or disposition of rights under an employee option agreement. The deduction is currently equal to one-half of the amount of the employment benefit, and the effect of the deduction is to tax the benefit at a rate equivalent to the capital gains inclusion rate.

Paragraph 110(1)(d) sets out certain conditions that must be satisfied in order to qualify for the stock option deduction. These conditions include a minimum exercise price requirement under the option giving rise to the benefit under subsection 7(1) and, if that option was acquired as a consequence of one or more qualifying exchanges of options, under each of the previous options. Thus, if a reduction in the exercise price under an employee stock option causes the exercise price to fall below the minimum threshold established under paragraph 110(1)(d) for that option, the employee will not be entitled to claim the stock option deduction.

However, there are situations in which an otherwise disqualifying reduction in an option exercise price could be effected by way of an exchange of options without jeopardizing the employee's eligibility for the deduction. This would be the case, for example, if the exercise price had originally been set at the fair market value (FMV) of the underlying securities at the time of grant, there is a subsequent decline in the FMV of the securities and the exercise price is adjusted to that lower FMV. The combined effect of subsections 110(1.7) and (1.8) is to deem such a reduction to have been effected by way of an exchange, thus ensuring that the employee remains eligible for the stock option deduction.

In particular, new subsection 110(1.7) provides that, where there is a reduction in the exercise price under an employee stock option and the conditions in subsection 110(1.8) are satisfied, the employee is deemed to have disposed of the rights under the option immediately before the reduction and to have acquired the amended rights immediately thereafter as consideration for the disposition.

New subsection 110(1.8) sets out two conditions that must be satisfied in order for new subsection 110(1.7) to apply.

These conditions ensure that the provisions of subsection 110(1.7) apply only where an otherwise disqualifying reduction in the exercise price under an employee stock option could have been effected by way of an exchange of options without so disqualifying the employee.

Example:

Pierre is granted an option to acquire ten shares of Company A at an exercise price of $100 a share, which is the FMV of such a share at that time. After a downturn of the business, the Company amends the option to reduce the exercise price to $30 a share, which is the new FMV of such a share.

Results:

Without the benefit of subsection 110(1.7), paragraph 110(1)(d) would require that the exercise price under the option at the time of exercise be no less than the FMV of the underlying share at the time the option was granted. Since the exercise price of $30 would be less than the FMV of $100 at the time the option was issued, this condition would not be met and Pierre would not be eligible for the stock option deduction.

If the reduction had been effected by way of an exchange of options, there would have been no increase in the net benefit associated with the option (i.e., the difference between the FMV of the shares under the "new option" and the "new exercise price" ($300 - $300 = $0) would have been no greater than the difference between the FMV of the shares under the "old option" and the "old exercise price" ($300 - $1,000 = $0)). Thus, the exchange would have been an exchange to which subsection 7(1.4) applied.

If Pierre had exercised the new option immediately after the exchange, paragraph 110(1)(d) would have required that the following exercise price tests be met:

  • The exercise price under the old option at the time it was disposed of would have to be not less than the FMV of the underlying shares when the option was granted. Since the exercise price of $100 was equal to the FMV at the date of grant, this condition would have been met.
  • The exercise price under the new option at the time of exercise would have to be not less than the exercise price set when the new option was acquired. Since Pierre would have paid $30 a share on exercise, which was the exercise price established when the new option was acquired, this condition would have been met.

Thus, if the reduction had been effected by way of an exchange and Pierre had exercised the option immediately after the exchange, he would have been eligible for the stock option deduction.

Since the requirements of subsection 110(1.8) are satisfied, subsection 110(1.7) applies to deem the reduction to have been effected by way of an exchange. Consequently, the reduction will not disqualify Pierre from claiming the stock option deduction.

New subsections 110(1.7) and (1.8) apply to exercise price reductions that occur after 1998.

Extended Deadline for Deferral Election

Where certain conditions are satisfied, subsection 7(8) of the Act allows an employee to defer taxation of a stock option benefit to the year in which the employee disposes of the security. One condition is that the employee be eligible to claim the deduction under paragraph 110(1)(d) in respect of the benefit. Another condition is that the employee files an election to defer before January 16th of the year following the year in which the option is exercised (or before August 14, 2001 for securities acquired in 2000).

The coming-into-force provisions for subsections 110(1.7) and (1.8) extend the deferral election deadline for securities which are acquired before this legislation receives Royal Assent, and which become qualified for the deduction under paragraph 110(1)(d) only by reason of amended subsection 110(1.7), to the later of the election deadline that would otherwise apply, and the day that is 60 days after Royal Assent.

No deferral election is possible after March 4, 2010 because of the repeal of subsection 7(8) announced in Budget 2010.

Clause 238

Charitable Donations Deduction

ITA
110.1

Section 110.1 of the Act provides a deduction in computing taxable income in respect of gifts made by corporations to qualified donees. Section 110.1 is amended to expand the entities referred to in this section to include municipal or public bodies performing a function of government in Canada. This amendment is in response to the Quebec Court of Appeal decision in Tawich Development Corporation v. Deputy Minister of Revenue of Quebec, 2001 D.T.C. 5144. For additional information, see the commentary to paragraph 149(1)(d.5).

Section 110.1 is also amended as a consequence of the addition of new subsections 248(30) to (38) of the Act. Generally, those subsections clarify the circumstances under which a transfer of property will be considered a gift notwithstanding that the transferor may be entitled to receive an advantage or benefit in respect of the property. New subsection 248(31) generally provides that the "eligible amount" of the gift is the excess of the fair market value of a property transferred by way of gift over the value of the advantage or benefit, if any, to which the transferor is entitled. For additional information, see the commentary to new subsections 248(30) to (39).

Deduction for Gifts

ITA
110.1(1)

Paragraphs 110.1(1)(a) to (d) of the Act provide, respectively, for the deduction by a corporation of amounts in respect of "charitable gifts", "gifts to Her Majesty", "gifts to institutions" and "ecological gifts". The amount deductible by the corporation is generally the fair market value of the gift. These paragraphs are amended, consequential to the addition of new subsection 248(31) of the Act, to provide that the amount deductible by the corporation is generally the "eligible amount" of a gift.

In addition, paragraph 110.1(1)(d) is expanded to provide that a deduction is available in respect of gifts made by corporations to municipal or public bodies performing a function of government in Canada.

Paragraph 110.1(1)(d) is also amended to clarify its application to "real servitudes" under the Civil Code of Quebec.

The amendments to subsection 110.1(1) apply in respect of gifts made after December 20, 2002, except that subparagraph 110.1(1)(d)(i) is amended for gifts made after May 8, 2000 and before December 21, 2002 to add a reference to municipal or public bodies performing a function of government in Canada.

Proof of Gift

ITA
110.1(2)

Subsection 110.1(2) of the Act provides that a corporation may not deduct an amount in respect of a gift unless the gift is evidenced by a receipt containing prescribed information. The subsection is amended, concurrently with subsection 110.1(1) of the Act, to refer to the "eligible amount" of a gift.

It is proposed that subsections 3501(1), (1.1) and (6) of the Regulations be amended to provide that every official receipt issued by a registered organization in respect of a gift contain, in addition to the information already prescribed, the amount of the advantage, if any, and the eligible amount of the gift.

For additional details, see the commentary to new subsections 248(31) and (32) of the Act regarding the eligible amount and the amount of the advantage in respect of a gift.

These amendments to subsection 110.1(2) of the Act and subsections 3501(1), (1.1) and (6) of the Regulations are to be effective in respect of gifts made after December 20, 2002.

Gifts of Capital Property

ITA
110.1(2.1) and (3)

Subsection 110.1(3) of the Act provides that, if a corporation donates capital property to a charity, it may designate a value between the adjusted cost base and the fair market value of the donated property to be treated both as the proceeds of disposition for the purpose of calculating its capital gain and the amount of the gift for the purpose of the deduction allowed for charitable donations under subsection 110.1(1) of the Act.

Subsection 110.1(3) is restructured as new subsection 110.1(2.1) and revised subsection 110.1(3). New subsection 110.1(2.1) describes the circumstances under which amended subsection 110.1(3), which remains generally unchanged, will apply. However, where the property is depreciable property, subsection 110.1(2.1) includes those situations where the actual value of the gifted property is between the undepreciated capital cost of that class at the end of the taxation year of the corporation and the fair market value of the donated property.

Amended subsection 110.1(3) provides for the amount that may be designated by the corporation. As with the former provision, the amount designated is considered to be the corporation's proceeds of disposition of the gift. The subsection also continues to provide that the amount designated is treated as the fair market value of the property transferred by way of gift. However, under the amended version, this is for the purpose of new subsection 248(31) of the Act instead of for subsection 110.1(1). New subsection 248(31) generally provides that the "eligible amount" of a gift is the excess of the fair market value of a property transferred by way of gift over the value of the advantage or benefit, if any, to which the transferor is entitled. The "eligible amount" is relevant to the determination of the amount deductible under subsection 110.1(1) by the corporation.

Finally, amended subsection 110.1(3) allows a corporation to reduce the amount of recaptured depreciation that might otherwise be calculated in respect of a gift of depreciable property, with a corresponding reduction to the eligible amount deductible under subsection 110.1(1) in respect of the gift. However, the designated amount may not be lower than the amount of any actual proceeds of disposition in respect of the property (or, more specifically, the amount of the advantage in respect of the gift, as defined in new subsection 248(32) of the Act).

In particular, the amount designated by the corporation in respect of the property transferred may not exceed the fair market value of the property otherwise determined, and may not be less than the greater of

See also the example in the commentary to subsections 118.1(5.4) and (6) of the Act, which apply similarly to individuals as do subsections 110.1(2.1) and (3) to corporations.

Subsections 110.1(2.1) and (3) of the Act (as amended) generally apply in respect of gifts made after 1999. For additional details regarding the eligible amount and the amount of the advantage in respect of a gift, see the commentary to new subsections 248(31) and (32) of the Act.

Gifts Made by a Partnership

ITA
110.1(4)

Subsection 110.1(4) of the Act allows the attribution of gifts made by a partnership to its corporate members, according to each member's share in the partnership. Subsection 110.1(4) is amended, consequential to the addition of new subsection 248(31) of the Act, in respect of gifts made by a partnership after December 20, 2002, to refer to the "eligible amount" of a gift made because of a corporation's membership in a partnership.

Ecological Gifts

ITA
110.1(5)(b)

Subsection 110.1(5) of the Act provides that the fair market value of a gift of ecologically sensitive land (or a covenant, easement or servitude in respect of ecologically sensitive land) is deemed to be the amount determined by the Minister of the Environment. Paragraph 110.1(5)(b) provides that the amount so determined in respect of a covenant, easement or servitude will not be considered to be less than the decrease in value of the subject land that resulted from the making of the gift.

Paragraph 110.1(5)(b) is amended to clarify its application to "real servitudes" under the Civil Code of Quebec.

This amendment applies to gifts made after December 20, 2002.

Clause 239

Lump-sum Averaging

ITA
110.2(1)

"qualifying amount"

Subsection 110.2(1) of the Act defines the terms used for the purpose of calculating the lump-sum deduction in subsection 110.2(2). If a taxpayer claims a lump-sum deduction in respect of a qualifying amount, that amount is subject to a special tax that is meant approximate the tax and interest that would result if the recipient's income tax return for a prior taxation year were adjusted to include the amount.

In general, a "qualifying amount" is a specific type of lump-sum payment, received in a year but relating to a preceding year, the principal portion of which must be included in income. It can include, for example, certain employment insurance benefits. This definition is amended to add income replacement benefits of Canadian Forces members and veterans, as described in paragraph 6(1)(f.1) of the Act.

This amendment is deemed to have come into force on April 1, 2006.

Clause 240

Lifetime Capital Gains Exemption

ITA
110.6

Section 110.6 of the Act sets out the rules for calculating the entitlement of an individual to the lifetime capital gains exemption.

Definitions

ITA
110.6(1)

The definitions in subsection 110.6(1) of the Act apply for the purposes of rules in section 110.6 for the capital gains exemption.

"qualified farm property"

Subsection 110.6(2) of the Act provides to individuals an exemption of up to $750,000 for capital gains realized on the disposition of "qualified farm property". Qualified farm property generally includes real property owned by an individual, the individual's spouse or a family farm partnership in which the individual or spouse has an interest. In general, in order to qualify, paragraph (a) of that definition requires that the property have been used principally in a farming business operated by the individual, the individual's spouse or any of their children (including, in general terms, when such business is operated through a family farm corporation or partnership or a personal trust).

Paragraph (a) of that definition is amended to remove the word "principally". This amendment applies to dispositions made after May 1, 2006.

"qualified fishing property"

Subsection 110.6(2.2) of the Act provides to individuals an exemption of up to $750,000 for capital gains realized on the disposition of "qualified fishing property". Qualified fishing property generally includes real property owned by an individual, the individual's spouse or a family fishing partnership in which the individual or spouse has an interest. In general, in order to qualify, paragraph (a) of that definition requires the real property have been used principally in a fishing business operated by the individual, the individual's spouse or any of their children (including, in general terms, when such business is operated through a family fishing corporation or partnership or a personal trust).

Paragraph (a) of that definition is amended to remove the word "principally". This amendment applies to dispositions made after May 1, 2006.

Property Used in a Farming Business

ITA
110.6(1.3)

Subsection 110.6(1.3) of the Act provides that, for the purposes of the definition of "qualified farm property" in subsection 110.6(1) of the Act, a property will not be considered to have been used in the course of carrying on the business of farming in Canada except in certain circumstances.

In this regard, existing paragraphs 110.6(1.3)(a) and (b) describe conditions of ownership for property that was acquired, generally, after June 17, 1987 and not acquired under an agreement in writing entered into before June 18, 1987. These paragraphs are amended to combine them as new paragraph (a), clarifying that the conditions in both of new paragraphs 110.6(1.3)(a)(i) and (ii) must be met in order for the property to be considered to be used in the business of farming in Canada.

These amendments apply to dispositions made after November 5, 2010.

Failure to Report a Capital Gain

ITA
110.6(6)

Subsection 110.6(6) of the Act denies a capital gains exemption for certain unreported gains, notwithstanding the amount that could otherwise be claimed as a capital gains exemption under subsections 110.6(2) to (2.3). Subsection 110.6(6) applies where an individual has realized a capital gain on a disposition of capital property in a taxation year and knowingly or under circumstances amounting to gross negligence fails to report the disposition in their return of income for that taxation year or fails to file a return for that taxation year within one year following the taxpayer's filing-due-date for the taxation year and the Minister of National Revenue establishes the facts justifying the denial.

In May 2006, amendments to this provision inadvertently removed the words "or any subsequent taxation year". Subsection 110.6(6) is amended to return the provision to its original wording to clarify that a failure to report a capital gain in a taxation year will result in a denial of the lifetime capital gains exemption against that gain in any subsequent taxation year. This could apply, for example, if a taxpayer were, after initially failing to report any capital gain in the year of a disposition of a capital property, to claim a reserve in respect of the capital gain for the year of disposition, such that a portion of the capital gain would instead be reported in a subsequent year. The amendment ensures that a claim for a capital gains exemption in the subsequent year will not be available.

This amendment applies to taxation years for which a return of income has not been filed before October 31, 2011 except in respect of gains realized in taxation years for which a return of income was filed before October 31, 2011.

Trust Deduction — Death of Spouse or Common-Law Partner

ITA
110.6(12)

Subsection 110.6(12) of the Act allows trusts described in paragraph 104(4)(a) or (a.1) to take advantage of any unused capital gains exemption of the trust's spouse beneficiary after that person dies. To avoid administrative complexity, this advantage is not extended to pre-1972 spousal trusts described in paragraph 104(4)(a.1) that have made an election under subsection 104(5.3).

Subsection 110.6(12) is amended by removing the reference to subsection 104(5.3), which is repealed for taxation years that begin after October 31, 2011. For further information, see the commentary on subsection 104(5.3).

This amendment applies to taxation years that begin after October 31, 2011.

Related Persons, etc.

ITA
110.6(14)

Subsection 110.6(14) of the Act provides certain rules that apply for the purposes of the definition "qualified small business corporation share" in subsection 110.6(1) and the capital gains exemption in respect of such shares. This subsection is amended to add new paragraph 110.6(14)(d.1).

New paragraph 110.6(14)(d.1) deems a person who is a member of a partnership that is a member of another partnership (a lower-tiered partnership) to be a member of the lower-tiered partnership. This amendment will permit such a taxpayer to have access to the deduction for taxable capital gains arising on the disposition of a qualified small business corporation share by the lower-tiered partnership.

This amendment applies to dispositions that occur after December 20, 2002 and, if a taxpayer so elects in writing and files the election with the Minister of National Revenue on or before the taxpayer's filing-due date for the taxpayer's taxation year in which this amendment is assented to, to dispositions made by the taxpayer after 1999.

Clause 241

Losses Deductible

ITA
111

Section 111 of the Act provides rules relating to the treatment of losses, and in particular establishes the extent to which a taxpayer is permitted to deduct, in computing taxable income for a taxation year, losses of other years.

Net Capital Losses

ITA
111(1.1)

Subsection 111(1.1) of the Act determines the amount that a taxpayer may deduct in respect of a net capital loss claimed under paragraph 111(1)(b).

The 2000 Budget and the 2000 Economic Statement provided for the reduction of the capital gains inclusion rate from 3/4 to 2/3 and then to 1/2, respectively. This reduction in the inclusion rate gave rise to changes to the adjusting factors in subsection 111(1.1). An additional amendment is made to subsection 111(1.1) to permit the Minister of National Revenue to determine a reasonable amount of deduction in respect of net capital loss carryovers where the other rules in that subsection produce inappropriate results.

The amendment to subsection 111(1.1) applies to the 2000 and subsequent taxation years.

The amount that may be deducted under paragraph 111(1)(b) in respect of net capital losses will differ from the amount claimed under paragraph 111(1)(b) where the inclusion rate for capital gains and losses for the year in which the loss was realized differs from the inclusion rate for the year in which the loss is deducted against taxable capital gains.

Paragraph 111(1.1)(c) provides the Minister of National Revenue the discretion to determine the appropriate deduction where the formula in paragraph 111(1.1)(a) provides an inappropriate result because of the application of one or more of subsections 104(21.6), 130.1(4), 131(1) or 138.1(3.2) to a particular taxpayer. Consequential on the proposed repeal of subsections 104(21.6) and 138.1(3.2) and proposed amendments to subsections 130.1(4) and 131(1), subsection 111(1.1)(c) is amended to refer to those provisions as they applied to the taxpayer's last taxation year that began on or before October 31, 2011.

This amendment applies to taxation years that begin after October 31, 2011.

1977-1978 and Subsequent Taxation Years of a Life Insurer

ITA
111(7.1) to (7.2)

Subsections 111(7.1), (7.11) and (7.2) of the Act apply with respect to certain losses of life insurance companies realized in their taxation years that ended before 1977. These subsections provide relief for losses in those cases where the losses and deductions of prior years exceeded a company's reserves. Since subsections 111(7.1) to 111(7.2) apply only to specific taxation years before 1978 and are no longer relevant they are repealed.

This amendment applies to taxation years that begin after October 31, 2011.

Definitions

ITA
111(8)

Subsection 111(8) of the Act contains definitions that apply for the purposes of section 111.

"pre-1986 capital loss balance"

An individual's "pre-1986 capital loss balance" for a taxation year is relevant for the purpose of paragraph 111(1.1)(b) and represents the individual's unused pre-1986 capital losses that the individual can deduct, to a maximum of $2,000 per year, from income other than capital gains of the individual. The reference in the description of C in the definition to "taxation years that end before 1988 or after October 17, 2000" is corrected to refer to "taxation years that end before 1988 or begin after October 17, 2000". The amended definition is applicable to the 2000 and subsequent taxation years.

Clause 242

Deductions of Taxable Dividends Received by Corporations Resident in Canada

ITA
112

Section 112 is one of the principal provisions dealing with the treatment of dividends received by a corporation resident in Canada from another corporation. Subsection 112(1) permits a corporation to deduct, subject to certain exceptions, taxable dividends in computing its taxable income.

Where No Dividend Deduction Permitted

ITA
112(2.1)

Subsection 112(2.1) prevents a specified financial institution from deducting taxable dividends received on most term preferred shares in computing its taxable income. This subsection is amended to replace the first reference to the term "paid" with the word "received" and to remove the second reference to the term "paid".

This amendment applies to dividends received on or after November 5, 2010.

Guaranteed Shares

ITA
112(2.2)

Subsection 112(2.2) denies the intercorporate dividend deduction for dividends on certain shares that are guaranteed by a specified financial institution. Paragraph 112(2.2)(a) is amended to replace the reference to the term "paid" with the word "received".

This amendment applies to dividends received on or after November 5, 2010.

Clause 243

Deduction in Respect of Dividend Received from Foreign Affiliate

ITA
113

Subsection 113(1) of the Act permits a resident corporation to deduct specified amounts in respect of dividends received from a foreign affiliate out of the exempt, taxable and pre-acquisition surplus of the foreign affiliate. The amounts so deductible are determined largely with reference to Part LIX of the Income Tax Regulations. (As a result of amendments contained in Part 3 of this enactment, subsection 113(1) will also, after August 19, 2011, allow deductions in respect of "hybrid surplus". See the commentary under that subsection in Part 3 of these notes for more details.) The deductions under paragraphs 113(1)(b) and (c) with regard to dividends out of taxable surplus are also determined with reference to the resident corporation's "relevant tax factor".

Subsection 113(1) is amended, in two places, to explicitly link the "relevant tax factor" to the resident corporation receiving the dividends and the taxation year in which the dividends are received. By virtue of subsection 113(3), the meaning of "relevant tax factor" is derived from the definition of that expression in subsection 95(1).

This amendment applies after 2000.

Clause 244

Not Carrying on Business in Canada

ITA
115.2(2)

Section 115.2 of the Act is an interpretive rule that ensures that, provided certain conditions are met, a qualified non-resident is not considered to be carrying on business in Canada solely because of the provision to the non-resident of designated investment services by a Canadian service provider. Subsection 115.2(2) outlines the qualifying conditions and sets out the relevant applications of this interpretive rule. The rule currently applies for the purposes of subsection 115(1) and Part XIV branch tax.

Subsection 115.2(2) of the Act is amended to apply the interpretative rule, in addition to subsection 115(1) and Part XIV, for the purposes of subsection 150(1). If a non-resident benefits from section 115.2, the non-resident is considered not to be carrying on business in Canada for the purposes of subsection 150(1).

The amendment applies to taxation years that end after 1998.

ITA
115.2(2)(c)

Subparagraph 115.2(2)(c) of the Act precludes a non-resident from benefiting from section 115.2 if, at the particular time that is one year after the partnership was formed, the non-resident is a member of a partnership whose members that are affiliated with the Canadian service provider ("CSP") that provides designated investment services to the partnership own more than 25% of the fair market value of the partnership, which is generally referred to as an "independence test".

Subparagraph 115.2(2)(c) is amended to ensure that the independence test between the non-resident and the CSP is applied at the partner level instead of at the partnership level. Consequently, subparagraph 115.2(2)(c)(ii) will preclude a non-resident member from benefiting from section 115.2 if the non-resident member is, or is affiliated with, a person that is affiliated with the CSP or is owned more than 25% by a person or partnership affiliated with the CSP ("an unqualified person") and, either alone or together with other unqualified persons, owns more than 25% of the fair market value of all interests in the partnership.

The amendment applies to taxation years that end after 2001. A transitional provision provides that the amendment will not apply to a taxpayer for the period that ends on October 31, 2011 if the taxpayer elects, in writing, on or before the filing-due date of its taxation year that includes October 31, 2011.

Interpretation

ITA
115.2(3)

Subsection 115.2(3) of the Act provides an interpretative rule for the determination of fair market value for the purpose of subparagraph 115.2(2)(b)(iii) and subsection 115.2(3). As subparagraph 115.2(2)(c)(ii) also requires a determination of fair market value for the purpose of that subparagraph in the same manner as subparagraph 115.2(2)(b)(iii), and subparagraph 115.2(2)(c)(ii) has been in force for taxation years that end after 2001, subsection 115.2(3) is amended to apply the interpretative rule to the determination of fair market value for the purposes of subparagraph 115.2(2)(c)(ii) as well.

The amendment applies to taxation years that end after 2001.

Taxable Canadian Property

ITA
115.2(5)

Prior to March 5, 2010, the definition "taxable Canadian property" in subsection 248(1) of the Act included property used or held in carrying on a business in Canada by a partnership as well as the interest of that partnership.

New subsection 115.2(5) applies for the purpose of determining whether a non-resident's interest in a partnership is, at any particular time before March 5, 2010, a taxable Canadian property. For this purpose, property of the partnership is not considered to be used or held by the partnership in a business carried on in Canada, if because of subsection 115.2(2) the member is considered not to be carrying on business in Canada at that particular time.

The subsection applies to taxation years that end after 2007, but is repealed effective March 5, 2010 because as of that date this interpretative rule has no further relevance. The definition "taxable Canadian property" in subsection 248(1) from March 5, 2010 includes only interests of a partnership where more than 50% of the fair market value of the partnership is derived directly or indirectly from a combination of real property in Canada, Canadian resource property, timber resource property and options or interests in any of those properties.

Clause 245

Certificates for Dispositions

ITA
116(5.2)

Section 116 of the Act sets out rules that apply when a non-resident person disposes of any of certain types of property. Subsection 116(5.2) allows a non-resident vendor to obtain a certificate of compliance in respect of the disposition or proposed disposition of, among other things, depreciable property that is a taxable Canadian property. Subsection 116(5.2) is amended to include among the types of property to which it applies eligible capital property that is a taxable Canadian property. This amendment applies after December 23, 1998, which is when the definition "taxable Canadian property" in subsection 248(1) of the Act first included eligible capital property used in carrying on a business in Canada.

Excluded Property – Authorized Foreign Banks

ITA
116(6)(f)

Subsection 116(6) of the Act defines "excluded property" for the purposes of section 116 of the Act. Paragraph 116(6)(f) defines the "excluded property" of an authorized foreign bank.

Paragraph 116(6)(f) currently treats as an excluded property any property of an authorized foreign bank that is used or held in the bank's "Canadian banking business" (defined in subsection 248(1) of the Act). The paragraph is amended to treat as excluded property all of the property of an authorized foreign bank that carries on a Canadian banking business. As a result, the treatment of authorized foreign banks will in this respect be comparable to the treatment of non-resident insurers.

This amendment applies to dispositions that occur after June 27, 1999.

Clause 246

Pension Credit

ITA
118(7)

"pension income"

Section 118 of the Act provides for a number of credits that are deductible in computing the tax payable by an individual, including the pension credit in subsection 118(3). The pension credit available to a taxpayer who is 65 years of age or older is based on the taxpayer's "pension income", as defined in subsection 118(7). The definition "pension income" is also relevant for the pension income splitting rules under section 60.03. Pension income includes lifetime annuity payments under a pension plan and payments under a registered retirement income fund (RRIF).

The definition "pension income" is amended to add periodic payments under a money purchase provision of a registered pension plan (RPP), to the extent that such payments are not already included. This amendment is consequential on amendments to section 8506 of the Regulations, the purpose of which is to allow money purchase RPPs to provide members with retirement benefits that are payable in the same manner as is permitted under a RRIF. Since these benefits would not be considered to be lifetime annuity payments, it is necessary to ensure that they qualify for the purpose of the pension credit and, for years after 2006, for the purpose of pension income splitting.

This amendment applies to the 2004 and subsequent taxation years.

Clause 247

Public Transit Pass Credit

ITA
118.02

Section 118.02 of the Act provides to an individual a non-refundable tax credit in respect of the cost of eligible public transit passes attributable to the use, by the individual or a qualifying relation in respect of the individual, of public transit in a taxation year.

The definition of "qualified Canadian transit organization" in subsection 118.02(1) is amended to clarify that the definition "permanent establishment" in section 8201 of the Regulations applies for these purposes.

This amendment applies to the 2009 and subsequent taxation years.

Clause 248

Charitable Donations Tax Credit

ITA
118.1

Section 118.1 of the Act provides for a charitable donations tax credit to individuals in respect of gifts made to qualified donees. Section 118.1 is amended to expand the entities referred to in this section to include municipal or public bodies performing a function of government in Canada. This amendment is in response to the Quebec Court of Appeal decision in Tawich Development Corporation v. Deputy Minister of Revenue of Quebec, 2001 D.T.C. 5144. For additional information, see the commentary to paragraph 149(1)(d.5).

The amendments to section 118.1, described below, are made consequential to the addition of new subsections 248(30) to (39) of the Act. Generally, those subsections clarify the circumstances under which a transfer of property will be considered a gift notwithstanding that the donor may be entitled to receive an advantage or benefit in respect of the property. New subsection 248(31) generally provides that the "eligible amount" of the gift is the excess of the fair market value of a property transferred by way of gift over the value of the advantage or benefit, if any, to which the transferor is entitled. For additional information, see the commentary to new subsections 248(30) to (39).

Definitions

ITA
118.1(1)

Subsection 118.1(1) of the Act provides definitions of the terms "total charitable gifts", "total Crown gifts", "total cultural gifts" and "total ecological gifts". These definitions apply for the purpose of the tax credit available under subsection 118.1(3) of the Act to individuals who make such gifts. The amount of a gift that is eligible for a tax credit is, generally, the fair market value of the property disposed of by the individual in the making of the gift.

The definitions "total charitable gifts", "total Crown gifts", "total cultural gifts" and "total ecological gifts" in subsection 118.1(1) are amended, as a consequence of the addition of new subsection 248(31) of the Act, to provide that the amount that qualifies for the credit under subsection 118.1(3) is the "eligible amount" of a gift.

In addition, the definition of "total ecological gifts" in subsection 118.1(1) is expanded to include a gift to a municipal or public body performing a function of government in Canada.

The definition "total ecological gifts" is also amended to clarify its application to "real servitudes" under the Civil Code of Quebec.

Variable B in the formula in the definition of "total gifts" in subsection 118.1(1) generally provides that 100% of a taxable capital gain that results from a gift is included in the annual income limit that applies to gifts. This is an enhancement of the 75% income limit that generally applies to other types of income. Variable B is amended as a consequence of the addition of new subsection 248(31) of the Act, to ensure that the enhanced income limit only applies to the portion of a taxable capital gain that relates to the eligible amount of a gift.

The amendments to subsection 118.1(1) apply in respect of gifts made after December 20, 2002, except that paragraph (a) of the definition "total ecological gifts" in subsection 118.1(1) is amended for gifts made after May 8, 2000 and before December 21, 2002 to add a reference to municipal or public bodies performing a function of government in Canada.

Proof of Gift

ITA
118.1(2)

Subsection 118.1(2) of the Act provides that an amount in respect of a gift by an individual may not be included in the amount eligible for a tax credit under subsection 118.1(3) unless the gift is evidenced by a receipt containing prescribed information. Subsection 118.1(2) is amended concurrently with subsection 118.1(1), to refer to the "eligible amount" of a gift.

It is proposed that subsections 3501(1), (1.1) and (6) of the Regulations be amended to provide that every official receipt issued by a registered organization in respect of a gift contain, in addition to the information already prescribed, the amount of the advantage, if any, and the eligible amount of the gift.

For additional details, see the commentary to new subsections 248(31) and (32) of the Act regarding the eligible amount and the amount of the advantage in respect of a gift.

The amendments to subsection 118.1(2) of the Act and subsections 3501(1), (1.1) and (6) of the Regulations are to be effective in respect of gifts made after December 20, 2002.

Gift of Capital Property

ITA
118.1(5.4) and (6)

Subsection 118.1(6) of the Act provides that, if an individual donates capital property to a charity, the individual may designate a value between the adjusted cost base and the fair market value of the donated property to be treated both as the proceeds of disposition for the purpose of calculating the individual's capital gain and the amount of the gift for the purpose of calculating the tax credit allowed for charitable donations under subsection 118.1(3) of the Act.

Subsection 118.1(6) is restructured as new subsection 118.1(5.4) and revised subsection 118.1(6). New subsection 118.1(5.4) describes the circumstances under which amended subsection 118.1(6), which remain generally unchanged, will apply. However, where the property is depreciable property, subsection 118.1(5.4) includes those situations where the actual value of the gifted property is between the undepreciated capital cost of that class at the end of the taxation year of the individual and the fair market value of the gifted property.

Amended subsection 118.1(6) provides for the amount that may be designated by the individual. As with the former provision, the amount designated is deemed to be the individual's proceeds of disposition of the gift. The provision also continues to provide that the amount designated is treated as the fair market value of the property transferred by way of gift. However, under the amended version, this is for the purpose of new subsection 248(31) of the Act (changed from subsection 118.1(1) of the Act). New subsection 248(31) generally provides that the "eligible amount" of the gift is the excess of the fair market value of a property transferred by way of gift over the value of the advantage or benefit, if any, to which the transferor is entitled. The "eligible amount" is relevant to the determination of the tax credit deductible by the individual under subsection 118.1(3).

Finally, amended subsection 118.1(6) effectively allows an individual to reduce the amount of recaptured depreciation that might otherwise be calculated in respect of a gift of depreciable property, with a corresponding reduction to the eligible amount deductible in respect of the gift under subsection 118.1(6). However, the designated amount may not be lower than the amount of any actual proceeds of disposition in respect of the property (or, more specifically, the amount of the advantage in respect of the gift, as defined under new subsection 248(32) of the Act).

In particular, the amount designated by the individual in respect of the property transferred may not exceed the fair market value of the property otherwise determined, and may not be less than the greater of

Subsections 118.1(5.4) and (6) (as amended) generally apply in respect of gifts made after 1999. For additional details regarding the eligible amount and the amount of the advantage in respect of a gift, see the commentary to new subsections 248(31) and (32).

Example

Mr. Adams transfers a rental property with a fair market value of $200,000 to a registered charity, in exchange for proceeds of disposition of $95,000. The original cost to Mr. Adams when he purchased the property in 1985 was $65,000. The rental property is the only depreciable property in its class, with an undepreciated capital cost balance before the transfer of $45,000.

Assuming that the transfer qualifies as a gift (see the commentary to subsections 248(30) to (32)), Mr. Adams may designate any amount between $95,000 and $200,000 as the proceeds of disposition for the gift. Mr. Adams could have designated an amount as low $45,000, if he had received a lesser amount in actual proceeds from the charity.

Mr. Adams decides to designate $150,000 as its proceeds of disposition. The taxable gain to Mr. Adams on the transfer can therefore be allocated as follows:

Allocation of Taxable Gain
  Subtotal Total
Designated proceeds   $150,000
Adjusted cost base (original cost) 65,000 65,000
Capital Gain   85,000
Taxable Capital Gain   42,500
Undepreciated Capital Cost 45,000  
Recaptured depreciation   20,000
Total Income Inclusion   $ 62,500
The eligible amount of the gift is calculated as follows:
  Total
Designated proceeds $150,000
Amount of advantage (consideration) 95,000
Eligible amount of the gift 55,000

Gifts of Art

ITA
118.1(7)(d) and 118.1(7.1)(d)

Subsection 118.1(7) of the Act provides that, if an artist donates artwork created by the artist and held in the artist's inventory, the artist may designate a value between the cost amount and the fair market value of the artwork to be treated both as the proceeds of disposition for the purpose of calculating the artist's income and the amount of the gift for the purpose of calculating the tax credit allowed for charitable donations under subsection 118.1(3) of the Act.

If the artwork is certified as a cultural gift, as described in subsection 118.1(1) of the Act, subsection 118.1(7.1) of the Act applies instead of subsection 118.1(7). Under subsection 118.1(7.1), the artist is treated as having received proceeds of disposition equal to the cost amount to the artist of the work of art for the purpose of calculating the artist's income, but the fair market value of the artwork is not affected. This means that the artist is entitled to a credit based on the value of the donation, but that the artist recognizes neither a profit nor a loss on the disposition of the work of art in computing income from a business for income tax purposes.

Paragraphs 118.1(7)(d) and (7.1)(d) are amended consequential to the addition of subsections 248(31) and (32) of the Act. Amended paragraph 118.1(7.1)(d) generally provides that the artist's proceeds of disposition from a gift of cultural property that was created by the artist and held as inventory may not be lower than the amount of any actual proceeds of disposition in respect of the property (or, more specifically, the amount of the advantage in respect of the gift, as defined under new subsection 248(32)). In particular, the amount that may be designated by the artist must be the greater of the cost amount of the work of art and the amount of the advantage in respect of the gift. As a result, the artist will have business income from the disposition if the amount of the advantage in respect of the gift exceeds the cost amount to the artist of the work of art.

For gifts from an artist's inventory that are not certified cultural property, amended paragraph 118.1(7)(d) provides that the amount designated in the artist's return of income is deemed to be the artist's proceeds of disposition. The provision also continues to provide that the amount designated is treated as the fair market value of the property transferred by way of gift. However, under the amended version, this is for the purpose of new subsection 248(31) (changed from subsection 118.1(1)). New subsection 248(31) generally provides that the "eligible amount" of the gift is the excess of the fair market value of a property transferred by way of gift over the value of the advantage or benefit, if any, to which the transferor is entitled. The "eligible amount" is relevant to the determination of the tax credit deductible by the individual under subsection 118.1(3).

The amount designated in the artist's return of income in respect of the property transferred may not exceed the fair market value of the property otherwise determined, and may not be less than the greater of

As a result, the artist will have business income from the disposition to the extent that the amount of the advantage in respect of the gift (or some other amount designated in the artist's return of income, if greater) exceeds the cost amount to the artist of the work of art.

For additional details regarding the eligible amount and the amount of the advantage in respect of a gift, see the commentary to new subsections 248(31) and (32) of the Act.

The amendments to paragraphs 118.1(7)(d) and (7.1)(d) apply in respect of gifts made after December 20, 2002.

Gifts Made by Partnership

ITA
118.1(8)

Subsection 118.1(8) of the Act allows the attribution of gifts made by a partnership to its individual members, according to each member's share in the partnership. Subsection 118.1(8) is amended consequential to the addition of new subsection 248(31) of the Act, to refer to the "eligible amount" of a gift made because of an individual's membership in a partnership.

The amendment applies in respect of gifts made by a partnership after December 20, 2002.

Non-qualifying Securities

ITA
118.1(13)(b) and (c)

Subsection 118.1(13) of the Act provides that, if an individual makes a gift of a "non-qualifying security" (defined in subsection 118.1(18) of the Act), that gift will be ignored for the purpose of the charitable donations tax credit.

Paragraphs 118.1(13)(b) and (c) concern the amount to be included in a taxpayer's "total charitable gifts" or "total Crown gifts" (defined in subsection 118.1(1) of the Act) for the taxation year in which a security ceases to be a "non-qualifying security" or the donee disposes of a non-qualifying security. If either of these events occurs within five years of the actual donation of the non-qualifying security by a taxpayer, the taxpayer will be treated as having made a gift at that later time. The fair market value of this deemed gift is considered to be the lesser of two amounts. The first amount is the fair market value of the security at the time that it was actually donated. (Note that this amount may have been designated by the taxpayer as a lower amount than the actual fair market value if an election were made under subsection 118.1(6) of the Act for the taxation year of the actual donation.) The second amount is

Amendments to paragraphs 118.1(13)(b) and (c) are to provide language complementary to the amendment of the definitions "total charitable gifts" and "total Crown gifts" in subsection 118.1(1). The amendments apply to gifts actually made after December 20, 2002.

Clause 249

Medical Expense Tax 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.

ITA
118.2(1)

The description of B in subsection 118.2(1) is amended to clarify that an individual may claim the medical expenses of a spouse or a common-law partner, but not both.

This amendment applies to taxation years that end after October 31, 2011.

ITA
118.2(2)(c), (d), (e), (g), and (h)

The eligibility of certain expenses to the medical expense tax credit is conditional on a medical practitioner's certification. Paragraphs 118.2(2)(c), (d), (e), (g), and (h) are amended to clarify that such a certification has to be in writing. These amendments apply after December 20, 2002.

ITA
118.2(2)(i)

Subsection 118.2(2) of the Act contains a list of expenditures that qualify as eligible medical expenses. Paragraph 118.2(2)(i) is amended to correct the spelling of ileostomy.

This amendment applies on Royal Assent.

ITA
118.2(2)(l.1)

Paragraph 118.2(2)(l.1) of the Act allows for the deduction, as medical expenses, of certain expenses related to a bone marrow or organ transplant. The French version of the paragraph refers to "moelle épinière" rather than "moelle osseuse". The amendment corrects this error and will come into force on Royal Assent.

ITA
118.2(2)(1.9)

Subsection 118.2(2) of the Act sets out the expenses that may be included in the computation of an individual's medical expense tax credit. Under paragraph 118.2(2)(l.9) the cost paid for therapy may qualify as a medical expense, but not if the payee is the individual's spouse or under the age of 18.

Paragraph 118.2(2)(l.9) is amended to provide that the payee also cannot be the individual's common-law partner.

This amendment applies to taxation years that end after October 31, 2011.

Clause 250

Credit for Mental or Physical Impairment

ITA
118.3

Section 118.3 of the Act provides a tax credit, generally referred to as the Disability Tax Credit (DTC), for individuals who have a severe and prolonged mental or physical impairment.

ITA
118.3(2)(a)

Paragraph 118.3(2)(a) of the French version of the Act is amended to include a phrase that was inadvertently deleted from the provision when it was last amended. This amendment applies to the 2001 and subsequent taxation years.

ITA
118.3(4)

Paragraph 118.3(4)(a) of the Act provides a requirement for certain persons to provide, upon request of the Minister of National Revenue, additional information with respect to an individual's impairment. If this information is provided by a medical practitioner referred to in paragraph 118.3(1)(a.2) of the Act, paragraph 118.3(4)(b) of the Act provides that the information is considered to be in the form of a certificate required for the purpose of claiming the DTC.

Paragraph 118.3(4)(b) is amended to add a similar reference to a medical practitioner referred to in paragraph 118.3(1)(a.3) of the Act, which was added by the 2006 budget.

This amendment applies to the 2005 and subsequent taxation years.

Clause 251

Tuition Credit

ITA
118.5(1)(a)(iii)

Subsection 118.5(1) of the Act provides a tax credit in respect of tuition fees paid to certain educational institutions. Subparagraph 118.5(1)(a)(iii) provides that an amount paid on behalf of an individual by the individual's employer is not eligible for the credit unless the amount is required to be included in computing the individual's income. Subparagraph 118.5(1)(a)(iii) is amended, applicable on Royal Assent, to clarify that an amount paid by the individual, for which the individual is reimbursed by the individual's employer, is also not eligible for the credit unless the reimbursement is required to be included in computing the individual's income.

Clause 252

Education Tax Credit

ITA
118.6

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

Definitions

ITA
118.6(1)

Subsection 118.6(1) of the Act defines the expression "designated educational institution", which is relevant for the purposes of the child care expense and attendant care expense deductions and the tuition fee and education tax credits. Generally speaking, a designated educational institution is an institution that provides post-secondary education, an institution certified by the Minister of Human Resources Development that furnishes or improves skills in an occupation, or a foreign university. This amendment to subparagraph (a)(i) of that definition, applicable to the 1998 and subsequent taxation years, is consequential on the change in the name of the Quebec statute under which financial assistance is provided to students as well as the change in the name of the responsible Quebec ministry.

Clause 253

Credit for EI and QPIP Premiums and CPP Contributions

ITA
118.7

Section 118.7 of the Act provides for calculating an individual's tax credit in respect of Canada Pension Plan contributions, contributions under a provincial pension plan defined in section 3 of that Act and employment insurance premiums.

The French version of section 118.7 is amended to describe this calculation as a formula.

Section 118.7 is amended, consequential to the introduction of the Quebec Parental Insurance Plan (QPIP) on January 1, 2006, to provide for a tax credit in respect of premiums paid under that Plan. The marginal note is also amended to add a reference to the QPIP. This amendment applies to the 2006 and subsequent taxation years.

Section 118.7 is also amended, consequential to the enactment of the Fairness for the Self-Employed Act, to provide for a tax credit in respect of premiums paid by a self-employed individual under the Employment Insurance Act. This amendment applies to the 2010 and subsequent taxation years.

Clause 254

Minimum Tax Carry-over

ITA
120.2(3)(b)

Section 120.2 of the Act allows an individual to apply additional taxes, imposed for a given year under the minimum tax in section 127.5 of the Act, against the individual's ordinary Part I tax liability for following years. Paragraph 120.2(3)(b) is amended to remove the reference in that paragraph to subsection 120.4(2). This amendment ensures that an individual's additional tax in respect of the minimum tax does not include the special 29% tax imposed under section 120.4 on certain passive income of minors.

This amendment applies to the 2000 and subsequent taxation years.

Clause 255

Lump-sum Payments

ITA
120.31(3)(b)

Section 120.31 of the Act provides for the calculation of the tax payable on certain lump-sum payments. The amount of the tax is equal to the total of the additional taxes that would be payable for each relevant taxation year if the portion of the lump-sum payment that relates to that preceding year were added to the individual's taxable income for that year.

A notional amount of interest (using the rate of interest on tax refunds applicable to the relevant period) is added to the additional tax to take into account the fact that the calculation of the tax on the lump-sum payment should reflect not only the additional tax that would have been payable had the payment been received on an on-going basis, but also the fact that this additional tax was not paid during those preceding years.

The amendment to paragraph 120.31(3)(b) clarifies that the notional amount of interest is calculated on the amount of the additional tax for each relevant previous year and not on the whole tax payable for that year. This amendment applies to the 1995 and subsequent taxation years.

Clause 256

Tax on Split Income

ITA
120.4

Section 120.4 of the Act provides a special 29% tax applicable to certain passive income of individuals under the age of 18. These tax on split income rules were first proposed in the 1999 Budget Plan. At the time, the Government indicated that it "would monitor the effectiveness of this targeted measure, and may take appropriate action if new income-splitting techniques develop".

Definitions

ITA
120.4(1)

"split income"

The expression "split income" describes the type of income to which this measure applies.

Among other things, split income of an individual includes all amounts (other than excluded amounts) required to be included in the individual's income in respect of partnership or trust income if the source of the income is the provision of goods or services by the partnership or trust to, or in support of, a business carried on by

The phrase "goods or services" in the English version of subparagraph (b)(ii) and clause (c)(ii)(C) in the definition "split income" is replaced by the phrase "property or services". This ensures that the split income rules will apply to income from property, such as rental income. This change applies in computing the split income of a specified individual for taxation years that begin after December 20, 2002, other than in computing an amount included in that income that is from a trust or partnership for a fiscal period or taxation year of the trust or partnership that began before December 21, 2002. Also see the commentary to subsection 160(1.2) of the Act, which is amended consequential to this amendment.

Clause 257

Tax Payable by Inter Vivos Trust

ITA
122(2)

Subsection 122(1) of the Act provides that, instead of graduated income tax rates, inter vivos trusts are generally subject to top marginal rates of income tax on their undistributed income. Subsection 122(2), which does not apply to mutual fund trusts, permits graduated income tax rates for certain inter vivos trusts established before June 18, 1971. One of the conditions for an inter vivos trust continuing to qualify for graduated income tax rates is that it not receive any gifts after June 18, 1971.

The opening words of subsection 122(2) are amended to modernize the language and to clarify its intended scope.

This amendment applies to trust taxation years that begin after 2002.

Clause 258

SIFT trusts and SIFT partnerships

ITA
122.1

Section 122.1 of the Act sets out rules that apply in respect of the taxation of specified investment flow-through (SIFT) trusts and, in some cases, SIFT partnerships.  “SIFT trust” is defined in subsection 122.1(1), and “SIFT partnership” is defined in section 197.  Both definitions are made by subsection 248(1) to apply for all purposes of the Act.

Definitions

ITA
122.1(1)

Subsection 122.1(1) of the Act sets out a number of definitions that apply for the purposes of the rules for SIFT trusts and, in some cases, SIFT partnerships.  Specifically, the definitions in subsection 122.1(1) apply for the purposes of sections 104 and 122, as well as for the purposes of section 122.1.

Subsection 122.1(1) is amended by adding several definitions and modifying a number of others.

These amendments apply to the 2011 and later taxation years, and also on an elective basis for earlier taxation years (i.e., the 2007 to 2010 taxation years).  The following commentary describes the new and amended definitions in alphabetical order.

“eligible resale property”

The new definition “eligible resale property” is added as part of a series of amendments intended to allow real estate investment trusts (REITs) to hold certain kinds of non-capital property in limited circumstances. 

“Eligible resale property” of an entity is defined as real or immovable property (other than capital property) of the entity if

For example, a property may be eligible resale property where it forms a part of a REIT’s commercial leasing project if that property is to be subsequently severed for the ownership and use of an anchor tenant, and the holding of that property is integral to the holding by the REIT of the remaining property forming the project.

“gross REIT revenue”

The new definition “gross REIT revenue” applies for the purposes of the definition “real estate investment trust” in subsection 122.1(1).  Gross REIT revenue is also referred to in the revenue characterization rules in subsections 122.1(1.1) to (1.3) and in the definition “qualified REIT property”, which also apply for the purposes of the definition “real estate investment trust” in subsection 122.1(1).

The definition “gross REIT revenue” clarifies that the concept of revenue in the context of REITs is comprised of gross receipts and receivables of an entity.  In the case of receipts or receivables that arise on the disposition of a property (whether capital property or not), only the portion of those amounts that exceeds the cost to the entity of the property is included in the entity’s gross REIT revenue.  Accordingly, amounts such as recapture are not included in gross REIT revenue.

For information on related amendments, see the commentary on the amendments to the definition “real estate investment trust” in subsection 122.1(1), as well as the commentary on new subsections 122.1(1.1) to (1.3).

“qualified REIT property”

The definition “qualified REIT property” (QRP) applies in determining whether a trust is a REIT.  As described in the commentary on the definition “real estate investment trust”, in order to qualify as a REIT, at least 90% of the fair market value of a trust’s non-portfolio property must be from QRP.

Paragraph (a) of the definition “qualified REIT property”, which treats a trust’s real or immovable property as QRP, is amended so that it applies only to a trust’s real or immovable property that is capital property or eligible resale property of the trust.  Eligible resale properties would be expected to be held by a public REIT’s subsidiaries, and not the public REIT itself, with the public REIT’s interests in these subsidiaries themselves potentially qualifying as QRP of the public REIT.  Certain other properties, such as amounts on deposit and debt of or guaranteed by a government, will also now qualify as QRP under paragraph (a) of the definition.  For more information, see the commentary on the new definition “eligible resale property”.

Paragraph (b) of the definition “qualified REIT property” treats as QRP securities of a “subject entity” (as defined in subsection 122.1(1)) if the entity derives all or substantially all of its revenues directly from maintaining, improving, leasing or managing real or immovable properties that are capital properties of the trust (including real or immovable properties that the trust holds together with one or more other persons or partnerships).  This allows a REIT to hold shares of a management subsidiary that provides services to the REIT, such as the leasing of the REIT’s solely or jointly owned properties.  Paragraph (b) of the definition “qualified REIT property” is amended to replace the reference to “revenue” with a reference to “gross REIT revenue”.  For more information, see the commentary on the new definition “gross REIT revenue”.

Paragraph (d) of the definition “qualified REIT property” describes property that is ancillary to the earning by a trust of rent from real or immovable properties and capital gains from dispositions of real or immovable properties.  For example, a REIT may hold office furniture and computers that are ancillary to its operations.  Paragraph (d) of the definition is amended to expressly exclude equity holdings, as well as mortgages, hypothecary claims, mezzanine loans and similar obligations.  For this purpose, unpaid rent is not intended to be considered a similar obligation.

“real estate investment trust”

A trust is a REIT for a taxation year if it is resident in Canada throughout the year and meets a number of other conditions, including, under paragraph (a) of the definition “real estate investment trust”, the requirement that the trust at no time in the taxation year holds any non-portfolio property other than qualified REIT property.  This condition is amended so that only 90% of the REIT’s non-portfolio properties must be, at all times in a taxation year, qualified REIT properties.

Paragraphs (b) and (c) of this definition are amended to clarify the nature of the trust’s revenue that is intended to be measured.  For information on related amendments, see the commentary on the new definition “gross REIT revenue”.

Paragraph (b) is also amended to reduce from 95% to 90% the percentage of a REIT’s revenues that must be derived from rent, interest, dividends, royalties and dispositions of real or immovable properties that are capital properties, and to add to this list dispositions of eligible resale properties.  The references in paragraph (b) – and an amended reference in subparagraph (c)(iii) of the definition – to dispositions of capital property or eligible resale property reflect that gross REIT revenue already includes, with respect to dispositions, only the amounts by which the proceeds received or receivable from the dispositions exceed the cost of the properties disposed of.

Paragraph (d) is amended consistent with the amendment to paragraph (a) of the definition “qualified REIT property”.  For information on related amendments, see the commentary on the definition “qualified REIT property” and on the new definition “eligible resale property”.  Although the amendments to the definition “real estate investment trust” apply to the 2011 and later taxation years, and also on an elective basis for earlier taxation years, amended paragraph (d) is to be read for taxation years that end before 2013 without reference to the requirement that real or immovable property held by the trust be capital property or eligible resale property.

Paragraph (e) is added to the definition to clarify that investments in a trust must be listed or traded on a stock exchange or other public market in order for the trust to qualify as a REIT.  This change is consequential on the amendment, described elsewhere in this commentary, to the definition “Canadian real, immovable or resource property” in subsection 248(1).

“rent from real or immovable properties”

“Rent from real or immovable properties” is currently defined to include a payment out of the current income of a trust, but only to the extent that the payment is included in the recipient trust’s income and is paid from the part of the payer trust’s income that was derived from rent from real or immovable properties.

Subparagraph (a)(iii) of this definition, which includes such payments as “rent from real or immovable properties”, is repealed as part of a set of clarifying amendments that allow certain types of revenues to maintain their character when flowed through certain entities.  For information on related amendments, see the commentary on new subsections 122.1(1.1) and (1.2), and the new definition “gross REIT revenue” in subsection 122.1(1).

Revenue character flow-through 

ITA
122.1(1.1), (1.2), (1.3)

New subsections 122.1(1.1) and (1.2) of the Act set out a revenue characterization rule (referred to as the “revenue rule”) in order to clarify the intended application of paragraphs (b) and (c) of the definition “real estate investment trust” in subsection 122.1(1).  The revenue rule provides that if an entity is either affiliated with a source entity or has an equity interest in a source entity the fair market value of which represents more than 10% of the equity value of the source entity, then the entity’s gross REIT revenues received or receivable from the source entity in respect of a security of the source entity are, subject to the exception in paragraph 122.1(1.1)(c), treated as having the same character as they had as gross REIT revenues of the source entity.

Paragraph 122.1(1.1)(c) limits the scope of the revenue rule where the source entity is a particular entity’s management subsidiary (a subsidiary described by paragraph (b) of the definition “qualified REIT property”).  In this case, it is only the source entity’s gross REIT revenues that are not derived from maintaining, improving, leasing or managing real or immovable properties that are capital properties of the entity (including real or immovable properties that the entity holds together with one or more other persons or partnerships) that are subject to recharacterization in respect of an amount included in the gross REIT revenue of the particular entity.

The revenue rule is intended to work iteratively through a chain of ownership of several levels of subject entities.  The intended iterative nature of the revenue rule is illustrated in the following example.

Example

A public trust (the “Trust”) holds 100% of the equity value of a subsidiary corporation (“SubCo”), which holds 50% of the partnership units of a subsidiary partnership (the “LP”), which in turn generates rental revenues from leasing real property that is capital property, and has no other revenue. The revenue rule will be relevant to the Trust in the application of both the asset and revenue tests of the definition “real estate investment trust” in determining the Trust’s status as a REIT.

Results

Applying paragraph (a) of the definition “real estate investment trust”, the Trust will have to determine whether its interest in SubCo is qualified REIT property, since its interest in SubCo is non-portfolio property of the Trust (because the Trust holds more than 10% of the equity value of SubCo). 

If the interest in SubCo is a security of a trust that satisfies (or of any other entity that would, if it were a trust, satisfy) the conditions set out in paragraphs (a) to (d) of the definition “real estate investment trust”, the interest will be qualified REIT property pursuant to paragraph (a) of that definition and to the definition “real or immovable property”.  When applying these conditions to SubCo, the revenue rule in subsections 122.1(1.1) and (1.2) is applicable in determining whether SubCo’s interest in the LP is qualified REIT property and whether the revenues received by SubCo from the LP are qualifying revenues.  In effect, the revenue rule provides that the interest in the LP is qualified REIT property (in part because at least 90% of its own revenues are rent from real or immovable properties) and that the revenues received from the LP will retain their character as revenues derived from rent.  Accordingly, SubCo would be real or immovable property of the Trust, thereby allowing an interest in SubCo to be qualified REIT property of the Trust under paragraph (a) of the definition “qualified REIT property”.

Subsections 122.1(1.1) and (1.2) are also intended to work in an iterative manner when applying the revenue tests under paragraphs (b) and (c) of the definition “real estate investment trust”.  In determining the character of the revenues received by the Trust from SubCo, the Trust must determine the character of the revenues realized by SubCo.  SubCo’s revenues will be derived from the revenues of the LP, the character of which is rent.  Consequently, the revenues of SubCo realized when the rental revenues of the LP flow through to it will carry the character of rent.  Similarly, the character will also be preserved when those rental revenues of SubCo are paid out and included in the revenues of the Trust.

New subsection 122.1(1.3) of the Act also applies for the purposes of the definition “real estate investment trust”.  Generally, this subsection recharacterizes a trust’s gross REIT revenue from certain hedging activities, and from certain changes in the value of foreign currency, in respect of the trust’s real or immovable property.  The relevant amounts instead carry the character of amounts of gross REIT revenue derived from that real or immovable property.

Paragraph 122.1(1.3)(a) applies to amounts that are included in a trust’s gross REIT revenue and that are from arrangements that mitigate risks stemming from fluctuations in interest rates on debt incurred by the trust to acquire or refinance real or immovable property.  These amounts are treated as gross REIT revenue having the same character as would amounts included in gross REIT revenue from the underlying real or immovable property.

Paragraph 122.1(1.3)(b) applies to amounts that are included in a trust’s gross REIT revenue and that are in respect of real or immovable property situated in a country other than Canada.  These amounts are treated as gross REIT revenue having the same character as would amounts included in gross REIT revenue from the underlying real or immovable property if these amounts:

For example, foreign currency gains from Euro-denominated debt incurred by a trust to acquire real or immovable property in Germany from which the REIT receives gross REIT revenue from rent would be treated as gross REIT revenue of the trust from rent and not from foreign currency gains.

These rules are intended to work in complementary fashion with the revenue rule, under subsections 122.1(1.1) and (1.2), such that foreign real property holdings may be held by subsidiaries of a REIT.  Taking the German real property example noted above, a Canadian resident trust that is a REIT may incur debt financing in Euros to finance a German subsidiary entity and its holding of German real property from which rental revenue will be received.  By operation of subsections 122.1(1.1) and (1.2), the revenue sourced from the German rental property (including as determined by application of subsection 122.1(1.3) to the subsidiary) is intended to retain its character in the hands of the parent REIT.  Accordingly, gains in respect of the debt financing incurred by the REIT from fluctuations in the value of the Euro relative to the Canadian dollar are included in the gross REIT revenue of the REIT as rental revenues from the German real property. 

This amendment applies to the 2011 and later taxation years, and also on an elective basis for earlier taxation years (i.e., the 2007 to 2010 taxation years).

Clause 259

Overseas Employment Tax Credit

ITA
122.3

Section 122.3 of the Act provides an "overseas employment tax credit" to individuals resident in Canada who are employed for at least six consecutive months in a foreign country by a specified employer in respect of certain enumerated activities.

Subsection 122.3(1.1), which at present limits access to the tax credit in one set of circumstances, is amended so that the credit is also unavailable in another situation. New paragraph 122.3(1.1)(b) denies an individual the benefit of the credit if, at any time in the qualifying period, the services of the individual are provided to a firm with which the employer does not deal at arm's length, and less than 10% of the fair market value of all the interests in the firm are held directly or indirectly by persons resident in Canada.

Example:

Situation:

An individual is employed by a corporation that is a specified employer. The employer supplies the individual's services to a non-resident corporation, the shares of which are held as follows: 60% are held by a non-resident corporation that also controls the individual's corporate specified employer; 20% are held by a non-resident trust, all of the units of which are held by non-residents; and 20% are held by a second non-resident trust, half of the units of which are held by residents of Canada.

Result:

Since they are related, the specified employer does not deal at arm's length with the recipient of the services in this example. However, new paragraph 122.3(1.1)(b) would not apply in this instance because residents of Canada hold, indirectly through the second trust, 10% of the interests in the recipient corporation.

 

The set of circumstances currently described in paragraphs 122.3(1.1)(a), (b) and (c) is contained in amended paragraph 122.3(1.1)(a), and subsection 122.3(1) is amended to ensure that the term "qualifying period" applies to subsection 122.3(1.1), as well as to subsection 122.3(1).

These amendments to subsections 122.3(1) and (1.1) apply to taxation years that begin after this Act is assented to.

Clause 260

Goods and Services Tax Credit

ITA
122.5(7)

Section 122.5 of the Act provides rules for determining the goods and services tax (GST) credit for individuals. Subsection 122.5(7) is intended to ensure that the bankruptcy of an individual or the individual's spouse will not affect the amount of the individual's GST credit.

For most purposes, paragraph 128(2)(d) of the Act divides the calendar year in which an individual becomes bankrupt into two taxation years. A taxation year of an individual is deemed to have ended immediately before the day on which the individual became a bankrupt and another taxation year is deemed to have begun at the beginning of the day on which the individual became a bankrupt.

Existing paragraph 122.5(7)(b) provides that, for the purpose of determining the GST credit for the year that includes the bankruptcy of a single person with no dependents, the amount of the person's personal credit for the pre-bankruptcy taxation year will be used in the calculation. Paragraph 122.5(7)(b) originally achieved this by reference to clause 122.5(3)(e)(ii)(B), which in turn referred to paragraph (c) of the description of B in subsection 118(1) of the Act.

Paragraph 122.5(7)(b) is repealed consequential to the removal of the reference to paragraph (c) of the description of B in subsection 118(1) in former clause 122.5(3)(e)(ii)(B) by S.C. 1999, c. 26. The calculation of the GST credit for a single person with no dependents is now provided for in paragraph 122.5(3)(f), without reference to section 118.

This amendment comes into force on Royal Assent.

Clause 261

Corporate Tax Reductions

ITA
123.4

Section 123.4 of the Act contains rules that allow a corporation to reduce its tax otherwise payable under Part I of the Act by a percentage of the corporation's "full rate taxable income" – a term that is separately defined in the section for Canadian-controlled private corporations (CCPCs) and for other corporations.

From 2001 to 2004, that section also allowed a corporation that was a CCPC to reduce its tax otherwise payable under Part I of the Act with respect to a portion of its active business income by a percentage that was usually higher than the general rate reduction percentage during those years. Such reduction was based on a portion of the active business income earned by a CCPC in a taxation year which exceeded its small business limit for the year for the purposes of the small business deduction under section 125.

Definitions

ITA
123.4(1)

Subsection 123.4(1) of the Act sets out definitions for the purposes of section 123.4 of the Act.

"full rate taxable income"

The "full rate taxable income" of a corporation for a taxation year is, in general terms, that part of the corporation's taxable income for the year that is not exempt from tax and has not benefited from any of the various special effective tax rates provided under the Act. This amount is determined differently depending on the nature of the corporation and the type of income earned by it.

Subsection 123.4(1) is amended to exclude from the definition “full rate taxable income”, income earned by a corporation from a personal services business, as defined in subsection 125(7). This amendment provides that the general rate reduction percentage does not apply to the portion of the taxable income of a corporation earned in the year from a personal services business.

This amendment applies to taxation years that begin after October 31, 2011.

Paragraph (b) of the definition "full rate taxable income" applies to Canadian-controlled private corporations. Under subsection 136(1) and 137(7), cooperatives and credit unions are deemed not to be private corporations for the purposes of the Act, except for the purposes of specific provisions among which is section 125. Pursuant to proposed amendments to those subsections, which apply to the 2001 and subsequent taxation years, cooperatives and credit unions would be treated as private corporations for the purpose of section 123.4 so that the appropriate corporate tax rate reductions apply to active business income earned by cooperatives and credit unions. Paragraph (b) of the definition "full rate taxable income" is amended to reflect the fact that the proposed amendments to subsections 136(1) and 137(7) are in respect of such income.

The preamble of paragraph (b) of the definition “full rate taxable income” is amended to clarify that the general rate reduction percentage in subsection 123.4(2) does not apply to the portion of the taxable income of a corporation for which tax payable is not based on the general corporate income tax rate of 38% established under paragraph 123(1)(a).

This amendment applies to taxation years that end after October 31, 2011.

Clause 262

Small Business Deduction

ITA
125

Section 125 of the Act provides for a corporate tax reduction (called the "small business deduction") in respect of income of a Canadian-controlled private corporation (CCPC) from an active business carried on by it in Canada.

ITA
125(1)

Under subsection 125(1), a Canadian-controlled private corporation's small business deduction for a taxation year is calculated as 17% of the least of three amounts. One of these, set out in paragraph 125(1)(b), is the amount by which the corporation's taxable income for the year exceeds income that has supported a foreign tax credit (FTC) or that is statutorily exempt from tax. The amount of income that has supported an FTC is determined by multiplying the corporation's FTCs for the year (subject to certain adjustments) by a factor that reflects an assumed rate of tax.

The limit for business income FTCs is based on the applicable federal corporate income tax rate without taking into account the provincial abatement, because foreign business income earned through a permanent establishment outside Canada is typically not taxable by a province. For business income FTCs, the factor is currently 10/4, which assumes a tax rate of 40%. Subparagraph 125(1)(b)(ii) is amended to adjust the factor for foreign business income in the context of the reductions in the general federal corporate income tax rate for the 2003 and subsequent taxation years. Under the definition of "relevant factor" that is added in subsection 248(1), the factor for taxation years that end after 2002 and before 2010 is 3, which assumes a tax rate of 33.3%. The factor for taxation years that end after 2009 will take into account the "general rate reduction percentage" that applies to a corporation's taxation year as provided in section 123.4. For example, if a corporation's taxation year corresponds to the 2010 calendar year, its relevant factor will be 1/(.38–.10). or 3.5714. For taxation years that end after 2009, this amendment takes into account the fact that a corporation's taxation year may straddle two calendar years with different tax rates.

For FTCs in respect of foreign non-business income, the factor is currently 10/3, which reflects an assumed tax rate of 30%. The assumed corporate tax rate is based on the fact that foreign non-business income of a corporate taxpayer resident in Canada is typically taxable by a province, in which case the taxpayer is entitled to a 10% abatement under subsection 124(1). Subparagraph 125(1)(b)(i) is amended to adjust the factor for foreign non-business income following the elimination of the surtax that was imposed on corporations before 2008.

This amendment applies to taxation years that end after October 31, 2011, subject to a transitional rule for taxation years that straddle October 31, 2011.

ITA
125(5.1)

A corporation's entitlement to the small business deduction for a particular taxation year is determined by reference to, among other things, the "business limit" of the corporation for the particular year. In broad terms, subsection 125(5.1) of the Act reduces the business limit of a corporation if tax under Part I.3 of the Act was payable by the corporation for its preceding taxation year. If the corporation is associated with one or more other corporations in the particular year, the provision takes into account the Part I.3 tax payable by it and those other corporations, in each case for their last taxation years that ended in the preceding calendar year. The amount of Part I.3 tax that is payable by a corporation is based on the taxable capital employed in Canada (within the meaning assigned by subsection 181.2(1) or 181.3(1) or section 181.4, as the case may be) of the corporation or of any other corporations with which it is associated in the relevant taxation year.

Subsection 125(5.1) is amended to respond better to cases in which a corporation is associated with more, fewer or different corporations in one taxation year than in the past. Specifically, the description of B in the formula in the subsection refers to the taxable capital employed in Canada and will take one of three forms, depending on the corporation's associations in the current and the preceding taxation year:

This amendment applies to taxation years that begin after December 20, 2002. However, for taxation years of corporations that are described in subsection 181.1(3) that began before this amendment is assented to, the description of B in the formula in subsection 125(5.1) refers, in effect, to an amount of tax under Part I.3 and will take one of three forms, depending on the corporation's associations in the current and, in some cases, the preceding taxation year:

Clause 263

Manufacturing and Processing Profits Deduction

ITA
125.1

Section 125.1 of the Act provides a reduced rate of corporate tax on Canadian manufacturing and processing profits.

Manufacturing and Processing Profits Deduction

ITA
125.1(1)(b)(ii)

Subsection 125.1(1) provides the basic rules for the calculation of a corporation's manufacturing and processing profits deduction. The deduction for a given taxation year is the lesser of two amounts, one of which is the corporation's taxable income less certain other amounts. One of those other amounts, described in subparagraph 125.1(1)(b)(ii), is the grossed-up amount of the corporation's foreign tax credits (FTCs) for the year in respect of foreign businesses. The limit for business income FTCs is based on the applicable federal corporate income tax rate without taking into account the provincial abatement, because foreign business income earned through a permanent establishment outside Canada is typically not taxable by a province. Currently, the corporation's FTCs are grossed-up by a factor of 10/4, which assumes this income was subject to tax at a rate of 40%. Subparagraph 125.1(1)(b)(ii) is amended to adjust the factor for foreign business income in the context of the reductions in the federal general corporate income tax rate for the 2003 and subsequent taxation years. Under the definition of "relevant factor" that is added in subsection 248(1), the factor for taxation years that end after 2002 and before 2010 is 3, which assumes a tax rate of 33.3%. The factor for taxation years that end after 2009 will take into account the "general rate reduction percentage" that applies to a corporation's taxation year as provided in section 123.4. For example, if a corporation's taxation year corresponds to the 2010 calendar year, its relevant factor will be 1/(.38–.10). or 3.5714. For taxation years that end after 2009, this amendment takes into account the fact that a corporation's taxation year may straddle two calendar years with different federal general corporate income tax rates.

Definitions

ITA
125.1(3)

Subsection 125.1(3) of the Act defines the expression "manufacturing or processing" for the purpose of section 125.1. Paragraph 125.1(3)(l) of this definition excludes any manufacturing or processing of goods for sale or lease.

The French version of subparagraphs (l)(i) and (ii) of the definition are amended to replace the word "articles" by the word "marchandises" in order to be consistent with the terminology used in the opening words of paragraph (l) of the definition. A similar amendment is made to the French version of the definition "Canadian manufacturing and processing profits" in subsection 125.1(3).

These amendments apply on Royal Assent.

Clause 264

Resource Income

ITA
125.11

"taxable resource income"

Section 125.11 of the Act has the effect of reducing the federal corporate income tax rate for income earned from resource activities from 28% to 21% by 2007. This is accomplished for the years 2003-2006 by providing a deduction against the 28% rate for income that falls within the definition of "taxable resource income". After 2006 resource income will be included in full rate taxable income and be subject to the general rate reduction rules.

Currently, a taxpayer's "taxable resource income" is the lesser of the taxpayer's taxable income for the taxation year and the amount calculated by the formula: 3(A/B) + C- D. A represents the deduction taken as a resource allowance under paragraph 20(1)(v.1). B is a reduction of the resource allowance, which is being phased out between 2003 and 2006, prorated for non-calendar year-ends. C represents additions to the taxpayer's income resulting from negative resource pools. Lastly, D is any amounts deducted from income on account of resource pools.

The definition "taxable resource income" is being amended to ensure that resource income that was earned by a Canadian-controlled private corporation (CCPC) and received a small business deduction under subsection 125(1) of the Act is not also eligible for this rate reduction. The result is that a taxpayer's "taxable resource income" will now be the lesser of two amounts. The first amount is the taxpayer's taxable income for the year less 100/16 of the amount the taxpayer deducted from tax payable pursuant to subsection 125(1) of the Act. The second amount is calculated by the formula 3(A/B) + C - D - E. Elements A to D are unchanged from the previous formula contained in this definition, and remain as described above. New element E is 100/16 of the amount deducted from tax otherwise payable pursuant to subsection 125(1) of the Act. This amendment ensures that resource income earned by a CCPC can only benefit from one rate reduction.

This amendment applies to taxation years that begin after February 27, 2004 and before 2007.

Clause 265

Deduction of Part VI Tax

ITA
125.2

Part VI of the Act levies a tax on capital employed in Canada by large financial institutions. Amendments made in 1992 reversed the former process of crediting Part VI tax payable against Part I tax liability, providing instead that a financial institution's Part I tax payable may be applied to reduce its Part VI tax. As part of those 1992 amendments, transitional relief was provided under section 125.2 of the Act. That relief allowed a financial institution that had not previously deducted its Part VI tax for a pre-1992 taxation year, to carry forward for up to seven years the undeducted balance and to deduct it from Part I tax. That carry-forward period has now expired. This section is therefore repealed.

This amendment applies to taxation years that begin after October 31, 2011.

Clause 266

Deduction of Part I.3 Tax

ITA
125.3(1.1)(b)

Part I.3 of the Act levies a tax on taxable capital employed in Canada by large corporations. Section 125.3 of the Act provides a corporation with a deduction from Part I tax for the corporation's unused Part I.3 tax credits. Subsection 125.3(1.1) computes this deduction if the corporation is a financial institution (as defined in section 190). The deduction under subsection 125.3(1.1) may be taken in a taxation year of the financial institution to the extent that it does not exceed the lesser of two amounts. These two amounts are described in paragraphs 125.3(1.1)(a) and (b) and are, respectively, the amount by which the financial institution's "Canadian surtax payable" for the year exceeds the amount that would be its tax payable under Part I.3 for the year but for its unused Part I.3 tax credits, and the amount by which the financial institution's tax payable under Part I for the year (determined without reference to sections 125.2 and 125.3) exceeds the amount that would be its tax payable under Parts I.3 and VI for the year but for its unused Part I.3 and Part VI tax credits.

Paragraph 125.3(1.1)(b) is amended consequential to the repeal of section 125.2 to remove the reference to that section. For further information, see the commentary on section 125.2.

This amendment applies to taxation years that begin after October 31, 2011.

Clause 267

Foreign Tax Deduction

ITA
126

Section 126 of the Act provides rules under which taxpayers may deduct, from tax otherwise payable, amounts they have paid in respect of foreign taxes.

ITA
126(2.22)

The French version of subsection 126(2.22) of the Act is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. These amendments will come into force on Royal Assent.

Denial of Foreign Tax Credit

ITA
126(4.11) to (4.13)

126(7) "business-income tax"

126(7) "non-business-income tax"

New subsections 126(4.11) to (4.13) of the Act, together with new rules in subsections 91(4.1) to (4.7) of the Act and section 5907 of the Regulations, are intended to address tax schemes established by taxpayers with the intent of creating foreign tax credits and similar deductions for foreign tax the burden of which is not, in fact, borne by the taxpayer. For more details about these schemes, see the commentary on subsections 91(4.1) to (4.7).

New subsection 126(4.11) denies foreign tax credits ("FTCs") in respect of the income of a partnership in certain circumstances. These circumstances would generally arise where an investment in a partnership that is characterized as an equity investment for the purposes of the Act is characterized as a debt instrument issued by the partnership, or another entity, under the relevant foreign tax law.

More specifically, subsection 126(4.11) provides that this FTC denial rule will apply where the taxpayer is considered to have a lesser direct or indirect share of the partnership's income under the relevant foreign tax law than it is considered to have under the Act. Note that the reference to an "indirect" share is intended to address situations where the taxpayer may, under foreign and Canadian tax law, be considered to have the same level of partnership interest in an upper-tier partnership, but a different level of interest in a partnership of which the upper-tier partnership is a member.

New subsection 126(4.12) ensures that certain factors will not be taken into account in determining whether subsection 126(4.11) will apply to a particular situation. This exception will apply where one or more of the enumerated factors could otherwise be interpreted as invoking its application and there are no other factors that would trigger the application of the rule. The enumerated factors are, essentially,

New subsection 126(4.13) ensures that, for purposes of subsections 126(4.11) and (4.12), a taxpayer that is a member of an upper-tier partnership will also be considered to be a member of any partnership of which such upper-tier partnership is a direct or indirect member.

The definitions "business-income tax" and "non-business-income tax" in subsection 126(7) are amended to ensure they are also subject to new subsections 126(4.11) to (4.13).

New subsections 126(4.11) to (4.13) and the amendments to the definitions "business-income tax" and "non-business-income tax" in subsection 126(7) apply to income or profits tax paid for taxation years of a taxpayer that end after March 4, 2010. However, there are transitional rules for taxation years that end on or before August 27, 2010.

Example

Assumptions

1. USco, a U.S. resident corporation, incorporates and capitalizes two U.S. resident subsidiary corporations (Sub 1 and Sub 2).

2. Sub 1 and Sub 2 form and capitalize a partnership (the "Partnership") governed by the laws of Nevada. Sub 1 owns a 99% interest in the partnership, while Sub 2 owns a 1% interest.

3. The Partnership lends all of the funds it receives in 2. back to USco.

4. The Partnership elects to be treated as a U.S. corporation for U.S. tax purposes and is not part of the U.S. consolidated group that includes USco, Sub 1 and Sub 2.

5. Canco purchases, with cash, a 39% share of Sub 1's interest in the Partnership. The purchase is subject to an agreement that obligates Sub 1 to repurchase that 39% partnership interest at a fixed price and time in the future.

6. Sub 1 directly or indirectly loans the funds received in 5. back to Canco.

7. Under U.S. tax law, Canco's purchase of the partnership interest for cash is treated as a loan to Sub 1, which is considered to still own a 99% interest in the Partnership.

8. The Partnership pays 35% tax on the interest income it earns from USco.

Analysis

Canco is considered under U.S. tax law not to own any interest in the Partnership. As such, new subsection 126(4.11) would apply to deny any FTC claim in respect of the 35% U.S. tax paid in respect of the Partnership's income. Although the Partnership is treated as a corporation under U.S. tax law, even if it were treated as a partnership under U.S. tax law, subsection 126(4.11) would still apply. As such, new paragraph 126(4.12)(b) will not protect the partnership from the application of the FTC denial rule.

Foreign Tax Credit – Short-term Securities Acquisitions

ITA
126(4.2)

Section 126 of the Act provides rules under which a taxpayer may deduct, from tax otherwise payable, amounts that have been paid in respect of foreign tax. Subsection 126(4.2) limits the foreign tax credit in respect of dividends or interest on a share or debt obligation held by the taxpayer for one year or less. The tax credit is limited to the amount of Canadian tax that would be payable at a notional rate on the gross income from a foreign country in which the tax was paid. The rule applies to foreign taxes on dividends or interest that are similar to the non-resident withholding tax levied on non-residents of Canada under Part XIII. The rule limits the amount of foreign tax included in the taxpayer's business-income tax or non-business-income tax to 40% (in the former case) or 30% (in the latter case) of the taxpayer's gross profit from the share or debt. The difference in rates reflects the fact that non-business foreign income of a corporate taxpayer resident in Canada is typically taxable by a province, in which case the taxpayer is entitled to a 10% abatement under subsection 124(1). Foreign business income earned through a permanent establishment outside Canada is not typically taxable by a province. As part of a series of amendments reflecting reductions in corporate income tax rates, as well as the elimination as of January 1, 2008 of the surtax that was imposed on corporations, the description of A is amended to adjust the factors for foreign business income and non-business income taxes.

This amendment applies to taxation years that begin after October 31, 2011.

Foreign Tax Credit – Dispositions Ignored

ITA
126(4.4)

Subsection 126(4.4) of the Act directs that certain dispositions and acquisitions of property be ignored for the purposes of the foreign tax credit limitations in subsections 126(4.1) and (4.2) and the definition of "economic profit" in subsection 126(7). As a consequence of the restructuring of section 132.2 of the Act, the reference in paragraph 126(4.4)(a) to paragraph 132.2(1)(f) is replaced by a reference to section 132.2.

This amendment applies to dispositions and acquisitions that occur after 1998 except that, in applying paragraph 126(4.4)(a) of the Act to dispositions and acquisitions that occur before June 28, 1999, that paragraph is to be read without reference to subsections 10(12), 10(13), 14(14) and 14(15) of the Act.

Foreign Tax Credit – Foreign Oil and Gas Levies

ITA
126(5)

Ordinarily, the only foreign taxes that may be credited against tax under Part I of the Act are income or profits taxes. Subsection 126(5) of the Act, together with several definitions in subsection 126(7), treat certain levies imposed by a foreign government in connection with oil and gas businesses as income or profits taxes paid to that government. The general effect of that subsection is to treat a taxpayer's "production tax amount" as a foreign income or profits tax, subject to a maximum of 40% of the taxpayer's income from the business in question. The 40% rate is an approximation of the Canadian corporate income tax rate, and is based on the fact that foreign business income earned through a permanent establishment outside Canada is typically not taxable by a province. As part of a series of amendments reflecting reductions in corporate income tax rates, as well as the elimination as of January 1, 2008 of the surtax that was imposed on corporations, subparagraph 126(5)(a)(i) is amended to adjust the factor for foreign business income.

This amendment applies to taxation years that begin after October 31, 2011.

Rules of Construction

ITA
126(6)(d)

Section 126 of the Act permits a taxpayer to claim a foreign tax credit. Subsection 126(1) sets out the rules for claiming the credit in respect of foreign non-business-income tax – that is, the foreign taxes imposed on investment income and other categories of foreign source non-business income. A credit in respect of foreign taxes on business income is provided under subsection 126(2).

Subsection 126(1) has been interpreted to allow a non-business foreign tax credit for non-business foreign tax paid on interest income earned abroad by a Canadian business that does not carry on business in the foreign jurisdiction, and therefore is not eligible for a business foreign tax credit. In order to ensure that the credit continues to be available in these situations, subsection 126(6), which contains interpretation rules that apply to the section, is amended to add new paragraph 126(6)(d). New paragraph 126(6)(d) deems foreign interest income earned from a business carried on in Canada, and for which the business has paid a non-business foreign tax to a country other than Canada, to be from a source in that other country. Therefore, if a taxpayer includes in its Canadian business income for the year foreign interest income, and has paid foreign tax with respect to this amount, the taxpayer will be eligible to claim a non-business foreign tax credit subject to the limits set out in section 126.

New paragraph 126(6)(d) applies to amounts received after February 27, 2004.

Clause 268

UI Premium Tax Credit

ITA
126.1

Section 126.1 of the Act provides certain employers with a refundable tax credit to offset the increase in the employer's portion of 1993 unemployment insurance premiums.

This section has lapsed, and is repealed in respect of forms filed after March 20, 2003.

Clause 269

Deductions in Computing Tax

ITA
127

Section 127 of the Act permits deductions in computing tax payable in respect of logging taxes, political contributions and investment tax credits.

Logging Tax Deduction

ITA
127(1)

The French versions of paragraphs 127(1)(a) and (b) are amended, applicable on Royal Assent, by replacing the "des" in front of "opérations" with "d'", to update the language used in the French version to current standards.

ITA
127(2)

The amendments to the French version of subsection 127(2) of the Act correct a grammatical error. In this subsection, the expression "revenu tiré pour l'année des opérations forestières dans la province" has the meaning set out in the Regulations. However, the expression that appears in the Regulations is "revenu tiré pour l'année d'opérations forestières dans la province", which is grammatically correct. The Act is therefore amended accordingly on Royal Assent.

Contributions to Registered Parties and Candidates

ITA
127(3)

Subsection 127(3) of the Act provides a tax credit to a taxpayer in respect of amounts contributed to a registered party or to a candidate. Subsection 127(3) is amended consequential to the addition of new subsections 248(31) and (32) of the Act, to provide that the amount of a contribution that is eligible for the political contributions tax credit is to be reduced by the amount of any advantage or benefit, as defined by subsection 248(32), to which the taxpayer is entitled in respect of the contribution. Subsection 127(3) is also amended to remove the reference to "a provincial division of a registered party". These amendments are generally applicable to monetary contributions made after December 20, 2002.

For additional details, see the commentary to new subsections 248(31) and (32) regarding the amount of the advantage in respect of a contribution.

Allocation of Amount Contributed Among Partners

ITA
127(4.2)

Subsection 127(4.2) of the Act allows the tax benefits of political contributions made by a partnership to be flowed through to its members. Subsection 127(4.2) is amended consequential to the amendment of subsection 127(3) of the Act, applicable to contributions made after December 20, 2002, to provide the amount of a contribution that is eligible for a tax credit because of a taxpayer's membership in a partnership.

Investment Tax Credits

ITA
127(5) to (35)

Subsections 127(5) to (35) of the Act provide rules concerning investment tax credits.

Definitions

ITA
127(9)

Subsection 127(9) provides various definitions relevant for the purpose of calculating the investment tax credits (ITCs) of a taxpayer.

"eligible salary and wages"

"Eligible salary and wages" payable by a taxpayer to an eligible apprentice means the amount, if any, that is the salary and wages payable by the taxpayer to the eligible apprentice in respect of the first 24 months of the apprenticeship. The definition does not include remuneration that is based on profits, bonuses, and amounts described in section 6 or 7 of the Act, and amounts deemed to be incurred by subsection 78(4) of the Act.

The definition is amended to ensure that the definition does not include a qualified expenditure incurred by the taxpayer in a taxation year. Where an amount paid to an eligible apprentice is eligible to be included in both the eligible salary and wages and the qualified expenditures of a taxpayer, the taxpayer can include that amount only in one of the definitions and not both.

This amendment applies to taxation years ending after November 5, 2010.

"pre-production mining expenditure"

A “pre-production mining expenditure” qualifies for the 10% investment tax credit, available to a taxpayer that is a taxable Canadian corporation, as provided for in paragraph (a.3) of the definition “investment tax credit”.

Generally, a pre-production mining expenditure is a grass roots exploration and pre-production development expenditure in Canada for qualifying minerals. These expenses are described in paragraphs (f) and (g) of the definition of "Canadian exploration expense" in subsection 66.1(6). Those paragraphs require that the expenses be incurred before a new mine comes into production in reasonable commercial quantities. Qualifying minerals for the credit are diamonds, base or precious metals and industrial minerals that become base or precious metals through refining.

A taxable Canadian corporation which claims an investment tax credit in respect of a pre-production mining expenditure generally must actually incur the expense, in order for the expense to qualify as a pre-production mining expenditure. Specifically, an expense which has been renounced to the taxable Canadian corporation under subsection 66(12.6) does not qualify as a pre-production mining expenditure. The credit is also not allocable by a trust. As well, a member's share of expenses incurred by a partnership does not qualify as a pre-production mining expenditure.

Paragraph (b) of the definition "pre-production mining expenditure" (PPME) in subsection 127(9) is amended to allow for the flow-through of PPME in limited circumstances. In particular:

This amendment applies to the 2003 and subsequent taxation years.

Recapture of Investment Tax Credit

ITA
127(27)

Subsection 127(27) of the Act provides for the recapture of investment tax credits in respect of property used for scientific research and experimental development (SR&ED) where the property is sold or converted to commercial use. This recapture is effected by way of an addition to tax payable of an amount equal to the lesser of

Concern has been expressed about the application of subsection 127(27) of the Act in the context of shared-use equipment, only 25% or 50% of the cost of which is a "qualified expenditure" under subsection 127(9) because of subsection 127(11.5) of the Act. This concern is illustrated by the following example.

Example:

  • Year 1: Taxpayer acquires shared-use equipment for $100. The ITC rate is 20% and the taxpayer claims an ITC for first term shared-use-equipment of $5 (20% x $25 [1/4 of its $100 cost under paragraph 127(11.5)(c)]).
  • Year 2: Taxpayer claims an ITC for second term shared-use-equipment of $5 (20% x $25 [1/4 of its $100 cost under paragraph 127(11.5)(c)]).
  • Year 4: Taxpayer sells the property for $80.
  • Recapture under subsection 127(27):
    $10 being the lesser of:
    • $10 (20% x $100 x 50% because the property is second term shared-use-equipment), and
    • $16 (20% x $80 proceeds of disposition).

However, in this example the $16 amount should be $8 given that only a portion (50%) of the cost of the second term shared-use-equipment is a qualified expenditure.

As well, the government is concerned that subsection 127(27) should apply where the disposition or conversion relates to property acquired pursuant to an expenditure that would have been a qualified expenditure incurred in a taxation year but for the application of the 180-day-unpaid-amount rule in subsection 127(26) of the Act.

To address these concerns, subsection 127(27) is amended in four respects.

First, paragraphs 127(27)(b) and (c) are amended to refer to the "cost, or a portion of the cost, of the particular property" instead of to the "cost of the particular property".

Second, paragraphs 127(27)(b) and (c) are amended to provide that the reference therein to a qualified expenditure included in a taxpayer's investment tax credit be read without reference to subsection 127(26) relating to unpaid amounts.

Third, consequential changes are made to the wording between paragraphs 127(27)(d) and (e) of the Act. In particular, the first of the two amounts in the "lesser of" formula is moved to new paragraph 127(27)(e). The second of these two amounts is described in amended paragraph 127(27)(f), which combines former paragraphs 127(27)(e) and (f).

Fourth, paragraph 127(27)(f), which combines former paragraphs 127(27) (e) and (f), is changed to account for circumstances where the property that is disposed of or converted is first term shared-use-equipment or second term shared-use-equipment.

These amendments apply to dispositions and conversions that occur after December 20, 2002.

Clause 270

Labour-sponsored Venture Capital Corporations

ITA
127.4

Section 127.4 of the Act provides for a tax credit for individuals (other than trusts) that acquire shares issued by a labour-sponsored venture capital corporation (LSVCC).

Definitions

ITA
127.4(1)

"approved share"

Subsection 127.4(2) of the Act allows an individual (other than a trust) a tax credit for the acquisition of an "approved share", which is defined in subsection 127.4(1) as, generally, a share issued by a prescribed LSVCC. LSVCCs prescribed for this purpose under section 6701 of the Regulations include LSVCCs registered under Part X.3 of the Act, as well as specified provincially registered LSVCCs. Paragraph (b) of the definition "approved share" excludes from the definition certain shares issued by a provincially-registered LSVCC that is not a federally-registered LSVCC. This exclusion applies only in the event that, at the time of the issue of the shares, no assistance is available in respect of the acquisition of such shares because of a suspension or termination of assistance to the LSVCC under the laws of every province in which the LSVCC is registered.

Paragraph (b) of the definition "approved share" is amended to provide that an approved share does not include a share issued by a provincially-registered LSVCC (that is not a federally-registered LSVCC) if, at the time of the issue, no province under the laws of which the corporation is an LSVCC that is a prescribed LSVCC provides assistance in respect of the acquisition of the share. This amendment is provided to have the definition "approved share" better reflect the policy that a federal income tax credit be available in respect of a share issued by a provincially-registered LSVCC (that is not a federally-registered LSVCC) only if a provincial income tax credit is also available in respect of the share.

Paragraph (b) of the definition will continue to apply if, at the time of the issue by such an LSVCC of a share, no assistance is available in respect of the acquisition of shares of the LSVCC because of a suspension or termination of assistance to the LSVCC under the laws of every province in which the LSVCC is registered.

Amended paragraph (b) of the definition will also apply where there has not been a suspension or termination of assistance with respect to the issuance of the LSVCC's shares generally, but assistance is not available with respect to the acquisition of a particular share. For example, if under the laws of a province under which an LSVCC is a prescribed LSVCC, a taxpayer who acquires a share is not entitled to any assistance in respect of the acquisition either because of having reached the age of 65 years or because of the province of residence of the taxpayer, the share will not be treated as an approved share.

This amendment applies to acquisitions of shares that occur after 2003.

Labour-sponsored Funds Tax Credit

ITA
127.4(6)

Subsection 127.4(6) of the Act sets out the calculation of an individual's "labour-sponsored funds tax credit" for a taxation year in respect of an "original acquisition" of an approved share of an LSVCC. Except as provided by paragraphs 127.4(6)(b), (c) and (d), this tax credit is generally equal to 15% of the net cost to the individual (or to an RRSP trust funded by the individual) in respect of the original acquisition of the share by the individual or trust.

New paragraph 127.4(6)(e) is added concurrently with the amendment of sections 211.7 and 211.8 of the Act that allow for the issuance of exchangeable shares by LSVCCs. New paragraph 127.4(6)(e) is added to ensure that a tax credit is not provided if a new share of the LSVCC is acquired in exchange for another share of the LSVCC.

This amendment applies to the 2004 and subsequent taxation years.

Clause 271

Minimum Tax

ITA
127.52

Section 127.52 of the Act defines the "adjusted taxable income" of an individual for a taxation year for the purpose of determining the individual's minimum tax liability. Adjusted taxable income is calculated on the basis of the various assumptions set out in paragraphs 127.52(1)(b) to (j).

Adjusted Taxable Income Determined

ITA
127.52(1)(d)

Paragraph 127.52(1)(d) of the Act provides that in computing an individual's adjusted taxable income for minimum tax purposes, the total amount of capital gains and losses is to be taken into account. In some cases, because of subsection 104(21.6) of the Act (which in some cases deems a taxpayer to have realised a larger capital gain than was actually realised) more than the total amount of capital gains and losses would be taken into account. Excess capital gains are deemed by subsection 104(21.6) to have been realized in order that the inclusion rate for capital gains realized on property disposed of by a trust prior to February 28, 2000 is 3/4 and property disposed of by a trust after February 27, 2000 and before October 18, 2000 is 2/3. Paragraph 127.52(1)(d) is therefore amended to ensure that only the actual amount of the gain is included in computing the alternative minimum tax.

This change applies to the 2000 and subsequent taxation years.

ITA
127.52(1)(d)(ii)

Paragraph 127.52(1)(d) provides that in computing an individual's adjusted taxable income for alternative minimum tax purposes, the total amount of capital gains and losses is to be taken into account.

Subparagraph 127.52(1)(d)(ii) is amended to remove the reference to subsection 104(21.4), which is repealed. Since subsection 104(21.4) has no further application to taxation years that begin after October 31, 2011, this amendment has no effect on the computation of alternative minimum tax. For further information, see the commentary on subsection 104(21.4).

This amendment applies to taxation years that begin after October 31, 2011.

ITA
127.52(1)(d)(iii)

Paragraph 127.52(1)(d), as it would be amended by the draft legislative proposals released July 16, 2010, provides that in computing an individual's adjusted taxable income for alternative minimum tax purposes, the total amount of capital gains and losses is to be taken into account. In some cases, because of subsection 104(21.6) more than the total amount of capital gains and losses would be taken into account. Excess capital gains are deemed by subsection 104(21.6) to have been realized in order to ensure that the inclusion rate for capital gains realized on property disposed of by a trust prior to February 28, 2000 is 3/4 and property disposed of by a trust after February 27, 2000 and before October 18, 2000 is 2/3. Proposed subparagraph 127.52(1)(d)(iii) ensures that only the actual amount of the gain is included in computing the alternative minimum tax for the 2000 taxation year. As subparagraph 127.52(1)(d)(iii) has no application to any future taxation year, it is repealed for taxation years that begin after October 31, 2011.

ITA
127.52(1)(e)

Paragraph 127.52(1)(e) provides that "adjusted taxable income" is computed on the assumption that the total of specified resource-related deductions does not exceed specified resource income.

In particular, deductions for Canadian exploration expenses (CEE) in a taxation year are limited to the individual's income from the production of petroleum, natural gas and minerals. CEE includes Canadian renewable and conservation expense (CRCE) under section 66.1 of the Act. If the majority of tangible property in a project is eligible for inclusion in either capital cost allowance (CCA) Class 43.1 or Class 43.2 of Schedule II to the Income Tax Regulations, certain project start-up expenses (for example, engineering and design work and feasibility studies) qualify as CRCE, which can be fully deducted in the year incurred in calculating taxable income of a taxpayer.

New subparagraph (e)(i.1) is introduced to ensure that in applying the limitation in respect of the deduction of resource related-expenses under this paragraph, the sources of income against which an individual may deduct CRCE amounts include income from property or from the business of selling the product of property, described in CCA Class 43.1 and Class 43.2.

This amendment applies to taxation years that end after 2008.

ITA
127.52(1)(h)(i)

Paragraph 127.52(1)(h) provides that in computing an individual's adjusted taxable income, only certain of the deductions under sections 110 to 110.7 may be taken into account. Paragraph 127.52(1)(h) is amended to eliminate the reference to subsection 110.6(3), which was repealed by S.C. 1995, c. 3.

This amendment applies upon Royal Assent.

Clause 272

Personal Bankruptcy

ITA
128(2)(g)(iii)

Subsection 128(2) of the Act contains a number of special rules that apply in cases of personal bankruptcy. Paragraph 128(2)(g) prohibits an individual who is discharged absolutely from bankruptcy from claiming certain non-refundable tax credits, particularly those credits computed by reference to expenditures made before the individual became bankrupt. Subparagraph 128(2)(g)(iii) is amended consequential to the introduction of the textbook tax credit in the 2006 Budget, to make reference to unused tuition, textbook and education tax credits (as determined under subsection 118.61(1) of the Act).

This amendment applies to the 2006 and subsequent taxation years.

Clause 273

Instalment Interest

ITA
128.1(5)

Subsection 128.1(5) of the Act is a rule that applies for the purposes of computing instalment interest. This subsection is amended to remove cross-references to Part I.1 of the Act, which was repealed by S.C. 2001, c. 17.

This amendment applies to taxation years that begin after October 31, 2011.

Returning Trust Beneficiary

ITA
128.1(7)

The French version of subsection 128.1(7) of the Act is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Clause 274

Former Resident – Replaced Shares

ITA
128.3

Section 128.3 of the Act applies to shares ("new shares") that were received in exchange for other shares or equity in a SIFT wind-up entity ("old shares") on a tax-deferred basis pursuant to section 51, subparagraphs 85.1(1)(a)(i) or (ii), subsection 85.1(8), section 86 or section 87. For the purposes of section 119 and subsections 126(2.21) to (2.23), 128.1(6) to (8), 180.1(1.4) and 220(4.5) and (4.6), the individual is deemed not to have disposed of the old shares, and the new shares are deemed to be the old shares. This ensures that the relief available under those provisions is not lost as a result of such a share-for-share exchange.

Paragraph 128.1(4)(b) treats a taxpayer who ceases to be resident in Canada as having disposed of their property, other than certain properties, for proceeds equal to fair market value. Under subparagraph 128.1(4)(b)(iv), an individual (other than a trust) who has been resident in Canada for 60 months or less during the 10-year period preceding the cessation of residence is not deemed to dispose of any property that the individual owned on becoming resident in Canada, or that the individual inherited after becoming resident here.

Section 128.3 is amended to add a reference to subparagraph 128.1(4)(b)(iv) to the list of specified provisions to which the deeming rule in section 128.3 applies.

The amendment applies to taxation years that begin after 2001.

Clause 275

Private Corporations - "refundable dividend tax on hand"

ITA
129(3)(a)(ii)

Section 129 allows a private corporation that pays a taxable dividend to obtain a partial refund of the income taxes it has paid on its investment income. For this purpose, paragraph 129(3)(a) adds to the refundable dividend tax on hand of a Canadian-controlled private corporation at the end of a taxation year the least of three amounts. One of these amounts, which is described in subparagraph 129(3)(a)(ii), is 26  2/3% of the corporation's taxable income, less income that either benefited from the section 125 small business deduction or supported a foreign tax credit (FTC). Income that supported an FTC is measured by multiplying both the corporation's non-business and business income FTCs by factors that reflect assumed Canadian tax rates.

The limit for business income FTCs is based on the applicable federal corporate income tax rate without taking into account the provincial abatement, because foreign business income earned through a permanent establishment outside Canada is typically not taxable by a province. Clause 129(3)(a)(ii)(C) is amended to adjust the factor for foreign business income in the context of the reductions in the general federal corporate income tax rate for the 2003 and subsequent taxation years. Under the definition “relevant factor” that is added in subsection 248(1), the factor for taxation years that end after 2002 and before 2010 is 3, which assumes a tax rate of 33.3%. The factor for taxation years that end after 2009 will take into account the “general rate reduction percentage” that applies to a corporation’s taxation year as provided in section 123.4. For example, if a corporation’s taxation year corresponds to the 2010 calendar year, its relevant factor will be 1/(.38–.10). or 3.5714. For taxation years that end after 2009, this amendment takes into account the fact that a corporation’s taxation year may straddle two calendar years with different federal general corporate income tax rates.

Clause 129(3)(a)(ii)(B) is amended to adjust the factor for foreign non-business income to reflect the elimination of the surtax that was imposed on corporations before 2008.

This amendment applies to taxation years that begin after October 31, 2011.

ITA
129(3)(a)(iii)

Section 129 of the Act allows a private corporation that pays a taxable dividend to obtain a partial refund of the income taxes it has paid on its investment income. For this purpose, paragraph 129(3)(a) adds to the “refundable dividend tax on hand” of a Canadian-controlled private corporation at the end of a taxation year the least of three amounts. One of these amounts, which is described in subparagraph 129(3)(a)(iii), is the corporation’s tax payable for the year under Part I determined without reference to section 123.2. That section, which imposed a corporate surtax, has been repealed for taxation years that begin after 2007. This amendment deletes the reference to “without reference to section 123.2” in subparagraph 129(3)(a)(iii) to reflect the repeal of that section.

This amendment applies to taxation years that begin after 2007.

Clause 276

Mortgage Investment Corporations

ITA
130.1

Section 130.1 of the Act sets out rules that apply to mortgage investment corporations and their shareholders. A mortgage investment corporation is essentially treated as a conduit in that its income may be flowed through to its shareholders and taxed in their hands rather than as income of the corporation.

Election Regarding Capital Gains Dividend

ITA
130.1(4), (4.2) to (4.5)

Section 130.1 of the Act provides for an election by a mortgage investment corporation that allows certain dividends payable by the mortgage investment corporation to the shareholders of any class of its capital stock to be treated as capital gains in the hands of the shareholders who receive the dividends. When a mortgage investment corporation elects in respect of the full amount of a dividend, subsection 130.1(4) deems the dividend to be a capital gains dividend to the extent that it does not exceed the appropriate fraction of the undistributed taxed capital gains of the corporation for the year, and the dividend is deemed to be a capital gain of the recipient of the dividend from the disposition of property in the year in which the dividend was received.

Among other things, paragraph 130.1(4)(b) limits the amount of the dividend that can be included in the shareholder's income as a capital gain. Subsections 130.1(4.2) to (4.5) of the Act provides rules to ensure that this flow-through mechanism works appropriately for taxation years of the corporation that include either February 27, 2000 or October 17, 2000. When subsection 130.1(4) applies in respect of a dividend paid in the period that begins 91 days after the beginning of the corporation's taxation year that includes either February 28, 2000 or October 17, 2000 and ends 90 days after the end of that year by a mortgage investment corporation to a shareholder of any class of shares of its capital stock, subsections 130.1(4.2) to (4.4) provide rules for determining when the underlying capital gain was realized by the corporation, and thus, the appropriate portion of the dividend that can be treated as a capital gain. When no dividend was paid by the corporation during the above-mentioned periods but the corporation had net capital gains or net capital losses from the disposition of property during those periods, subsection 130.1(4.5) sets out an optional method for determining when the corporation is deemed to have realized the capital gains or capital losses, and thus, the appropriate amount of the corporation's net capital gains or net capital losses that will be included in its undistributed taxed capital gains at that time.

Recognizing that these provisions have limited application to future taxation years, they are repealed subject to the coming-into-force provision described below. Since these provisions relate solely to capital gains realized by the corporation in one of the above-mentioned periods, the repeal of these provisions has no practical effect on the designation of dividends as capital gains dividends for future taxation years.

In addition, paragraph 130.1(4)(b) is amended to conform to modern drafting standards by inserting existing language into subparagraph (i), and to renumber existing subparagraph (vii) as subparagraph (ii).

These amendments apply to taxation years that begin after October 31, 2011, except that if any part of a dividend declared by a corporation is in respect of capital gains of the corporation from dispositions of property before October 18, 2000, then paragraph 130.1(4)(b) is to be read in its application to that part of the dividend as it read in its application to the corporation's last taxation year that began on or before October 31, 2011.

"mortgage investment corporation"

ITA
130.1(6)

Section 130.1 of the Act sets out rules that apply to mortgage investment corporations and their shareholders. Subsection 130.1(6) defines "mortgage investment corporation" for the purposes of section 130.1. Subsection 130.1(6) lists certain criteria that a mortgage investment corporation must satisfy throughout a taxation year.

Paragraph 130.1(6)(f) provides that, in order to qualify as a mortgage investment corporation, the cost amount to the corporation of certain specified assets plus the amount of any money of the corporation must be at least 50% of the cost amount to the corporation of all of its property. For the purposes of this asset test, subparagraph 130.1(6)(f)(i) refers to debts owing to the corporation that were secured by mortgages, hypothecs or in any other manner, on houses or on property included within a housing project.

The terms "house" and "housing project" referenced in subparagraph 130.1(6)(f)(i) take their meaning from section 2 of the National Housing Act. A former enactment of the definition "housing project" in that Act specifically excluded hotels, which is consistent with the tax policy underlying subsection 130.1(6). However, that definition was replaced with the current enactment of the definition by S.C. 1999, c. 27, effective June 17, 1999.

In order to avoid any ambiguity in the meaning of the term "housing project" as it applies for the purposes of subsection 130.1(6) of the Act, subparagraph 130.1(6)(f)(i) is amended to provide that the term "housing project" is to be read as it was defined in the National Housing Act as that definition read on June 16, 1999 (i.e., as it read under its former enactment).

This amendment applies to property acquired after October 31, 2011, subject to two exemptions. Firstly, as an extended transitional rule, the amendment will not apply to property acquired by a corporation after October 31, 2011 if that acquisition results from the renewal of mortgage debt held by the corporation, as a mortgage investment corporation, on October 31, 2011 and the term on that new debt does not exceed the term in effect on October 31, 2011 for the debt it is replacing. Secondly, as a suspension of this grandfathering rule, even if property was held by a corporation on October 31, 2011 (i.e., would otherwise not be affected by this amendment), the property will be deemed to have been acquired by the corporation on a particular day that is after October 31, 2011 (i.e., and therefore become subject to the amendment), if the property consists of debt the term for repayment of which is extended pursuant to an agreement entered into on the particular day, and the extended term exceeds the maximum term for repayment of the debt in effect on October 31, 2011.

Clause 277

Capital Gains Dividend Election

ITA
131(1), (1.5) to (1.9) and (5.1)

Section 131 of the Act provides for an election by a mutual fund corporation that allows certain dividends payable by the corporation to the shareholders of any class of its capital stock to be treated as capital gains in the hands of the shareholders who receive the dividends. The percentage of the capital gain that is included in the shareholder's income as a taxable capital gain depends on when the mutual fund corporation realized the capital gain that forms part of its capital gains dividend account.

Subsection 131(1.5) provides that the income inclusion rate will be 75% unless the mutual fund corporation discloses the period in which the capital gain was realized in prescribed form. In addition, subparagraphs 131(1)(b)(i) to (vi) and (viii) to (ix) and subsections 131(1.6) to (1.9) determine the appropriate capital gains inclusion rate for capital gains realized by a mutual fund corporation in a taxation year that includes February 28, 2000 or October 13, 2000.

As each of the above-mentioned provisions has no further application to any future taxation year, they are repealed. However, paragraph 131(1)(b) is amended to conform to modern drafting standards by inserting existing language into subparagraph (i), and to renumber existing subparagraph (vii) as subparagraph (ii). Consequential on these amendments, subparagraph 131(5.1)(b)(i) is updated to refer to subparagraph 131(1)(b)(ii).

These amendments apply to taxation years that begin after October 31, 2011, except that if any part of a dividend declared by a corporation is in respect of capital gains of the corporation from dispositions of property before October 18, 2000, then paragraph 131(1)(b) is to be read in its application to that part of the dividend as it read in its application to the corporation's last taxation year that began on or before October 31, 2011.

"capital gains dividend account"

ITA
131(6)

Subsection 131(6) of the Act defines a number of terms used in section 131. Among these, the "capital gains dividend account" of a mutual fund corporation represents the cumulative net undistributed capital gains of the corporation on which it paid refundable capital gains tax.

Paragraph (a) of the definition is amended in order to allow for the inclusion in a mutual fund corporation's capital gains dividend account of an amount in respect of a capital gains distribution made by a trust to the corporation. Under the existing paragraph (a) of the definition, when a mutual fund corporation holds units of a trust that distributed funds out of its realized capital gains, and the trust makes an election under subsection 104(21) of the Act with respect to the corporation, the corporation is deemed to realize a taxable capital gain as opposed to a capital gain. No amount of the distribution is included in the capital gains dividend account of the corporation.

New subparagraph (a)(ii) of the definition will include in the capital gains dividend account of a mutual fund corporation amounts in respect of a capital gains distribution made by a trust to the corporation (at a time that is after its 2004 taxation year and at which it is a mutual fund corporation) equal to twice the amount determined by the formula A – B. Element A of the formula is the amount of the distribution. Element B of the formula is the amount designated under subsection 104(21) by the trust in respect of the net taxable capital gains of the trust attributable to those capital gains. The result is that the corporation may, under that subparagraph, add to its capital gains dividend account an amount only to the extent of twice the portion of a trust distribution representing the capital gain associated with a taxable capital gain designated under subsection 104(21) by the trust in the corporation's favour.

This amendment applies to the 2005 and subsequent taxation years.

Subparagraph (b)(iii) of the definition "capital gains dividend account" is also amended to remove references to provisions that no longer have effect in respect of certain capital gains refunds. This amendment applies to taxation years that begin after October 31, 2011, except that, to ensure that the appropriate amount continues to be reflected in computing paragraph (b) of that definition in determining a corporation's capital gains dividend account balance, if a corporation had a capital gains refund for a taxation year that began on or before October 31, 2011, then in computing the capital gains dividend account of the corporation at any time in a taxation year of the corporation that begins after October 31, 2011, subparagraph (b)(iii) of the definition is to be read in its application to the corporation as it read in its application to the corporation's last taxation year that began on or before October 31, 2011.

Clause 278

Definition "mutual fund trust"

ITA
132(6)(c)

Subsection 132(6) of the Act sets out the definition "mutual fund trust". Under paragraph 132(6)(c), a trust will qualify at any time as a mutual fund trust only if at that time it meets prescribed conditions relating to the number of its unit holders, dispersal of ownership of trust units issued by it and public trading of trust units issued by it.

Paragraph 132(6)(c) is amended so that the prescribed conditions that a trust may be required to satisfy in order to qualify as a mutual fund trust are not limited to those relating to ownership and trading of its units.

This amendment applies to the 2000 and subsequent taxation years.

The regulations setting out these prescribed conditions for a mutual fund trust are found in Part XLVIII of the Income Tax Regulations. In particular, Regulation 4801 sets out conditions that apply to a class of units issued by a trust in order for the trust to be considered a mutual fund trust. It is intended that proposed amendments to Part XLVIII of the Regulations would include the following:

These amendments to the Regulations would, except as described above, be proposed to apply to the 2000 and subsequent taxation years of trusts.

Clause 279

Taxation Year of Mutual Fund Trust

ITA
132.11(1)

Section 132.11 of the Act generally allows a mutual fund trust to elect to have taxation years that end on December 15, rather than on December 31.

Where a trust makes this election, each subsequent taxation year of the trust is deemed to start on December 16 of a calendar year and to end on December 15 of the following calendar year, unless any of certain events intervenes. One of the events that can intervene, and that results in an earlier year-end, is a qualifying exchange under section 132.2 of the Act.

As a consequence of the restructuring of section 132.2, the reference in paragraph 132.11(1)(b) to paragraph 132.2(1)(b) is replaced by a reference to paragraph 132.2(3)(b).

This amendment applies after 1998 except that, in applying the amended version of paragraph 132.11(1)(b) to taxation years that end before 2000, the paragraph is to be read as though it did not contain the words "subject to subsection (1.1)".

Paragraph 132.11(1)(c) generally provides that each fiscal period of a mutual fund trust that has made an election under subsection 132.11(1) shall end no later than the end of the trust's taxation year that ends on December 15th.

The French-language version of paragraph 132.11(1)(c) is amended to clarify that the paragraph applies to each fiscal period of the trust that either begins in a taxation year of the trust that ends on December 15 because of an election under paragraph 132.11(1)(a) or that ends in a subsequent taxation year of the trust. This technical change does not represent a change in policy.

This amendment applies to the 1998 and subsequent taxation years.

Amounts Paid or Payable to Beneficiaries

ITA
132.11(4)

Subsection 132.11(4) of the Act is designed to permit distributions made in the last 16 days of a calendar year in respect of a trust's taxation year ending on December 15 of the calendar year to be treated as if they were made at the end of that taxation year.

Subsection 132.11(4) of the Act is amended so that it applies for the purpose of paragraph (i) of the definition "disposition" in subsection 248(1). As a result, in the case of a mutual fund trust that has elected under section 132.11 to have a December 15th taxation year-end, distributions from the trust in respect of a taxpayer's capital interest made in the last 16 days of a calendar year will not result in a disposition of the interest.

This amendment applies to amounts that, after 1999, are paid or have become payable by a trust.

Clause 280

Mutual Fund Qualifying Exchanges

ITA
132.2

Section 132.2 of the Act provides rules to allow two mutual fund trusts, or a mutual fund trust and a mutual fund corporation, to merge on a tax-deferred basis. Such a merger is referred to as a "qualifying exchange".

In addition to introducing several substantive improvements to the rules in section 132.2, these amendments restructure the provision as a whole. In general terms, the section is now organized as follows: new subsection 132.2(1) sets out definitions that apply for the section; subsection (2) describes the order in which the events that make up a qualifying exchange are considered to have occurred; subsection (3) provides a set of general rules; subsection (4) deals with non-depreciable property that is transferred on the qualifying exchange; and subsection (5) deals with depreciable property that is transferred. Subsection (6) establishes the due date for the election to treat a transfer as a qualifying exchange; and subsection (7) provides authority for the Minister of National Revenue to allow that election to be amended or revoked.

Despite this restructuring, the basic principles of section 132.2 remain unchanged, as do most aspects of its operation. The exceptions – the areas where these amendments change the provision substantively – have to do with depreciable property that is transferred on a qualifying exchange, and with the election to treat a transaction as a qualifying exchange. Further modifications have been made to prevent the creation of artificial or "phantom" losses, generally in circumstances where one fund holds units or shares of the other fund immediately before the transfer time and to ensure that the transactions involving non-resident investors that occur as part of a qualifying exchange are not subject to either the requirements of section 116 or Part XIII.2 tax.

Transfers of Depreciable Property

In its current form, section 132.2 does not deal comprehensively with transfers of depreciable property between mutual funds. In particular, the deemed timing of the transfer, in relation to the deemed year-end of the funds, may prevent either fund from claiming capital cost allowance (CCA) for the last taxation year that began before the qualifying exchange. The transferor has disposed of the property two moments before the end of its year, and the transferee will not acquire it until the last moment of its own year.

To ensure that one CCA claim is available for that last year, new subsection 132.2(5) provides a special regime for qualifying exchanges that include transfers of depreciable property. A key aspect of these special rules is the ordering of events in accordance with new subsection 132.2(2). That subsection provides that, starting with the actual (i.e., legal) transfer of property between a transferor fund and a transferee fund that carry out a qualifying exchange, the following series of times occurs, each immediately after the previous one:

Series of Times
Name of Time Description Reference
the transfer time The actual transfer of the property between the funds takes place. definition "qualifying exchange" in 132.2(1)
the first intervening time The funds are treated as having disposed of and reacquired non-transferred property (other than depreciable property). 132.2(3)(a)
the acquisition time The transferee is treated as having acquired transferred property (other than depreciable property); the funds' taxation years are treated as ending. 132.2(4)(a); 132.2(3)(b)
the beginning of the funds' first post-exchange years   132.2(3)(b)
the depreciables disposition time The transferor is deemed to have disposed of any transferred property that is depreciable property. 132.2(5)(a)
the second intervening time The funds are treated as having disposed of and reacquired any non-transferred property that is depreciable property. 132.2(3)(c)
the depreciables acquisition time The transferee is deemed to have acquired any transferred property that is depreciable property. 132.2(5)(b)

As a result of this timing, the transferor fund will be treated as owning, until after its first post-exchange year has begun, any depreciable property that is being transferred. This will ensure that the transfer does not prevent the transferor from deducting CCA in respect of property of that class, for its taxation year that ends at the acquisition time. The new rule also ensures that the transferee does not duplicate that deduction, by treating the transferee as having acquired the property only after its new taxation year has begun.

This treatment of depreciable property applies, along with most aspects of the restructuring of section 132.2, to qualifying exchanges that take place after 1998.

Timing of Election

For section 132.2 to apply to a transfer of property between mutual funds, the definition "qualifying exchange" currently requires the funds to file their joint election in prescribed form with the Minister of National Revenue within six months after the transfer time. This timing requirement is changed to allow greater flexibility. The amended definition "qualifying exchange" requires that the funds' election be made before the election's "due date", defined in new subsection 132.2(6) to mean either the day that is six months after the day that includes the transfer time or any later day that the Minister accepts, on joint application by the funds. An example of a case in which the Minister might accept such an application would be one in which the Minister has already decided to accept a late filing of the funds' returns of income for the taxation year that includes the qualifying exchange.

In certain cases, mutual funds that have elected to treat a transfer as a qualifying exchange may wish to amend, or even revoke, their election. New subsection 132.2(7) allows the funds to do this, on joint application and with the permission of the Minister.

New subsections 132.2(6) and (7), and the amended definition "qualifying exchange" in subsection 132.2(1), apply to qualifying exchanges that take place after June 1994, except that, in applying the amended definition before December 20, 2007, the definition is to be read as though it did not contain the phrase "(other than a SIFT wind-up corporation)".

Rules of General Application

ITA
132.2(3)(g)(v) and 132.2(1)(j)(iii)

New subparagraph 132.2(3)(g)(v) of the Act applies in determining whether a person is a "designated beneficiary" (as defined in section 210 of the Act) of a trust. Under the definition designated beneficiary, certain persons or partnerships that are beneficiaries under a trust may be treated (or may cause trusts or partnerships of which they are beneficiaries or members to be treated) as designated beneficiaries under the trust, unless the relevant interest in the trust is held at all times by the person or partnership, as the case may be, or by another person exempt because of subsection 149(1) of the Act from tax, under Part I of the Act, on all of the other person's taxable income.

In a qualifying exchange, a mutual fund trust or mutual fund corporation (transferor) transfers all or substantially all of its property to another mutual fund trust (transferee) and takes back units of the transferee. Those units are then provided by the transferor to its investors in exchange for their shares or units of the transferor. New subparagraph 132.2(3)(g)(v) ensures that, in these circumstances, the transferor is treated, for the purpose of the definition designated beneficiary, as not having held the units of the transferee.

These amendments applies for qualifying exchanges that occur after 1998. A similar rule, in former subparagraph 132.2(1)(j)(iii), applies for qualifying exchanges that occurred after June 1994 and before 1999.

Rules of General Application - Losses

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132.2(3)(f) and (g)

New paragraphs 132.2(3)(f) and (g) of the Act are amended to ensure that the mutual fund merger rules do not apply inappropriately to create artificial or "phantom" losses. Although the changes reflected in these new provisions are not expected to be relevant to most qualifying exchanges, the following is a description of their purpose and effect.

Under the definition "qualifying exchange" in new subsection 132.2(1), all or substantially all of the outstanding shares issued by the transferor must be disposed of to the transferor within the 60 days after the transfer time, and every person so disposing of shares of the transferor must receive only units of the transferee as consideration. The second leg of a qualifying exchange is thus a set of transactions in which the transferor's investors replace their shares of the transferor with units of the transferee. The tax effect of those transactions are governed by paragraphs 132.2(1)(f) and (g). For clarity, these notes reflect the legislation by referring to investments in the transferor – whether a corporation or a trust – as shares, reserving the term "units" to refer to the units of the transferee mutual fund trust.

Existing paragraph 132.2(1)(i) provides that if, within 60 days after the transfer time, the transferor fund disposed of units of the transferee in exchange for shares of itself, its proceeds of disposition are deemed to be nil. Since the units acquired by the transferor in return for its property are deemed, under existing paragraph 132.2(1)(h) (now new paragraph 132.2(3)(e)), also to have had a cost of nil, this provision allows the transferor to roll those units out to its investors with no tax consequences to it. New paragraph 132.2(3)(f) provides that if, within 60 days after the transfer time, the transferor fund disposes of units of the transferee in exchange for shares of itself, its proceeds of disposition will be deemed to be equal to the cost amount of the units to the transferor immediately before the disposition. This change – from nil proceeds to proceeds equal to cost amount – ensures appropriate results if the transferor held units of the transferee that were acquired otherwise than as a result of the qualifying exchange. In this situation, that first tranche of units will have a cost base that, pursuant to section 47 of the Act, will be averaged with the second tranche of units (i.e., the units that the transferor acquired in the qualifying exchange). Existing paragraph 132.2(1)(i) deems the proceeds of the disposition of the second tranche of units to be nil, an inappropriate result in that it creates a phantom loss. New paragraph 132.2(3)(f), deeming the proceeds of disposition equal to the cost amount of the units to the transferor immediately before the disposition, ensures that the transferor can still roll units of the transferee out to its investors with no tax consequences to it, and avoids the creation of a phantom loss.

Existing subparagraph 132.2(1)(j)(i) provides that, where a taxpayer disposes of shares of the transferor in exchange for units of the transferee within that same 60-day period, both the taxpayer's proceeds of disposition of the shares and the taxpayer's cost of the units are deemed to be equal to the cost amount of the shares immediately before the transfer time. New subparagraph 132.2(3)(g)(i) provides that, where a taxpayer disposes of shares of the transferor in exchange for units of the transferee within that same 60-day period, both the taxpayer's proceeds of disposition of the shares and the taxpayer's cost of the units are deemed to be equal to the cost amount of the shares immediately before the disposition. This change – from measuring the cost amount of the shares immediately before the transfer time to measuring it immediately before the disposition – ensures that the transferor's investors will not realize any gain or loss on their exchange of their shares for units of the transferee.

Paragraph 132.2(3)(g) also includes a new subparagraph 132.2(3)(g)(vi) to address the disposition by certain persons or partnerships of the units in the transferee that they received on the qualifying exchange. Those affected by this new provision are those who, when they acquire the units, are affiliated with one or both of the funds. This could include, for example, the transferee itself, or a corporation it controls.

The subparagraph first deems the units received in the qualifying exchange not to be identical to any other units of the transferee. This segregates the new units from the averaging effect of section 47 of the Act.

Next, the subparagraph specifies the effects of disposing of the new units. If the taxpayer is the transferee, and the units cease to exist when the taxpayer acquires them (if, for example, the units are cancelled immediately on receipt), clause 132.2(3)(g)(vi)(B) provides two effects. First, to prevent any possible question in this regard, the taxpayer is deemed to have acquired those units. This ensures, among other things, that subparagraph (i) establishes the taxpayer's cost of the units. Second, the taxpayer is treated as having disposed of those units immediately after it acquired them, for proceeds of disposition equal to the cost amount to the taxpayer of those units at that time. This ensures, for greater certainty, that a transferee that had an investment in the transferor prior to the qualifying exchange will not incur a phantom loss as a result of exchanging its shares in the transferor in return for units of itself.

If the taxpayer is affiliated with one or both of the funds, but is not the transferee, clause 132.2(3)(g)(vi)(C) provides that, for the purpose of computing any gain or loss of the taxpayer from the taxpayer's first disposition of each of those units, the proceeds of disposition of the unit will depend on whether the disposition is a renunciation or surrender of the unit or some other disposition.

New subclause 132.2(3)(g)(vi)(C)(I) provides that, if the disposition is a renunciation or surrender of the unit by the taxpayer for no consideration, and is not in favour of any person other than the transferee, the taxpayer's proceeds of disposition of that unit are deemed to be equal to that unit's cost amount to the taxpayer immediately before that disposition. This ensures that an affiliated taxpayer will never incur a phantom loss or gain on the renunciation or surrender of the unit.

If the disposition is not a renunciation or surrender of the unit described in subclause 132.2(3)(g)(vi)(C)(I), the affiliated taxpayer's proceeds of disposition of that unit are deemed by subclause 132.2(3)(g)(vi)(C)(II) to be equal to the greater of that unit's fair market value and its cost amount to the taxpayer immediately before that disposition. This ensures that the taxpayer will never incur a loss, including a phantom loss, on a disposition of one of those units, but may incur a gain.

Two additional points should be noted with respect to the operation of new subparagraph 132.2(3)(g)(vi).

The balance of the amendments to paragraphs 132.2(3)(f) and (g) (other than those described below), together with the rest of new subsection 132.2(3), generally apply to qualifying exchanges that occur after 1998. A limited exception applies in respect of certain qualifying exchanges in respect of which a return of income, claiming the losses sought to be prevented by these amendments, was filed by the transferee mutual fund before July 18, 2005.

Transactions involving non-residents

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132.2(3)(g)(ii) and (iii)

New paragraph 132.2(3)(g) is also amended to ensure that the transactions involving non-resident investors that occur as part of a qualifying exchange are not subject to either the requirements of section 116 or Part XIII.2 tax.

If a transferor mutual fund acquires its own shares or units in exchange for units of a transferee mutual fund in the course of a qualifying exchange from a non-resident, section 116 may apply to impose a reporting and withholding obligation. Section 116 generally applies when a non-resident person disposes of taxable Canadian property that is not excluded property. Subparagraph 132.2(3)(g)(ii) is amended to ensure that a disposition of an interest in a mutual fund in the course of a qualifying exchange is not subject to section 116.

If a non-resident investor receives units of the transferee mutual fund in exchange for shares or units of the transferor mutual fund in the course of a qualifying exchange, Part XIII.2 may apply to impose a 15% tax. In general, Part XIII.2 will apply only if the units or shares of the transferor are listed on a designated (or for certain earlier periods, prescribed) stock exchange and their value is primarily attributable to real property in Canada, Canadian resource property or timber resource property. If the shares or units meet those conditions, a 15% tax will apply to any amount that is paid or credited to a non-resident investor that is not otherwise subject to tax under Part I or Part XIII.2. Proposed subsection 132.2(3) is amended to ensure that a distribution to a non-resident in the course of a qualifying exchange is not subject to Part XIII.2.

The amendment contained in new subparagraph 132.2(3)(g)(ii), which eliminates section 116 reporting and withholdings requirements, applies to qualifying exchanges that occur after June 1994. The amendment contained in new subparagraph 132.2(3)(g)(iii), which eliminates the requirement for Part XIII.2 tax on the distribution of units to the non-resident investor, applies after 2004.

Clause 281

Non-resident-owned Investment Corporations - Transition

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134.1(2)

Section 134.1 of the Act was enacted, along with section 134.2, in 2001 to provide transitional relief for corporations that cease to be non-resident owned investment corporations (NROs). The essence of the relief provided in section 134.1 is to allow such a corporation to recover refundable tax by paying a dividend in its "first non-NRO year". In its current form, the section applies only in respect of dividends paid to a non-resident person or another NRO. There is, however, another kind of shareholder to whom an NRO may pay a dividend in respect of which it is appropriate to apply the section – a trust for the benefit of non-resident persons or their unborn issue. Since such a trust could, under the rules that have governed NROs themselves, have held the shares and debt of an NRO, a dividend to the trust ought to support a refund of the former NRO's refundable tax. Subsection 134.1(2) is therefore amended to include such dividends within the section's scope.

In addition, subsections 104(10) and (11) of the Act are added to the list of provisions in subsection 134.1(2) for which a former NRO is deemed to be an NRO during its first non-NRO year. Prior to the repeal of the NRO system, a trust that received a dividend from an NRO and that did not in turn distribute the amount of the dividend to its non-resident beneficiaries was entitled to deduct that amount from the trust's income under subsection 104(10). Subsection 104(11) then deemed the amount deducted under subsection 104(10) to have been paid to a non-resident beneficiary, with the result that Part XIII withholding tax would typically be payable. These two subsections are included in subsection 134.1(2) in order to allow a trust to benefit from these provisions in the year it receives the final payment of dividends from the former NRO.

Both of these amendments apply on the same basis as section 134.1: that is, to a corporation that ceases to be an NRO because of a transaction or event that occurs, or a circumstance that arises, in a taxation year of the corporation that ends after February 27, 2000.

Clause 282

Tax Deferred Cooperative Shares

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135.1(7)

Section 135.1 of the Act provides rules that apply in respect of agricultural cooperatives and their members. Subsection 135.1(7) applies a withholding requirement in respect of any share that was at the time it was issued a tax deferred cooperative share of an agricultural cooperative corporation. The subsection provides that if the share is redeemed, acquired or cancelled by the agricultural cooperative corporation, or by a person or partnership with whom it does not deal at arm's length, that cooperative or person or partnership must withhold and forthwith remit to the Receiver General, on account of the shareholder's tax liability, 15% from the amount otherwise payable on the redemption, acquisition or cancellation.

Subsection 135.1(7) is amended to provide an exemption from the withholding requirement if the amount payable on the redemption, acquisition or cancellation is to a trust governed by an RRSP or a RRIF that is exempt from tax under section 149 of the Act. Because a share will only qualify as a tax deferred cooperative share if it is issued to an eligible member, which does not include RRSPs or RRIFs, the withholding exemption is expected to be available only in the relatively unusual circumstances that an eligible member decides to forego the deferred tax treatment of the shares by transferring them to a trust governed by an RRSP or an RRIF.

This amendment applies to tax deferred cooperative shares redeemed, acquired or cancelled after 2007.

Note that, because of the application of new subsection 135.1(10) (described below), subsection 135.1(7) does not impose a withholding requirement for amounts payable on the redemption, acquisition or cancellation of a share that arises as a result of an exchange described by paragraph 87(2)(s) or new subsection 135.1(9). For further information, see the commentary on new subsections 135.1(9) and (10).

ITA
135.1(9) and (10)

New subsection 135.1(9) of the Act sets out the conditions that must be satisfied in order for new subsection 135.1(10) to apply. Under subsection 135.1(10) a taxpayer will not be required to include an amount in income under subsection 135.1(2) if, as set out in subsection 135.1(9), that taxpayer disposes of a tax deferred cooperative share (referred to as the "old share") and the following criteria are met:

If the conditions in paragraph 87(2)(s) or new subsection 135.1(9) are met in respect of a disposition of a share by a taxpayer, then new subsection 135.1(10) ensures that the taxpayer is not required to include an amount in income under subsection 135.1(2) and that, in conjunction with subsection 135.1(7), no withholding tax is required in respect of the disposition. In addition, new subsection 135.1(10) ensures that the new share will be treated as a tax deferred cooperative share until such time as it is ultimately disposed of by the taxpayer.

In particular, when new subsection 135.1(10) applies:

New subsections 135.1(9) and (10) apply after September 28, 2009. However, transitional rules are available in respect of shares acquired on an exchange that is described by paragraph 87(2)(s) that occurs before October 31, 2011.

Firstly, if such a share was subsequently disposed before October 31, 2011 new paragraph 135.1(10)(a) is to be read (consistent with subparagraph 87(2)(s)(ii) as it would have actually read at that time) without reference to the condition that the share have been issued pursuant to an allocation in proportion to patronage.

Secondly, new paragraph 135.1(10)(b) is to be read (also consistent with subparagraph 87(2)(s)(ii) as it would have actually read at that time) without reference to the restriction that no other person or partnership receive at any time any consideration in exchange for the old share.

Clause 283

Cooperative Corporations

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136

Section 136 of the Act provides rules that apply to cooperative corporations.

Subsection 136(1) provides that a cooperative corporation that would otherwise be a private corporation is treated as a private corporation for the purposes of specified provisions of the Act. The subsection is amended to include among those provisions section 123.4 of the Act, which in effect provides reductions in corporate tax rates. This subsection is amended, for the 2001 and subsequent taxation years, to provide that a cooperative corporation that otherwise qualifies as a Canadian-controlled private corporation (CCPC) may use the special rate reduction provided for CCPCs.

Subsection 136(2) of the Act sets out conditions that a corporation must meet in order to be a cooperative corporation. The condition in current paragraph 136(2)(c) has two parts: at least 90% of its members must be individuals, other cooperative corporations, or corporations or partnerships that carry on the business of farming; and at least 90% of its shares, if any, must be held by those persons or partnerships.

The second part of this condition is modified to accommodate cases where the shares of a cooperative are held not only by the members themselves, but also by trusts governed by registered retirement savings plans, registered retirement income funds, registered education savings accounts or TFSAs. If shares are held by a trust that is governed by such a plan, provided a member of the cooperative is the plan's annuitant, holder or subscriber as the case may be, those shares will be counted in the same way as if they were held by a member personally. Amended paragraph 136(2)(c) and new paragraph 136(2)(d), which give effect to this change, apply to the 1998 and subsequent taxation years, except that the accommodation with respect to shares held by TFSAs does not apply for taxation years that end before 2009.

Clause 284

Credit Unions

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137(4.3)(a)

Section 137 of the Act provides rules relating to the taxation of credit unions. Paragraph 137(4.3)(a) defines the "preferred-rate amount" of a corporation that is a credit union at the end of a taxation year. Income qualifying for the small business deduction under section 125 – which, pursuant to subsection 137(4), includes income qualifying under subsection 137(3) – is intended to be included in a corporation's preferred-rate amount. To determine the preferred-rate amount, the amount deducted under section 125 is multiplied by a factor that reflects the small business deduction rate. The current factor reflects a small business deduction rate of 16%. The small business deduction rate that is effective for the 2008 and subsequent taxation years has been increased to 17%. Consequently, the multiplication factor used in this paragraph to determine the amount of a corporation's income that has qualified under section 125 is changed to 100/17 from 25/4.

This amendment applies to the 2008 and subsequent taxation years. A transitional rule is provided to determine the preferred-rate amount of a credit union at the end of its taxation year which began in 2007 and ended in 2008. Under the transitional rule, the preferred-rate amount of a credit union at the end of such taxation year will be prorated based upon the number of days of its taxation year that are in 2007 and the number that are in 2008.

Credit Unions

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137(6)

"member"

Section 137 of the Act provides rules that apply to credit unions. Among the definitions set out in subsection 137(6) is “member”, meaning essentially a member of record who is entitled to the services of the credit union. This definition is amended, for the 1996 and subsequent taxation years, to treat as a member a registered retirement savings plan, registered retirement income fund, TFSA or registered education savings plan, provided that the annuitant, holder or subscriber under the plan is a person who meets the existing definition of “member”.  However, the amendment to treat as a member a TFSA the holder of which is a person who meets the existing definition of “member” does not apply for taxation years that end before 2009.

Credit Union not Private Corporation

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137(7)

Subsection 137(7) of the Act provides that a credit union that would otherwise be a private corporation is treated as a private corporation for the purposes of specified provisions of the Act. The subsection is amended to include among those provisions section 123.4 of the Act, which in effect provides reductions in corporate tax rates. This amendment, which applies to the 2001 and subsequent taxation years, provides that a credit union that otherwise qualifies as a Canadian-controlled private corporation (CCPC) may use the special rate reduction provided for CCPCs.

Clause 285

Deposit Insurance Corporations

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137.1

Section 137.1 of the Act provides rules for the taxation of deposit insurance corporations (DICs), including rules that affect the computation of income. In general terms, the premiums that a member institution pays to a DIC are deductible in computing the member's income and are not included in computing the income of the DIC, while any assistance that the DIC provides to the member or the member's depositors is not deductible for the DIC and is included in computing the member's income.

In certain circumstances, two or more DICs may share responsibilities toward a group of members. In such a case, it may be necessary for one DIC to pay to another an amount in respect of premiums. To ensure the appropriate tax consequences of such a payment, subsections 137.1(2) and (4) are amended. New paragraph 137.1(2)(b) excludes from the income of a DIC any amount it receives from another DIC, to the extent the amount can reasonably be considered to have been paid out of premiums or assessments received or receivable by the other DIC from its member institutions. New paragraph 137.1(4)(d), on the other hand, precludes the paying DIC from deducting the amount in computing its own income. These amendments apply to the 1998 and subsequent taxation years.

Clause 286

Insurance Corporations

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138

Section 138 of the Act provides detailed rules relating to the taxation of insurance corporations.

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138(2)

Subsection 138(2) of the Act provides rules for the purpose of computing the income of a life insurer resident in Canada where the life insurer carries on an insurance business in Canada and in a country other than Canada. The subsection provides that the insurer's income from carrying on an insurance business is the amount of its income from carrying in the insurance business in Canada computed in accordance with the Act. As well, the subsection provides that the insurer's taxable capital gains and allowable capital losses from property used or held in the course of carrying on an insurance business is the insurer's taxable capital gains and allowable capital losses from designated insurance property.

Subsection 138(2) is being amended to extend its application to non-resident insurer's that carry on an insurance business in Canada. As well, it is being amended to provide, for greater certainty, the following:

  1. In computing a multinational insurer's income from an insurance business carried on by it in Canada, no amount is to be included in respect of the insurer's gross investment revenue for a taxation year derived from property used or held in the course of carrying on an insurance business that is not designated insurance property of the insurer. Subsection 138(9) of the Act provides that in computing a multinational insurer's income from an insurance business carried on by it in Canada the insurer must include its gross investment revenue for the year from its designated insurance property for the year plus the amount prescribed in respect of the insurer for the year. Designated insurance property is defined in section 2400 of the Income Tax Regulations.
  2. In computing a multinational insurer's taxable capital gains and allowable capital losses for the year from the disposition of property used or held in the course of carrying on an insurance business there is to be included the insurer's taxable capital gains and allowable capital losses from dispositions of its designated insurance property for the year. It also provides that the insurer's taxable capital gains and allowable capital losses for the year from the disposition of property used or held in the course of carrying on an insurance business that is its designated insurance property for the year are not to be included in computing a multinational insurer's taxable capital gains and allowable capital losses for the year.

The amendments are applicable to taxation years that end after 1999.

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138(3)

Subsection 138(3) of the Act sets out certain deductions for life insurers in computing their income from carrying on a life insurance business in Canada.

Subparagraph 138(3)(a)(iii) of the Act permits a life insurer to make a deduction in respect of policy dividends paid or payable by it in a year under its participating life insurance policies. This deduction is limited to the insurer's income from its accumulated Canadian participating life insurance business earned after 1968. Under subparagraph 138(3)(a)(iv), a life insurer is also permitted a reserve for dividends that become payable in the following year on its participating policies.

Paragraph 138(3)(a) is amended to remove the restriction, under clause 138(3)(a)(iii)(B), on the deduction of policy dividends paid or payable in a year and to remove the deduction, under subparagraph (a)(iv), for dividends that become payable in the following year.

Paragraph 138(3)(f) provides a transitional rule. Life insurance companies first became taxable in 1969 and were required to include in their income any interest on a policy loan received in that year. At that time, no provision was made to exclude the policy loan interest earned before the 1969 taxation year. Subparagraph 138(3)(f)(i) permits a deduction in respect of policy loan interest earned before 1969 for the first taxation year of an insurer ending after November 12, 1981.

Since 1978, life insurance companies have been required to report their policy loan interest income on a cash basis. Some corporations recorded this income on an accrual basis to the end of the 1977 taxation year. However, when the transition was made in 1978 to the cash basis, no provision was made to exclude from 1978 income the accrued policy loan interest which had been included in income in previous years. Subparagraph 138(3)(f)(ii) permits a similar deduction for any policy loan interest income accrued at the end of the 1977 taxation year and included in the income of a subsequent taxation year.

Paragraph 138(3)(f) is now obsolete and is repealed.

These amendments apply to taxation years that begin after October 31, 2011.

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138(3.1) and (4.1) to (4.3)

Subsection 138(3.1) provides a transitional rule in respect of the years 1977 and 1978. For the purposes of clause 138(3)(a)(iii)(A), the subsection deems certain amounts to have been deductible in computing an insurer's income. For the purposes of paragraph 138(4)(a), subsections 138(4.1) to (4.3) similarly provide transitional rules that deem an insurer to have deducted certain amounts in past taxation years. As these provisions are no longer relevant, they are repealed for taxation years that begin after October 31, 2011.

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138(4)

Paragraph 138(4)(a) requires a life insurer to include in computing its income for a taxation year certain reserves deducted by it in computing its income for the immediately preceding taxation year. This paragraph is amended to remove the reference to subparagraph 138(3)(a)(iv) which, as described above, is repealed. This amendment applies to taxation years that begin after October 31, 2011.

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138(11.5)

Subsection 138(11.5) sets out the rules that allow a non-resident insurer to transfer, on a tax-deferred basis, an insurance business carried on in Canada through a branch to a qualified related corporation. Paragraphs (j) to (l) of this subsection are amended to remove references to subparagraph (3)(a)(iv) and subsections 142.5(5) and (7) which are repealed. For further information, see the commentary on subsections 138(3) and section 142.5.

This amendment applies to taxation years that begin after October 31, 2011.

ITA
138(11.91)

Subsection 138(11.91) of the Act provides rules for the purpose of computing the income of a non-resident insurer that at any time in a particular taxation year commences to carry on business in Canada or that ceases to be exempt from tax under Part I of the Act.

Paragraph 138(11.91)(f) of the English version of the Act applies where the non-resident insurer's capital cost of a depreciable property exceeds the property's fair market value immediately before the commencement of the particular taxation year. To ensure that on a later disposition of the property the non-resident insurer is subject to recapture of any excess capital cost allowance claimed before the particular taxation year, this paragraph preserves the property's capital cost, and treats the excess as having been allowed as capital cost allowance.

Since it is inappropriate to provide for the recapture of capital cost allowance that was claimed when the business was not carried on in Canada or when the non-resident insurer was exempt from tax under Part I of the Act, paragraph 138(11.91)(f) of the English version of the Act is repealed.

Paragraph 138(11.91)(d) of the French version of the Act is repealed for the same reason.

This amendment applies to taxation years that end after 1999.

In addition, paragraph 138(11.91)(d) of the English version and paragraph 138(11.91)(b) of the French version are amended to remove the reference to subparagraph 138(3)(a)(iv), which is repealed. For further information, see the commentary on subsection 138(3).

This amendment applies to taxation years that begin after October 31, 2011.

ITA
138(11.94)(b)

Subsection 138(11.94) of the Act provides for the transfer on a tax-deferred (i.e., rollover) basis of an insurance business carried on in Canada by an insurer resident in Canada to a corporation resident in Canada that is a subsidiary wholly-owned corporation of that insurer. This rollover treatment is available on an elective basis, provided that the following conditions are met:

The definition "subsidiary wholly-owned corporation" is found in subsection 248(1) of the Act. In its current form, the definition "subsidiary wholly-owned corporation" covers a corporation all of the issued shares of which (other than directors' qualifying shares) are held by a particular corporation of which it is a subsidiary.

Subparagraph 138(11.94)(b)(ii) is amended to replace the reference to "subsidiary wholly-owned corporation" with a reference to "qualified related corporation (within the meaning of subsection 219(8))". The effect of this amendment is that the rollover treatment under subsection 138(11.94) will be available when the transfer of an insurance business in Canada is made to a qualified related corporation, being a corporation all of the issued shares of which (other than directors' qualifying shares) are owned by a particular corporation of which it is a subsidiary, or by other corporations that are subsidiary wholly-owned corporations of the particular corporation of which it is a subsidiary. This has the effect of broadening the rollover treatment to include a transfer of an insurance business made by a corporation to a corporation in the same corporate group, but that is not necessarily a direct subsidiary of the transferor corporation.

This amendment applies to transfers made after October 2004.

ITA
138(12)

"surplus funds derived from operations"

Subsection 138(12) defines the term "surplus funds derived from operations" of an insurer for the purpose of the rules in section 138 applicable to insurance corporations. This definition also applies, with certain modifications, in determining the capital of a non-resident insurance corporation for the purposes of the tax on large corporations under Part I.3 and the tax on the capital of financial institutions under Part VI. This definition is amended to consequential to the repeal of clause 138(3)(a)(iii)(B) and subsection 138(4.1). For further information on related amendments, see the commentary on those provisions.

These amendments apply to taxation years that begin after October 31, 2011.

Certain definitions in subsection 138(12) were needed for the purposes of applying transitional rules and have no current application. These include the definitions "1975-76 excess capital cost allowance", "1975-76 excess investment reserve", "1975-76 excess policy dividend deduction", "1975-76 excess policy reserves", "1975-76 excess additional group term reserve" and "1975 branch accounting election deficiency". As these provisions are no longer relevant, they are repealed.

"transition year"

Section 138 is also amended to modify existing transitional rules for insurers in respect of their life insurance businesses carried on in Canada ("life insurers"). These modifications are as a result of changes ("segregated fund policy changes") to the prescribed rules in Part XIV of the Income Tax Regulations ("Regulations") for computing the maximum amount deductible under subparagraph 138(3)(a)(i) by a life insurer as a reserve in respect of its life insurance policies in Canada. These changes to the Regulations, announced on March 16, 2011, clarify the computation of the maximum allowable reserves in respect of segregated fund policies.

These amendments to the transitional rules in section 138 are generally intended to ensure that any increase or decrease in the reserves of an insurer resulting from the segregated fund policy changes will be taken into account in computing income for tax purposes over a five-year period.

The changes to the Regulations, and these consequential changes to section 138, apply to the 2012 and subsequent taxation years.

The definition "transition year" in subsection 138(12) of the Act provides for two separate transition years of a life insurer. The first relates to accounting changes adopted by the Accounting Standards Board, and effective as of October 1, 2006. The second relates to changes to accounting rules in respect of the International Financial Reporting Standards adopted by the Accounting Standards Board and effective as of January 1, 2011 ("IFRS").

The definition is amended to add a third separate transition year for a life insurer. The third transition year ("segregated fund policy transition year") relates to the segregated fund policy changes and is a life insurer's 2012 taxation year.

As a result of this amendment, a life insurer will be required to compute, in respect of its life insurance business carried on in Canada in its segregated fund policy transition year, its reserve transition amount (as defined in existing subsection 138(12)) in respect of policy reserves arising from the segregated fund policy changes. This computation is independent of the reserve transition amount computed in respect of the 2006 accounting changes and IFRS. In this regard, new subsection 138(26) provides special rules for applying the related income tax provisions in circumstances where a life insurer has more than one transition year for the same taxation year. For more detail, see the commentary on new subsection 138(26).

As a result of this amendment, existing subsection 138(16) requires the inclusion, in computing the insurer's income for its segregated fund policy transition year, of the positive amount, if any, of the insurer's reserve transition amount for its segregated fund policy transition year. Similarly, subsection 138(17) requires the deduction in computing the insurer's income for its segregated fund policy transition year of the absolute value of the negative amount, if any, of the insurer's reserve transition amount for its segregated fund policy transition year. If an insurer has included an amount under subsection 138(16), or deducted an amount under subsection 138(17), subsections 138(18) and (19) will provide for corresponding deductions or inclusions — recognized over a five-year period beginning with its segregated fund policy transition year — in computing the insurer's income.

ITA
138(26)

New subsection 138(26) of the Act contains rules of application in respect of the determination of a life insurer's reserve transition amount and the associated application of subsections 138(16), (17), (18) and (19). Those subsections provide for transition in some circumstances where the calculation of a life insurer's life insurance policy reserves changes.

New paragraph 138(26)(a) provides an application rule for the purposes of computing the income tax effects in the transitional rules in subsections 138(16), (17), (18) and (19), and for the purposes of the definition "reserve transition amount" in subsection 138(12), where the application of those subsections is relevant to the segregated fund policy changes. For those purposes, that paragraph provides a special rule for computing an insurer's reserve transition amount for its segregated fund policy transition year. Specifically, variable A in the formula in the definition "reserve transition amount" in subsection 138(12) is to be read such that it represents the maximum amount that a life insurer would be permitted to claim as a policy reserve in its base year computed as though the amendment to paragraph 1406(b) of the Regulations incorporating the segregated fund policy changes applied to that base year.

New paragraphs 138(26)(b) and (c) both apply if a life insurer has more than one transition year for the same taxation year.

Paragraph 138(26)(b) applies specifically where the segregated fund policy transition year and the IFRS transition year are for the same taxation year of the life insurer. In this circumstance, for the purposes of the IFRS transition year, the insurer's reserve transition amount, and the associated application of subsections 138(16), (17), (18) and (19), is determined without regard to the segregated fund policy changes.

Paragraph 138(26)(c) applies generally where a life insurer has more than one transition year for the same taxation year (note that, as a practical matter, under the income tax provisions, including as amended currently, this will only involve, as under paragraph 138(26)(b), where the segregated fund policy transition year and the IFRS transition year are for the same taxation year of the life insurer). In this circumstance, paragraph 138(26)(c) clarifies

Clause 287

Rules Relating to Segregated Funds

ITA
138.1

Section 138.1 of the Act provides rules governing the operation of segregated fund trusts established by insurance companies.

ITA
138.1(3.1) and (3.2)

Subsections 138.1(3.1) and (3.2) of the Act set out the appropriate inclusion rate for capital gains realized by a related segregated fund trust in a taxation year that included February 28, 2000 or October 17, 2000, but that were deemed to be the capital gain or loss of a policyholder or other beneficiary of the related segregated fund trust.

As these provisions have no effect for any future taxation year, they are repealed for taxation years that begin after October 31, 2011.

Clause 288

Mark-to-Market Properties

ITA
142.5(4) to (7)

Section 142.5 of the Act requires shares and certain debt obligations to be marked to market by certain financial institutions each year, and requires the profit or loss to be included or deducted in computing the financial institutions income. The section also contains transitional rules for the introduction of the mark-to-market requirement.

Subsection 142.5(4) is a transitional rule for non-capital property deemed to be disposed of on the initial application of the mark-to-market requirement. This subsection allows a financial institution to deduct an amount not exceeding a prescribed amount (as determined under Part LXXXI of the Income Tax Regulations) in its taxation year that includes October 31, 1994. Subsection 142.5(5), in conjunction with the Income Tax Regulations, includes the deducted amount in income over a 5-year period starting with the taxation year that includes October 31, 1994.

Subsection 142.5(6) is a transitional rule that applies with respect to capital property that is deemed to be disposed of on the initial application of the mark-to-market requirement. It permits a financial institution to claim an allowable capital loss not exceeding a prescribed amount (as determined under Part LXXXI of the Income Tax Regulations). Subsection 142.5(7), in conjunction with the Income Tax Regulations, require an equivalent amount of taxable capital gains to be recognized over a 5-year period starting in the taxation year that includes October 31, 1994.

Subsections 142.5(4) to (7) are now obsolete and are repealed for taxation years that begin after October 31, 2011.

Clause 289

Mark-to-market Rules

ITA
142.6(1)

Subsection 142.6(1) of the Act contains rules that apply where a taxpayer becomes (or ceases to be) a financial institution. This is most likely to happen where the change of status occurs because the taxpayer becomes (or ceases to be) controlled by a financial institution.

If a taxation year of the taxpayer does not end immediately before the time at which its status as a financial institution changes, subparagraph 142.6(1)(a)(i) deems the taxpayer's taxation year that would otherwise have included that time to end immediately before that time. A new taxation year begins at that time, and the taxpayer is permitted to adopt a new fiscal period. One purpose for the deemed year-end is to ensure the proper application, in taxation years in which the taxpayer is a financial institution, of the rules, commonly known as the mark-to-market rules,

The expressions "financial institution", "specified debt obligation" and "mark-to-market property" are defined in section 142.2 of the Act.

Paragraph 142.6(1)(b) applies where a taxpayer becomes a financial institution. This paragraph generally provides for a deemed disposition at fair market value of each property held by the taxpayer that is

This deemed disposition under paragraph 142.6(1)(b) is intended to ensure that amounts brought, because of the mark-to-market rules in sections 142.3 and 142.5, into the taxpayer's income for the taxpayer's subsequent taxation year (i.e., the taxation year that includes the time of the change of status) do not include gains or losses accrued before the beginning of that subsequent taxation year.

Paragraph 142.6(1)(b) is amended to ensure that this is achieved in connection with mark-to-market properties. Amended paragraph 142.6(1)(b) results in the taxpayer being deemed to have disposed of, immediately before the end of its particular taxation year that ends immediately before the time of the change of status, and for proceeds equal to its fair market value at the time of that disposition, a mark-to-market property of the taxpayer

Paragraph 142.6(1)(c) provides for a deemed disposition of specified debt obligations (other than mark-to-market property) in the opposite situation of change of status, i.e., where the taxpayer ceases to be a financial institution. Paragraph 142.6(1)(d) provides that the taxpayer is deemed to have reacquired, at the end of the taxation year referred to in paragraph 142.6(1)(b) or (c), each property deemed by that paragraph to have been disposed of by the taxpayer, at a cost equal to the proceeds of disposition of the property.

Consequential to the amendments to paragraph 142.6(1)(b), paragraph 142.6(1)(d) is amended to provide that the taxpayer is deemed to have reacquired, at the end of its taxation year that ends immediately before the time of the change of status, each property deemed by paragraph 142.6(1)(b) or (c) to have been disposed of by the taxpayer, at a cost equal to the proceeds of disposition of the property.

Amended paragraphs 142.6(1)(b) and (d) apply to taxation years that end after 1998.

Clause 290

Authorized Foreign Banks – Conversion

ITA
142.7(8)(a.1)

Section 142.7 of the Act provides time-limited rules to facilitate foreign banks' transformation of certain Canadian operations, currently carried out through subsidiaries, into Canadian branches (known as "authorized foreign banks") of the foreign banks themselves.

When an authorized foreign bank assumes certain debt obligations of its Canadian affiliates, subsection 142.7(8) applies to govern the tax consequences of the assumption.

Subparagraph 212(1)(b)(vii) of the Act provides an exemption from Part XIII tax in respect of interest payments on certain long- and medium-term corporate debt. The exemption can depend upon, among other things, the time at which a debt is issued. New paragraph 142.7(8)(a.1) is added to treat, for the purpose of subparagraph 212(1)(b)(vii), a debt obligation assumed by an authorized foreign bank from its Canadian affiliate as having been issued at the time that the debt was issued by the Canadian affiliate.

This amendment applies after June 27, 1999 and before 2008.

Clause 291

Communal Organizations

ITA
143

Section 143 of the Act sets out rules governing the taxation of communal organizations (referred to in that section as "congregations") that do not allow their members to own property in their own right.

Election in Respect of Gifts

ITA
143(3.1)

Subsection 143(3.1) of the Act allows a communal organization that makes an election under subsection 143(2) of the Act to elect to have its total charitable, Crown, cultural and ecological gifts flowed through to those members (the "participating" members) of the congregation for whom an amount is included in income for the year under subsection 143(2).

Subsection 143(3.1) is amended consequential to the addition of new subsection 248(31) of the Act, in respect of gifts made after December 20, 2002, to refer to the "eligible amount" of a gift made because of a person being a participating member in the communal organization.

Clause 292 and 293

Limited-recourse Debt in Respect of a Gift or Monetary Contribution

ITA
143.2(6.1)

New subsection 143.2(6.1) of the Act describes limited-recourse debt in respect of a gift or monetary contribution made after February 18, 2003. Such an amount is an advantage under subsection 248(32) of the Act, such that it reduces the eligible amount of a gift or political contribution determined under subsection 248(31) of the Act. For additional details regarding the amount of an advantage, see the commentary to new subsection 248(32).

A limited-recourse debt includes the unpaid principal of any indebtedness for which recourse is limited, even if that limitation applies only in the future or contingently. It also includes any other indebtedness of the taxpayer, related to the gift or contribution, if there is a guarantee, security or similar indemnity or covenant in respect of that or any other indebtedness. For example, if a donor (or any other person mentioned below) enters into a contract of insurance whereby all or part of a debt will be paid upon the occurrence of either a certain or contingent event, the debt is a limited-recourse debt in respect of a gift if it is in any way related to the gift.

Such an indebtedness is also a limited-recourse debt if it is owed by a person dealing non-arm's length with the taxpayer or by a person who holds an interest in the taxpayer.

Information Located Outside Canada

ITA
143.2(13)

Subsection 143.2(13) of the Act applies where information related to an indebtedness in respect of an expenditure is located outside Canada, and the Minister of National Revenue is not satisfied that the indebtedness is not a limited-recourse amount. In such a case, the indebtedness is deemed to be a limited-recourse amount in respect of the expenditure. Subsection 143.2(13) is extended to also apply in respect of an indebtedness that relates to a gift or political contribution made after February 18, 2003.

Clause 294

Expenditure – Limitations

ITA
143.3

New section 143.3 of the Act reduces, if applicable, the amount of a taxpayer's expenditure by certain amounts for the purposes of computing the taxpayer's income, taxable income and tax payable or an amount considered to have been paid on account of the taxpayer's tax payable.

New section 143.3 comes into force on November 17, 2005 except that for securities issued or sold before Announcement Date, the definition "option" is to be read without reference to its paragraph (a).

Definitions

ITA
143.3(1)

New subsection 143.3(1) of the Act provides definitions that apply for the purposes of section 143.3. Those definitions are:

"expenditure"

"Expenditure" of a taxpayer, which means an expense, expenditure or outlay made or incurred by the taxpayer, or that is a cost or capital cost of property acquired by the taxpayer.

"option"

"Option", which means

(a) a security that is issued or sold by a taxpayer under an agreement referred to in subsection 7(1); or

(b) an option, warrant or similar right, issued or granted by the taxpayer, giving the holder the right to acquire an interest in the taxpayer or in another taxpayer with which the taxpayer does not, at the time the option, warrant or similar right is issued or granted, deal at arm's length.

"taxpayer"

"Taxpayer", which is defined to include a partnership.

Options – limitation

ITA
143.3(2)

New subsection 143.3(2) of the Act provides that, in computing a taxpayer's income, taxable income or tax payable or an amount considered to have been paid on account of the taxpayer's tax payable, an expenditure of the taxpayer is deemed not to include any portion of the expenditure that would – if the Act were read without reference to subsection 143.3(2) – be included in determining the expenditure because of the taxpayer having granted or issued an option on or after November 17, 2005. In essence, the value of an option granted by a taxpayer is not considered to be an expenditure for income tax purposes.

Corporate Shares – Limitation

ITA
143.3(3)

New subsection 143.3(3) of the Act provides for two reductions that apply to an expenditure that would – if the Act were read without reference to subsection 143.3(3) – include an amount because of a corporation (or another corporation not dealing at arm's length with the corporation) having issued a share of its capital stock at any particular time on or after November 17, 2005. The reductions apply to the corporation in computing its income, taxable income or tax payable or an amount considered to have been paid on account of the corporation's tax payable.

New paragraph 143.3(3)(a) applies on the issuance of the share (other than on the exercise of an option). Generally, the corporation is to reduce the related expenditure by the amount, if any, by which

(i) the fair market value of the share

exceeds

(ii) if the transaction under which the share is issued is a transaction to which section 85, 85.1 or 138 of the Act applies, the amount determined under that section to be the cost to the corporation of the property acquired in consideration for the issuance of the share, or

(iii) in any other case, the amount of consideration that is the fair market value of the property transferred or issued to, or the services provided to, the issuing corporation for issuing the share.

In addition, under new paragraph 143.3(3)(b), if the issuance of the share is a consequence of the exercise of an option, generally the corporation is to reduce the related expenditure by the amount, if any, by which

(i) the fair market value of the share

exceeds

(ii) that portion of the amount paid, pursuant to the terms of the option, by the holder to the issuing corporation for issuing the share.

Example

Facts

In its 2006 taxation year, Corporation X grants an option to Y in return for $1,000 worth of paintings by a little-known Canadian artist. Corporation X does not give cash or any other consideration for the paintings. The option gives Y the right to acquire one share of Corporation X for $10,000 in 2007. (At the time the option is granted one share of Corporation X has a fair market value of $10,000.)

In 2007, Y exercises the option and pays Corporation X $10,000 cash for the share. The share has a fair market value of $15,000 at the time of issue.

Corporation X files its 2007 income tax return on the basis that the cost of the paintings is $5,000, representing the difference between the fair market value of the share when it was issued and the cash paid by Y for the share.

Application of section 143.3 of the Act

1. On granting the option:

  • New subsection 143.3(2) applies to clarify that there is no expenditure by Corporation X resulting from it issuing the option.

2. On the exercise of the option:

When issuing the share on the exercise of the option, new paragraph 143.3(3)(b) ensures that an expenditure, if any, of Corporation X is reduced by $5,000 – being the amount by which

$15,000 (the fair market value of the share – see subparagraph (b)(i))

exceeds

$10,000 (the amount paid for the share – see subparagraph (b)(ii).

However, and as noted in the explanatory note accompanying new subsection 143.3(5), the reductions provided for under subsections 143.3(3) and (4) do not apply to reduce an expenditure if the expenditure itself does not include an amount determined to be excesses described in those subsections.

Non-corporate Interests – Limitation

ITA
143.3(4)

New subsection 143.3(4) of the Act provides for two reductions that apply to a non-corporate taxpayer's expenditure that would – if the Act were read without reference to subsection 143.3(4) – include an amount because the taxpayer (or another taxpayer not dealing at arm's length with the taxpayer) issues or creates an interest in itself at any particular time on or after November 17, 2005. The reductions apply to the taxpayer in computing its income, taxable income or tax payable or an amount considered to have been paid on account of the taxpayer's tax payable.

In general terms, under new paragraph 143.3(4)(a), if the issuance or creation of the interest in a taxpayer is not a consequence of the exercise of an option, the taxpayer is to reduce the expenditure by the amount, if any, by which

(i) the fair market value of the interest

exceeds

(ii) if the transaction under which the interest is issued or created is a transaction to which paragraph 70(6)(b), subsection 97(2), paragraph 73(1.01)(c), subsection 73(1.02), section 107.4 or 132.2 of the Act applies, the amount determined under that provision to be the cost to the taxpayer of the property acquired for the interest, or

(iii) in any other case, the amount of the consideration that is the fair market value of the property transferred or issued to, or the services provided to, the taxpayer for the interest.

In addition, under new paragraph 143.3(4)(b), if the issuance or creation of the interest is a consequence of the exercise of an option, the taxpayer is to reduce the expenditure by the amount, if any, by which

(i) the fair market value of the interest

exceeds

(ii) the amount paid, pursuant to the terms of the option, by the holder to the taxpayer for the interest.

However, and as noted in the explanatory note accompanying new subsection 143.3(5), the reductions provided for under subsections 143.3(3) and (4) do not apply to reduce an expenditure if the expenditure itself does not include an amount determined to be excesses described in those subsections.

Clarification

ITA
143.3(5)

New subsection 143.3(5) of the Act provides four rules for greater certainty.

First, paragraph 143.3(5)(a) clarifies that subsection 143.3(2) does not reduce an expenditure that is a commission, fee or other amount for services rendered by a person as a salesperson, agent or dealer in securities in the course of the issuance of the option.

Second, paragraph 143.3(5)(b) clarifies that subsections 143.3(3) and (4) do not apply to reduce an expenditure to the extent that the expenditure does not include an amount determined to be an excess under those subsections. For example, if a corporation were to issue shares of its capital stock having a fair market value of $100 in consideration for having acquired property or services having a fair market value of $40, no excess exists under paragraph 143.3(3)(a) if the expenditure of the corporation for the property or services claimed by the corporation without reference to section 143.3 is, for income tax purposes, $40. To the extent the corporation seeks to claim an expenditure in excess of that $40, paragraph 143.3(3)(a) would reduce that excess to nil. Paragraph 143.3(5)(b) recognizes that the jurisprudence that would treat an expenditure of the type reduced by subsections 143.3(3) and (4) currently applies only to scientific research and experimental development (SR&ED) tax credits, and is limited to a single decision of the Tax Court of Canada. It may very well transpire that future jurisprudence may constrain or eliminate any such expenditure that may be considered to arise in these circumstances.

Third, paragraph 143.3(5)(c) clarifies that section 143.3 does not determine the cost or capital cost of property determined under certain tax-deferral rules. For example, if section 85 of the Act deems a transferee corporation that acquires non-depreciable capital property to do so at a cost of $100 in circumstances where the corporation issued a share of its capital stock having a fair market value of $200, this section does not decrease or increase the $100 cost for the property to the corporation, as determined under section 85.

Fourth, paragraph 143.3(5)(d) clarifies that section 143.3 does not determine the amount of a taxpayer's expenditure if the amount of the expenditure as determined under section 69 of the Act is less than an amount determined under section 143.3.

Clause 295

Expenditure – Limit for Contingent Amount

ITA
143.4

Background

The Act provides that taxpayers who earn income from a business or property may deduct expenses incurred for the purpose of earning that income on an accrual basis. In general, such expenses and outlays of a current nature that become "payable" in a taxation year are deductible in computing income for that year, regardless of whether the expense or outlay is paid only in a subsequent taxation year. A similar principle applies in respect of the cost of capital outlays.

An amount is considered to be "payable" by a taxpayer under the Act in a taxation year if the taxpayer is legally obligated to pay a fixed and ascertainable amount in respect of that year. An existing provision in the Act (paragraph 18(1)(e)) expressly precludes any deduction in respect of an expense or outlay as, or on account of, a "contingent liability or amount". This limitation applies if the liability to pay the amount, or the amount to be paid, is "contingent" on the happening of some future event. The Collins decision has adverse implications with respect to the intended application of this rule.

In Collins v. The Queen (2010 FCA 12), two taxpayers deducted accrued, but unpaid, interest expense even though they had an existing right to satisfy their interest obligations by electing to pay a substantially lower amount of interest. The Federal Court of Appeal found that it was not the original obligation to pay the interest that was contingent, but that it was each taxpayer's subsequent decision to exercise the option to pay the lower amount that was contingent. Accordingly, the effect of this decision was to allow for interest payable under the original obligation to be deducted in computing income even though both taxpayers had a right to elect to pay a lower amount.

In response, and in general terms, new section 143.4 of the Act clarifies that the amount of a taxpayer's unpaid expenditure otherwise deductible for income tax purposes does not include an amount in respect of which the taxpayer, or a person that does not deal at arm's length with the taxpayer, has a right to reduce or eliminate. For greater certainty, this treatment will also apply where the right is contingent upon the happening of another event, or in any other way, if it is reasonable to conclude having regard to all the circumstances that the right will become exercisable. This means, for example, that interest payable under an original obligation in excess of a lower amount that the taxpayer could elect to pay would not be deductible for income tax purposes unless and until it was actually paid.

New section 143.4 of the Act provides a rule that, in general, reduces the amount of a taxpayer's expenditure, that is otherwise deductible for the purposes of the Act or that otherwise forms part of a capital property to the taxpayer, if the taxpayer has a right to reduce or eliminate the amount that the taxpayer is required to pay in respect of the expenditure. Further commentary on this new rule is provided below.

Definitions

ITA
143.4(1)

New subsection 143.4(1) of the Act provides four definitions that apply for the purpose of the limitation that may apply in respect of an expenditure under section 143.4. The main rule in respect of this limitation is found in subsection 143.4(2) which provides, in general, that an "expenditure" of a "taxpayer" is reduced to the extent there is, in the year in which the expenditure occurs, a "contingent amount" of the taxpayer – essentially where the taxpayer has a "right to reduce" an amount in respect of the expenditure. These four definitions are more fully described below.

"Contingent amount" of a taxpayer at any time (other than a time at which the taxpayer is a bankrupt) includes an amount to the extent that the taxpayer, or another taxpayer that does not deal at arm's length with the taxpayer, has a right to reduce the amount at that time.  

"Expenditure" of a taxpayer means an expense, expenditure or outlay made or incurred by the taxpayer, or a cost or capital cost of property acquired by the taxpayer.

"Right to reduce" in respect of an amount of an expenditure at any time is broadly defined to mean a right to reduce or eliminate the amount. For these purposes a "right to reduce" is defined to include a right that is contingent upon the occurrence of an event, or in any other way, but only if it is reasonable to conclude, having regard to all the circumstances, that the right will become exercisable.

"Taxpayer" includes a partnership.

Limitation of amount of expenditure

ITA
143.4(2)

New subsection 143.4(2) of the Act provides that the amount of a taxpayer's expenditure is the lesser of two amounts. Paragraph (a) provides that the first of these two amounts is the amount of the expenditure calculated under the Act without reference to new section 143.4. In general, the second amount in paragraph (b) is calculated by reducing the first amount by the amount, if any, that is the total of each contingent amount in respect of the expenditure. The amount computed under paragraph (b) is to be reduced by the total of all amounts each of which is an amount paid by the taxpayer in order to obtain a right to reduce an amount in respect of the expenditure or is a paragraph 143.2(6)(b) limited-recourse amount that reduces the expenditure under subsection 143.2(6) in respect of the contingent amount. 

Payment of contingent amount

ITA
143.4(3)

New subsection 143.4(3) of the Act provides, in general, that if an expenditure of a taxpayer has been reduced because of a contingent amount referred to in subsection 143.4(2) and the taxpayer later pays all or a portion of the contingent amount, then the taxpayer is considered to have incurred the previously reduced expenditure to the extent it was paid. In this case, the amount paid is considered to be incurred in the year paid for the same purpose and to have the same character as the expenditure that was reduced under subsection 143.4(2).

Subsequent years – application of paragraph 12(1)(x)

ITA
143.4(4)

New subsection 143.4(4) of the Act provides a special rule that, in general, applies if a taxpayer, or a person with whom the taxpayer does not deal at arm's length, has a right to reduce (as defined by subsection 143.4(1)) in respect of an expenditure in a year subsequent to the taxation year in which the expenditure occurred. In such cases, subsection 143.4(4) deems the taxpayer to have received a "subsequent contingent amount" in the course of earning income from a business or property to which paragraph 12(1)(x) applies. This rule applies to the extent subsections 143.4(2) and (4) have not previously applied in respect of the expenditure. For this purpose, the amount of a taxpayer's subsequent contingent amount is to be determined under new subsection 143.4(5).

However, subsection 143.4(4) does not apply to a taxpayer's subsequent contingent amount if the special anti-avoidance rule in new subsection (6) applies to deem the amount to be a contingent amount in the previous year in which the expenditure otherwise occurred. In such cases, subsection 143.4(2) applies to reduce the amount of the expenditure in the taxation year in which it otherwise occurred.  For more detail see the discussion in respect of the special anti-avoidance rule in subsection 143.4(6)).

Subsequent contingent amount

ITA
143.4(5)

New subsection 143.4(5) of the Act provides in general that a taxpayer's "subsequent contingent amount" is, for the purpose of applying subsection 143.4(4), the amount by which the amount in respect of an expenditure may be reduced under a right to reduce exceeds the amount paid to obtain the right to reduce the amount in respect of the expenditure.

Anti-avoidance

ITA
143.4(6)

New subsection 143.4(6) of the Act provides a special anti-avoidance rule that applies if it is reasonable to conclude that one of the purposes for having a right to reduce an amount in respect of an expenditure after the end of the taxation year in which an expenditure otherwise occurred was to avoid a reduction under subsection 143.4(2) in respect of the expenditure.

In such a case, subsection 143.4(6) deems the right to reduce to exist in the taxation year in which the expenditure otherwise arose. The result of deeming the right to reduce to exist in the year in which the expenditure otherwise occurred is that the limitation in subsection 143.4(2) for a contingent amount in respect of an expenditure applies to reduce the amount of the expenditure in that previous taxation year.

Assessments

ITA
143.4(7)

New subsection 143.4(7) of the Act provides to the Minister of National Revenue the authority to make the assessments, determinations and redeterminations that are necessary to give effect to section 143.4 notwithstanding that the taxation year in question is otherwise statute-barred from assessment.

New section 143.4 applies in respect of taxation years ending on or after March 16, 2011.

Clause 296

Registered Retirement Savings Plans

ITA
146

Section 146 of the Act provides rules relating to registered retirement savings plans (RRSPs).

Definitions

ITA
146(1)

"earned income"

Subsection 146(1) of the Act defines "earned income", which is relevant in determining the maximum tax-deductible contributions that a taxpayer may make to RRSPs. The definition includes references to a number of provisions that have previously been repealed or re-numbered. The definition is amended to remove these references and update the numbering, with application from the time the provisions were repealed or re-numbered.

Deemed Receipt of Refund of Premiums

ITA
146(8.1)

Subsection 146(8.1) of the Act deals with situations in which an amount paid from a deceased individual's RRSP to the individual's estate would have been a "refund of premiums" if it had been paid by the RRSP to a beneficiary under the estate. An amount paid out of an RRSP as a consequence of the death of the annuitant is defined, by subsection 146(1) of the Act, to be a "refund of premiums" if the recipient was, immediately before the death of the RRSP annuitant, a spouse or common-law partner of the annuitant or a financially dependent child or grandchild of the annuitant.

Subsection 146(8.1) allows the legal representative of a deceased RRSP annuitant's estate and a qualifying beneficiary under the estate to elect jointly to have the RRSP proceeds that were paid to the estate treated as a refund of premiums received by the beneficiary from the RRSP. When such an election is made, the beneficiary may include the deemed refund of premiums in income. If a corresponding amount is used to acquire a qualifying annuity or is paid into an RRSP or registered retirement income fund of the beneficiary and certain other conditions are satisfied, the beneficiary will be entitled to an offsetting deduction under paragraph 60(l) of the Act.

Subsection 146(8.1) is amended to provide that the expression "beneficiary" under a deceased RRSP annuitant's estate has the meaning assigned by subsection 108(1) of the Act. This has the effect of extending the provisions of subsection 146(8.1) to an individual who is "beneficially interested" in a deceased RRSP annuitant's estate (as defined in subsection 248(25)), but who is not a beneficiary under the estate. This could occur, for example, where an individual has only an indirect interest in the deceased RRSP annuitant's estate by virtue of being a beneficiary under a trust that is a beneficiary under the estate – a structure typically contemplated in the estate planning of parents of mentally infirm children.

This change applies after 1988.

Where Tax Payable

ITA
146(10.1)

Subsection 146(10.1) of the Act provides that income earned by a trust governed by a retirement savings plan from non-qualified investments is taxable under Part I. Subparagraph 146(10.1)(b)(ii) provides that income for this purpose includes the full amount of capital gains in excess of capital losses. This subparagraph is reworded for clarity, applicable on Royal Assent.

Clause 297

Home Buyers' Plan

ITA
146.01

Section 146.01 of the Act set out the requirements for the Home Buyers' Plan (HBP), which allows the tax-free withdrawal of RRSP funds for the purchase of a home.

Definitions

ITA
146.01(1)

"quarter"

Subsection 146.01(1) of the Act contains the definition "quarter" for purposes of the rules relating to the HBP. This definition is repealed as a consequence of the repeal of subsection 146.01(8) of the Act, where this definition applied. The repeal of this definition applies for the 2002 and subsequent taxation years.

Filing of Prescribed Form

ITA
146.01(8)

In order for an RRSP withdrawal to qualify as an HBP withdrawal, the taxpayer must make a written request in prescribed form to the RRSP issuer. The prescribed form for this purpose is the T1036. Under subsection 146.01(8) of the Act, an RRSP issuer to whom a T1036 is submitted must file the form with the Minister of National Revenue no later than 15 days after the quarter in which it was so submitted.

Subsection 146.01(8) is repealed. Rather than reporting HBP withdrawals on a quarterly basis by filing the relevant T1036, RRSP issuers are instead required (by subsection 214(1) of the Regulations) to report such withdrawals on an annual basis using the T4RSP.

The repeal of subsection 146.01(8) applies for the 2002 and subsequent taxation years.

Clause 298

Registered Education Savings Plans - Conditions for Registration

ITA
146.1(2)(g.3) and (2.3)

Subsection 146.1(2) of the Act sets out the conditions that must be satisfied in order for an education savings plan to be accepted for registration.

New paragraph 146.1(2)(g.3) is introduced to preclude non-residents and individuals who have not yet been assigned a Social Insurance Number (SIN) from becoming a beneficiary under a registered education savings plan (RESP) or from benefiting from RESP contributions.

Specifically, paragraph 146.1(2)(g.3) requires that an education savings plan not permit an individual to be designated as a beneficiary under the plan, and not allow a contribution for an individual who is a beneficiary under the plan, unless the individual's SIN has been provided to the promoter of the plan and the individual is resident in Canada.

If an individual is designated as a beneficiary under an RESP in conjunction with the transfer of property into the plan from another RESP under which the individual was a beneficiary immediately before the transfer, the requirement that the individual be resident in Canada in order to be designated as a beneficiary does not apply. However, subject to the exceptions in new subsection 146.1(2.3), the individual's SIN has to be provided to the promoter in order for the individual to be designated as a beneficiary under the transferee RESP. This special rule is intended primarily to accommodate transfers from an RESP to a replacement RESP after the beneficiary has ceased to be resident of Canada. (It should be noted that the transfer itself, as a contribution to an RESP, is not subject to the SIN and residency conditions that apply to ordinary contributions.)

New subsection 146.1(2.3) provides two additional exceptions to the SIN condition that are primarily of relevance to RESPs that were entered into before 1999 and RESPs that replace such plans. These exceptions recognize that the Canada Revenue Agency only began requiring the beneficiary's SIN to be provided on the application for registration for plans entered into after 1998.

The first new exception allows an education savings plan that was entered into before 1999 to not require that an individual's SIN be provided in respect of a contribution to the plan. Such contributions, however, continue to be ineligible for the Canada Education Savings Grant. It should be noted that this exception is only relevant for contributions made for existing beneficiaries under such plans. An individual without a SIN is prevented from being designated as a new beneficiary under such a plan.

Under the second new exception, an education savings plan may permit a non-resident individual who does not have a SIN to be designated as a beneficiary under the plan provided that the designation is being made in conjunction with a transfer of property into the plan from another RESP under which the individual was a beneficiary immediately before the transfer. This exception is intended, in particular, to accommodate the transfer of property from an RESP that was entered into before 1999, under which the beneficiary had always been non-resident or had ceased to be resident in Canada before having been assigned a SIN, to a replacement RESP (and successive transfers).

Paragraph 146.1(2)(g.3) and subsection 146.1(2.3) apply after 2003.

Clause 299

Tax-Free Savings Accounts

ITA
146.2(1)

"holder"

Subsection 146.2(1) of the Act provides a number of definitions for the purposes of the rules applicable in respect of Tax-Free Savings Accounts (TFSAs). Under the current definition "holder" in subsection 146.2(1), only a "survivor" (defined in subsection 146.2(1) as the individual who was, immediately before the death of the individual who opened the TFSA, the spouse or common-law partner of that individual) can be a successor holder. The legislation does not allow the survivor to designate a subsequent successor holder (e.g., a new spouse of the survivor in case of remarriage of the survivor) in respect of the TFSA. On the other hand, the TFSA rules do permit the survivor to transfer the funds out of the existing TFSA to a new TFSA in respect of which he or she can designate a successor holder, thereby achieving the same result indirectly.

The definition "holder" is amended to simplify the TFSA rules regarding successor holder designations by allowing the survivor (and subsequent survivors) to designate a subsequent successor holder. Note that the same conditions apply to the designation of a successor holder to a survivor as to the designation of a survivor to the initial holder of the TFSA: that is, the successor holder has to acquire, as part of the survivor's rights as holder or in addition to those rights, the unconditional right to revoke any beneficiary designation made by the survivor in relation to the TFSA.

This amendment applies to the 2009 and subsequent taxation years.

Clause 300

Registered Retirement Income Funds

ITA
146.3

Section 146.3 of the Act provides rules relating to registered retirement income funds (RRIFs).

Definitions

ITA
146.3(1)

"annuitant"

Subsection 146.3(1) of the Act contains the definition "annuitant" for purposes of the rules relating to RRIFs. Paragraph (b) of the definition allows the spouse or common-law partner of a deceased annuitant to become the successor annuitant under the RRIF, if the deceased annuitant so elected or the legal representative of the deceased annuitant consents. When this paragraph was amended by S.C. 2000, c. 12 (the Modernization of Benefits and Obligations Act, formerly Bill C-23), the word "or" in the English version was inadvertently removed. The definition is amended to correct this error, and to improve the readability of this paragraph, with the same application as the initial amendment in Bill C-23.

Acceptance of Fund for Registration

ITA
146.3(2)

Subsection 146.3(2) of the Act outlines the conditions that must be satisfied in order for a retirement income fund to be registered as a RRIF.

Paragraph 146.3(2)(c) of the English version refers to a carrier who "is a person referred to as a depository in section 146". This paragraph is amended to replace the word "depository" with the word "depositary", which is the term used in section 146. This amendment applies after 2001.

Paragraph 146.3(2)(f) prohibits a RRIF from receiving property, other than property transferred from sources listed in that paragraph. The paragraph is amended so that a RRIF may receive property transferred directly from a deferred profit sharing plan (DPSP) in accordance with subsection 147(19) of the Act. This amendment is consequential on an amendment to subsection 147(19) that permits direct transfers from DPSPs to RRIFs. For more details, see the commentary to that subsection. This amendment applies after March 20, 2003.

Amount Included in Income

ITA
146.3(5.1)

In 2000, the Act was amended to include common-law partners, but some provisions, including the English version of subsection 146.3(5.1), were overlooked. This subsection is therefore amended to correct this omission. The amendment applies, in general, to the 2001 and subsequent taxation years. However, it may apply as of 1998 if the common-law partners jointly choose to be deemed as such, beginning in that year, for the purposes of the application of the Act.

Tax Payable on Income from Non-qualified Investment

ITA
146.3(9)

Subsection 146.3(9) of the Act provides that, if a trust governed by a RRIF acquires a non-qualified investment, any income earned by the trust from the investment is taxable under Part I.

Subsection 146.3(9) is amended to clarify that income from property that was a qualified investment at the time it was acquired but later became non-qualified is also taxable in respect of the non-qualified period. This amendment, which applies to the 2003 and subsequent taxation years, is consistent with the tax treatment of income earned by RRSP trusts from non-qualified investments under subsection 146(10.1) of the Act.

Subparagraph 146.3(9)(b)(ii) is reworded for clarity, applicable on Royal Assent.

Clause 301

Deferred Profit Sharing Plans

ITA
147

Section 147 of the Act provides rules relating to DPSPs.

Acceptance of Plan for Registration

ITA
147(2)(e)

Subsection 147(2) of the Act sets out the conditions that a profit sharing plan must satisfy in order to be registered as a DPSP. Paragraph 147(2)(e) requires that such a plan include a provision stipulating that no right of an employee who is a beneficiary under the plan is capable of surrender or assignment.

Paragraph 147(2)(e) is amended in two ways. First, it is amended to extend the application of the provision to require that the stipulation apply to all persons who have rights under a DPSP, not just employee beneficiaries. Second, it is amended to provide that the stipulation is not required to prohibit:

These new provisions are similar to the rule in Regulation 8502(f) that applies to registered pension plans (RPPs). The new provisions are, in part, consequential on amendments to subsection 147(19) of the Act that accommodate the division of DPSP assets on the breakdown of a marriage or common-law partnership.

These amendments apply after March 20, 2003.

Compensation

ITA
147(5.11)

Subsection 147(5.1) of the Act sets out the employer contribution limits for DPSPs. In general terms, the maximum employer contributions in respect of an individual for a calendar year cannot exceed the lesser of: (i) 18% of the individual's compensation for the year from the employer; and (ii) 1/2 of the year's money purchase limit. For this purpose, "compensation" and "money purchase limit" are generally as defined in subsection 147.1(1). Additional cross-plan limits apply if the individual also participates in an RPP sponsored by the employer or in a DPSP or RPP sponsored by a non-arm's length employer.

If the contribution limits are not respected for a calendar year, the Minister of National Revenue may revoke the registration of the DPSP. In addition, the employer is denied a deduction for all contributions made in the year, except as expressly permitted in writing by the Minister.

Subsection 147(5.11) provides a special relieving rule that applies when an employee who is a beneficiary under a DPSP terminates employment with a participating employer in a calendar year. In this circumstance, for the purposes of determining whether the contribution limits have been satisfied, the employee's compensation can be based on the compensation for the immediately preceding year, if it is more than the compensation for the year of termination.

This rule recognizes that it is common practice for an employer to make contributions to a DPSP only after its fiscal year-end, since this is when profits are determined. This can often result in employer contributions being made based (in whole or in part) on employees' earnings in the previous calendar year, but being included in the employees' contribution limits for the current calendar year. This in turn can give rise to over-contributions when an employee terminates employment later in the year before having earned sufficient compensation to support the contribution. However, subsection 147(5.11) generally ensures that such over-contributions do not result in adverse tax effects by allowing the contribution limits to be based on the employee's compensation from the preceding calendar year.

There are, however, two policy concerns with the approach used in subsection 147(5.11). The first concern is that the provision deals only with over-contributions that involve employees who terminate employment. It does not provide relief for similar over-contributions that arise where an employee takes an unpaid leave of absence before having earned sufficient compensation to support any contributions that the employer had already made on his or her behalf. The second concern is that the provision allows DPSP contributions to be made in situations where there is no supporting employment income.

To address these concerns, subsection 147(5.11) is repealed and replaced by a broader relief mechanism in section 8301 of the Regulations. The new mechanism will provide relief in both of the situations described above by allowing over-contributions to be ignored for purposes of the DPSP contribution limits, provided the excess is refunded from the plan.

The repeal of subsection 147(5.11) applies to cessations of employment that occur in 2003 and subsequent calendar years, while the new refund mechanism in the Regulations applies for 2002 and subsequent calendar years. As a result, for excess contributions relating to cessations of employment that occur in 2002, employers will be entitled to relief either by relying on existing 147(5.11) or by using the new refund mechanism.

Transfer to RPP, RRSP, RRIF or DPSP

ITA
147(19)

Subsection 147(19) of the Act provides for the tax-free transfer on behalf of an individual of a lump sum amount from a DPSP to an RPP, an RRSP or another DPSP for the individual's benefit. Currently, direct transfers may be made on behalf of an individual only if the individual is an employee or former employee of an employer who participated in the plan or was a spouse or common-law partner of a deceased employee at the date of the employee's death.

A number of technical amendments are being made to subsection 147(19) to provide greater consistency with the transfer provisions that apply to RPPs.

Subsection 147(19) is amended so that a direct transfer on the death of an employee may be made on behalf of a former spouse or common-law partner of the deceased employee. It is also amended to allow for direct transfers of DPSP assets to be made on behalf of a spouse or common-law partner, or former spouse or common-law partner, of an employee or former employee, where the transfer relates to a division of property arising on the breakdown of their marriage or common-law partnership.

Finally, subsection 147(19) is amended to allow for direct transfers from DPSPs to RRIFs. This is primarily of relevance where the surviving spouse or common-law partner of a deceased employee has already been required to convert an RRSP to a RRIF and, therefore, cannot transfer the DPSP assets to an RRSP. In this regard, the French version of paragraph 147(19)(d) is amended in order to add a reference to the word "fonds".

These amendments apply to amounts transferred after March 20, 2003.

Clause 302

Registered Pension Plans – Foreign Missions and International Organizations Act

ITA
147.1(1) "compensation"

Subsection 147.1(1) of the Act provides a number of definitions relating to registered pension plans, including the definition "compensation". As currently defined, "compensation" includes amounts that, but for paragraph 81(1)(a) as it applies with respect to the Indian Act, would be required by section 5 or 6 to be included in computing an individual's income. In other words, the existing definition includes as compensation amounts that are exempt from income tax under paragraph 81(1)(a) only as it applies with respect to the Indian Act.

The amended definition "compensation" extends the meaning of the term to also include amounts exempt from income tax under paragraph 81(1)(a) as it applies with respect to the Foreign Missions and International Organizations Act. This will accommodate participation in registered pension plans by employees whose compensation is tax-exempt because of that Act and ensure that the remuneration of these employees can be taken into account for the purposes of the pension adjustment limits in subsection 147.1(8) and any other applicable pension tax rules.

This amendment applies after 1990.

Clause 303

Registered Pension Plans

ITA
147.2(7)

Subsection 147.2 provides rules that govern the deductibility of contributions to registered pension plans (RPPs). Subsection 147.2(7) applies where, as a result of a default or failure under the terms of a letter of credit, the issuer of the letter of credit pays an amount to a registered pension plan. Subsection 147.2(7) generally treats the payment as if it had been an employer contribution and entitles the employer to a deduction for the amount of the payment.

Subsection 147.2(7) is amended, consequential on the introduction of new subsection 147.2(8), to ensure that the wording of those two subsections is consistent.

This amendment applies after November 5, 2010.

Registered Pension Plans – Purchase of a Business

ITA
147.2(8)

New subsection 147.2(8) allows the deductibility of eligible contributions made to RPPs (under subsections 147.2(1) and (2) and related regulations) to apply appropriately in certain circumstances relating to the purchase of a business. The amendment ensures that contributions made by a participating employer to fund benefits in respect of former employees of a predecessor employer (referred to as the "vendor") are deductible. For example, the amendment is relevant to a situation where the purchase transaction involves the assignment of a defined benefit plan by the vendor to the participating employer (being the purchaser of the vendor's business) and the participating employer takes over the responsibility of funding benefits provided under the plan to the former employees of the vendor. By deeming the former employees of the vendor to be former employees of the participating employer, the amendment allows the participating employer to deduct eligible contributions made to the plan to fund benefits provided to these employees.

Under subsection 147.2(8), a former employee of the vendor is deemed to be a former employee of the participating employer if

This amendment applies to employer contributions made after 1990.

Clause 304

Registered Pension Plans - Transfers

ITA
147.3(6)(b)

Subsection 147.3 provides rules governing the transfer of funds from a registered pension plan (RPP) to another RPP, an RRSP or a RRIF. Subsection 147.3(6) provides rules applicable to the transfer of member contributions under a defined benefit provision of an RPP. These rules contemplate only contributions that were actually made to the plan in question. This can create difficulties where member contributions are transferred from one plan to another as a result of a plan reorganization (for example, the splitting of one plan into two or more plans, the transfer of a group of members from one plan to another or the amalgamation of two or more plans). Paragraph 147.3(6)(b) is amended to ensure that subsection 147.3(6) and related provisions apply appropriately where member contributions are transferred from one plan to another. With the amendment, member contributions that were made to the former plan will be treated as having been made to the replacement plan for the purpose of permissible transfers and refunds.

For more information, see the commentary to the amendments to subsection 8500(9) of the Income Tax Regulations.

This amendment applies to transfers out of registered pension plans that occur after 1999.

Clause 305

Amounts Included in Computing Policyholder's Income

ITA
148(1)(e)

Subsection 148(1) of the Act requires the inclusion in income of certain amounts from the disposition of a life insurance policy, but excludes from this rule annuities described in paragraph 148(1)(e).

Paragraph 148(1)(e) describes

An annuity described in paragraph 148(1)(e) is defined, by paragraph 304(1)(b) of the Income Tax Regulations, to be a "prescribed annuity contract" and, as such, is not subject to the accrual rules set out in section 12.2 of the Act. This treatment reflects the fact that the policyholder acquiring such an annuity does so with tax-deferred funds, and is generally meant to be taxed only when amounts are paid out of the annuity.

Subsection 148(1) is amended to include, in the annuities described in paragraph (e), an annuity that is a "qualifying trust annuity" with respect to a taxpayer (as defined in new subsection 60.011(2)), the payment for which was deductible by the taxpayer under paragraph 60(l). This reflects the fact that a qualifying trust annuity will typically be held by a trust, rather than by the taxpayer who is entitled to the deduction under paragraph 60(l), and ensures that it is treated, for tax purposes, in the same manner as if it were held by the taxpayer.

This amendment applies after 1988.

Transfer to spouse at death

ITA
148(8.2)

The French version of subsection 148(8.2) of the Act is amended to correct a terminology error. In effect, the term "attribué" is replaced by "distribué" so that it is clear that an interest in a life insurance policy is actually distributed to the spouse or common-law partner of the policyholder and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Clause 306

Eligible Funeral Arrangements

ITA
148.1

Section 148.1 of the Act provides for the tax-free build-up of income earned on contributions made under an eligible funeral arrangement (EFA), which is an arrangement that provides for the pre-funding of expenses with respect to funeral and cemetery services.

Contributions made to an EFA are not deductible, and income earned in an EFA accrues tax-free. Distributions from an EFA as payment for the provision of funeral or cemetery services are not taxable. Other distributions from an EFA are generally treated first as a distribution of earnings, which is taxable, then as a return of contributions, which is not taxable.

Definitions

ITA
148.1(1)

"relevant contribution"

A "relevant contribution" to a particular arrangement is the amount of any contribution that is not made by way of a transfer from another eligible funeral arrangement or the amount of any other contribution made directly to another eligible funeral arrangement that can reasonably be considered to have been transferred into the particular arrangement.

Paragraph (b) of the French version of the definition "relevant contribution" refers to « l'arrangement visé à l'alinéa a) » (the arrangement referred to in paragraph (a)). This is a source of confusion as paragraph (a) refers to two arrangements: the particular arrangement and an eligible federal arrangement. For clarification purposes, the French version of the definition is reformulated in order to introduce the notion of « arrangement donné » (a particular arrangement), making it clear which arrangement is referred to in paragraph (b).

This amendment applies on Royal Assent.

Transfer of Funds

General Discussion

ITA
148.1(3) to (5)

Section 148.1 is amended to provide specific rules relating to transfers from one EFA account to another. In general terms, the changes are as follows:

These changes are described in more detail below.

Income Inclusion on Return of Funds

ITA
148.1(3)

Subsection 148.1(3) of the Act provides for an income inclusion by a taxpayer in the event that there is a distribution of funds from an individual's EFA account to the taxpayer (otherwise than as a payment for the provision of funeral or cemetery services with respect to the individual). The amount of the income inclusion is the lesser of the distributed amount and a second amount. In general terms, this second amount is determined by the formula:

A + B – C

where

A is the balance in the EFA account immediately before the distribution,

B is the total of all payments made from the EFA account before the distribution for the provision of funeral or cemetery services, and

C is the total of all "relevant contributions" in respect of the EFA account that were made before the distribution.

For the purpose of the description of C, an amount is defined in subsection 148.1(1) to be a "relevant contribution" in respect of a particular EFA account if

The effect of subsection 148.1(3) is to include in the income of the taxpayer the lesser of the amount received and an amount which generally represents the income accumulated in the EFA account. If the amount received by the taxpayer is greater than the amount included in the taxpayer's income, the excess generally represents a non-taxable refund of relevant contributions (represented by the variable C in the formula).

The description of C is amended so that its value is reduced, in effect, by any relevant contributions previously transferred from the EFA account to another EFA account. This ensures that the amount of the transferred relevant contribution (which, by virtue of subsection 148.1(3), can be distributed from the recipient EFA account tax-free) cannot also be used to support a subsequent tax-free withdrawal from the transferor EFA account.

The description of C is amended to provide that its value is determined by the formula

D – E

For this purpose, the value of D is the amount determined under the existing description of C. The value of E is the total of all amounts each of which is

minus

This amendment applies to transfers made after December 20, 2002.

Deemed Distribution on Transfer

ITA
148.1(4)

New subsection 148.1(4) of the Act contains rules that apply when an amount is transferred from one EFA account to another EFA account of the same or another person.

Paragraph 148.1(4)(a) deems the transfer to be a distribution from the transferor EFA account. If the individual from whose account the amount is transferred is alive at the time of the transfer, that individual is deemed to be the recipient of the distribution. Otherwise, the recipient is deemed to be the individual to whose EFA account the amount is transferred. This deeming provision ensures that subsection 148.1(3) applies to the transfer. Consequently, the transferred amount will be included in computing the income of the deemed recipient, except to the extent that the transferred amount exceeds the income accumulated in the transferor EFA account.

Paragraph 148.1(4)(b) of the Act deems the amount transferred to be a contribution made (otherwise than by way of transfer) under the recipient EFA account. This ensures that the income portion of the transferred amount (which is included in income, under subsection 148.1(3), as a distribution from the transferor account) is considered to be a "relevant contribution" in respect of the recipient EFA account (which it would not otherwise be, because of the definition "relevant contribution" in subsection 148.1(1)). This allows it to subsequently be withdrawn from the recipient EFA account on a tax-free basis.

New subsection 148.1(4) applies to transfers made after December 20, 2002.

Non-application of Subsection (4)

ITA
148.1(5)

New subsection 148.1(5) of the Act provides that new subsection 148.1(4) does not apply when the entire balance of an individual's EFA account is transferred to another EFA account of the same individual and the transferor EFA account is terminated immediately after the transfer. Consequently, there will be no deemed distribution resulting from such a transfer.

New subsection 148.1(5) applies to transfers made after December 20, 2002.

The following examples illustrate the application of the amendments to subsection 148.1.

Example 1

Paul sets up an EFA account for the pre-funding of his funeral expenses. He contributes $10,000 to his account, and earns $7,000 of interest in the account. Paul transfers $3,000 to an EFA account which he establishes for his daughter, Gaby.

The transferred amount is deemed to be a distribution to Paul under new paragraph 148.1(4)(a). Consequently, Paul includes in his income, under subsection 148.1(3), an amount of $3,000, which is the lesser of

  • $3,000, which is the amount distributed, and
  • $7,000, which is the amount determined by the formula under subsection 148.1(3):

A + B – C (where C = D – E)
= $17,000 + $0 – ($10,000 - $0)

The transfer is treated, in effect, as a distribution of a portion of the income accumulated in the plan.

Under new paragraph 148.1(4)(b), the transferred amount is also deemed to be a contribution made, other than by way of transfer, to Gaby's EFA account. Thus, the $3,000 is considered to be a relevant contribution in respect of Gaby's EFA account, and can subsequently be withdrawn tax-free.

 

Example 2

The facts are the same as in Example 1, except that Paul transfers $13,000 to Gaby's EFA.

The transferred amount is deemed to be a distribution to Paul under new paragraph 148.1(4)(a). Consequently, Paul includes in his income, under subsection 148.1(3), an amount of $7,000, which is the lesser of

  • $13,000, which is the amount distributed, and
  • $7,000, which is the amount determined by the formula under subsection 148.1(3):

A + B – C ( where C = D – E)
= $17,000 + $0 – ($10,000 – $0)

The transfer is treated, in effect, as a distribution of all of the income accumulated in the plan ($7,000), which is taxable, plus a return of a portion of the relevant contributions in respect of the EFA ($6,000), which is not taxable.

Under new paragraph 148.1(4)(b), the transferred amount is also deemed to be a contribution made, other than by way of transfer, to Gaby's EFA account. This has no particular significance with respect to the portion of the transfer that represents relevant contributions in respect of Paul's EFA account, since this amount would be considered to be a relevant contribution to Gaby's EFA account under the existing rules. However, it does have significance with respect to the portion of the transfer that represents income in Paul's EFA account, in that it allows that portion to become a relevant contribution in respect of Gaby's EFA account which can then be withdrawn from Gaby's account tax-free.

 

Example 3

The facts are the same as in Example 2. After the transfer of $13,000, the balance in Paul's EFA account is $4,000, all of which represents relevant contributions in respect of the account. Over the next few years, the account earns an additional $2,500 of interest. Paul then withdraws the entire balance from the account.

The withdrawal is a distribution under subsection 148.1(3). Consequently, Paul includes $2,500 in his income, which is the lesser of:

  • $6,500, which is the amount of the withdrawal, and
  • $2,500, which is the amount determined by the formula under subsection 148.1(3):

A + B – C (where C = D – E)
= $6,500 + 0 - ($10,000 - $6,000)

The value of E ($6,000) is the excess of the amount that was previously transferred and to which subsection 148.1(4) applied ($13,000) over the portion of that amount that was included in income under subsection 148.1(3) ($7,000).

Clause 307

Exemptions

ITA
149

Section 149 of the Act provides that no tax is payable under Part I on certain persons' taxable income for a period in a taxation year during which the person is a person listed in that section.

Exemptions – Certain Subsidiaries

ITA
149(1)(d.5)

Paragraph 149(1)(d.5) of the Act exempts from tax, subject to an income test, the taxable income of any corporation, commission or association at least 90% of the capital of which is owned by one or more municipalities in Canada.

In accordance with the Tax Court of Canada decision in Otineka Development Corporation Limited and 72902 Manitoba Limited v. The Queen, 94 D.T.C. 1234, [1994] 1 C.T.C. 2424, an entity could be considered a municipality for the purpose of this paragraph on the basis of the functions it exercises. However, the decision in Tawich Development Corporation v. Deputy Minister of Revenue of Quebec, [1997] 2 C.N.L.R. 187 (Que. Civil Chamber), aff'd 2001 D.T.C. 5144 (Que. C.A.), a decision under the Taxation Act (Quebec), held that an entity could not attain the status of a municipality by exercising municipal functions but rather only by statute, letters patent or order. From a tax policy perspective, it is desired that the entities previously entitled to the exemption on the basis of the Otineka decision continue to have access to the exemption. This amendment resolves the uncertainty resulting from the two conflicting cases. The exemption in paragraph 149(1)(d.5) is therefore extended to include any corporation, commission or association at least 90% of the capital of which was owned by one or more entities each of which is a municipal or public body performing a function of government in Canada, which is consistent with the bodies described in paragraph 149(1)(c) of the Act.

This amendment applies to taxation years that begin after May 8, 2000.

ITA
149(1)(d.6)

Paragraph 149(1)(d.6) of the Act exempts from tax, subject to an income test, a wholly-owned subsidiary of a corporation, commission or association referred to in paragraph 149(1)(d.5) of the Act. As a consequence of the amendment to paragraph 149(1)(d.5), the geographical boundaries of the entities referred to in subparagraphs (i) and (ii) of paragraph 149(1)(d.6) are expanded to include references to all of the entities in the amended 149(1)(d.5).

This amendment applies to taxation years that begin after May 8, 2000.

ITA
149(1)(d.6)

Paragraphs 149(1)(c) to (d.6) of the Act exempt from tax under Part I of the Act the taxable income of any corporation, commission or association the shares or the capital of which are owned 100% (or in some cases 90%) by the federal or provincial Crown, by municipalities and public bodies performing a function of government in Canada, or by Crown corporations, municipal corporations or certain other corporations jointly or indirectly held by the Crown or municipalities in Canada.

Currently, a corporation that is jointly held by a municipality directly and a municipal corporation (i.e., by a municipality indirectly through a municipal holding corporation) with neither shareholder holding an interest of at least 90% is not captured by the exemptions from Part I tax under paragraphs 149(1)(c) to (d.6).

Paragraph 149(1)(d.6) is amended such that a particular corporation will be exempt from tax under Part I of the Act if all of the shares (except directors' qualifying shares) or of the capital of the particular corporation are owned by one or more entities each of which is a corporation, commission or association to which paragraph (d.5) applies, a corporation to which paragraph (d.6) applies, a municipality in Canada, or a municipal or public body performing a function of government in Canada (collectively referred to as "qualifying owners") provided the remaining existing conditions of that paragraph are satisfied. The particular corporation will qualify for exempt status under that paragraph only if no more than 10% of its income is from activities carried on outside the geographic boundaries of its qualifying owners.

This amendment applies to taxation years that end after April 30, 2004.

Pension Investment Corporations

ITA
149(1)(o.2)(iii)(B)

Subsection 248(26) identifies circumstances in which an obligation of a person (referred to as the "debtor") will be regarded as having been issued as a debt obligation of the debtor. This provision applies where a debtor becomes liable to repay borrowed money, or becomes liable to pay an amount (other than interest) as consideration for any property acquired by the debtor or services rendered to the debtor or an amount that is deductible in computing the debtor's income. Although introduced principally for the purposes of the debt forgiveness rules in section 80 and for certain other purposes, this rule has general application for the purposes of the Act.

Under clause 149(1)(o.2)(iii)(B), a tax-exempt pension investment corporation cannot issue debt obligations. The amendment to clause 149(1)(o.2)(iii)(B) ensures that a pension investment corporation does not lose its tax-exempt status solely by the operation of subsection 248(26).

This amendment applies to taxation years that end after February 21, 1994.

Election for Corporation to Remain Taxable

ITA
149(1.11)

Subsection 149(1.11) of the Act allows a person that would otherwise become tax exempt because the conditions in any of paragraphs 149(1)(d.2) to (d.4) have been satisfied, to remain taxable by filing a written election to that effect. This subsection was added when the addition of paragraphs 149(1)(d.2) to (d.4) would have caused some previously taxable persons to become tax exempt. The election to remain taxable is required to have been made before 2002 and is effective only so long as, among certain other conditions, there is no change in the direct or indirect control of the electing person.

In the context of amalgamations, the Act generally treats an amalgamated corporation as a new corporation for income tax purposes. As such, if a particular corporation amalgamates with a subsidiary wholly-owned corporation pursuant to section 87, the effect of an election made by the particular corporation under subsection 149(1.11) would not be carried over to the new amalgamated corporation.

New subsection 149(1.12) is added to provide that if there is an amalgamation under subsection 87(1) between a parent corporation and one or more subsidiary wholly-owned corporations, and immediately before the amalgamation the parent is a person to which subsection 149(1) does not apply because of an election under subsection 149(1.11), the new corporation is deemed for the purposes of subsection 149(1.11) to be the same corporation as, and a continuation of, the parent corporation.

For this purpose, the term "subsidiary wholly-owned corporation" is to be read as it is defined under subsection 248(1).

This amendment applies to amalgamations that occur after October 4, 2004.

Income Test

ITA
149(1.2)

Subsection 149(1.2) of the Act excludes, for the purposes of paragraphs 149(1)(d.5) and (d.6) of the Act, certain income from the determination of where an entity to which either of those paragraphs applies derives its income. As a consequence of the amendment to paragraph 149(1)(d.5), a written agreement in subsection 149(1.2) is expanded to include reference to a municipal or public body.

In addition, subparagraph 149(1.2)(a)(vi) is added to clarify that the geographical boundary of a municipal or public body performing a function of government in Canada is defined to be the area described in new subsection (11).

This amendment applies to taxation years that begin after May 8, 2000.

Votes or de Facto Control

ITA
149(1.3)

Subsection 149(1.3) of the Act provides that, for the purposes of applying paragraph 149(1)(d.5) and subsection 149(1.2) of the Act to a corporation, 90% of the capital of the corporation is considered to be owned by one or more municipalities only if the municipalities are entitled to at least 90% of the votes associated with the shares of the corporation.

As a consequence of the amendment to paragraph 149(1)(d.5), subsection 149(1.3) is amended applicable to taxation years that begin after May 8, 2000, to include reference to municipal or public bodies performing a function of government in Canada.

In addition, subsection 149(1.3) is replaced, applicable to taxation years that begin after December 20, 2002, to provide that paragraphs 149(1)(d) to (d.6) do not apply to exempt a person's taxable income for a period in a taxation year in two cases.

First, under new paragraph 149(1.3)(a), a corporation is not exempt from tax on its taxable income for a period in a taxation year if at any time during the period the corporation has issued shares that are owned by one or more persons (other than certain tax-exempts) that, in total, give them more than 10% of the votes that could be cast at a meeting of shareholders. For this purpose, it is necessary to determine whether more than 10% of the votes could be cast at a meeting of the shareholders by a person or persons other than:

Second, under new paragraph 149(1.3)(b), a person is not exempt because of any of paragraphs 149(1)(d) to (d.6) from tax on taxable income for a period in a taxation year if at any time in the period the person is, or would be if the person were a corporation, controlled, directly or indirectly in any manner whatever, by a person (or by a group of persons that includes a person) other than:

For further details about the expression "controlled, directly or indirectly in any manner whatever", reference should be made to subsections 256(5.1) and (6) of the Act. In general, the expression refers to a controller, who has any direct or indirect influence that, if exercised, would result in control in fact of the person.

Exempt Corporations

ITA
149(10)(c)

Subsection 149(10) of the Act applies where, at a particular time, a corporation becomes or ceases to be exempt from tax under Part I on its taxable income (otherwise than by reason of the exemption for certain insurers in paragraph 149(1)(t)). A new taxation year is considered to start at the particular time and the corporation's properties are deemed to have been disposed of at fair market value and reacquired at the particular time for the same amount.

Paragraph 149(10)(c) provides that the corporation is, for specified purposes in the Act, treated as a new corporation. One of the specified purposes is with regard to the investment tax credit regime set out in subsections 127(5) to (26). Paragraph 149(10)(c) is amended to also refer to subsections 127(27) to (36), consequential to the earlier enactment of those subsections.

These amendments apply to corporations that, after 2006, become or cease to be exempt from tax on their taxable income under Part I of the Act.

Geographical Boundaries - Body Performing Government Functions

ITA
149(11)

Subsection 149(11) of the Act is added to define, for the purposes of section 149, the geographical boundaries of a municipal or public body performing a function of government in Canada. Those boundaries are defined as encompassing the area in respect of which an Act of Parliament or an agreement given effect by an Act of Parliament recognizes or grants to the body a power to impose taxes; or if there has been no such recognition or grant, the area within which the body has been authorized by the laws of Canada or of a province to exercise that function.

For example, if a particular self-governing First Nation meets the definition of “a public body performing a function of government in Canada”, it is intended that the relevant geographic boundary would delineate the area where the self-government agreement, or the statute enacting self-government powers, provides the First Nation authority to impose direct taxes. As a second example, if a particular Indian Band meets the definition of “a public body performing a function of government in Canada”, it is intended that the geographic boundary of the Indian Band be the band’s reserves as defined in the Indian Act. Similarly, if a particular school board meets the definition of “a municipal or public body performing a function of government in Canada” it is intended that the geographic boundary of the school board be the area of jurisdiction of the board as defined by provincial legislation or regulation.

This amendment applies to taxation years that begin after May 8, 2000.

Clause 308

Charities

ITA
149.1

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 contains definitions that are relevant for the purposes of section 149.1.

"charitable organization"

The definition "charitable organization" provides that more than 50% of the directors, trustees, officers or similar officials of a charitable organization must deal with each other and with each of the other directors, trustees, officers or similar officials at arm's length.

For a charity that has applied for registration after February 15, 1984 and which has been designated as a private or public foundation, the definition "charitable organization" also requires that not more than 50% of the charity's capital be contributed by a person or group of persons not dealing with each other at arm's length. This definition is amended to replace the "contribution" test with a "control" test. As a result, a charity will not be disqualified from being treated as a charitable organization solely because a person, or a group of persons not dealing with each other at arm's length, has contributed more than 50% of the charity's capital. However, such a person or group is not permitted to control the charity in any way, nor may the person or the members of the group represent more than 50% of the directors, trustees, officers and similar officials of the charity.

This amendment generally applies after 1999.

"disbursement quota"

The "disbursement quota" for a taxation year of a charitable foundation or organization is defined in subsection 149.1(1) of the Act for the purpose of determining the amount that the charity is required to spend on charitable activities or gifts to other charities. The implementing legislation of Budget 2010 reformed the disbursement quota such that it no longer refers to the eligible amount of a gift for which a receipt has been issued, applicable generally to taxation years that on or after March 4, 2010.

However, consequential to the addition of new subsection 248(31) of the Act, the definition "disbursement quota" is to be read, in respect of gifts made after December 20, 2002 and in a taxation year that begins before March 23, 2004, so as to provide that the amount of a gift for which a tax receipt is issued refers to the "eligible amount" of the gift. For additional information, see the commentary to new subsection 248(31).

"enduring property"

The definition "enduring property" was repealed in legislation implementing Budget 2010. However, the application of the English version of the definition for taxation years that begin after March 22, 2004 and before March 4, 2010, is amended to correct a cross-reference in its paragraph (d).

"public foundation"

The definition "public foundation" provides that more than 50% of the directors, trustees, officers or similar officials of a public foundation must deal with each other and with each of the other directors, trustees, officers or similar officials at arm's length.

This definition requires that not more than 50% (75% in some cases) of the foundation's capital can be contributed by a person or group of persons not dealing with each together at arm's length. The "contribution" test in the definition is replaced by a "control" test. As a result, a foundation will not be disqualified from being treated as a public foundation solely because a person, or a group of persons not dealing with each other at arm's length, has contributed more than 50% of the foundation's capital. However, such a person or group is not permitted to control the foundation in any way, nor may the person or the members of the group represent more than 50% of the directors, trustees, officers and similar officials of the foundation.

This amendment generally applies after 1999.

Revocation of Registration

ITA
149.1(2), (3) and (4)

Subsections 149.1(2), (3) and (4) of the Act set out the reasons for which the Minister of National Revenue may revoke the registration of a charitable organization, a public foundation and a private foundation, respectively. These subsections are amended to permit the revocation of the registration of such entities if they make gifts (other than gifts made in the course of their charitable activities) to persons or entities that are not qualified donees. A "qualified donee" is essentially a person or entity to which a tax deductible or tax creditable donation may be made.

These amendments apply to gifts made after December 20, 2002.

Accumulation of Property

ITA
149.1(9)

Subsection 149.1(9) was repealed in legislation implementing Budget 2010. However, the application of subsection 149.1(9) in respect of gifts made after December 20, 2002 and in taxation years that end before March 4, 2010, is amended consequential to the addition of new subsection 248(31) of the Act to provide that the amount of a gift for which a tax receipt is issued refers to the "eligible amount" of a gift. For additional information, see the commentary to new subsection 248(31).

Clause 309

Assessment

ITA
152

Section 152 of the Act contains rules relating to assessments and reassessments of tax, interest and penalties payable by a taxpayer and to determinations and redeterminations of amounts of tax deemed to have been paid by a taxpayer.

Determination of UI Premium Tax Credit

ITA
152(3.4)

This subsection enables a taxpayer to request the Minister of National Revenue to determine the amount deemed by subsection 126.1(6) or (7) of the Act to be an overpayment on account of the taxpayer's liability under Part I of the Act.

This subsection is repealed consequential to the repeal of section 126.1. For additional information, see the commentary to section 126.1.

This change applies in respect of forms filed after March 20, 2003.

Notice of Determination

ITA
152(3.5)

Subsection 152(3.5) of the Act requires the Minister of National Revenue to respond to a request for a determination of the UI premium tax credit. This subsection is repealed consequential to the repeal of section 126.1. For additional information, see the commentary to section 126.1.

This change applies in respect of forms filed after March 20, 2003.

Where Waiver Revoked

ITA
152(4.1)

Where a taxpayer has filed a waiver under subparagraph 152(4)(a)(ii) of the Act, subsection 152(4.1) of the Act limits the period during which the Minister may reassess the taxpayer to six months after the taxpayer has notified the Minister of the revocation of the waiver. Subsection 152(4.1) is amended to make reference to a waiver referred to in paragraph 152(4)(c).

Consequential Assessment

ITA
152(4.3)

Where it is necessary, as a result of an assessment or an appeal of a taxpayer for a taxation year, to adjust an amount deducted or included in computing a "balance" that is relevant for another taxation year, subsection 152(4.3) of the Act allows the Minister of National Revenue to reassess the other taxation year beyond its normal reassessment period, as well as to redetermine an amount deemed to have been paid or to have been an overpayment on account of tax in respect of that other year. Subsection 152(4.3) is amended to also allow, under the same conditions, the modification of a refund or other amount payable by a taxpayer for the other year.

This amendment applies to reassessments, redeterminations and modifications in respect of taxation years that relate to changes in balances for other taxation years as a result of an assessment made, or a decision on appeal rendered, after November 5, 2010.

Reassessment Where Certain Deductions Claimed

ITA
152(6)

Paragraph 152(6)(e) of the Act requires the Minister of National Revenue to reassess prior taxation years in order to give effect to a taxpayer's carry-back of unused Part VI tax credits under section 125.2.

This paragraph is repealed consequential on the repeal of section 125.2. For further information, see the commentary on section 125.2.

This amendment applies to taxation years that begin after October 31, 2011.

Reassessment for Section 119 Credit

ITA
152(6.3)

Section 119 of the Act provides a tax credit in certain circumstances where the "stop- loss" rule in subsection 40(3.7) applies to an individual who ceased to be resident in Canada in a prior year.

Currently, paragraph 152(6)(c.1) provides that assessments to take into account section 119 credits are permitted only where they are made within 3 years after the normal reassessment period, as subsection 152(6) of the Act is to be read together with paragraph 152(4)(b).

New subsection 152(6.3) of the Act is being introduced to ensure that credits under section 119 are available to emigrant taxpayers without regard to the normal or extended reassessment periods. Specifically, new subsection 152(6.3) requires that the Minister of National Revenue reassess a taxpayer's tax for the departure year (and any relevant subsequent year) in order to take into account a deduction claimed under section 119 in respect of a disposition in a post-departure year if

Existing paragraph 152(6)(c.1) is being repealed as it is no longer necessary.

These amendments generally apply to taxation years that end after October 1, 1996. A prescribed form filed under new subsection 152(6.3) amending a departure year return will be considered to have been filed in a timely manner if it is filed on or before the filing-due date for the year that includes the day of Royal Assent.

Clause 310

Withholding

ITA
153(1)

Section 153 of the Act imposes tax withholding and remittance obligations on payments described in subsection 153(1). Subsection 153(1) requires the withholding of tax from certain payments described in paragraphs 153(1)(a) to (t). The person making the payment is required to remit the amount withheld to the Receiver General on behalf of the payee.

ITA
153(1)(d.1)

Paragraph 153(1)(d.1) of the Act is amended consequential to the introduction of the Quebec Parental Insurance Plan introduced on January 1, 2006. This amendment applies to the 2006 and subsequent taxation years.

ITA
153(1)(s)

Paragraph 153(1)(s) of the Act is amended to add a reference to amounts described in new paragraph 56(1)(z.2).

New paragraph 56(1)(z.2) effectively requires a taxpayer to include in income an amount that is received from a current or former employee life and health trust to the extent that the amount received is not a payment of a "designated employee benefit". "Designated employee benefit" is defined in new subsection 144.1(1). For more information, see the commentary on those provisions.

This amendment applies after 2009.

Clause 311

Instalments

ITA
157

Section 157 of the Act sets out the required payment dates for corporate income tax instalments and for any balance of corporate income tax payable.

Small Canadian-controlled Private Corporation

ITA
157(1.2)

Subsection 157(1.2) sets out the conditions that a corporation must meet in order to be a small Canadian-controlled Private Corporation and then to be eligible to pay its annual tax liability by quarterly instalments, instead of monthly.

Paragraph 157(1.2)(b) requires that the corporation's taxable capital employed in Canada, determined under subsection 157(1.4) which includes the taxable capital employed in Canada of associated corporations, cannot be more than $10 million, either in the preceding taxation year or in the current taxation year.

Taxable Capital – Small Canadian-controlled Private Corporation

ITA
157(1.4)

Subsection 157(1.4) provides that the reference to the amount in paragraph 157(1.2)(b) is, if a corporation is associated with other corporations, a reference to the sum of taxable capital employed in Canada by each corporation in the group of associated corporations. For this purpose, the taxable capital employed in Canada by the corporation has the meaning assigned by section 181.2 of the Act and includes the taxable capital employed in Canada in the year of any associated corporation.

Paragraphs (a) and (b) of subsection 157(1.4) are amended to add a reference to section 181.3.  If a corporation is a financial institution, its taxable capital employed in Canada is described in subsection 181.3.  This amendment ensures the correct measurement, for the purposes of determining the eligibility for payment of quarterly instalments, of the taxable capital employed in Canada by a Canadian-controlled private corporation that is a financial institution. 

These amendments apply to taxation years that begin after 2007.

Instalments

ITA
157(3)

Section 157 of the Act requires a corporation to pay monthly instalments of its total tax payable under Parts I, I.3, VI, VI.1 and XIII.1 of the Act. Subsection 157(3) allows corporations to reduce each monthly instalment by 1/12 of the amount of certain tax refunds, including the "dividend refund" under section 129 of the Act. For most mutual fund corporations, the dividend refund amount is computed according to rules set out in subsection 131(5) of the Act. Paragraph 157(3)(c), which allows a mutual fund corporation to apply its dividend refund to reduce its instalments, therefore refers to subsection 131(5). However, prescribed labour-sponsored venture capital corporations (LSVCCs), which are by definition mutual fund corporations, do not use subsection 131(5) to compute their dividend refunds – instead, they use special rules in subsection 131(11) of the Act. To ensure that subsection 157(3) applies appropriately to LSVCCs, this amendment adds to paragraph 157(3)(c) a reference to subsection 131(11). The amendment applies for the 1999 and subsequent taxation years.

Clause 312

Person Acting for Another – Personal Liability

ITA
159(3)

Subsection 159(1) of the Act provides, in part, that a legal representative acting for another person is jointly and severally liable for each amount payable by the other person under the Act, to the extent that the representative has possession and control of the other person's assets. If the representative distributes assets of the other person before obtaining a certificate from the Minister of National Revenue that the other person's tax debts have been paid, the Minister may, under subsection 159(3) of the Act, assess the representative for the amount of the debt.

Subsection 159(3) is amended to clarify that a legal representative so assessed after December 20, 2002 is subject to interest on the assessment without any limit on the amount of interest for which the representative may be liable.

Clause 313

Tax Liability – Non-arm's Length Transfers of Property

ITA
160

Section 160 of the Act contains rules regarding the joint and several liability of a taxpayer for the income tax liability of another person (the "tax debtor") who, when not dealing at arm's length with the taxpayer, transferred property to the taxpayer for consideration less than its fair market value.

ITA
160(1)(e)

The amount that a taxpayer is liable to pay in respect of the transfer of property from a non-arm's length tax debtor is determined under subsection 160(1) of the Act. The Minister may assess the taxpayer for such a liability under subsection 160(2) of the Act. Paragraph 160(1)(e) is amended, in respect of assessments made after December 20, 2002, to clarify that the assessment of the taxpayer is subject to interest, without any limit on the amount of interest for which the taxpayer may be liable.

Joint Liability Where subsection 69(11) Applies

ITA
160(1.1)

Subsection 160(1.1) of the Act provides that where subsection 69(11) of the Act applies to deem a disposition of property to have occurred at fair market value, both the person disposing of the property and the person acquiring the property are jointly and severally liable for the payment of each other's liabilities arising under the Act as a result of that disposition. The Minister of National Revenue may assess the person for such a liability under subsection 160(2) of the Act. Subsection 160(1.1) is amended, in respect of assessments made after December 20, 2002, to clarify that the assessment of the taxpayer is subject to interest.

Joint Liability – Tax on Split Income

ITA
160(1.2)

Subsection 160(1.2) of the Act, which applies in respect of tax owing on split income, is amended in two respects.

First, paragraphs 160(1.2)(a), (b) and (d) are amended to replace the phrase "goods or services" with the phrase "property or services" as a consequence of the same changes made to paragraphs (b) and (c) of the definition "split income" in subsection 120.4(1). These amendments apply after December 20, 2002.

Second, a "postamble" is added to subsection 160(1.2) to clarify that, in respect of assessments made under subsection 160(2) after December 20, 2002, the assessment is subject to interest.

Assessment

ITA
160(2)

Subsection 160(2) of the Act allows the Minister of National Revenue to assess a taxpayer at any time in respect of liabilities arising under section 160, with such assessment having the same effect as if it had been made under section 152 of the Act. Subsection 160(2) is amended, in respect of assessments made after December 20, 2002, to clarify that the assessment is subject to interest.

Clause 314

Where Excess Refunded

ITA
160.1(3)

Subsection 160.1(3) of the Act allows the Minister of National Revenue to assess a taxpayer in respect of excess refunds and overpayments for which the taxpayer is jointly and severally liable under subsection 160.1(1), (1.1), (2.1) or (2.2) of the Act. Subsection 160.1(3) is amended, in respect of such assessments made after December 20, 2002, to clarify that such an assessment is subject to interest, except that no interest is payable to the extent that the excess refund is attributable to the overpayment of a GST tax credit or a child tax benefit.

Clause 315

Joint and Several Liability – Amounts Received out of or under RRSP

ITA
160.2(1), (2) and (3)

Subsection 160.2(1) of the Act provides that a taxpayer who receives benefits out of another person's registered retirement savings plan is jointly and severally liable for the portion of that other person's tax that is attributable to those benefits. Subsection 160.2(2) of the Act provides a similar result with respect to benefits received out of another person's registered retirement income fund. The Minister may assess the taxpayer for such a liability under subsection 160.2(3) of the Act.

Subsections 160.2(1), (2) and (3) are amended, in respect of assessments made after December 20, 2002, to clarify that the assessment is subject to interest, without any limit on the amount of interest for which the taxpayer may be liable.

Joint and Several Liability in Respect of a Qualifying Trust Annuity

ITA
160.2(2.1)

New subsection 160.2(2.1) applies to annuities that are "qualifying trust annuities" with respect to a taxpayer (as defined in new subsection 60.011(2)).

A distinguishing feature of a qualifying trust annuity with respect to a taxpayer is that the annuitant thereunder is a trust under which the taxpayer is a beneficiary. Such an annuity will typically be acquired and held either by the trust that is the annuitant under the annuity, or by the estate of a deceased spouse, common-law partner, parent or grandparent of the taxpayer which acquired the annuity with proceeds received from a registered retirement savings plan or registered retirement income fund of the deceased individual or from a registered pension plan in which the deceased individual participated.

Where the cost of a qualifying trust annuity with respect to a taxpayer is deductible by the taxpayer under paragraph 60(l) and the taxpayer has not died before 2006, new section 75.2 deems amounts payable out of or under the annuity after 2005 and before the taxpayer's death to have been received by the taxpayer. Section 75.2 also deems the taxpayer to have received, immediately before death, an amount out of or under the annuity equal to the fair market value of the annuity. By virtue of paragraph 56(1)(d.2), the taxpayer is required to include these amounts in computing income under Part I.

New subsection 160.2(2.1) provides that, where a taxpayer is deemed by section 75.2 to have received an amount from a qualifying trust annuity, the annuitant and the policyholder (which may be one and the same) are jointly and severally, or solidarily, liable for the portion of the taxpayer's tax that is attributable to the amounts that the taxpayer is deemed to have received from the annuity. The Minister of National Revenue may reassess the annuitant and the policyholder for such a liability under subsection 160.2(3) of the Act.

Subsection 160.2(2.1) applies to assessments made after 2005.

No Limitation on Liability

ITA
160.2(2.2)

New subsection 160.2(2.2) of the Act provides that the provisions of new subsection 160.2(2.1), which make the annuitant and policyholder of a "qualifying trust annuity" with respect to a taxpayer (as defined in new subsection 60.011(2)) jointly and severally, or solidarily, liable for a portion of the taxpayer's tax, do not limit the liability of the taxpayer under any provision of the Act. It also provides that there is no limitation on the liability of the annuitant or policyholder for the interest for which the annuitant or policyholder is liable under the Act on an assessment in respect of an amount that the annuitant or policyholder is liable to pay because of subsection 160.2(2.1).

Subsection 160.2(2.2) applies to assessments made after 2005.

Rules Applicable – Qualifying Trust Annuity

ITA
160.2(5)

New subsection 160.2(5) of the Act provides that a payment by the annuitant or policyholder of a "qualifying trust annuity" with respect to a taxpayer (as defined in new subsection 60.011(2)), on account of the annuitant's or policyholder's joint liability for a portion of the taxpayer's tax, directly reduces the joint liability to the extent of the payment. However, a payment by the taxpayer on account of the taxpayer's tax liability reduces the joint liability of the annuitant and the policyholder only to the extent that the payment reduces the total liability of the taxpayer to an amount that is less than the amount in respect of which the annuitant and policyholder were made jointly liable under subsection 160.2(2.1).

Subsection 160.2(5) applies to assessments made after 2005.

Clause 316

Liability – Amounts Received out of or under RCA Trust

ITA
160.3(1) and (2)

Subsection 160.3(1) of the Act provides that a person who receives benefits from a retirement compensation arrangement that relate to another taxpayer's employment is jointly and severally liable for the portion of that other taxpayer's tax that is attributable to such benefits. The Minister of National Revenue may assess the person for such a liability under subsection 160.3(2) of the Act. Subsections 160.3(1) and (2) are amended, in respect of assessments made after December 20, 2002, to clarify that such an assessment is subject to interest, without any limit on the amount of interest for which the person may be liable.

Clause 317

Liability – Transfers by Insolvent Corporation

ITA
160.4(1) to (3)

Subsection 160.4(1) of the Act applies where a transfer of property has been made by a corporation and, as a consequence of the transfer (or the transfer combined with other transactions), the corporation is precluded under subsection 61.3(3) of the Act from deducting an amount under section 61.3. Where this is the case, the transferee is jointly and severally liable with the transferor under subsection 160.4(1) for the transferor's tax under Part I of the Act for the first taxation year of the transferor that ends after the time of the transfer and for preceding taxation years. The liability of the transferee applies up to the amount, if any, by which the fair market value of the property at the time of the transfer exceeds the fair market value of the consideration given for the property transferred.

In addition, subsection 160.4(2) of the Act provides for joint and several liability of subsequent non-arm's length transferees for the corporation's Part I tax if the original transferee makes a further non-arm's length transfer and one of the reasons that the transfer was made was to prevent the enforcement of section 160.4.

Under subsection 160.4(3) of the Act, the Minister of National Revenue may assess a transferee for a liability arising under subsections 160.4(1) or (2).

Subsections 160.4(1), (2) and (3) are amended, in respect of assessments made after December 20, 2002, to clarify that such an assessment is subject to interest, without any limit on the amount of interest for which the transferee may be liable.

Clause 318

Effect of Carryback of Loss, Etc.

ITA
161(7)

Subparagraph 161(7)(a)(vi) of the Act provides that a reduction of tax resulting from the carryback of an unused Part VI tax credit from a subsequent taxation year will not be taken into account in determining interest charges on any unpaid tax (and certain penalties in respect of unpaid instalments) until the day that is 30 days after the latest of several dates.

This subparagraph is repealed consequential on the repeal of section 125.2. For further information, see the commentary on section 125.2.

This amendment applies to taxation years that begin after October 31, 2011.

Interest on Penalties

ITA
161(11)(b.1)

Subsection 161(11) requires the payment of interest on penalties imposed under the Act. Subsection 161(11) is amended to add in paragraph (b.1) a reference to new subsection 237.3(8). New subsection 237.3(8) provides a penalty if a person fails to comply with the reporting requirements in respect of a "reportable transaction" under new section 237.3.

This amendment applies in respect of avoidance transactions that are entered into after 2010 or that are part of a series of transactions that begins before 2011 and ends after 2010.

Clause 319

Penalties

ITA
162

Section 162 of the Act imposes penalties for infractions such as the failure to file a return for a taxation year.

Failure to Provide Identification Number

ITA
162(6)

Subsection 162(6) of the Act provides a penalty for failure by a person or partnership to provide on request their social insurance number or their business number to any person who is required to make an information return in their regard. The French version of this subsection refers to individuals instead of persons, thereby excluding corporations. The provision is therefore amended to replace the word « particulier » by the word « personne ».

This amendment applies after June 18, 1998, the date on which the penalty in subsection 162(6) was extended to corporations in respect of business numbers.

Clause 320

False Statements or Omissions – GSTC Payments

ITA
163(2)(c.1)

Subsection 163(2) of the Act imposes a penalty where a taxpayer knowingly, or in circumstances amounting to gross negligence, participates in or makes a false statement for the purposes of the Act. The penalty is determined with reference to the understatement of tax or the overstatement of amounts deemed to be paid on account of tax. Paragraph 163(2)(c.1) imposes a penalty where the false statement relates to the goods and services tax credit (GSTC).

The GSTC provisions were amended (S.C. 2002, chapter 9, formerly Bill C-49) to make the credit more responsive to changes in family circumstances by providing that the eligibility to the credit and the amount paid in each quarter reflect such changes that occurred before the end of the preceding quarter rather than in the preceding taxation year.

Paragraph 163(2)(c.1) is amended to reflect the new quarterly calculation of the GSTC. This amendment applies to amounts deemed to be paid during months specified for the 2001 and subsequent taxation years.

Partnership Liable to Penalty

ITA
163(2.9)

Subsection 163(2.9) allows a penalty imposed under subsection 163(2.4) to be assessed against a partnership and applies the provisions of the Act relating to assessments, interest, refunds, objections and appeals with respect to the penalty as if the partnership were a corporation. Subsection 163(2.9) is amended to apply to a penalty assessed against a partnership under the proposed reportable transactions rules in new subsection 237.3(8).

This amendment applies in respect of avoidance transactions that are entered into after 2010 or that are part of a series of transactions that begins before 2011 and ends after 2010.

Clause 321

Refunds

ITA
164

Section 164 of the Act contains rules relating to refunds of taxes, including provisions dealing with repayments, application to other debts, and interest.

Refund of Instalment – Hardship

ITA
164(1.51) to (1.53)

New subsections 164(1.51) to (1.53) of the Act, which apply on Royal Assent, allow the Minister of National Revenue to refund excessive instalment amounts paid on account of a taxpayer's tax liability. In order for such a refund to be made, four conditions must be met. Three of these are set out in new subsection 164(1.51). First, the taxpayer must have paid one or more instalments of tax under Part I or, where the taxpayer is a corporation, Part I.3, VI, VI.1 or XIII.1 of the Act. Second, it must be reasonable to conclude that the total amount of the instalments the taxpayer has paid exceeds the total amount of taxes payable by the taxpayer under those Parts for the year. Third, the Minister must be satisfied that the payment of the instalments has caused or will cause the taxpayer undue hardship.

The last condition is implied in new subsection 164(1.52) of the Act. The availability of an instalment refund in a particular case is a matter of the Minister's discretion. The final condition is therefore that the Minister agree to make the refund. Similarly, new subsection 164(1.52) makes it clear that the amount of any instalment refund is to be decided by the Minister: the Minister may refund all or any part of an excessive instalment.

New subsection 164(1.53) of the Act provides that, for the purposes of computing interest and penalties, a taxpayer that receives an instalment refund is treated as not having paid the instalment to that extent.

Refund of UI Premium Tax Credit

ITA
164(1.6)

Subsection 164(1.6) of the Act provides rules concerning refunds of the UI premium tax credit. This subsection is repealed consequential to the repeal of section 126.1. For additional information, see the commentary to section 126.1.

This change applies in respect of forms filed after March 20, 2003.

Interest on Refunds and Repayments

ITA
164(3)

Subsection 164(3) of the Act provides for the payment of interest on tax refunds. Two amendments are made to the subsection. First, the preamble of that subsection is being amended to adapt the wording to the new terminology now used elsewhere the Act. Second, the reference to section 126.1 is deleted consequential on the repeal of that section.

These changes apply in respect of forms filed after March 20, 2003.

Effect of Carryback of Loss, Etc.

ITA
164(5)

Paragraph 164(5)(g) of the Act provides that an overpayment of tax resulting from the carryback of an unused Part VI tax credit from a subsequent taxation year will not be taken into account in determining interest payable on a refund of the overpayment until the day that is 30 days after the latest of several dates.

This paragraph is repealed consequential on the repeal of section 125.2. For further information, see the commentary on section 125.2.

This amendment applies to taxation years that begin after October 31, 2011.

Clause 322

Documents to be Forwarded to the Tax Court of Canada

ITA
170(2)

Section 170 of the Act requires the transmittal of certain documents between the Tax Court of Canada and the Commissioner of Revenue.

Subsection 170(2) of the Act provides generally that, when a notice of appeal to the Tax Court of Canada under the Informal Procedure is received, the Commissioner of Revenue must transmit to the Tax Court of Canada copies of certain documents that are relevant to the appeal.

The requirements under subsection 170(2) are unnecessary since rules for the transmittal of documents to the Tax Court of Canada are provided under the Tax Court of Canada Act. Consequently, subsection 170(2) is repealed.

This repeal comes into force on Royal Assent.

Clause 323

Documents to be Transmitted to the Tax Court of Canada and the Federal Court of Appeal

ITA
176

Section 176 of the Act requires the Minister of National Revenue to transmit certain relevant documents to the Tax Court of Canada and the Federal Court of Appeal.

Subsection 176(1) provides generally that, when a notice of appeal to the Tax Court of Canada under the General Procedure is received, the Minister of National Revenue must cause to be transmitted to the Tax Court of Canada and to the appellant copies of certain documents that are relevant to the appeal.

Subsection 176(2) provides generally that, when a notice of appeal to the Federal Court of Appeal in respect of which section 180 applies is received, the Minister of National Revenue must cause to be transmitted to the Federal Court of Appeal copies of all documents that are relevant to the appeal.

The requirements under subsections 176(1) and (2) are unnecessary since rules for the transmittal of documents to the Tax Court of Canada and the Federal Court of Appeal are provided for under the Tax Court of Canada Act and the Federal Courts Act, respectively. Consequently, section 176 of the Act is repealed.

This repeal comes into force on Royal Assent.

Clause 324

Large Corporations Tax

ITA
Part I.3

Part I.3 of the Act imposes a tax (generally known as the "large corporations tax") on the amount by which a large corporation's taxable capital employed in Canada exceeds a $50 million "capital deduction" (shared among related corporations).

Definitions

ITA
181(1)

"financial institution"

Subsection 181(1) of the Act sets out definitions for the purposes of the Part I.3 tax on large corporations. Among these is the term “financial institution”, which is relevant for a number of purposes. Most importantly, corporations that are financial institutions compute their capital for the purposes of Part I.3 differently from other corporations. The status of a particular corporation is also relevant to corporations that invest in the particular corporation or hold its debt, since whether certain of those investments are counted in the investor corporation’s “investment allowance” – and thus whether they will reduce their own tax under Part I.3 – depends, in part, on whether the particular corporation is a financial institution.

In addition to listing several types of corporations, the definition "financial institution" provides, in its paragraph (g), that the definition applies as well to a prescribed corporation. Currently, such corporations are prescribed under section 8604 of the Regulations. Paragraph (a) of that regulation provides that a corporation of which all or substantially all of the assets of which are shares or indebtedness of a financial institution (as defined in subsection 181(1) of the Act) to which the corporation is related, is itself prescribed to be a financial institution; the remaining paragraphs list particular corporations by name.

Paragraph (g) of the definition is amended to reflect a fundamental change in the technique by which these corporations will be identified as financial institutions. Rather than listing corporations in a regulation, this new approach is to list them in a schedule to the Act. Amended paragraph (g) therefore refers to corporations that are either listed in the schedule, as per new subparagraph (g)(i), or that are described in new subparagraph (g)(ii), currently paragraph (a) of section 8604 of the Regulations.

These changes to paragraph (g) of the definition apply after December 22, 1997.

As a consequence to the changes to paragraph (g) of the definition, section 8604 of the Regulations is to be repealed and a schedule is added at the end of the Act. Subject to a number of deletions due primarily to name changes and amalgamations, the schedule lists those corporations that are currently prescribed under section 8604 immediately before its repeal. The schedule also lists a number of corporations that are not currently prescribed, but meet the requirements for treatment as financial institutions and have asked to be treated as such.

Transitional rules for paragraph (g) of the definition ensure that corporations prescribed before the repeal of Regulation 8604 retain the status that they would have had under paragraph (g) had it not been amended to exclude prescribed corporations.

As described above, a number of corporations currently not prescribed are listed in the schedule, effective as of dates that precede December 20, 2002. Transitional rules ensure that, for any taxation year that begins before December 20, 2002, no corporation that deals at arm's length with any of these corporations will lose an investment allowance as a result the corporation's change in status to a financial institution under paragraph (g) of the definition.

Clause 325

Taxable Capital Employed in Canada

ITA
181.2

Section 181.2 of the Act provides rules for determining the capital, taxable capital, taxable capital employed in Canada and investment allowance of corporations (other than financial institutions) resident in Canada for the purposes of the Part I.3 tax on large corporations, which was fully phased out in 2005. The determination of a corporation's taxable capital employed in Canada is relevant for other provisions in the Act, including the calculation of a corporation's small business deduction and the scientific research and experimental development expenditure limit.

Tiered Partnerships

Subsections 181.2(3) and (5) of the Act are amended to clarify the effect of tiered partnerships (i.e. structures in which one partnership is a member of another partnership).

Subsection 181.2(3) defines the "capital" of a corporation, and in paragraph 181.2(3)(g) includes in a corporation's capital a pro-rata share of the reserves, deferred foreign exchange gains and indebtedness of any partnership of which it is a member. To determine those amounts, the relevant paragraphs of subsection 181.2(3) are applied to the partnership in the same way that they apply to corporations. Paragraph 181.2(3)(g) is amended so that it itself applies on this basis. As a result, the proration of the reserve, deferred gain and debt amounts will carry through any number of tiered partnerships.

Subsection 181.2(4) of the Act provides for the "investment allowance" by which, in broad terms, one corporation's investment in another is excluded from the first corporation's taxable capital. Subsection 181.2(5) determines the carrying value of an interest of a corporation in a partnership for this purpose. Subsection 181.2(5) is amended to ensure that the carrying value of an interest of a corporation in a particular partnership, for the purposes of subsection 181.2(4), includes the carrying value of an interest of the particular partnership in another partnership.

These changes to paragraph 181.2(3)(g) and subsection 181.2(5) apply after December 20, 2002.

Preferred Shares

In general, a corporation's tax payable under Part I.3 of the Act is computed with reference to amounts reflected in the balance sheet of the corporation, as prepared in accordance with generally accepted accounting principles (GAAP).

The Canadian Institute of Chartered Accountants' Handbook (the Handbook), which is the principal authority of GAAP in Canada, requires that a liability of a corporation in respect of a redeemable preferred share be reflected on the corporation's balance sheet. The Handbook provides that this liability may be accounted for in one of two ways. Under the first method, the difference between the stated capital of a share and its redemption value is charged to retained earnings, which in some cases may result in the corporation having negative retained earnings or a deficit. Retained earnings are unaffected under the second method, under which a line account is set up reflecting the redemption liability of the preferred shares.

Current paragraph 181.2(3)(i) of the Act allows for a reduction of a corporation's capital, to the extent of any deficit deducted in computing the corporation's shareholders' equity. To accommodate the alternative presentation of a provision for the redemption of preferred shares, the paragraph is amended to refer explicitly to the amount of such a provision.

This amendment applies to taxation years that begin after 1995.

Capital

ITA
181.2(3)

As discussed above, subsection 181.2(3) of the Act defines the "capital" of a corporation, and in paragraph 181.2(3)(g) includes in a corporation's capital a pro-rata share of the reserves, deferred foreign exchange gains and indebtedness of any partnership of which it is a member. To determine those amounts, the relevant paragraphs of subsection 181.2(3) are applied to the particular partnership in the same way as they apply to corporations. Paragraph 181.2(3)(g) also applies on this basis, such that it applies on an iterative basis to lower-tier partnerships in which the corporation has an interest through its membership in the particular partnership. This results in the proration of the reserves, deferred foreign exchange gains and debt amounts for the lower-tier partnerships. However, the calculation requires a corporation to look first to the fiscal period of the particular partnership of which the corporation is a member that ends in the corporation's taxation year, then to the fiscal period of the first lower-tier partnership that ends in the particular partnership's fiscal period, and so on.

In general, paragraph 181.2(3)(g) is amended to eliminate the iterative nature of this calculation. The amount determined under that paragraph will calculate the corporation's pro-rata share of reserves, deferred foreign exchange gains and indebtedness of any partnership of which it is a member, whether directly or through one or more other partnerships. In this regard, the amount added to a corporation's capital in respect of any partnership is to be calculated based on the amount at the end of the partnership's last fiscal period that ends at or before the end of the corporation's taxation year.

This amendment applies to the 2012 and subsequent taxation years.

Investment Allowance

ITA
181.2(4)

Subsection 181.2(4) of the Act provides for the determination of a corporation's "investment allowance" by which, in broad terms, one corporation's investment in another is excluded from the first corporation's taxable capital. In general, investment in debt of a partnership is not included in a corporation's taxable capital if all the members of the partnership (an "eligible partnership") are "eligible corporations" (corporations, other than the investor corporation, that are neither financial institutions nor corporations exempt from Part I.3 tax otherwise than because they were non-residents and did not carry on a business through a permanent establishment in Canada). Paragraph 181.2(4)(d.1) of the Act is amended to allow for the effect of tiered partnerships: structures in which all the members of the investee partnership are eligible partnerships and eligible corporations.

This amendment applies to the 2004 and subsequent taxation years.

Clause 326

Taxable Capital Employed in Canada of Financial Institution

ITA
181.3

Section 181.3 of the Act provides rules for determining the capital, taxable capital, taxable capital employed in Canada and investment allowance of a financial institution (as defined in subsection 181(1)) for the purposes of the Part I.3 tax on large corporations.

Section 181.3 is amended in two respects. First, changes are made to several paragraphs of subsection 181.3(3) to accommodate a change to the accounting presentation of redeemable preferred shares. Second, a new subparagraph and a new clause are added, respectively, to paragraph 181.3(3)(c) and subparagraph 181.3(3)(d)(iv) to reflect the manner in which property and casualty insurers are required to account for claims reserves.

Preferred Shares

The accounting procedures described in the notes to amended section 181.2 of the Act are relevant to financial institutions as well as to other corporations, and readers may consult those notes for additional background. As in that section, the amendments introduced to section 181.3 include, in the computation of a deficit deducted in computing shareholders' equity, the amount of any provision for the redemption of preferred shares. This inclusion is added to three specific provisions: subparagraph 181.3(3)(a)(v) in respect of financial institutions other than insurers and authorized foreign banks; subparagraph 181.3(3)(b)(iv) in respect of Canadian-resident life insurance corporations; and subparagraph 181.3(3)(c)(v) in respect of other Canadian-resident insurance companies.

These amendments apply to taxation years that begin after 1995.

Claims Reserves

In general, a corporation is required to compute amounts relevant in determining its tax payable under Part I.3 of the Act using generally accepted accounting principles (GAAP).

The Canadian Institute of Chartered Accountants' Handbook (the Handbook), which is the principle authority of GAAP in Canada, requires that property and casualty insurers account for claims reserves on a gross basis, rather than net of reinsurance.

Paragraphs 181.3(3)(c) and (d) of the Act stipulate the amounts to be included in determining the capital of an insurance corporation resident in Canada (other than a life insurance corporation) and an insurance corporation not resident in Canada, respectively. Among other things, claims reserves are required under these paragraphs to be included in computing the capital of such a corporation.

New subparagraph 181.3(3)(c)(vii) and clause 181.3(3)(d)(iv)(F) allow such corporations to reduce their capital by an amount that is recoverable through reinsurance, to the extent that the amount relates to an amount that was included in capital as a claims reserve. In this way, claims reserves are included on a net of reinsurance basis under paragraphs 181.3(3)(c) and (d).

New subparagraph 181.3(3)(c)(vii) and clause 181.3(3)(d)(iv)(F) apply to taxation years that begin after 1995.

Clause 327

Additional Tax on Excessive Elections

ITA
Part III

Under section 83 of the Act, a private corporation can identify a dividend as a “capital dividend”, with the result that the dividend is not taxable to the shareholders who receive it. In concept, a capital dividend is a distribution of the non‑taxable portion of the corporation’s capital gains, which portion is recorded in the corporation’s “capital dividend account”. A similar mechanism allows mutual fund corporations and mortgage investment corporations to designate a dividend as a “capital gains dividend” – which is taxable to the shareholder, but as a capital gain.

Part III of the Act (sections 184 and 185) applies a special tax to a corporation that designates as a capital dividend or a capital gains dividend an amount that exceeds the amount available to be paid as such a dividend. If the corporation obtains the consent of its shareholders, it can avoid the special tax by treating the excess amount as a separate taxable dividend.

These amendments simplify Part III and update its language, reduce the rate of the special tax, and modify the requirement for shareholder consent to the recharacterization of an excessive dividend. These amendments apply to dividends that are paid by a corporation after its 1999 taxation year, with a special transitional rule for elections, described below in the notes to subsection 184(5) of the Act.

Tax on Excessive Elections

ITA
184(2)

Subsection 184(2) of the Act applies the tax under Part III of the Act to the amount by which a dividend paid by a corporation as a capital dividend or a capital gains dividend exceeds the amount eligible to be so designated. For greater clarity, the subsection is amended to refer to the full amount of the initial dividend as the “original dividend”. That term is then used elsewhere in amended Part III.

The rate of tax imposed by subsection 184(2) is also changed, as part of a series of amendments that reflect reductions in tax rates. The rate is reduced from 75% of the excess capital gains dividend to 60% of the excess.

Reduction of Excess

ITA
184(2.1)

Subsection 184(2.1) of the Act is a transitional rule that applies to certain dividends that became payable before June 18, 1987. That subsection has lapsed and is repealed.

Election to Treat Excess as Separate Dividend

ITA
184(3)

Subsection 184(3) of the Act allows a corporation that would otherwise be liable to tax under Part III in respect of an excessive capital dividend or capital gains dividend to treat the excess as a separate taxable dividend, and thus to avoid the tax. The subsection is amended to update and clarify its language.

Concurrence with Election

ITA
184(4)

Subsection 184(4) of the Act sets out the requirements for shareholders' consent to the recharacterization, under subsection 184(3), of an excessive capital dividend or capital gains dividend. This subsection is amended to update and clarify its language.

Exception for Non-taxable Shareholders

ITA
184(5)

New subsection 184(5) of the Act provides an exception to the shareholder consent requirements of subsection 184(4). Where a corporation wishes to recharacterize an excessive dividend under subsection 184(3), and the dividend was paid on a class of shares all of the holders of which are persons all of whose taxable income is exempt from tax (for example, registered plans), the corporation need not obtain the shareholders' consent. Instead, the only requirement imposed by new subsection 184(5) is that the corporation's election be made within 30 months after the time that the original (excessive) dividend became payable.

An election under new subsection 184(5) will be deemed to have been made in a timely manner if it is made within 90 days after these amendments receive Royal Assent.

Clause 328

Revocation Tax

ITA
188(1)

Subsection 188(1) of the Act imposes a tax payable by a registered charity in respect of the revocation of the charity's registration. The tax is generally equal to the total of the value of the assets of the charity plus the amount of receipted donations and inter-charity gifts received by the charity after the "valuation day" of the charity's assets, net of certain eligible disbursements.

Subsection 188(1) is amended consequential to the addition of new subsection 248(31) of the Act, in respect of gifts made after December 20, 2002, to refer to the "eligible amount" of a gift for which a receipt was issued by the charity. For additional information, see the commentary to new subsection 248(31).

Clause 329

Calculation of Capital Tax

ITA
190.1

Part VI of the Act imposes a capital tax on financial institutions. A financial institution can reduce its capital tax payable by the amount of income tax it pays under Part I. If its income tax exceeds its capital tax payable for a taxation year, a financial institution can carry excess income tax credits forward seven years and back three years against Part VI tax.

ITA
190.1(3)(a)

Under the current rule, the amount of income tax payable in a taxation year that a corporation can deduct in computing its liability for tax under Part VI must be reduced by the lesser of the Canadian surtax payable and the tax payable under Part I.3 for the year by the corporation. Part I.3 formerly imposed a capital tax on large corporations. No tax is payable under Part I.3 for taxation years that begin after 2005, and the surtax has been eliminated for taxation years that begin after 2007. Consequently, the reference to a corporation's Canadian surtax payable for the year and to the tax payable under Part I.3 for the year is being removed.

This amendment applies to taxation years that begin after 2007.

ITA
190.1(5)

"unused Part I tax credit"

Under the current rule, the "unused Part I tax credit" of a corporation for a taxation year is the amount by which its tax payable under Part I for the year exceeds the total of its Part VI tax payable (determined without taking into account the deduction allowed with respect to the amount for Part I tax paid in the year) and the corporation's Canadian surtax payable for the year. In general, a corporation's Canadian surtax payable for a year is equal to the lesser of the amount of surtax payable by the corporation for the year and its income tax payable under Part I for the year. The surtax has been eliminated for taxation years beginning after 2007. Accordingly, this amendment removes the reference to a corporation's Canadian surtax payable for the year.

This amendment applies to taxation years that begin after 2007.

Clause 330

Financial Institutions Capital Tax

ITA
190.13

Section 190.13 of the Act contains the rules for determining the capital of a financial institution for the purpose of Part VI of the Act. Section 190.13 is amended to accommodate a change to the accounting presentation of provisions for the redemption of preferred shares.

Generally accepted accounting principles (GAAP) are relevant to the determination of amounts referred to in section 190.13. The accounting procedures described in the notes to amended section 181.2 of the Act are therefore relevant in the context of Part VI of the Act, and readers may consult those notes for additional background. As in that section, the amendments introduced to section 190.13 include, in the computation of a deficit deducted in computing shareholders' equity, the amount of any provision for the redemption of preferred shares. This inclusion is added to two specific provisions: subparagraph 190.13(a)(v), in respect of financial institutions other than life insurers and authorized foreign banks; and subparagraph 190.13(b)(iv) in respect of Canadian-resident life insurance corporations.

These amendments apply to taxation years that begin after 1995.

Clause 331

Capital Tax - Transitional Provisions

ITA
190.16

The Part VI minimum tax on financial institutions was amended in 2006 to increase the Part VI capital deduction to $1 billion from $200 million and introduce a single Part VI tax rate of 1.25% on taxable capital employed in Canada above that capital deduction, effective for taxation years that end on or after July 1, 2006. Section 190.16 sets out the transitional rules in respect of those amendments to Part VI.

As those transitional rules are no longer necessary, section 190.16 is repealed for taxation years that begin after October 31, 2011.

Clause 332

Excluded Dividend – Partner

ITA
191(6)

Section 191 of the Act sets out a number of rules relating to the taxes imposed, under Part VI.1 of the Act, on taxable Canadian corporations that pay dividends of certain kinds. Those taxes are not payable in respect of “excluded dividends”, a term defined in subsection 191(1) of the Act. Dividends paid by a corporation to a shareholder that holds a “substantial interest” in the corporation are excluded dividends.

"Substantial interest" is itself defined in subsection 191(2) of the Act. In general, a shareholder has a substantial interest in a corporation if the shareholder is related to the corporation (otherwise than because of a right under paragraph 251(5)(b)) or if the shareholder's holdings meet certain thresholds in terms of votes and value.

If a shareholder has a substantial interest in a corporation, and is also a member of a partnership that holds shares of the corporation, it is appropriate that a dividend paid by the corporation to the partnership be an excluded dividend, to the extent of the shareholder’s interest in the dividend. To ensure this result, new subsection 191(6) is added to the rules that govern the Part VI taxes. The new subsection provides that a dividend paid to a partnership is, for the purposes of the “excluded dividend” definition, considered to have been paid rateably to each member of the partnership.

Three technical aspects of the new rule bear special mention. First, the apportionment of the dividend among the partners is based upon each partner's share of the partnership's income for its last fiscal period that ended before the corporation paid the dividend. (If the dividend was paid during the partnership's first fiscal period, the apportionment looks to that period.)

Second, to ensure appropriate effects where there is more than one tier of partnerships between the dividend-paying corporation and the person that holds a substantial interest in the corporation, the new provision applies to itself. That is, if a member of a partnership is itself a partnership, the rule will treat the dividend-paying corporation as having paid a proportionate amount as a dividend not only to the second partnership, but also to that second partnership's members.

Third, in apportioning a dividend among members of a partnership, new subsection 191(6) uses the new definition of “specified proportion”, which is added to subsection 248(1) of the Act. For further information, see the commentary to that amendment.

New subsection 191(6) applies to dividends paid after December 20, 2002.

Clause 333

Tax on Taxable Dividends

ITA
191.1(1)(a)

Subsection 191.1(1) provides for a tax to be paid under Part VI.1 by a corporation that has paid taxable dividends on taxable preferred shares. In the case of short-term preferred shares, subparagraph 191.1(1)(a)(i) sets the tax rate at 66 2/3% of the dividend. This rate produces an amount of tax that approximates the amount of income tax that would have been collected had a corporate shareholder sought the same after-tax return in the form of interest. The Part VI.1 tax is based on an assumed combined federal and provincial corporate income tax rate. That result obtains, at the current 66 2/3 percent rate, if interest income is assumed to be taxed at 40%. This amendment reduces the tax rate under subparagraph 191.1(1)(a)(i) in the context of the reductions in the general federal corporate income tax rate for the 2003 and subsequent taxation years.

Clause 334

Distribution Deemed Disposition

ITA
200

The French version of section 200 of the Act is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Clause 335

Definitions

ITA
204.8(1)

The definitions in subsection 204.8(1) of the Act apply for the purposes of penalties and taxes and other provisions under Part X.3 of the Act that govern labour-sponsored venture capital corporations.

"reserve"

Federally registered labour-sponsored venture capital corporations (LSVCCs) are generally required to invest at least 60 percent of their assets in eligible small businesses.  Any amount not invested in eligible small businesses must be held in investments that meet the definition “reserve” in subsection 204.8(1) of the Act. “Reserve” is defined as property described in any of paragraphs (a), (b), (c), (f) and (g) of the definition “qualified investment” in section 204 of the Act.  The definition “reserve” in subsection 204.8(1) is amended to include deposits with credit unions that are “member institutions”, as that term is defined in subsection 137.1(5) of the Act.

This amendment applies to taxation years ending after 2006.

"terminating corporation"

Paragraph 204.8(2)(a) of the Act, in conjunction with section 204.841 of the Act, imposes a tax on an LSVCC if its articles cease to comply with the requirements in paragraph 204.81(1)(c). Some LSVCCs may be required to amend their articles of incorporation in order to complete a merger with another LSVCC. In these cases, the predecessor LSVCCs will terminate and continue as a new fund. The successor LSVCC will purchase, at fair market value, all the assets of each terminating LSVCC. The terminating LSVCCs will redeem the shares of the individual investors, providing, as payment for the redemption, Class A shares of the continuing LSVCC.

Such a transaction may qualify as a "merger" under subsection 204.85(3) of the Act, providing relief from some provisions of the Act that might otherwise apply upon the redemption of shares of an LSVCC. For example, a redemption arising on a merger will generally not result in recovery of the labour-sponsored funds tax credit from the shareholders of the terminating LSVCCs.

The new definition "terminating corporation" applies to an LSVCC (the "predecessor LSVCC") that undertakes a merger to which subsection 204.85(3) applies with another LSVCC if Class A shares of the continuing LSVCC have been issued to the predecessor LSVCC in exchange for property of the predecessor LSVCC and, within a reasonable period of time after the exchange, the Class A shareholders of the predecessor LSVCC will receive all of those Class A shares of the continuing LSVCC in the course of a wind-up of the predecessor LSVCC.

This amendment is made concurrently with the amendment of clause 204.81(1)(c)(ii)(A) of the Act and applies after 2004.

When a Venture Capital Business is Discontinued

ITA
204.8(2)

Subsection 204.8(2) of the Act sets out the circumstances in which an LSVCC is considered, for certain purposes of the Act, to have discontinued its venture capital business.

When a federally registered LSVCC or a revoked corporation first discontinues its venture capital business there are a number of consequences:

Paragraph 204.8(2)(b) is amended to ensure that a corporation that relies on prescribed provincial wind-up rules will be not be considered to have discontinued its venture capital business at the time set out under the prescribed rules solely due to the corporation's use of the prescribed wind-up rules. This amendment is being made to ensure that a federally registered LSVCC that continues to follow the requirements for federally registered LSVCCs, but is considered to have discontinued its venture capital business pursuant to provincially prescribed wind-up rules enacted due to the discontinuance of a provincial venture capital program, will not be considered to have discontinued its venture capital business for federal purposes.

Paragraph 204.8(2)(b) is amended concurrently with the introduction of new section 6708 of the Income Tax Regulations. For more information on prescribed wind-up rules, refer to the notes for that provision.

The amendment to subsection 204.8(2) applies as of Announcement Date.

Clause 336

Conditions for Registration

ITA
204.81(1)

Section 204.81 sets out the conditions for the registration of labour-sponsored venture capital corporations (LSVCCs). Subsection 204.81(1) permits the Minister of National Revenue to register a corporation as an LSVCC under Part X.3 of the Act if its articles satisfy specified conditions, and other requirements are met.

ITA
204.81(1)(c)(ii)(A)

Subparagraph 204.81(1)(c)(ii) sets out the conditions that relate to the authorized capital of an LSVCC. Clause 204.81(1)(c)(ii)(A) sets out that the Class A shares of the LSVCC may be issuable only to individuals (other than trusts), trusts governed by registered retirement savings plans, and trusts governed by Tax-Free Savings Accounts.

Clause 204.81(1)(c)(ii)(A) is amended to also permit the issuance of Class A shares to a terminating corporation that is being merged with the LSVCC. This amendment is made concurrently with the addition of the definition "terminating corporation" in subsection 204.8(1) of the Act and applies after 2004.

ITA
204.81(1)(c)(v)(E)

Subparagraph 204.81(1)(c)(v) sets out the requirements of a federally-registered LSVCC's articles regarding the circumstances in which the LSVCC may redeem shares of its capital stock. The current rule generally provides, pursuant to clause 204.81(1)(c)(v)(E), a minimum holding period of eight years for corporations that are incorporated after March 5, 1996.

Clause 204.81(1)(c)(v)(E) is amended to require that the articles of a federally-registered LSVCC provide that the LSVCC shall not redeem its shares unless the redemption occurs either

The amendment to clause 204.81(1)(c)(v)(E) applies to corporations after February 6, 2000 regardless of when they were incorporated.

ITA
204.81(1)(c)(iv) and (vii)

Subparagraph 204.81(1)(c)(iv) provides that the articles of an LSVCC must not permit a reduction in the paid-up capital in respect of a class of shares (other than Class B shares) of the capital of the corporation otherwise than by way of a redemption of shares of the corporation or in such other manner as is prescribed. Subparagraph 204.81(1)(c)(iv) is amended in order to allow for a corporation's articles to permit reductions in paid-up capital, in respect of a class or series of shares more than eight years after shares of the class or series were last issued.

Subparagraph 204.81(1)(c)(vii) sets out the circumstances under which the articles of an LSVCC can provide for the registration of a transfer of Class A shares. Subparagraph 204.81(1)(c)(vii) is amended to permit the transfer of a Class A share more than eight years after the share was issued.

The discontinuance by an LSVCC of its venture capital business could subject an LSVCC to a penalty under subsection 204.841 of the Act. As a result of the amendments to subparagraphs 204.81(1)(c)(iv) and (vii), a corporation will not, solely as a result of distributions of capital to Class A shareholders or the dispositions of Class A shares by shareholders more than eight years after the shares were issued, be considered to have discontinued its venture capital business pursuant to subsection 204.8(2) of the Act.

The amendments to subparagraphs 204.81(1)(c)(iv) and 204.81(1)(c)(vii) apply as of Announcement Date.

ITA
204.81(1.1) and (1.2)

Federally-registered LSVCCs that were incorporated before March 6, 1996 may contain statements in their articles that provide that the LSVCC shall not redeem certain of its shares unless the redemption occurs more than five years after the day on which such a share was issued. New subsection 204.81(1.1) provides that in applying clause 204.81(1)(c)(v)(E), at any time before 2004, in respect of a corporation incorporated before March 6, 1996, the references in that clause to the word "eight" are replaced with references to the word "five" if, at that time, the relevant statements in the corporation's articles refer to the word "five". This is intended to ensure that the extended (February, or March 1st) redemption provisions required of a federally-registered LSVCC's articles apply equally to shares originally subject to a minimum five year holding period and those subject to a minimum eight year holding period.

New subsection 204.81(1.2) is a transitional rule that provides a federally-registered LSVCC, incorporated before February 7, 2000, with a reasonable amount of time to amend its articles as required by clause 204.81(1)(c)(v)(E). Subsection 204.81(1.2) provides that, in applying subsection 204.81(1) at any time before 2004 to such an LSVCC, if the LSVCC's articles comply with subclause 204.81(1)(c)(v)(E)(I) (as modified by subsection 204.81(1.1)) those articles are deemed to provide the statement required by subclause 204.81(1)(c)(v)(E)(II).

New subsections 204.81(1.1) and (1.2) apply after February 6, 2000. These amendments are part of a set of amendments, announced by the Minister of Finance (News Release 2000-009, dated February 7, 2000) concerning the redemption requirements for federally-registered LSVCCs. For information on a related amendment, see the commentary to subsection 211.8(1) of the Act.

ITA
204.81(8.3) and (8.4)

New subsections 204.81(8.3) and (8.4) of the Act are being added to provide rules for provincially registered LSVCCs that are also federally registered LSVCCs to, under certain conditions, revoke their federal registration without penalty, where a province has decided to discontinue its venture capital tax credit program.

New subsection 204.81(8.3) provides that if a provincially registered LSVCC informs the Minister of National Revenue of its intention to revoke its registration and meets all the requirements under the particular province's wind up rules, the following rules apply:

New subsection 204.81(8.4) further provides that the relieving rules available to an LSVCC under subsection 204.81(8.3) are only available if the LSVCC meets further conditions.

The first condition requires that, of the corporation's outstanding shares issued over the last eight years that were eligible for the labour-sponsored venture capital tax credit, less than 20 percent were issued in the last two years.

The second condition requires that the LSVCC revoke its registration within three years of providing notice of its intention to revoke its registration.

New subsections 204.81(8.3) and (8.4) apply as of Announcement Date.

Clause 337

Transfers Between Plans

ITA
204.9(5)

The French version of subsection 204.9(5) of the Act is amended to correct a terminology error. In effect, the concept of “attribution” is replaced by “distribution” so that it is clear that the property is actually remitted to the trust’s beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Clause 338

Taxes in respect of Registered Education Savings Plans

ITA
204.94(2)

Tax on Accumulated Income Payments

Part X.5 of the Act imposes a special 20% tax on "accumulated income payments" from registered education savings plans (RESPs). This special tax generally applies where an RESP is terminated because the beneficiary does not pursue post-secondary education and the plan's accumulated investment income is paid out to the subscriber. The tax is intended to discourage the use of RESPs strictly for tax deferral purposes and is in addition to regular income tax. Subsection 204.94(2) of the Act sets out the charging provision for the tax.

Under section 146.1 of the Act, an RESP may be established on behalf of a child in care by the child's "public primary caregiver", which is defined in subsection 146.1(1) as the department, agency or institution that maintains the child or the public trustee or curator of the province in which the child resides. Child welfare services are generally administered by a provincial government department. However, some jurisdictions, including Ontario and Nova Scotia, have created independent non-profit organizations to provide these services. While paragraph 149(1)(l) of the Act will provide an exemption from regular income tax with respect to any accumulated income payments made to child welfare agencies in these provinces, there is no comparable exemption from Part X.5 tax. Child welfare agencies in Ontario and Nova Scotia may thus be liable for Part X.5 tax on accumulated income payments from RESPs set up on behalf of children under their care.

Subsection 204.94(2) is amended so that it does not apply to a public primary caregiver as defined in subsection 146.1(1) of the Act. This will ensure that all child welfare organizations – regardless of legal structure – are able to reallocate the full amount of any investment income from an RESP that is not used for the beneficiary's post-secondary education to other RESPs established for other children under the organization's care. The amendment is consistent with the fact that non-profit child welfare organizations are already exempt from regular income tax on accumulated income payments and will provide comparable tax treatment for all RESPs established by child welfare organizations.

This amendment applies to the 2007 and subsequent taxation years.

Clause 339

Foreign Property Rules

ITA
Part XI

Part XI of the Act set out rules for a 1% per month penalty tax on excess foreign property held by deferred income plans. Part XI was repealed, effective for months that end after 2004, in Budget Implementation Act, 2005, S.C. 2005, c.30. A number of amendments are being made to Part XI that are effective prior to its repeal.

Definitions

ITA
206(1)

"cost amount"

"Cost amount" is defined in subsection 206(1) of the Act for the purposes of Part XI. The definition was introduced in 2001 to deal with arrangements that provided for trust income to be "capitalized" without the trust issuing new units. Under the definition, the cost amount otherwise determined of a taxpayer's interest in such a trust reflects the capitalized amounts. For months that end after December 20, 2002 and before 2005, the definition is to be read to clarify that it applies to trusts under which all beneficiaries are registered plan trusts (e.g., trusts described in paragraph (e) of the definition "trust" in subsection 108(1)).

"foreign property"

"Foreign property" is defined in subsection 206(1) of the Act. Under paragraph (d.1) of the definition, foreign property includes certain shares and debt issued by Canadian corporations, if shares of the corporation may reasonably be considered to derive their value primarily from foreign property. Paragraph (g) of the definition treats as foreign property the indebtedness of a non-resident person other than indebtedness issued by various international organizations or indebtedness issued by an authorized foreign bank and payable at a Canadian branch of that bank.

For months that end after October 2003 and before 2005, paragraphs (d.1) and (g) are to be read to provide that a mortgage obligation that is fully secured by real property situated in Canada is not foreign property.

"specified proportion"

Subsection 206(1) of the Act includes a definition of a partner's "specified proportion" of a partnership for a fiscal period. To enable the definition to be used for other purposes as well, it is moved to subsection 248(1) of the Act, and is repealed in subsection 206(1), effective after December 20, 2002.

Acquisition of Qualifying Security

ITA
206(3.1)

The French version of subsection 206(3.1) of the Act is amended to correct an erroneous reference. The reference to subparagraph 206(2)(a)(iii), which does not exist in the French version of the Act, is replaced by a reference to subparagraph 206(2)(a)(ii). This amendment applies to months that end after 1997, which corresponds to the application of the last amendment to subsection 206(3.1).

Clause 340

Tax Payable by Recipient of an Ecological Gift

ITA
207.31

Section 207.31 of the Act imposes a tax on charities and Canadian municipalities where, without the approval of the Minister of the Environment, they dispose of or change the use of property donated to them as an ecological gift. The tax is equal to 50% of the amount that is the fair market value of the property at the time of the disposition or change in use as determined for the purposes of section 110.1 or 118.1 of the Act.

Section 207.31 is amended, in respect of dispositions of or changes of use of property after July 18, 2005, to clarify that it also applies to a municipal or public body performing a function of government in Canada. For more information, refer to the commentary for subsection 118.1(1) and paragraph 149(1)(d.5).

Clause 341

Tax on Designated Income of Certain Trusts

ITA
Part XII.2

Part XII.2 of the Act imposes a special tax on the designated income (as defined in subsection 210.2(2) of the Act) of certain trusts that are resident in Canada with respect to distributions to non-residents and other designated beneficiaries. One of the objectives of Part XII.2 tax is to prevent the minimization of tax on specified Canadian-source income that would otherwise arise where a Canadian trust's income is distributed to a non-resident and is subject only to Part XIII tax. Part XII.2 tax is also meant to discourage transactions between taxable and tax-exempt beneficiaries designed to allow taxable income earned by a trust to be flowed-through to tax-exempt beneficiaries after the acquisition of a trust unit by the tax-exempt beneficiary from the taxable beneficiary.

Definitions and Application

ITA
210

Section 210 of the Act defines "designated beneficiary" for the purpose of Part XII.2.

Section 210 is amended so that a number of definitions that apply for the purposes of Part XII.2 are now found in new subsection 210(1). In addition, new subsection 210(2) replaces section 210.1 of the Act, which is being repealed.

Definitions

ITA
210(1)

New subsection 210(1) of the Act contains the definitions "designated beneficiary" (previously found in section 210 of the Act) and "designated income" (previously found in subsection 210.2(2) of the Act). These definitions apply in Part XII.2.

"designated beneficiary"

Under paragraphs (a) and (b) of the definition "designated beneficiary", a designated beneficiary includes, respectively, a non-resident person and a non-resident-owned investment corporation. Under paragraph (c) of the definition, a person exempt from tax under Part I of the Act is treated as a designated beneficiary because of owning an interest in a trust (acquired from a beneficiary under the trust) unless, generally speaking, no taxable entity previously owned that interest. Under paragraph (d) of the definition, a trust is a designated beneficiary of another trust if a beneficiary of the trust includes, generally, either a person or partnership described in any of paragraphs (a), (b), (c) or (e) of the definition or another trust (other than a testamentary trust resident in Canada). Under paragraph (e) of the definition, a partnership is a designated beneficiary of a trust if a member of the partnership is a person described in paragraph (a), (b) or (d) of the definition, another partnership or a person exempt from tax under Part I by reason of subsection 149(1) of the Act.

The opening words of the definition "designated beneficiary" are amended so that the references in the definition to a "trust" under which there may be a designated beneficiary are references to a "particular trust".

Paragraph (c) of the definition "designated beneficiary" is amended to clarify that a designated beneficiary of a particular trust includes, except as provided in subparagraphs (c)(i) and (ii) of the definition, a person who is, because of subsection 149(1), exempt from tax under Part I on all or part of their taxable income and who acquired an interest in the particular trust after October 1, 1987 directly or indirectly from a beneficiary under the particular trust.

Paragraph (d) of the definition "designated beneficiary" is amended so that a designated beneficiary of a particular trust includes another trust (in this commentary referred to as the "other trust") having as a beneficiary any one of the following persons or partnerships:

Note that a person or partnership that is a beneficiary of the other trust need only be described in any of one of subparagraphs (d)(i) to (iv) in order for the other trust to be a designated beneficiary of the particular trust. Note also that references in paragraph (d) of the definition to the expression "resident in Canada" are removed as these are unnecessary given that paragraph (a) of the definition provides that a non-resident person is a designated beneficiary.

Paragraph (d) of the definition is also amended to provide that the other trust will not be treated, under that paragraph, as a designated beneficiary of the particular trust if it is a testamentary trust, a mutual fund trust, or a trust that is exempt because of subsection 149(1) from tax under Part I on all or part of its taxable income. However, these excluded trusts may be treated as designated beneficiaries of the particular trust under paragraphs (a) or (c) of that definition (e.g., a non-resident testamentary trust).

Amended paragraph (e) of the definition provides, in new subparagraph (e)(i), that a designated beneficiary of a particular trust includes a particular partnership any of the members of which is another partnership. However, no such other partnership will cause the particular partnership to be a designated beneficiary under the particular partnership if

Under subparagraphs (e)(ii) to (iv), a particular partnership will be a designated beneficiary under a particular trust if any one of the partnership's members is a non-resident person, a non-resident-owned investment corporation, or a specified person. For this purpose, a specified person means a trust that is a designated beneficiary of the particular trust because of paragraph (d) of the definition or a trust that would be such a designated beneficiary on the following assumptions: the other trust was at that time a beneficiary under the particular trust whose interest as a beneficiary under the particular trust were

New subparagraph (e)(v) of the definition provides that a particular partnership will be a designated beneficiary of a particular trust if any of the members of the particular partnership is a person exempt because of subsection 149(1) from tax under Part I on all or part of its taxable income, unless the interest of the particular partnership in the particular trust was held, at all times after the day on which the interest was created, by the particular partnership or by persons who were exempt because of subsection 149(1) from tax under Part I on all of their taxable income.

Note that, for the purposes of the definition "designated beneficiary", a new rule in section 132.2 applies in respect of certain trust units acquired by a beneficiary under a "qualifying exchange" (as defined in subsection 132.2(1)). For more detail, see the commentary on section 132.2.

This amendment applies to the 1996 and subsequent taxation years.

"designated income"

The tax under Part XII.2 of the Act is calculated by reference to a trust's "designated income" (as determined under subsection 210.2(2)).

Subsection 210.2(2) is being replaced (for more detail, see the commentary below) and the definition "designated income" is now found in subsection 210(1) of the Act.

Paragraphs (a), (b) and (d) of the new definition "designated income" in subsection 210(1) are largely unchanged from the equivalent provisions found in repealed subsection 210.2(2).

Paragraph (c) of the new definition replaces paragraph 210.2(2)(b). Under subparagraph (c)(i), designated income is calculated by reference to taxable capital gains and allowable capital losses from dispositions of the trust's taxable Canadian property. Subparagraph (c)(ii) provides that a trust's designated income is also calculated by reference to taxable capital gains and allowable capital losses from a disposition by the trust of particular property (other than property described in any of subparagraphs 128.1(4)(b)(i) to (iii) of the Act).

In this context, particular property (or property for which the particular property is a substitute) must be property (referred to in this commentary as the "transferred property") that was transferred to a particular trust in circumstances in which subsection 73(1) or 107.4(3) of the Act applied. This condition will be met whether the particular trust is the trust in respect of which the designated income is being determined, or any other trust to which the transferred property was transferred in circumstances in which subsection 73(1) or 107.4(3) applied and that subsequently transferred, directly or indirectly, the property to the trust in respect of which the designated income is being determined.

In addition, clauses (c)(ii)(A) and (B) of the definition require

These amendments generally apply for the 1996 and subsequent taxation years. Subparagraph (c)(ii) of the definition as described above applies, in effect, to dispositions, of property by a trust, that occur after December 20, 2002.

Application of Part XII.2

ITA
210(2) and 210.1

Section 210.1 of the Act provides a list of types of trusts to which Part XII.2 does not apply.

Section 210.1 is being repealed. The list of types of trusts to which Part XII.2 does not apply is now found in new subsection 210(2). New subsection 210(2), consequential on the amendments to the definition "designated beneficiary" (described in the commentary above), also clarifies that it applies only to determine to which trusts the special Part XII.2 tax does not apply. Subsection 210(2) does not apply, for example, to determine whether a trust referred to in that subsection may have a designated beneficiary.

These provisions are also amended to update their structure to conform to modern drafting standards. This amendment applies to the 1996 and subsequent taxation years.

Clause 342

Amateur Athlete Trusts

ITA
210.2(2)

Subsection 210.2(1.1) of the Act extends the tax under Part XII.2 to amateur athlete trusts, which are provided for in section 143.1, in circumstances where amounts are distributed by such trusts to non-resident beneficiaries.

Subsection 210.2(1.1) of the Act is amended by renumbering it as subsection 210.2(2). In addition, the reference in that subsection to section 210.1 is, given that section's renumbering as subsection 210(2), replaced with a reference to subsection 210(2). The amended subsection also replaces the existing reference to the phrase "36% of 100/64" with the numerical equivalent of "56.25%". Finally, the provision is amended to clarify that Part XII.2 tax applies to a trust for a particular taxation year of the trust on the amount that is required by subsection 143.1(2) to be included in computing the income under Part I for a taxation year of a beneficiary under the trust, only if

This amendment applies to the 1996 and subsequent taxation years.

Tax Deemed Paid by Beneficiary

ITA
210.2(3)

Subsection 210.2(3) of the Act permits a trust to designate an amount in respect of certain beneficiaries that are not designated beneficiaries (as defined in subsection 210(1) of the Act, and with respect to non-resident beneficiaries, read without reference to the definition's paragraph (a)). The designated amount, which represents the beneficiary's "share" of the trust's Part XII.2 tax as determined under the formula in subsection 210.2(3), is deemed to have been paid by the beneficiary on account of the beneficiary's tax payable under Part I of the Act.

The French version of subsection 210.2(3) and the equivalent English provision – paragraph 210.2(3)(b) of the English version of the Act – are amended consequential to the amendment to the definition "designated beneficiary", which is now found in subsection 210(1) of the Act.

This amendment applies to the 1996 and subsequent taxation years, except that for the 1996 and 1997 taxation years, references to "un traité fiscal" in the French version of the Act and to "treaty" in the English version of the Act are to be read as "un acord ou une convention fiscale ayant force de loi au Canada et conclue entre le gouvernement du Canada et le gouvernement d'un pays étranger" and as "convention or agreement with another country that has the force of law in Canada", respectively.

Clause 343

Recovery of Labour-sponsored Funds Tax Credit

ITA
Part XII.5

Part XII.5 of the Act (sections 211.7 to 211.9) provides for a special tax that is designed to recover the federal tax credit under section 127.4 of the Act with respect to the original acquisition of a share issued by a labour-sponsored venture capital corporation. This tax applies where there is a disposition of an "approved share", as defined in subsection 127.4(1) of the Act.

ITA
211.7(1)

"qualifying exchange"

The new definition "qualifying exchange" means an exchange by a taxpayer of an "approved share" (within the meaning assigned by the definition in subsection 211.7(1) of the Act) that is part of a series of Class A shares of the capital stock of a labour-sponsored venture capital corporation (LSVCC), for another approved share of the LSVCC, where the only consideration received by the taxpayer on the exchange is the other share, and the rights in respect of the series of shares are identical except for the portion of the "reserve" (within the meaning assigned by the definition in subsection 204.8(1) of the Act) of the corporation that is attributable to each series.

The definition "qualifying exchange" is added concurrently with amendments to sections 127.4 and 211.8 of the Act to allow for the issuance of exchangeable shares by LSVCCs. This amendment applies after 2003.

For more information regarding the definition "reserve", refer to the commentary for subsection 204.8(1).

Deemed Issuance Date Qualifying Exchange

ITA
211.7(3)

Section 211.8 of the Act provides a mechanism for the recovery of the federal tax credit under section 127.4 of the Act with respect to the original acquisition of a share issued by a labour-sponsored venture capital corporation (LSVCC). The special tax payable under section 211.8 is generally charged where the share of a federally-registered LSVCC or a revoked corporation is redeemed, acquired or cancelled less than eight years after the share was issued.

New subsection 211.7(3) of the Act is added consequential to the amendment of sections 127.4 and 211.8 to allow for the issuance of exchangeable shares by LSVCCs. New subsection 211.7(3) is added to ensure that a share issued in a qualifying exchange is considered to have been issued on the same date as the share for which it was exchanged. This amendment ensures that the date a share is issued on an exchange, for a qualifying exchange, is not taken into account in determining whether the share has been redeemed, revoked or cancelled within eight years of the date the share was issued.

This amendment also ensures that the date of issuance on an exchange, for a qualifying exchange, is ignored for the purposes of determining the corporation's obligations under Part X.3 of the Act, such as for the purposes of determining penalties, if any, for investment shortfalls under section 204.82 of the Act.

This amendment applies in respect of shares issued after 2003.

Clause 344

Disposition of Approved Share

ITA
211.8(1)

Subsection 211.8(1) of the Act imposes a special tax under Part XII.5, generally if Class A shares of the capital stock of a federally-registered labour sponsored venture capital corporation (LSVCC), that qualify for the federal LSVCC tax credit under section 127.4 of the Act, are redeemed prior to the expiry of a minimum period.

Subsection 211.8(1) is amended so that there is no Part XII.5 tax in respect of the redemption by a federally-registered LSVCC of a share the original acquisition of which was after March 5, 1996, if the redemption occurs on a day that is in February or on March 1st of a calendar year and that day is no more than 31 days before the day that is eight years after the day on which the share was issued. For a share the original acquisition of which occurred before March 6, 1996, the circumstances in which there is no recovery of the tax credit are extended to include the redemption of the share on a day that is in February or on March 1st of a calendar year if that day is no more than 31 days before the day that is five years after the day on which the share was issued.

This amendment applies to redemptions, acquisitions, cancellations and dispositions that occur after November 15, 1995.

This amendment is part of a set of amendments, announced by the Minister of Finance (News Release 2000-009, dated February 7, 2000) concerning the redemption requirements for federally-registered LSVCCs. The set of amendments is intended to accommodate taxpayers wishing to acquire new LSVCC shares in the first 60 days of a year using the proceeds from the redemption of LSVCC shares. Other related changes include amendments to section 204.81 of the Act. For additional information, see the commentary on those provisions.

Example 1

On February 2nd, 1998 a federally-registered LSVCC redeemed 200 Class A shares owned by Charles. The original acquisition by Charles of the shares was on March 1, 1993, the same day on which the shares were issued. The issuing LSVCC was incorporated on December 1, 1992. The LSVCC's Articles comply with the applicable registration requirements.

Results:

1. Under new clause (i)(C) of the description of B in paragraph 211.8(1)(a), there will be no recovery of the tax credit on the redemption of the 200 shares because the original acquisition of the shares was before March 6, 1996 and the redemption occurred on a day in February not more than 31 days before the day that is five years after the day on which the shares were issued.

2. Because of new subsection 204.81(1.2), subsection 204.81(6) of the Act would not apply to allow the Minister of National Revenue to revoke the LSVCC's registration solely because of the redemption.

 

Example 2

On February 15, 2005 a federally-registered LSVCC redeemed 200 Class A shares owned by Marguerite. The circumstances of the redemption are not described in any of the provisions, described in clauses 204.81(1)(c)(v)(A) to (D) of the Act, of the LSVCC's articles. The original acquisition by Marguerite of the first 100 shares was on March 1, 1997, although the shares were issued on March 12th, 1997. The original acquisition by Marguerite of the second 100 shares was on February 29, 2000, the same day on which the shares were issued. The LSVCC was incorporated on May 1, 1996.

Results:

1. Under new subparagraph (i.1) of the description of B in paragraph 211.8(1)(a), there will be no recovery of the tax credit on the redemption of the first 100 shares because the redemption occurred in February on a day not more than 31 days before the day that is eight years after the day on which the shares were issued. Subparagraph (i) of the description of variable B in paragraph 211.8(1)(a) does not apply because the original acquisition of the shares was not before March 6, 1996.

2. Under new subparagraph (i.1) of the description of B in paragraph 211.8(1)(a), there will be a recovery of the tax credit on the redemption of the second 100 shares because the redemption occurred less than eight years after the day on which the share was issued and more than 31 days before the day that is eight years after the day on which the shares were issued.

3. Because of new subsection 204.81(1.2), subsection 204.81(6) would not apply to allow the Minister of National Revenue to revoke the LSVCC's registration solely because of the redemption of the first 100 shares. However, the early redemption by the corporation of the second 100 shares, in violation of the provisions of its articles described in clause 204.81(1)(c)(v)(E), authorizes the Minister of National Revenue to revoke the LSVCC's registration under subsection 204.81(6).

Subsection 211.8(1) is also amended, concurrently with amendments to sections 127.4 and 211.7 of the Act, to allow for the issuance by LSVCCs of Class A shares that are exchangeable shares in certain circumstances. In particular, where the new share is issued by an LSVCC as part of a "qualifying exchange" (as defined in subsection 211.7(1) of the Act) and is another Class A share of the LSVCC, the disposition of the original share by the shareholder will not result in the application of the special Part XII.5 tax.

This amendment applies in respect of shares redeemed, assigned or cancelled after 2003.

Clause 345

Tax for Failure to Re-acquire Certain Shares

ITA
211.81

New section 211.81 of the Act is added to provide for a matching federal tax when an individual is liable to pay a provincial tax, prescribed by regulation, in respect of an approved share of a labour-sponsored venture capital corporation. In this regard, section 211.81 is introduced concurrently with the introduction of new section 6709 of the Income Tax Regulations, which prescribes the tax payable under Quebec's Taxation Act for an individual who fails to acquire a new "approved share" of an LSVCC, after the individual has disposed of another "approved share" of an LSVCC for the purpose of investing the proceeds in a home buyers plan or a lifelong learning plan. The penalty applicable under section 211.81 is equal to the penalty imposed under Quebec's Taxation Act for failing to re-purchase LSVCC shares in the same circumstances.

New section 211.81 applies as of Announcement Date.

Provisions applicable to Part XII.5

ITA
211.82

Part XII.5 of the Act provides for a special tax on the shareholder of a labour-sponsored venture capital corporation (LSVCC), that effectively recovers the federal tax credit under section 127.4 of the Act, generally where an "approved share" of the LSVCC is redeemed, cancelled or disposed of less than eight years after the share was issued.

New section 211.82 of the Act is added to provide rules for the administration of Part XII.5. New subsection 211.82(1) requires that any person liable for tax under Part XII.5 for a taxation year file a return in prescribed form containing an estimate of tax payable under Part XII.5. New subsection 211.81(2) provides that certain provisions of Part I relating to assessments, penalties, objections and appeals are applicable for the purposes of the taxes payable under Part XII.5.

New section 211.82 applies for taxation years that end after Announcement Date.

Clause 346

Refund

ITA
211.9

Section 211.9 provides authority to the Minister to refund an excessive withholding of tax under Part XII.5 by a labour-sponsored venture capital corporation in respect of an amount payable by a shareholder. Consequential to the introduction of the administrative provisions in section 211.82, section 211.9 of the Act is repealed.

The repeal of section 211.9 applies for taxation years ending after Announcement Date.

Clause 347

Taxation of Non-residents

ITA
Part XIII

Part XIII of the Act applies a tax on certain amounts paid by a person resident in Canada to a non-resident person.

Non-resident Withholding Tax – Interest

Paragraph 212(1)(b) of the Act imposes the Part XIII tax on interest paid or credited to a non-resident unless one of the exemptions in the paragraph applies. This paragraph was significantly revised in 2007 for interest paid or payable after 2007. After 2007, the paragraph exempts interest from withholding tax where the interest is paid to an arm's length person and is not "participating debt interest".

The following amendments revise or add to the exemptions available under the paragraph before the 2007 revision and generally have application before 2008.

Non-resident Withholding Tax – Interest

ITA
212(1)(b)(iv)

Subparagraph 212(1)(b)(iv), as it read before the 2007 revision, provides an exemption for interest payable to an arm's length person who holds a valid "certificate of exemption". These certificates, issued by the Minister of National Revenue under the authority provided by subsection 212(14) of the Act, are generally available to foreign pension entities, charities and certain other tax-exempt entities.

In its pre-2007 revision form, subparagraph 212(1)(b)(iv) applies only to interest on a “bond, debenture or similar obligation”. Since this restriction may unduly limit the scope of the provision, it is broadened to encompass all forms of indebtedness. It should be noted, however, that no change is made to the requirement that the Canadian-resident payer of the interest and the non-resident recipient deal at arm’s length.

This amendment applies to the 1998 and subsequent taxation years.

ITA
212(1)(b)(xii)

Subparagraph 212(1)(b)(xii), as it read before the 2007 revision, provides an exemption for interest payable under certain securities lending arrangements by registered or licensed securities dealers resident in Canada. Given the current definition of "securities lending arrangement" in subsection 260(1) of the Act, this exemption is only available to dealers who are dealing at arm's length with the other parties to the arrangements.

Consequential to the amendments to the definition of "securities lending arrangement" in subsection 260(1), which now includes certain arrangements between non-arm's length parties, the amendment to subparagraph 212(1)(b)(xii) confirms that the exemption is limited to arm's length arrangements.

This amendment applies to arrangements made after 2002.

Non-resident Withholding Tax - Interest

ITA
212(1)(b)(xiii)

Securities lending arrangements often include an obligation for one party to compensate the other for certain income amounts. In the absence of special rules, these compensation payments may be subject to tax under Part XIII if they are paid by a person resident in Canada to a non-resident person.

New subparagraph 212(1)(b)(xiii) is added to paragraph 212(1)(b), as it read before the 2007 revision, and exempts from tax under Part XIII certain interest compensation payments made to a non-resident by a borrower resident in Canada under a securities lending arrangement. For the exemption to apply,

the payments must be made by the borrower in the course of carrying on its business outside of Canada; and

the borrowed securities must be issued by a non-resident issuer.

This amendment applies to securities lending arrangements entered into after May 1995, except that, before 2002, the reference to "subparagraph 260(8)(c)(i)" is to be read as "subparagraph 260(8)(a)(i)".

ITA
212(1)(b)

Paragraph 212(1)(b) imposes Part XIII tax on interest paid or credited to a non-resident except under certain conditions. The paragraph was significantly revised in 2007, and its applicable exemptions before the revision have been revised as noted in the amendments above. For clarity, the 2007 revision has been re-enacted – to exempt interest that is paid to an arm's length party and that is not participating debt interest.

This amendment applies to interest paid or credited to a non-resident after 2007.

Non-resident Withholding Tax - Interest

ITA
212(1)(b)(i)

Subparagraph 212(1)(b)(i) of the Act imposes withholding tax on interest payments that a payer resident in Canada makes to a non-resident recipient with whom the payer does not deal at arm's length if the interest is not in respect of certain debt obligations such as Canadian government bonds (referred to as "fully exempt interest").

Subparagraph 212(1)(b)(i) is amended to impose withholding tax on interest that, in addition to not being fully exempt interest, is paid or payable to either:

a. a non-resident recipient with whom the payer does not deal at arm's length; or

b. a non-resident recipient (whether arm's length or not) if the interest is paid or payable in respect of a debt obligation owed by the payer to a non-resident with whom the payer does not deal at arm's length.

The following example illustrates the application of this amendment.

A Co., a corporation resident in Canada, and NR Co., a non-resident corporation, are controlled by the same non-resident parent corporation. A Co. and NR Co. deal at non-arm's length for the purposes of the Act. A Co. owes a debt to NR Co. that has a 20-year term and on which interest is paid semi-annually. During the first nine years that the debt is outstanding, Part XIII withholding tax is remitted on any interest paid on the debt by A Co. to NR Co. In year 10, NR Co. sells the right to receive the remaining interest payments to a non-resident bank that deals at arm's length with A Co. As a result of this amendment, Part XIII withholding tax will continue to apply to the interest paid by A Co. Even though the remaining interest payments will be paid to a non-resident that deals at arm's length with A Co., the interest is paid in respect of a debt owed by A Co. to a non-arm's length non-resident (i.e., NR Co.).

This amendment applies to interest paid or payable on or after March 16, 2011 unless it is interest on an obligation incurred by the payer before that date and the recipient acquired the entitlement to the interest before March 16, 2011.

Estate and Trust Income

ITA
212(1)(c)

The French version of paragraph 212(1)(c) is amended to replace the term "paiement" with the term "distribution" for consistency with other provisions of the Act dealing with amounts distributed by trusts and estates. This amendment will come into force on Royal Assent.

Rents, Royalties, etc.

ITA
212(1)(d)

Paragraph 212(1)(d) of the Act describes various amounts, in the nature of rent, royalties and similar payments, on which tax under Part XIII of the Act is imposed. Subparagraphs 212(1)(d)(vi) through (xi) list payments to which the tax does not apply. Three changes have been made to paragraph 212(1)(d).

First, subparagraph 212(1)(d)(iv), which concerns payments made in respect of an agreement between a person resident in Canada and a non-resident person under which the non-resident person agrees not to use or not to permit any other person to use any thing referred to in subparagraph (d)(i), is amended so that it does not apply to certain restrictive covenant amounts to which new paragraph 212(1)(i) applies. This change applies to amounts paid or credited after October 7, 2003.

Second, subparagraph 212(1)(d)(xi), which currently provides that Part XIII tax does not apply to payments made to an arm's length person for the use of property that is an aircraft, certain attachments thereto as well as to spare parts for such property, is amended, applicable after July 2003, to also apply to air navigation equipment utilized in the provision of services under the Civil Air Navigation Services Commercialization Act, and to computer software that is necessary to the operation of that equipment that is used by the payer for no other purpose.

Third, new subparagraph 212(1)(d)(xii) clarifies that subsection 212(5) of the Act, which is amended as described below, is the sole provision in Part XIII that applies the tax to payments for rights in or to use a film or video that is used or reproduced in Canada. This change applies for the 2000 and subsequent taxation years.

Restrictive Covenant Amount

ITA
212(1)(i)

New paragraph 212(1)(i) of the Act includes, as amounts subject to the withholding tax, two amounts. First, the withholding tax applies to an amount in respect of a restrictive covenant to which new subsection 56.4(2) applies. Second, the withholding tax applies to an amount to which new paragraph 56(1)(m) applies (an amount received on a bad debt previously deducted).

New paragraph 212(1)(i) applies to amounts paid or credited after October 7, 2003.

Exempt Dividends

ITA
212(2.1)

New subsection 212(2.1) is added to exempt from Part XIII tax certain dividend compensation payments made to a non-resident by a Canadian securities borrower under a securities lending arrangement if

This amendment applies to securities lending arrangements entered into after May 1995, except that, before 2002, the reference to "subparagraph 260(8)(c)(i)" is to be read as "subparagraph 260(8)(a)(i)".

Replacement Obligations

ITA
212(3)

Subsection 212(3) was revised significantly in 2007. The pre-2007 revision contains the definition of replacement obligations, and the post-2007 version contains the definitions of "fully exempt interest" and "participating debt interest". The pre-2007 version of subsection 212(3) – the definition of replacement obligations – is amended.

Among the exceptions to the imposition of tax under Part XIII of the Act on interest is one found in subparagraph 212(1)(b)(vii), as it read before the 2007 revision to paragraph 212(1)(b), for interest paid by a corporation resident in Canada on its medium and long-term arm's length debt. Subsection 212(3), which applies for the purpose of subparagraph 212(1)(b)(vii) (as it read before the 2007 revision), allows a corporation in certain circumstances of financial difficulty to treat a debt obligation that replaces another as having been issued when that other obligation was issued. The circumstances in which this is possible are set out in paragraphs 212(3)(a) to (c). Paragraph 212(3)(b) requires that, for the subsection to apply, it must be possible to regard the proceeds of the replacement borrowing as being used in financing an active business that was carried on in Canada, by the issuing company or one with which it does not deal at arm's length, immediately before the replacement obligation was issued.

There is no clear basis in tax policy for this requirement. The condition in paragraph 212(3)(b) is repealed for replacement debt obligations that are issued after 2000.

Interest – Definitions

ITA
212(3)

Subsection 212(3) contains definitions for the purposes of paragraph 212(1)(b). In 2007, the subsection was revised to contain two definitions, namely "fully exempt interest" and "participating debt interest", for the purpose of paragraph 212(1)(b). Before the 2007 revision, it contained the definition of replacement obligations for the purpose of subparagraph 212(1)(b)(vii). As the application of subsection 212(3) before 2008 has been amended (as noted above), for clarity, the 2007 revision has re-enacted the two definitions noted above.

This amendment applies to interest paid or credited to a non-resident after 2007.

Motion Picture Films

ITA
212(5)

Subsection 212(5) of the Act applies tax under Part XIII to, in general terms, any amount that a person resident in Canada pays to a non-resident person for a right in or to the use of a motion picture film or video product that has been or is to be used or reproduced in Canada (otherwise than for a news program). As presently worded, the subsection can be read as applying even if the payment in question is not for that Canadian use or reproduction, but relates instead to employment of the film or video in some other country. Accordingly, subsection 212(5) is amended to impose tax only to the extent that the amount of the payment relates to the use or reproduction of the product in Canada. This amendment applies to the 2000 and subsequent taxation years.

Exemptions

ITA
212(9)

Subsection 212(9) of the Act provides an exemption from withholding tax under Part XIII of the Act with respect to certain amounts of a trust's income that are paid or credited to a non-resident beneficiary under the trust and that would otherwise be subject to withholding tax under paragraph 212(1)(c). The exemption currently applies only in respect of amounts that are attributable to income of the trust in the form of: dividends or interest received by the trust from a non-resident-owned investment corporation; certain artistic royalties; and interest, where the trust is a mutual fund maintained primarily for the benefit of non-resident persons. If no Part XIII tax would have been payable with respect to the dividends, interest or royalties if they had been paid directly to the beneficiary, no Part XIII tax is payable with respect to a distribution from trust income to non-resident beneficiaries that derives from the dividends, interest or royalties.

Subsection 212(9) is amended to add a fourth type of trust income to this list of exemptions. In certain circumstances, Canada's Superintendent of Financial Institutions or a provincial regulatory authority having powers similar to those of the Superintendent (such as the Autorité des Marchés Financiers) may require a non-resident reinsurer that reinsures Canadian risks to place assets in a trust in Canada. Such a "reinsurance trust" may earn dividend or interest income, which is payable to the non-resident. In recognition of the regulatory requirement for the use of these trusts, subsection 212(9) is amended to provide that, if the dividends or interest would not have borne Canadian tax if the non-resident had earned them directly, they may be distributed to the non-resident free of Part XIII tax, provided that trust was established under a reinsurance trust agreement that accords with guidelines issued by the relevant regulatory authority and that the regulatory authority is a party to that agreement.

This amendment applies to amounts paid or credited to non‑residents after 2000. Subsection 227(6) provides for a refund, upon application within a specified time, of amounts paid to the Receiver General on behalf of a person under Part XIII or Part XII.5.  For the purpose of a refund application under subsection 227(6), when an amount has remitted to the Receiver General in respect of a payment described by new paragraph 212(9)(d), the application will be deemed to be filed on time provided that it is made within 180 days after the day on which this Act receives Royal Assent. The effect of this deeming rule is to provide 180 days from the date on which this Act receives Royal Assent for refund applications to be made in respect of tax withheld on payments that are exempt from Part XIII tax by reason of paragraph 212(9)(d).

Rent and Other Payments

ITA
212(13)

Subsection 212(13) of the Act imposes non-resident withholding tax on certain payments made by one non-resident to another non-resident. Subsection 212(13) is amended to add new paragraph (g), which imposes non-resident withholding tax on amounts paid or credited by a non-resident person for a restrictive covenant to which new paragraph 212(1)(i) would apply if the amount paid or credited were paid or credited by a person resident in Canada, and the amount affects, or is intended to affect, in any way whatever,

In general, new paragraph 212(13)(g) applies to amounts paid or credited after October 7, 2003.

Application of Part XIII Tax Where Non-Resident Operates in Canada

ITA
212(13.2)

Subsection 212(13.2) of the Act is one of several provisions that extend Part XIII tax to apply in particular circumstances – in this case, for the most part, the payment by a non-resident of royalties and similar amounts in respect of a Canadian income source. The principle that underlies subsection 212(13.2) is that if a non-resident has Canadian-source business or resource income, and can deduct in computing that income (strictly speaking, in computing "taxable income earned in Canada") a payment to another non-resident, that payment ought to be treated for purposes of Part XIII tax as though it had been made by a person resident in Canada. This is accomplished by treating the first non-resident - the one making the payment - as a person resident in Canada for those purposes.

In its current form, subsection 212(13.2) applies only if the non-resident making the payment carries on business principally in Canada, manufactures or processes goods in Canada or carries out any of various resource activities here. On the other hand, the rule does not explicitly link that business or activity to the deductibility of the payment: it can be read as applying whether or not the payment is made in relation to the particular business or activity.

Accordingly, subsection 212(13.2) is amended to apply in respect of any portion of a payment (other than one to which the generally comparable rule in subsection 212(13) applies) made by one non-resident person to another that is deductible in computing the first non-resident's taxable income earned in Canada from any source. The only exceptions are payments that are deductible in respect of treaty-protected businesses or treaty-protected properties (as defined in subsection 248(1) of the Act).

This amendment applies to amounts paid or credited under obligations entered into after December 20, 2002.

Tax on Registered Securities Dealers

ITA
212(19)

Subsection 212(19) of the Act imposes a tax on Canadian-resident registered securities dealers that enter into certain securities lending arrangements. The tax is calculated, by formula, based in part on the capital or the margin requirement of the relevant provincial laws governing the registration or license of securities dealers.

Subsection 212(19) was amended in 2007 consequential to the amendment to paragraph 212(1)(b). The 2007 amendment to subparagraph (b)(i) of the description of B in the formula in subsection 212(19), which specifies the applicable provincial legislation that govern the registration or license of securities dealers, ought to have applied from an earlier date. This amendment is therefore re-introduced with an earlier coming-into-force date.

This amendment applies to securities lending arrangements entered into after May 28, 1993.

Clause 348

Deemed Payments

ITA
214(3)

The French version of paragraph 214(3)(k) of the Act is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Clause 349

Alternative re Rents and Timber Royalties

ITA
216

Section 216 of the Act allows a non-resident person to file a return of income under Part I in respect of rent on real property in Canada or timber royalties and to pay, instead of the non-resident withholding tax under Part XIII, tax under Part I on the basis of the non-resident's income from the rent or royalties.

Subsection 216(1), which provides the basic rule permitting a non-resident to be taxed under Part I of the Act on this income, is amended to improve its structure and language. Most of the changes are stylistic; the amendment also updates the subsection's reference to the form of the non-resident's Part I tax return, to reflect the implementation of a special return for these non-residents. This amendment applies to taxation years that end after December 20, 2002.

In general terms, subsection 216(5) of the Act requires that a person who has previously made an election under subsection 216(1), and who has claimed capital cost allowance in computing income under the subsection, must file a return of income for the year in which the property that was the subject of the election is disposed of. Subsection 216(5) is modified in the same manner as subsection 216(1), again with the main change being an updated description of the relevant form. This amendment applies to taxation years that end after December 20, 2002.

Subsection 216(7) of the Act provides that the rules in section 61 of the Act, dealing with income averaging annuity contracts, do not apply in computing a non-resident person's income for a taxation year in respect of which subsection 216(5) applies to the person. Since section 61 is no longer relevant to any current transaction, subsection 216(7) is repealed. This repeal takes effect on Royal Assent.

Clause 350

Administration and Enforcement

ITA
220

Section 220 of the Act sets out a number of rules relating to the administration and enforcement of the Act.

Waiver of Filing of Documents

ITA
220(2.2)

Under subsection 220(2.1) of the Act, if a provision of the Act or the Regulations requires a person to file a prescribed form, receipt or other document, or to provide prescribed information, the Minister may waive the requirement, but the document or information shall be provided at the Minister's request.

New subsection 220(2.2) provides that subsection 220(2.1) does not extend to a prescribed form, receipt, document or information, or prescribed information, that is filed on or after the day specified – in respect of the form, receipt, document or information – in subsection 37(11) or paragraph (m) of the definition "investment tax credit" in subsection 127(9) of the Act. Those provisions provide, in general, that a taxpayer's claim for SR&ED treatment be made in a prescribed form that must be received by the Minister no later than 12 months after the taxpayer's filing-due date for the taxation year in which the expenditures were made.

The effect of new subsection 220(2.2) is that a person cannot deduct a scientific research and experimental development (SR&ED) expenditure under section 37 of the Act, or claim an investment tax credit in respect of an expenditure, if the person takes more than the additional 12 months allowed to make a claim with the Minister.

In general, new subsection 220(2.2) applies on and after November 17, 2005.

Security for Tax on Distributions of Taxable Canadian Property to Non-resident Beneficiaries

ITA
220(4.6) and (4.61)

The French version of subsections 220(4.6) and (4.61) of the Act is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Clause 351

Penalty

ITA
227(8)

Subsection 227(8) of the Act imposes a two-tier penalty for failure to deduct or withhold an amount as required by subsection 153(1) and section 215.

Subsection 227(8) is amended to replace the reference to subsection 227(8.5), which has been repealed, with a reference to subsection 227(9.5). Subsection 227(9.5) provides that in applying paragraph 227(8)(b), in respect of an amount required by paragraph 153(1)(a) to be deducted or withheld, each establishment of a person is deemed to be a separate person.

This amendment comes into force on Royal Assent.

Assessment

ITA
227(10)(b)

Subsection 227(10) empowers the Minister of National Revenue to assess a person for various amounts, including penalties and other amounts payable by the person in respect of the failure to comply with the various provisions of the Act. Subsection 227(10) is amended to apply to a person or partnership that is required to pay a penalty under new subsection 237.3(8) for failure to comply with the reporting requirements in respect of a reportable transaction (within the meaning assigned under new subsection 237.3(1)).

This amendment applies in respect of avoidance transactions that are entered into after 2010 or that are part of a series of transactions that begins before 2011 and ends after 2010.

Clause 352

Records and Books

ITA
230(2)

Subsection 230(2) of the Act requires that registered charities and registered Canadian amateur athletic associations keep books and records containing information that will enable the Minister of National Revenue to determine whether there are grounds for the revocation of their registration.

The French version of this subsection is amended to replace the expression « motifs d'annulation » by the expression « motifs de révocation » in order to be consistent with the terminology used in sections 149.1 and 168 of the Act, which authorize the Minister to revoke the registration of these charities and associations.

This amendment applies on Royal Assent.

ITA
230(3)

Subsection 230(3) provides that where a person has failed to keep adequate records and books of account, the Minister of National Revenue may require them to keep such records and books as the Minister specifies. The French version of this subsection is amended to correct grammatical errors.

This amendment applies on Royal Assent.

Clause 353

Requirement to Provide Documents or Information

ITA
231.2(1)

Subsection 231.2(1) of the Act provides that, notwithstanding any other provision of the Act, the Minister of National Revenue may by notice require that any person provide information or any document for any purpose relating to the administration or enforcement of the Act. An exception is made where the information or document relates to an unnamed person or persons, in which case the procedure set out in subsections 231.1(2) to (6) of the Act must be followed.

Subsection 231.2(1) is amended to provide that the Minister may by notice require any person to provide information or any document relating to the administration or enforcement of the Act, of a listed international agreement or, for greater certainty, of a tax treaty with another country.

A "listed international agreement" is newly defined in subsection 248(1) to mean the Convention on Mutual Administrative Assistance in Tax Matters, concluded at Strasbourg on January 25, 1988, as amended from time to time by a protocol or other international instrument as ratified by Canada and a comprehensive tax information exchange agreement that Canada has entered into, and that has effect, in respect of another country or jurisdiction. A "tax treaty" with a country is defined in subsection 248(1) to mean a comprehensive agreement or convention for the elimination of double taxation on income, between the Government of Canada and the government of the country, which has the force of law in Canada at that time.

This amendment applies on Royal Assent.

Clause 354

Returns Respecting Foreign Affiliates

ITA
233.4(1)

Section 233.4 of the Act provides reporting requirements in respect of foreign affiliates. In general terms, it provides that taxpayers resident in Canada (or certain partnerships) of which a non-resident corporation or non-resident trust is a foreign affiliate must file an information return in respect of the affiliate.

Subparagraph 233.4(1)(c)(ii) is amended to correct a grammatical error in the existing text. This amendment applies on Royal Assent.

Clause 355

Tax Shelters

Definitions

ITA
237.1(1)

Subsection 237.1(1) of the Act provides definitions of terms that apply for the purpose of tax shelter identification and the definition of "tax shelter investment" in subsection 143.2(1) of the Act. The definition "gifting arrangement" includes an arrangement in respect of which it may reasonably be expected, having regard to representations made, that if a taxpayer makes a gift or political contribution under the arrangement, a person (whether or not it is the taxpayer) will incur an indebtedness in respect of which recourse is limited. This definition is amended in respect of gifts and contributions made after 6:00 p.m. (EST), December 5, 2003, to also refer to a limited-recourse debt determined under new subsection 143.2(6.1) of the Act. For additional details regarding limited-recourse debt in respect of a gift, see the commentary to subsection 143.2(6.1).

Clause 356

Reporting for Tax Avoidance Transactions

ITA
237.3

Backgrounder

Budget 2010 announced a public consultation process for a proposed reporting regime in respect of certain aggressive tax avoidance transactions. On May 7, 2010, a backgrounder and further details about the proposed reporting regime were released for a 60-day public consultation period, which ended on July 7, 2010.

As stated in Budget 2010, the main objective of the proposed reporting regime is to identify to the Canada Revenue Agency certain types of potentially abusive tax avoidance transactions that are not currently subject to any specific information reporting requirements under the Act. To preserve the fairness and the integrity of Canada's self-assessment system, the Canada Revenue Agency must be able to properly review tax benefits claimed by taxpayers in their income tax returns, including tax benefits claimed in respect of aggressive tax planning arrangements. On the other hand, a balance must be struck between the need to protect the integrity of the Canadian income tax system and a taxpayer's entitlement to plan their affairs in a manner that legally minimizes their tax liability.

The submissions received in respect of the public consultation raised various issues on specific aspects of the proposals, many of which sought clarification regarding particular aspects of the criteria upon which the reporting requirement is based. In addition, it was suggested in several submissions that the proposals be further clarified in the Explanatory Notes.

These amendments address the issues raised, particularly when the proposed regime is considered as a whole. Notably, the definitions "advisor" and "promoter" have been drafted to reflect comments received, as have the limitations on the penalty to which an advisor or promoter may be subject. As well, the "due diligence defence" in new subsection 237.3(11) is intended to address some of these issues.

Under these amendments, a transaction would be a reportable transaction if it is an avoidance transaction (as defined for the purpose of the general anti-avoidance rule in the Act), or if it is a transaction that is part of a series of transactions that includes an avoidance transaction, if at any time any two of the hallmarks provided in the definition "reportable transaction" come into existence in respect of the avoidance transaction or series. Therefore, a transaction that is not an avoidance transaction, and a transaction in a series of transactions that does not include an avoidance transaction, would not be a reportable transaction, regardless of whether any of the hallmarks exist in respect of the transaction or series. Accordingly, it should be the case that normal commercial transactions that do not pose an increased risk of abuse would not have to be reported under this new reporting regime.

As noted, this reporting regime also provides a due diligence defence for persons who could be subject to the proposed reporting requirements. To avail themselves of this defence, a person would be required to make reasonable efforts to determine whether a transaction is a reportable transaction, whether they are subject to an information reporting requirement in respect of the reportable transaction, and what information would have to be provided to the Minister of National Revenue. If a transaction is a reportable transaction and the person is subject to an information reporting requirement, then the person must determine whether the reporting requirement to which they are subject has been satisfied in all respects by another person. If not, then the person must identify all the information to be provided in respect of the reportable transaction. If after making reasonable efforts to that effect, a particular person determines that no reporting requirement exists, or that another person has satisfied the reporting requirement to which the particular person is subject, the Minister of National Revenue will consider the particular person to have met the due diligence defence test. Whether a person has made such efforts would have to be determined according to the facts and circumstances of each case.

These explanatory notes provide further technical details about this information reporting regime and also address and clarify specific issues raised during the consultations.

Overview

New section 237.3 of the Act contains rules in respect of a new information reporting regime meant to require the disclosure to the Minister of National Revenue (the "Minister") in a timely manner of certain aggressive tax avoidance transactions.

In general terms, this new section imposes a reporting obligation on certain persons in respect of avoidance transactions or series of transactions that includes an avoidance transaction if two of three hallmarks provided in the definition "reportable transaction" in new subsection 237.3(1) are applicable in respect of the avoidance transactions or the series. The particular hallmarks reflect certain circumstances that commonly exist in the context of tax avoidance transactions. The presence of these hallmarks often indicates a greater likelihood that the underlying transactions are ones that could be challenged under the existing provisions of the tax law.

A reporting obligation is imposed on the particular person for whom a tax benefit could result from an avoidance transaction or series, any person who enters into an avoidance transaction for the benefit of the particular person as well as any "advisor" or "promoter" (within the meaning assigned under new subsection 237.3(1)) who is entitled to a fee in circumstances described in the definition "reportable transaction". A full and accurate information return must be filed in respect of each transaction that is a reportable transaction. The filing of an information return is for administrative purpose only, and cannot be construed as an admission by a person that section 245 applies to the transaction or that a transaction is part of a series of transactions.

If a full and accurate disclosure in respect of a reportable transaction is not made in accordance with this new section, the Minister may impose a late-filing penalty on the persons who have failed to satisfy their reporting obligations and redetermine the tax consequences of any person for whom a tax benefit could result from the undisclosed reportable transaction or series that includes that transaction. The redetermination could be made as if section 245 was deemed to apply, notwithstanding subsection 245(4).

Persons who have failed to fully satisfy their reporting obligations may be jointly and severally, or solidarily, liable to the penalty, subject to a limitation for advisors and promoters and the due diligence defence provided in new subsection 237.3(11). If the reporting obligation is satisfied in accordance with this new section only after the filing date, and any late-filing penalty and interest is paid, the Minister may allow a tax benefit from a reportable transaction disclosed late if the tax benefit satisfies all of the requirements of the otherwise applicable income tax law, including the general anti-avoidance rule.

New section 237.3 applies in respect of avoidance transactions that are entered into after 2010, as well as to avoidance transactions that are part of a series of transactions that commenced before 2011 and is completed after 2010. If the filing of an information return under proposed subsection 237.3 would be required before July 1, 2012, the information return is deemed to be filed before that day if it is filed before the day that is 120 days after the day on which the amendments to the Act receive Royal Assent. Also, as a transitional rule, a prohibition against disclosure that is a part of a general engagement agreement entered into between an advisor and his or her client before March 4, 2010 will be deemed not to be “confidential protection” in respect of an avoidance transaction that is part of a series of transactions that commenced before 2011 and is completed after 2010. For the purpose of this transitional rule, an engagement agreement means an agreement entered into between an advisor and his or her client for the provision of accounting, legal or similar tax advisory services.

Definitions

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237.3(1)

New subsection 237.3(1) contains definitions that are relevant in determining, among other things, if an avoidance transaction or a transaction in a series of transactions is a "reportable transaction", a person is required to file an information return in respect of the "reportable transaction", and the amount of any penalty that may be payable by the persons required to file the prescribed information return where the return does not provide full and accurate disclosure, is filed late, or is not filed at all.

The definition "reportable transaction" is the principal definition. The other definitions in new subsection 237.3(1) must be read in the context of that definition.

Definition "reportable transaction"

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237.3(1)

A "reportable transaction" means an avoidance transaction, within the meaning assigned by subsection 245(3), entered into by or for the benefit of a person, and each transaction entered into by or for the benefit of a person that is part of a series of transactions that includes the avoidance transaction, where at any time, any two of paragraphs (a) to (c) of that definition are applicable in respect of the avoidance transaction or series. Each transaction that is part of a series of transactions that includes an avoidance transaction is a separate reportable transaction, and this is also the case where a series of transactions includes more than one avoidance transaction.

In general terms, a transaction would be a reportable transaction to a person who could obtain a tax benefit from the transaction if the criteria of the definition "reportable transaction" exist in relation to the person. In the context of the reporting obligations imposed under new subsection 237.3(2), a person would have a reporting obligation in respect of a transaction if the person has entered into the transaction, if it may reasonably be considered that the transaction is an avoidance transaction to that person, and if any two of paragraphs (a) to (c) apply in respect of the avoidance transaction or series of transactions that includes the avoidance transaction. In the case of a person who could obtain a tax benefit from a transaction that is entered into by another person for the benefit of the former, both persons would have a reporting obligation in respect of the transaction to the extent that the transaction is an avoidance transaction to the person, the person could obtain a tax benefit from the transaction or series of transactions that includes the transaction, and if any two of paragraphs (a) to (c) apply in respect of the avoidance transaction or series. Whether a person would be considered to have entered into an avoidance transaction for the benefit of another person is to be based on the facts and circumstances of each case. In addition, a person who is an advisor or a promoter in respect of the reportable transaction could have a reporting obligation. The notes accompanying new subsection 237.3(2) provide further details in this regard.

Although it is often the case that there are two parties to a transaction, for example a purchaser and a seller of property, whether the transaction is a reportable transaction to either of these parties is to be determined from the perspective of each party. Accordingly, the fact that a transaction is an avoidance transaction and bears two hallmarks from the perspective of the purchaser, and therefore is a reportable transaction to the purchaser, does not mean that it is a reportable transaction to the seller.

Paragraphs (a) to (c) of the definition "reportable transaction" describe three sets of circumstances the existence of any two of which in respect of an avoidance transaction, or a series of transactions that includes the avoidance transaction, will cause that avoidance transaction, or each transaction that is part of that series, to be a "reportable transaction". As well, it is intended that paragraphs (a) to (c) apply in respect of a series of transactions if that series includes more than one avoidance transaction and if any two of the paragraphs are applicable in respect of one or more of those avoidance transactions. In other words, if a series of transactions includes more than one avoidance transaction, and any of paragraphs (a) to (c) are applicable in respect of one of those transactions while any of the paragraphs are applicable to another of those transactions, then each transaction in the series will be a reportable transaction.

Paragraph (a) – A "fee" in relation to the avoidance transaction or series of transactions that includes the avoidance transaction

Paragraph (a) of the definition "reportable transaction" under new subsection 237.3(1) refers to circumstances in which an "advisor" or "promoter" (within the meanings assigned by that new subsection), or any person who is not dealing at arm's length with an advisor or promoter, is entitled to any of three types of "fees". This paragraph applies from the perspective of the advisor or promoter who has or had an entitlement to a fee in respect of an avoidance transaction or series of transactions, and not from the perspective of the persons from whom the advisor or the promoter is or was entitled to receive the fee. In this explanatory note, a reference to an "advisor" or a "promoter" includes any person who is not dealing at arm's length with the advisor or promoter.

For the purpose of new section 237.3, a "fee" means any consideration that is, or could be, received or receivable, directly or indirectly and in any manner whatever, by an advisor or promoter in respect of an avoidance transaction, or a series of transactions that includes the avoidance transaction, for

The circumstances described in paragraph (a) would exist in respect of an avoidance transaction or series of transactions that includes the avoidance transaction if an amount meets the definition "fee" under new subsection 237.3(1) (see the discussion in respect of that definition for more details) and that fee meets the characteristics of any of the three types of fees described in this paragraph.

The first type of fee, described in subparagraph (a)(i), is a fee of an advisor or promoter the computation of which is to any extent based on the amount of a tax benefit that could result from an avoidance transaction or series of transactions that includes the avoidance transaction. Whether a fee is based on the amount of a tax benefit will depend on all the facts and circumstances relating to the consideration received. Examples of circumstances in which the amount of a fee of an advisor or promoter would be determined according to the amount of the tax benefit from the transaction include situations where the advisor or promoter sets a fee the amount of which is based, in whole or in part, on a percentage of the amount of the tax benefit from a transaction or series of transaction. However, a fee based solely on the value of the services provided in respect of a transaction or series, determined without reference to the tax results of the transaction or series, would not be a fee described in subparagraph (a)(i).

The second type of fee, described in subparagraph (a)(ii), refers to a fee of an advisor or promoter for which the advisor or promoter has or had an entitlement that is contingent upon the obtaining of, or the failure to obtain, a tax benefit from an avoidance transaction or series of transactions that includes the avoidance transaction. In contrast to subparagraph (a)(i) which is focused on fees the amount of which, or computation of the quantum of which, is dependent on the tax benefit sought under the avoidance transaction or series, the kinds of fees referred to in subparagraph (a)(ii) include the following:

Subparagraph (a)(ii) of the definition would not apply if no portion of the fee to which the advisor or promoter is entitled is dependent on the taxpayer obtaining any tax benefit, nor would it apply merely because the fee to which an advisor or promoter is entitled depends on whether a transaction or series is completed provided that the fee is not dependent on any tax benefit from the transaction or series.

The third type of fee, described in subparagraph (a)(iii), is a fee that is attributable to the number of persons who enter into an avoidance transaction or series (or a similar avoidance transaction or series), or who have been provided access to advice or an opinion given by the advisor or promoter regarding the tax consequences from the avoidance transaction or series (or a similar avoidance transaction or series). Similar transactions or series include transactions or series having the same or similar structure and entered into by different taxpayers, when the objective of those transactions or series is to result in similar tax benefits for each of those taxpayers, even if those transactions or series may involve different properties or obligations. For example, a broadly marketed scheme in which different taxpayers acquire and finance property separately, but where the property that each taxpayer acquires is similar in nature and where the financing structure that each taxpayer enters into is similar, may be considered as "similar avoidance transactions".

Paragraph (b) – "Confidential protection" to the benefit of an advisor or promoter in respect of the details or structure of an avoidance transaction or series of transactions that includes the avoidance transaction

Paragraph (b) of the definition "reportable transaction" refers to circumstances in which an "advisor" or "promoter" obtains "confidential protection" in respect of an avoidance transaction or series of transactions that includes the avoidance transaction. In this explanatory note, a reference to an "advisor" or a "promoter" includes any person who does not deal at arm's length with the advisor or promoter.

Based on the definition "confidential protection", the circumstances described in paragraph (b) of the definition "reportable transaction" would exist in respect of an avoidance transaction or series of transactions that includes the avoidance transaction if an advisor or promoter in respect of the transaction or series obtains or obtained anything that would prohibit the disclosure to any person or to the Minister of details or the structure of the avoidance transaction or series that includes the avoidance transaction under which a tax benefit could result. This is in contrast to a situation in which a client of an advisor benefits from the existence of solicitor-client privilege in respect of information regarding the avoidance transaction or series of transactions, and which would not give rise to a "hallmark" in respect of the avoidance transaction or series. See the explanatory notes accompanying new subsection 237.3(11) for further details about solicitor-client privilege in the context of new section 237.3.

For greater certainty, the disclaiming or restricting of an advisor's liability shall not be considered confidential protection if there is no prohibition of the disclosure of the details or structure of the avoidance transaction of series of transactions that includes the avoidance transaction. An example would be a standard provision found in many tax opinions limiting an adviser's liability solely to his or her client and disclaiming liability to any third parties. See also the discussion in respect of the definition "confidential protection" in new subsection 237.3(1).

Paragraph (c) – "Contractual protection" obtained for a person for whom a tax benefit could result from an avoidance transaction or series of transactions that includes the avoidance transaction

Paragraph (c) of the definition "reportable transaction" refers to the circumstances in which "contractual protection" is obtained in respect of an avoidance transaction or series of transactions. The explanatory note accompanying the definition "contractual protection" in new subsection 237.3(1) provides further details in this regard. The circumstances provided in paragraph (c) would exist in respect of an avoidance transaction or series of transactions that includes the avoidance transaction if one of the following circumstances applies in respect of the avoidance transaction or series:

"Contractual protection" in respect of a transaction or series of transactions means:

The first type of contractual protection described above refers to tax-result protection under which the taxpayer is compensated or indemnified should the tax benefit from the avoidance transaction or series for the taxpayer not be achieved under the law, in any form whatever. For greater certainty, an advance income tax ruling obtained from the Canada Revenue Agency by a person for whom a tax benefit could result from an avoidance transaction or series of transactions that includes an avoidance transaction is not to be considered contractual protection in respect of the avoidance transaction or series.

In addition, the first type of contractual protection could include situations where a taxpayer would be entitled to be compensated for any fees to be incurred during the course of an audit, an objection to an assessment, reassessment, additional assessment or determination pursuant to subsection 152(1.11) (hereafter referred to in these notes as an "assessment"), an appeal of an assessment to the Tax Court of Canada or any other subsequent appeal to a court of higher jurisdiction, in respect of a tax benefit which could result from an avoidance transaction or series of transactions.

The second type of contractual protection described above refers to situations where, in respect of a transaction or series of transactions, a promoter (or a person who does not deal at arm's length with the promoter) provides an undertaking to assist a person in the course of a dispute in respect of a tax benefit from the transaction or series, even if done for no consideration. This would include situations where the promoter offers to provide to a person relevant documentation and guidance to dispute an assessment or file an appeal of any court's decision in respect of the transaction or series.

"Contractual protection" would also exist in respect of an avoidance transaction or a series of transactions that includes the avoidance transaction if an advisor or promoter, or any person who does not deal at arm's length with the advisor or promoter, has or had contractual protection in respect of the avoidance transaction or series.

Fees that are contingent upon the obtaining of a tax benefit by a person are excluded from the application of paragraph (c) to preclude a double recognition of such fees. In the absence of this specific exclusion, an advisor's or a promoter's fee might be considered as both a type of "contractual protection" in paragraph (c) as well as the type of fee referred to in paragraph (a).

An advisor or promoter (for example, a promoter or an insurer) entitled to a "fee" for providing contractual protection in respect of an avoidance transaction, or a series of transactions that includes the avoidance transaction, may have a reporting obligation in respect of the avoidance transaction or series (along with the person who could benefit from the avoidance transaction or series) if an additional paragraph (hallmark) provided in the definition "reportable transaction" applies in respect of the avoidance transaction or series. For example, if in respect of an avoidance transaction or series of transactions that includes the avoidance transaction, a person obtains "contractual protection" from the advisor or promoter that the person will be compensated for all or a portion of a denied tax benefit or litigation costs (including a refund of any portion of a fee charged by the advisor or promoter) two hallmarks will exist if any portion of an advisor's or a promoter's fees were contingent on the tax benefit not being denied.

A person, including an advisor or promoter, who fails to file an information return as and when required may be liable to a penalty. The amount of certain fees of an advisor or promoter will be included in the amount of the penalty provided under new subsection 237.3(8). See the explanatory note accompanying new subsection 237.3(8) for further details in this regard.

Other Definitions (some of which were discussed above)

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Subsection 237.3(1)

"advisor"

The definition "advisor" is relevant in determining whether a person is required to file an information return in respect of an avoidance transaction or a transaction in a series of transactions that includes an avoidance transaction, and the amount of the penalty to which that person may be liable under new subsection 237.3(8).

An "advisor" means any person who, in respect of a transaction or a series of transactions, provides directly or indirectly in any manner whatever, any "contractual protection" in respect of the transaction or series, or any assistance or advice in creating, developing, planning, organizing or implementing the transaction or series, to any other person. A person can be an "advisor" to a particular person who enters into a transaction and for whom a tax benefit could result from the transaction or series, or to a person who enters into a transaction for the benefit of another person.

A person can also be an advisor in respect of a transaction or series if that person provides contractual protection, assistance or advice to any promoter or any other advisor in respect of the transaction of series of transactions, even though the person does not provide contractual protection, assistance or advice directly to the person who entered into the transaction or series. Thus, although an advisor would generally be a person whose business is to provide professional services or contractual protection to a person entering into a transaction or series, other persons can also be considered to be an "advisor" in respect of a transaction or series. More than one person may be an advisor in respect of a transaction or series of transactions.

A person or partnership that provides advice or representation to a person only in respect of an audit or tax dispute in relation to a particular transaction or series of transactions, and that, in respect of that transaction or series, was neither involved in the creation, development, planning, organizing or implementation of the transaction or series, nor in the providing of contractual protection, would not be an advisor in respect of that transaction or series.

"confidential protection"

"Confidential protection" in respect of a transaction or series of transactions means anything that prohibits the disclosure to any person or to the Minister of the details or structure of the transaction or series under which a tax benefit results or would result but for section 245. Under the definition "reportable transaction", "confidential protection" would be relevant as a "hallmark" in respect of an avoidance transaction or series of transactions that includes an avoidance transaction only if an advisor or promoter obtains or obtained such protection in respect of the avoidance transaction or series.

This hallmark will arise in respect of an avoidance transaction or series of transactions that includes an avoidance transaction if either

However, confidential protection would not arise by virtue of an obligation of confidentiality having been given by an advisor or promoter (as opposed to having been obtained by the advisor or promoter). Accordingly, for example, rights of confidentiality of a person who enters into a transaction will not be a "hallmark" under paragraph (b) of the definition "reportable transaction" if those rights protect the confidentiality entitlement of a person against the person's advisors (such as the rights of a client vis-à-vis his or her legal advisor which could arise, for example, by virtue of the existence of solicitor-client privilege).

For greater certainty, the disclaiming or restricting of an advisor's liability (such as a disclaimer against liability to third parties who might seek to rely on advice given by the advisor to a client, as is typical in tax opinions) shall not be considered confidential protection if there is no prohibition on the disclosure of the details or structure of the transaction of series. For more details, see explanatory notes accompanying the definition "reportable transaction".

"contractual protection"

"Contractual protection" means in respect of a transaction or series of transactions,

"fee"

A "fee" means any consideration that is, or could be, received or receivable, directly or indirectly in any manner whatever, in respect of a transaction or series of transactions by an advisor or a promoter, or any person who does not deal at arm's length with an advisor or a promoter, for undertaking any of the activities described in this definition. Consideration is assimilated to a "fee" for the purpose of new section 237.3 if that consideration is for providing advice or an opinion with respect to the transaction or series; for creating, developing, planning, organizing or implementing the transaction or series; for promoting or selling an arrangement, plan or scheme that includes, or relates to, the transaction or series; for preparing documents supporting the transaction or series, including tax returns or any information returns to be filed under the Act; or for providing "contractual protection" (within the meaning assigned by subsection 237.3(1)), in respect of the transaction or series.

"person"

"Person" includes a partnership.

"promoter"

"Promoter" means any person who, in respect of a transaction or series of transactions, promotes or sells an arrangement (as defined for the purposes of the definition), where it can reasonably be considered that the arrangement includes or relates to the transaction or series. A person is also a promoter if the person makes a statement or representation that a tax benefit could result from the arrangement, or accepts consideration in respect of the promotion or sale of the arrangement, or for the making of a statement or representation that a tax benefit could result from the arrangement. More than one person may be a promoter in respect of a transaction or series of transactions.

The definition "promoter" encompasses any person engaging in these activities or receiving such consideration whether as principal or agent and whether directly or indirectly.

"solicitor-client privilege"

"Solicitor-client privilege" has the meaning assigned by subsection 232(1) of the Act. This definition is relevant to determine whether a person who is a lawyer and an advisor in respect of a reportable transaction has a reporting obligation in respect of any particular information that has to be disclosed to the Minister of National Revenue under new section 237.3. "Lawyer" has the meaning assigned by subsection 232(1) of the Act. For more details about solicitor-client privilege, see explanatory notes accompanying new subsections 237.3(2), (11) and (17).

"tax benefit"

"Tax benefit" has the meaning assigned by subsection 245(1) of the Act.

"transaction"

"Transaction" has the meaning assigned by subsection 245(1) of the Act.

Reporting Obligation

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237.3(2) to (4)

New subsections 237.3(2) to (4) relate to the reporting obligations imposed by section 237.3. In general terms:

Subsection 237.3(2)

New subsection 237.3(2) imposes an obligation on certain persons to file an information return in respect of reportable transactions. This will be the case if, in general terms, any two of paragraphs (a) to (c) of the definition "reportable transaction" are applicable in respect of an avoidance transaction or series of transactions that includes the avoidance transaction. See the explanatory note accompanying the definition "reportable transaction" in new subsection 237.3(1) for more details in this regard.

A person for whom a tax benefit could result from an avoidance transaction or series of transactions that includes the avoidance transaction would be required to file an information return in respect of the avoidance transaction and, as the case may be, each transaction that is part of the series of transactions that includes the avoidance transaction. A person would have a reporting obligation in respect of a transaction if the transaction is an avoidance transaction to the person (whether the transaction has been entered into by the person or by another person for the benefit of the particular person), or is part of a series of transactions that includes an avoidance transaction to the person, and if any two of paragraphs (a) to (c) apply in respect of the transaction, any transaction in the series or the series itself. A reporting obligation can arise in respect of a series of transactions that includes an avoidance transaction if one of paragraphs (a) to (c) is applicable to one avoidance transaction in the series and another of those paragraphs is applicable in respect of that transaction or another avoidance transaction in the series.

A person who enters into an avoidance transaction for the benefit of another person for whom a tax benefit could result from the avoidance transaction or series would also be required to file an information return in respect of the avoidance transaction. Whether a transaction is an avoidance transaction is to be determined in respect of the person who could obtain a tax benefit from the transaction. Whether a person would be considered to have entered into an avoidance transaction for the benefit of another person would be based on the facts and circumstances of each case. A person could be considered as having entered into an avoidance transaction for the benefit of another person where it would be reasonable to consider that the person has undertaken the transaction or has arranged the transaction in order for the transaction to result in a tax benefit for the other person. The particular person for whom the tax benefit could result from the avoidance transaction may be unknown when the person enters into an avoidance transaction. For example, a corporation that undertakes a transaction or series of transactions to increase the paid-up capital of a class of shares of its capital stock might be considered to have undertaken the transaction or series for the benefit of its current or future shareholders, depending on the circumstances.

A person who is an "advisor" or "promoter", and any person with whom an advisor or promoter does not deal at arm's length, also may be subject to a reporting requirement if such a person is entitled to a fee (within the meaning assigned by new subsection 237.3(1)) in respect of the avoidance transaction or series of transactions that includes the avoidance transaction, in the circumstances described in paragraphs (a) or (c) of the definition "reportable transaction" under new subsection 237.3(1). In that case, the advisor or promoter (or relevant non-arm's length persons) would have a reporting obligation in respect of that avoidance transaction if it is a reportable transaction, or in respect of every transaction in the series that is a reportable transaction, depending on their circumstances. In addition to the person claiming the tax benefit, this would be the case for each of the persons mentioned above in the following circumstances:

The reporting requirements apply on a transaction-by-transaction basis. In other words, reporting is required in respect of each reportable transaction that is part of a series of transactions. More than one person may have a reporting requirement in respect of the same transaction. As well, every person mentioned above is required to file an information return for each reportable transaction in respect of each person for whom a tax benefit could result from the reportable transaction, or from the series of transactions that includes the reportable transaction. However, as described in the explanatory notes for the limitations provided in new subsections 237.3(3) and (4), the filing of a full and accurate information return by a person in respect of a particular transaction that is part of a series, which return accurately described each transaction that is part of the series, will satisfy the person's obligation in respect of each transaction that is part of the series. As well, the filing of a full and accurate information return in respect of the particular reportable transaction or each transaction that is part of the series, as the case may be, may also satisfy the reporting obligations of other persons in respect of the transaction or series, depending on each person's circumstances.

The information return must contain prescribed information as determined by the Minister of National Revenue. Every person who is subject to a reporting requirement would be expected to make reasonable and good faith efforts to identify the information to be reported and ensure that such information is provided to the Minister of National Revenue in order to satisfy that person's reporting obligation in respect of a reportable transaction. For greater certainty, a person who is a lawyer (within the meaning assigned by subsection 232(1)) and acting solely in the capacity of an advisor to a client in respect of a reportable transaction does not have a reporting obligation in respect of prescribed information to be provided about the transaction if, after having taken reasonable steps and based on reasonable grounds, the advisor determines that solicitor-client privilege exists in respect of the information. Such a person would nevertheless be expected to provide information for which solicitor-client privilege does not exist, and would be expected to keep proper records of information in respect of which the person asserts the existence of solicitor-client privilege, as well as to present an explanation supporting such an assertion, in the event that the assertion is challenged. The explanatory notes accompanying new subsection 237.3(17) provide further details about the reporting obligations of an advisor who is a lawyer. Also, the explanatory notes accompanying new subsection 237.3(11) provide further details in the context of the due-diligence defence, in situations in which an advisor is unsuccessful in asserting that information could not be reported as a result of solicitor-client privilege.

Subsection 237.3(3)

A person may have an obligation to report each transaction that is part of a series of transactions that includes an avoidance transaction. In such cases, new subsection 237.3(3) provides that that person will be deemed to have satisfied that person's reporting obligation in respect of each of those transactions if the person files an information return that fully and accurately discloses all of those transactions. This means that the person has to file only one information return in respect of the series of transactions to satisfy that person's reporting obligation, and not a separate information return for each transaction in the series. If a person, exercising due diligence, files an information return that is full and accurate in respect of all the transactions that the person should reasonably have been aware of, and those transactions are part of a larger series of transactions of which that person was unaware, the reporting obligation of that person would be considered to have been satisfied.

Subsection 237.3(4)

New subsection 237.3(4) provides the circumstances in which the filing by a person of an information return in respect of a reportable transaction could satisfy the reporting obligations of any other person who is also subject to a reporting obligation for the same transaction.

This new subsection provides that if any person is required to file an information return in respect of a reportable transaction, the filing of an information return with full and accurate disclosure in respect of the transaction is deemed to have been made by each person required to file an information return under new subsection 237.3(2) in respect of the transaction. In such case, each of those persons will be considered as having satisfied their respective reporting obligation in respect of the reportable transaction to the extent of that full and accurate disclosure.

However, the filing of the limited information return by that person would not satisfy the reporting obligation of any other person who has a broader or different reporting obligation in respect of the series. In such a case, every person who has a broader or different reporting obligation in respect of any undisclosed transactions in the series would still have an obligation to file information returns in respect of those transactions. See the explanatory note accompanying new subsection 237.3(11) for further details about the due diligence test.

Every person who fails to satisfy a reporting obligation in respect of any reportable transaction of the series is jointly and severally, or solidarily, liable to pay a late-filing penalty under new subsection 237.3(8). If a person fails to satisfy his or her reporting obligation in respect of one or more reportable transactions, any fee described in paragraph (a) or (c) of the definition "reportable transaction" in new subsection 237.3(1) to which every advisor or promoter is entitled in the context of the transaction or series of transactions can be included in the amount of the penalty to which that person is liable in respect of an undisclosed reportable transaction (including the fee of any advisor or promoter who has satisfied his or her own reporting obligations in respect of parts only of the series of transactions). The penalty provided under new subsection 237.3(8) is subject to an exception for advisors and promoters and the possibility that the due diligence defence may apply. See the explanatory note accompanying new subsections 237.3(6) and 237.3(8) to (11) for further details about the application of the penalty and the due diligence defence.

Filing Date

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237.3(5)

Under new subsection 237.3(5), a person who is required to file an information return under new subsection 237.3(2) in respect of a reportable transaction must file the return with the Minister of National Revenue on or before June 30 of the calendar year following the calendar year in which the transaction first became a reportable transaction in respect of the person.

A transaction first becomes a reportable transaction to a person when the transaction is an avoidance transaction or is part of a series of transactions that includes an avoidance transaction and at least two of paragraphs (a) to (c) of the definition "reportable transaction" are applicable in respect of the avoidance transaction or series. The circumstances described in the definition "reportable transaction" in new subsection 237.3(1) may arise in respect of the avoidance transaction or series before or after the avoidance transaction has been entered into or the end of the series of transactions. Accordingly, the time for filing an information return for an advisor or a promoter may arise after the avoidance transaction or the end of a series of transactions.

For example, if a series of transactions is implemented over two calendar years, but a particular advisor provided assistance or advice only in the second year and only in respect of transactions that occur in the second year, the transactions will have first become reportable transactions in respect of that advisor only in that second year.

Determination of Tax Consequences

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237.3(6)

New subsection 237.3(6) applies when an information return in respect of a reportable transaction is not filed in accordance with new subsection 237.3(2) and when any resulting penalty under new subsection 237.3(8) and any interest on that penalty are unpaid.

For a person to have the possibility to obtain a tax benefit from a transaction that is a reportable transaction to that person, or a series of transactions that includes a reportable transaction, a full and accurate information return in respect of the reportable transaction and of each reportable transaction that is part of a series that includes the transaction must be filed with the Minister of National Revenue on time. In accordance with new subsections 237.3(3) and (4), a person could obtain a tax benefit from the reportable transaction if that person's reporting obligation has been satisfied because another person has filed an information return that fully discloses the reportable transaction, or each reportable transaction that is part of a series of transactions, from which the tax benefit could result.

New subsection 237.3(6) provides that, if it applies to a transaction or series of transactions, then notwithstanding subsection 245(4), the tax consequences to a person in respect of the transaction or series can be determined as is reasonable in the circumstances under subsection 245(2) in order to deny a tax benefit that, but for section 245, would result, directly or indirectly, from the reportable transaction or series that includes that transaction. Subsections 245(5) to 245(8) would apply when subsection 245(2) is deemed to apply under new subsection 237.3.

The determination of the tax consequences based upon the deemed application of subsection 245(2) would have to be made in accordance with subsection 245(7). The tax consequences would be determined through a notice of assessment, reassessment, additional assessment or determination under subsection 152(1.11) involving the application of section 245.

If an information return that otherwise satisfies the requirements of new subsection 237.3(2) is filed after the period provided for under new subsection 237.3(5), and any late-filing penalty under new subsection 237.3(8) and interest thereon is fully paid to the Minister of National Revenue, the Minister may allow any tax benefit from the reportable transaction that is denied under this new subsection 237.3(6). However, in determining whether a person may obtain the tax benefit that was denied, the Minister of National Revenue may consider whether section 245 otherwise applies to the reportable transaction, including subsection 245(4). This is consistent with new subsection 237.3(12), which provides that the filing of an information return in respect of a reportable transaction under new section 237.3 is for administrative purposes only and cannot be considered as an admission by a person that section 245 applies to a transaction or transactions that are reported as required.

Assessments

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237.3(7)

New subsection 237.3(7) provides to the Minister of National Revenue the authority to make such assessments, determinations and redeterminations as are necessary to give effect to new subsection 237.3(8), which provides a penalty for late-filing in respect of the reporting obligation imposed under new subsection 237.3(2).

Penalty for Late Filing - Joint and Several Liability

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237.3(8) to (10)

When an information return in respect of a reportable transaction or, in the case of a series of transactions, each reportable transaction that is part of the series, is not filed in accordance with new subsection 237.3(2) and new subsection 237.3(5), every person who has failed to file an information return in respect of the reportable transaction or of each reportable transaction that is part of the series would be liable to pay a penalty.

The amount of the penalty is equal to the total of each amount that is a fee to which an advisor or a promoter in respect of the reportable transaction, or any person who does not deal at arm's length with such advisor or promoter, is entitled, either immediately or in the future and either absolutely or contingently, to receive in respect of the reportable transaction, of any transaction that is part of the series of transactions that includes the reportable transaction and of the series of transactions that includes the reportable transaction, if the fee is

The explanatory notes accompanying the definition "reportable transaction" provide further details in this regard.

Under new subsection 237.3(9), every person who is subject to a penalty under subsection 237.3(8) is jointly and severally, or solidarily, liable to pay the penalty, subject to the limitation provided under new subsection 237.3(10) for advisors and promoters.

Under new subsection 237.3(10), an advisor or a promoter, or a person who is not dealing at arm's length with the advisor or promoter, in respect of a reportable transaction that was not reported as and when required under new section 237.3 would be jointly and severally, or solidarily, liable to pay the penalty under new subsection 237.3(8) only to the extent of the fees that the particular advisor or promoter, or non-arm's length person, is entitled to receive in respect of the undisclosed reportable transaction or the series that includes that transaction, and that is included in the amount of that penalty.

Even if an advisor or promoter has fulfilled his or her reporting obligation in respect of a reportable transaction and is not liable to the penalty, the fees which that advisor or promoter is entitled to receive can be included in the amount of the penalty to which any other person may be liable should that other person fail to satisfy his or her reporting obligation in respect of other reportable transactions that are part of the same series of transactions. However, the liability of an advisor or a promoter, or a person who is not dealing at arm's length with the advisor or promoter, for a late-filing penalty in respect of a failure to fulfill the reporting obligation is limited to the fees that the particular advisor or promoter, or the non-arm's length person, is entitled to receive in respect of the reportable transaction or series.

Example

Assume that a taxpayer attempts to obtain tax benefits from a series of transactions that includes two avoidance transactions. The first avoidance transaction is part of the first five transactions in the series (the "first subset"), and the second avoidance transaction is part of the last five transactions in the series (the "second subset"). Also, assume that an advisor provides contractual protection to the taxpayer in respect of the first avoidance transaction and is entitled to receive a fee of $100. As well, a promoter is entitled to receive contingent fees of $50 in respect of the first avoidance transaction, another $50 in respect of the second avoidance transaction, and $25 in respect of the tax benefits to be derived from the series. The series of transactions began and ended in the same calendar year, and the contractual protection and the contingent fees also arose in that year.

Each transaction that is part of the series of transactions is a reportable transaction. That is because the advisor is entitled to a fee described in paragraph (c) of the definition "reportable transaction" in new subsection 237.3(1) in respect of the first avoidance transaction, and the promoter is entitled to a fee described in paragraph (a) of that definition in respect of the first and second avoidance transactions in addition to a fee in respect of the whole series. When two of the paragraphs under that definition apply in respect of one or more avoidance transactions that are part of a series of transactions or in respect of the series as a whole, each transaction that is part of the series is a reportable transaction. Also, in this example, it could be said that two paragraphs are applicable in respect of the series because one paragraph applies in respect of the first avoidance transaction of the series and another paragraph applies in respect of the second avoidance transaction.

Under new subsection 237.3(2), the taxpayer, the advisor and the promoter would each have a reporting obligation. Each would be required to file an information return in respect of each reportable transaction for which they have a reporting requirement no later than June 30 of the following calendar year, in accordance with new subsection 237.3(5).

The reporting obligation of the taxpayer, advisor and promoter would extend to each transaction that is part of the series of transactions.

The advisor, acting reasonably, decides to file on a timely basis an information return in respect of the first subset of transactions. Although the filing of an information return by the advisor in respect of the first subset would not be considered to have satisfied the reporting obligation of that advisor, the advisor would not be subject to any penalties under new section 237.3 because the advisor, acting reasonably, had no knowledge about the second subset and, therefore, the advisor's liability is limited under new subsection 237.3(11).

Although the reporting by the advisor of the first subset could be considered to have satisfied the reporting obligation of the taxpayer and the promoter in respect of the first subset, this does not relieve the taxpayer and the promoter in respect of transactions that are part of the second subset. Accordingly, the taxpayer and the promoter would be considered to have satisfied their respective reporting obligations only when their respective reporting obligations are satisfied in respect of the transactions that make up the entire series, including those that are part of the second subset. However, they did not file an information return in respect of the second subset.

Under new subsection 237.3(8), the promoter and the taxpayer are liable to a penalty because they did not satisfy their own respective reporting obligations in respect of all the reportable transactions of the series. The amount of the penalty to which a person is liable in respect of undisclosed reportable transactions includes not only the fees that are connected to those transactions, but also any fee in respect of any transaction that is part of the same series of transactions or in respect of the series as a whole. Therefore, the amount of the penalty to which the taxpayer and the promoter would potentially be liable is equal to $225 (which is the amount that is the total of all the fees that the advisor and the promoter are entitled to receive in respect of the first and second subset, and in respect of the series as a whole), and the taxpayer and the promoter would be jointly and severally (or solidarily) liable to pay the penalty under new subsection 237.3(9). However, under new subsection 237.3(10), the promoter's liability is limited to the fee that the promoter is entitled to receive in respect of the series which in this example is $125.

Due Diligence

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237.3(11)

A person who is required to file an information return under new subsection 237.3(2) is liable for a penalty under new subsection 237.3(8) if the person does not file an information return in respect of every reportable transaction that the person is required to report, or does not do so on a timely basis. However, under new subsection 237.3(11), a person will not be liable to a penalty if it is determined that the person has exercised the degree of care, diligence and skill to prevent the failure that a reasonably prudent person would have exercised in comparable circumstances. This limitation is commonly referred to as a "due diligence defence".

The due diligence defence applies in the context of the reporting obligations imposed upon the persons referred to in new subsection 237.3(2). Whether a person has exercised the degree of care, diligence and skill required will be based on the facts and circumstances of each case. It is intended that the application of the due diligence defence for the purpose of new section 237.3 be based on the jurisprudence that applies in respect of similar defences for the purposes of other provisions of the Act.

A person for whom a tax benefit could result from a reportable transaction, or from a series of transactions that includes a reportable transaction, is required to file an information return in respect of the avoidance transaction, or of each transaction that is part of a series of transactions that includes the avoidance transaction, as the case may be. Such person is required to make reasonable and good faith efforts to determine whether a transaction is an avoidance transaction, or is part of a series of transactions that includes the avoidance transaction, and whether any two of paragraphs (a) to (c) of the definition "reportable transaction" are applicable to the avoidance transaction or series of transactions. If such a person is subject to a reporting requirement under new subsection 237.3(2) in respect of an avoidance transaction, then the person is also required to make reasonable and good faith efforts in identifying and disclosing full and accurate information in respect of each transaction that is part of a series of transactions that includes the avoidance transaction.

A person who enters into an avoidance transaction that is a reportable transaction for the benefit of another person is required to file an information return in respect of the avoidance transaction. Such person is required to exercise the same degree of care, diligence and skill as they would if they had entered into the reportable transaction on their own behalf.

A person who is an advisor or a promoter in respect of an avoidance transaction, or a series of transactions that includes an avoidance transaction, and any person who does not deal at arm's length with such advisor or promoter, would also be required to exercise adequate care, diligence and skill to determine whether a tax benefit could result from the avoidance transaction or series for a person, and whether any two of paragraphs (a) to (c) of the definition "reportable transaction" are applicable to the avoidance transaction or series. A person who is an advisor or promoter would also be required to make reasonable and good faith efforts in identifying information that is required to be provided to the Minister of National Revenue, and take all reasonable steps to ensure that that information is provided to the Minister.

With respect to a person who is a lawyer who has a reporting obligation under new subsection 237.3(2) and who acted solely in the capacity of an advisor to a client in respect of a reportable transaction, new subsection 237.3(17) clarifies that such an advisor is not required under new subsection 237.3(2) to disclose any information in respect of the transaction if the lawyer, on reasonable grounds, believes that the client has solicitor-client privilege in respect of the information. It is expected that such an advisor would be considered to have acted diligently if the advisor has taken reasonable steps to ensure that the advisor's reporting obligation can be fulfilled by the time provided in new subsection 237.3(5) to file the information return. If, after having taken reasonable steps and based on reasonable grounds, the advisor believes that solicitor-client privilege exists in respect of information otherwise required to be provided to the Minister of National Revenue, such a person would nevertheless be expected to provide any other information for which solicitor-client privilege does not exist, and would be expected to keep proper records of information in respect of which the person believes solicitor-client privilege exists, as well as to present an explanation supporting such an assertion, in the event that the belief is challenged. If an advisor makes a claim that the reporting of information is prevented by the existence of solicitor-client privilege, and that claim is not upheld, proving that due diligence had been exercised in respect of the unreported information could be more difficult for the advisor if they did not make reasonable and good faith efforts to determine whether such privilege in fact existed and was not lost or waived before the required time for reporting, of if they did not keep proper records.

Persons, other than those for whom a tax benefit could result for a transaction or series, will not be subject to a penalty under new subsection 237.3(8) if they file on a timely basis (or if they reasonably believe that another person has filed on a timely basis) an information return in respect of each transaction for which they reasonably believe, after making reasonable efforts, that they are subject to a reporting requirement. For example, if an advisor, acting reasonably, determines that a reportable transaction in respect of which the advisor provided advice, and is entitled to a fee described in paragraph (a) or (c) of the definition "reportable transaction" in new subsection 237.3(1), is part of a series of three transactions, the advisor will have satisfied his or her reporting obligation if he or she files (or, pursuant to new subsection 237.3(4), if another person files) a full and accurate report in respect of the three transactions that made up that part of the series even if, unknown to the advisor, the three transactions were actually part of a larger series of transactions.

Reporting Not an Admission

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237.3(12)

New subsection 237.3(12) provides that the filing of an information return under new section 237.3(2) by a person in respect of a reportable transaction is not an admission by the person that section 245 applies in respect of any transaction, that any transaction is part of a series of transactions, or that any tax benefit results from the transaction or series of transactions.

If a required information return in respect of a reportable transaction is filed with the Minister of National Revenue and, in the case of a return that is late-filed, the applicable penalty and interest on the penalty is paid, the Minister may consider whether section 245 applies to the reportable transaction. If so, the Minister may determine any tax consequences to any person through a notice of assessment, reassessment, additional assessment or determination pursuant to subsection 152(1.11) with respect to the reportable transaction.

Application of Sections 231 to 231.3

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237.3(13)

New subsection 237.3(13) ensures that the provisions of sections 231 to 231.3 dealing with audits, inspections and powers of enforcement apply to any person who is required to file an information return in respect of a reportable transaction under new subsection 237.3(2) notwithstanding that, at the time of such audit or inspection, a return of income may not have been filed for the taxation year in which a tax benefit results, or would result but for section 245, from the reportable transaction or series of transactions that includes the reportable transaction.

Tax shelters and flow-through shares

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237.3(14) to (16)

New subsection 237.3(14) provides that no information return is required to be filed under new subsection 237.3(2) in respect of a transaction if the transaction is one that would otherwise be a "reportable transaction" (within the meaning assigned by new subsection 237.3(1)) that is, or is part of a series that includes, the acquisition of a tax shelter or the issuance of a flow-through share in respect of which the appropriate information return under the tax shelter of flow-through share regime has been filed with the Minister of National Revenue.

New subsection 237.3(15) provides a computation rule in respect of the amount of any penalty to which a person may be liable under new section 237.3 and under the flow-through share or tax shelter rules. This subsection applies if a person fails to satisfy that person's reporting obligation in respect of a reportable transaction that is the acquisition of a tax shelter or the issuance of a flow-through share under all the relevant rules. In such case, the amount of the penalty, if any, to which that person may be liable under the flow-through share or tax shelter rules will reduce the amount of the penalty, if any, to which that person is liable to under new section 237.3. Other persons may have a reporting obligation under new subsection 237.3(2) in respect of the acquisition of the tax shelter or the issuance of the flow-through share. In such a case, every other person who fails to file an information return as and when required under new section 237.3 remains subject to the penalty under new subsection 237.3(8), the amount of which is determined without taking into account any reduction that applies to a person under new subsection 237.3(15).

New subsection 237.3(16) provides an anti-avoidance rule intended to prevent persons from inserting the acquisition of a tax shelter or the issuance of a flow-through share into a series of transactions for the purpose of avoiding the reporting requirements under new subsection 237.3(2).

Solicitor-client privilege

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237.3(17)

For greater certainty, new subsection 237.3(17) provides that a person who is a lawyer (within the meaning assigned by subsection 232(1)) acting in the capacity of an advisor in respect of a reportable transaction does not have a reporting obligation in respect of particular information otherwise required to be provided to the Minister about the transaction under new subsection 237.3(2) if, based on reasonable grounds, the advisor believes that solicitor-client privilege (within the meaning assigned by new subsection 237.3(1)) exists in respect of the particular information.

In general terms, whether solicitor-client privilege exists in respect of information depends on whether that information is part of communication passing between a person and the person's lawyer in professional confidence, and such determination has to be made according to the facts and circumstances of each case. If, at or before the time that a reporting obligation arises, the privilege has been lost or waived, an advisor would be required to report the relevant information. Information about the facts and circumstances of transactions are often known to persons other than a lawyer and their client and, as such, not subject to solicitor-client privilege.

An advisor who is a lawyer and who believes that solicitor-client privilege exists in respect of some information otherwise required to be provided to the Minister of National Revenue would nevertheless be expected to provide information for which solicitor-client privilege does not exist. It is noted that in unusual circumstances solicitor-client privilege may extend to the existence of the solicitor-client relationship, in which case the privilege may absolve the lawyer of all reporting obligations under new section 237.3 in respect of the particular circumstances.

If a person reasonably believes that solicitor-client privilege extends to information relating to a particular client, the person would be expected to keep proper records of information in respect of which the person believes solicitor-client privilege exists, as well as to present an explanation supporting such a belief, in the event that it is challenged. The explanatory notes accompanying new subsection 237.3(11) of the Act provide further details in this regard in the context of the due diligence defence, in situations in which an advisor is unsuccessful in asserting that information could not be reported as a result of solicitor-client privilege.

If, in respect of a particular transaction, a lawyer acts both as an advisor and also as a promoter, tax planning advice given to clients and prospective clients in the course of promoting an arrangement would not be expected to be protected by solicitor-client privilege. Solicitor-client privilege generally applies in respect of advice relating to information passing between a client and a lawyer, and not in respect of information between a promoter and a client or prospective client.

Clause 357

Provision of Information

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241

Section 241 of the Act prohibits officials and other persons from using or communicating taxpayer information obtained under the Act unless they are specifically authorized by one of the exceptions found in that section.

Disclosure of Taxpayer Information

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241(4)

Subsection 241(4) of the Act authorizes the limited communication of information to government officials outside of the Canada Revenue Agency.

Subparagraph 241(4)(e)(xii) is amended to provide that an official may provide taxpayer information, or allow the inspection of or access to taxpayer information under and solely for the purposes of a provision contained in a tax treaty with another country or in a listed international agreement.

A "listed international agreement" is newly defined in subsection 248(1) to mean the Convention on Mutual Administrative Assistance in Tax Matters, concluded at Strasbourg on January 25, 1988, as amended from time to time by a protocol or other international instrument as ratified by Canada and a comprehensive tax information exchange agreement that Canada has entered into, and that has effect, in respect of another country or jurisdiction. A "tax treaty" with a country is defined in subsection 248(1) to mean a comprehensive agreement or convention for the elimination of double taxation on income, between the Government of Canada and the government of the country, which has the force of law in Canada at that time.

This amendment applies on Royal Assent.

Provision of Information

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241(11)

Subsection 241(11) is amended to provide that information obtained under the Federal-Provincial Fiscal Arrangements Act is afforded similar protection. In addition, the reference to the Petroleum and Gas Revenue Tax Act is being removed as it is no longer in effect.

This amendment comes into force on Royal Assent.

Clause 358

Interpretation

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248

Section 248 of the Act defines a number of terms that apply for the purposes of the Act, and sets out various rules relating to the interpretation and application of various provisions of the Act.

Definitions

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248(1)

"amount"

The expression "amount" is defined in subsection 248(1) to generally mean money, rights or things expressed in terms of the amount of money or the value in terms of money of the right or thing. However, a number of special definitions of "amount", which apply in limited circumstances, are set out in paragraphs (a) to (c) of the definition.

Under paragraph (c) of the definition "amount", the amount of a stock dividend is normally the increase in the paid-up capital of the corporation as a result of the payment of the stock dividend. The "amount" of a stock dividend is relevant both to the amount required to be included in the taxpayer's income under subsections 82(1) and 90(1) of the Act, as a result of the receipt of the dividend, and to the cost of the shares received in payment of that dividend as determined by subsection 52(3) of the Act.

Draft legislation released by the Department of Finance on July 18, 2005 proposed to amend the definition "amount" as it applies to a stock dividend paid by a non-resident corporation, as part of the package of amendments relating to the taxation of non-resident trusts and foreign investment entities. Under that proposal, the amount of a stock dividend paid by a non-resident corporation would be, except where subsection 95(7) applies to the dividend (i.e., a dividend from a foreign affiliate), the greater of two amounts. The first is the amount by which the paid-up capital of the corporation that paid the dividend is increased by reason of the payment of the dividend. The second is the fair market value of the share or shares paid as a stock dividend at the time of payment. That proposal was contained in paragraph (b.1) of the definition "amount" as released on July 18, 2005.

In Budget 2010, the Government announced that the proposals relating to the taxation of foreign investment entities would be replaced with limited enhancements to the existing rules in the Act. Consequently, proposed paragraph (b.1) of the definition "amount" is no longer required. However, proposed paragraph (b.1) is introduced on a temporary basis, and will apply, on an elective basis, in the case of a stock dividend declared by a non-resident corporation after July 17, 2005 and paid to a taxpayer before 2013. If a taxpayer files an election in writing with the Minister of National Revenue, the amount of each stock dividend (other than a stock dividend to which subsection 95(7) applies) declared by a non-resident corporation after July 17, 2005 and paid to the taxpayer before 2013 will be determined under paragraph (b.1) as described above.

The election is due by the taxpayer's filing-due date for the later of the 2012 taxation year and the taxation year in which this Act receives Royal Assent.

The amendment is repealed for taxation years that begin after 2012.

"common-law partner"

An individual becomes the common-law partner of another individual once they have cohabited in a conjugal relationship for at least one year. Paragraph (a) of the definition "common-law partner" in subsection 248(1) is amended, effective for the 2001 and subsequent taxation years, to clarify that, for an individual to be considered the common-law partner of another person at a particular time, the individual and that other person need to have cohabited in a conjugal relationship throughout the twelve-month period that ends at that particular time.

"controlled foreign affiliate"

The expression "controlled foreign affiliate" is defined to have the meaning assigned by subsection 95(1).

This definition is amended so that it applies except as expressly otherwise provided in the Act. See, for example, the definition "controlled foreign affiliate" in subsection 17(15).

This amendment applies to taxation years that begin after 2006.

"Canadian real, immovable or resource property"

The definition "Canadian real, immovable or resource property" applies in the context of the taxation of "SIFT trusts" and "SIFT partnerships". It is defined to mean four types of properties and any right to or interest in them.

The fourth type of property specified as being "Canadian real, immovable or resource property" is a share of the capital stock of a corporation, an income or capital interest in a trust or an interest in a partnership, excluding certain taxable entities, if more than 50% of the fair market value of the share or interest is derived directly or indirectly from one or any combination of properties that are real or immovable property situated in Canada. The description of this type of property is amended to further exclude interests in REITs, and interests in SIFT trusts and partnerships without reference to subsections 197(8) and 122.1(2) respectively (i.e., trusts and partnerships that would be SIFTs except for the transitional relief provided by those subsection for taxation years that end before 2011).

This amendment applies to the 2011 and later taxation years, and also on an elective basis for earlier taxation years (i.e., the 2007 to 2010 taxation years).

"disposition"

The expression "disposition" is used throughout the Act, particularly in provisions relating to transactions involving property.

The definition "disposition" was added to subsection 248(1) by S.C. 2001, chapter 17, s. 188(5) [formerly Bill C-22]. In general, that definition is applicable to transactions and events that occur after December 23, 1998. The former definition "disposition" was contained in section 54 of the Act, applicable to transactions and events that occurred before December 24, 1998.

Under the definition "disposition" in subsection 248(1), a "disposition" of any property includes a transaction or an event described in any of paragraphs (a) to (d) of that definition but does not include a transaction or an event described in any of paragraphs (e) to (m) of that definition.

Under subparagraph (b)(i) of that definition, a disposition of a property includes any transaction or event by which, where the property is a share, bond, debenture, note, certificate, mortgage, agreement of sale or similar property, or an interest in it, the property "is redeemed in whole or in part or is cancelled".

The definition "disposition" in subsection 248(1) is amended in the following ways.

First, subparagraph (b)(i) of the definition now provides that a disposition of property includes any transaction or event by which, where the property is a share, bond, debenture, note, certificate, mortgage, agreement of sale or similar property, or an interest in it, the property "is in whole or in Part redeemed, acquired or cancelled". This amendment makes it clear that a disposition will also include a transaction or event by which the property is acquired.

Second, paragraph (n) is added to the definition. New paragraph (n) provides that a redemption, an acquisition or a cancellation of a share, or of a right to be issued a share, (which share or which right, as the case may be, is referred to as the "security") of the capital stock of a corporation (the "issuing corporation") held by another corporation (the "disposing corporation") is considered not to be a "disposition" in the case where

Both amendments apply to redemptions, acquisitions and cancellations that occur after December 23, 1998.

In connection with redemptions, acquisitions and cancellations that occur before December 24, 1998, see the commentary to new subsection 248(1.1) of the Act.

Third, the definition "disposition" in subsection 248(1) is also amended by restricting the circumstances in which a transfer of property between trusts will not be treated as a disposition. In particular, paragraph (f) of the definition is amended so that a transfer of property from a trust to another trust will avoid, under that paragraph, characterization as a disposition only if both trusts are, at the time of the transfer, resident in Canada.

This amendment applies to transfers that occur after February 27, 2004.

Finally, the definition "disposition" is amended to add new paragraph (b.1). New paragraph (b.1) of the definition ensures that, where a property is an interest in a life insurance policy, what would constitute a disposition for the purposes of section 148 will also constitute a disposition for the entire Act.

This amendment applies to taxation years that begin after 2006.

"dividend rental arrangement"

A "dividend rental arrangement" is, in general terms, an arrangement under which one person receives a dividend on a share that has been borrowed from another person who retains the risk of loss or opportunity for gain from fluctuations in the share value. To clarify its application where a partnership is a party to the arrangement, the definition is restructured and amended; its language is also updated in certain respects.

Under the amended definition, the "person" who is the subject of the arrangement - that is, the person who enters into the arrangement in order to receive a dividend - may be a partnership or a person as otherwise defined.

Existing paragraph (c) of the definition ensures that the definition includes an arrangement under which a corporation receives a taxable dividend that would be deductible but for subsection 112(2.3) of the Act, and is obligated to make dividend compensation payments. This paragraph is replaced by new paragraph (b), which adds to the arrangements described one in which it is not the corporation receiving the dividend that is obligated to make the compensation payment, but rather a partnership of which the corporation is a member.

At first reading, new paragraph (b) may seem asymmetrical, in that it expressly covers the case where a partnership is obligated to make the compensation payment, but not the case where a partnership receives the taxable dividend. In fact, the paragraph covers both: since in the latter case the corporate partner is itself already considered to receive the dividend, it is not necessary to add a reference to the partnership in that regard.

The reference to "subsection 260(5)" in this definition is replaced with "subsection 260(5.1)" consequential to the amendments to section 260. This amendment applies to paragraph (d) of the former definition and clause (b)(ii)(B) of the amended definition.

The amendment to paragraph (d) of the former definition applies between January 1, 2002 and December 20, 2002 unless an election noted below is filed.

The amended definition applies to arrangements made after December 20, 2002; it also applies to an arrangement made after November 2, 1998 and before the day after December 20, 2002, if the parties jointly elect in writing filed with the Minister of National Revenue within 90 days after this Act has been assented to, except that before 2002 the reference to "subsection 260(5.1)" in the amended definition should be read as "subsection 260(5)".

"eligible relocation"

The definition "eligible relocation" in subsection 248(1) of the Act applies for the purpose of the deduction of expenses under section 62 of the Act in respect of a move from an "old residence" to a "new residence". The definition is amended to clarify that, in order to claim these expenses, an individual who is absent from, but resident in, Canada must, like other individuals, ordinarily reside before the relocation at the old residence and after the relocation at the new residence.

This amendment applies to taxation years that end after October 31, 2011.

"employee benefit plan"

The definition "employee benefit plan" in subsection 248(1) of the Act is amended consequential on the introduction of subsection 6(1.2) of the Act. The definition is amended to clarify that a payment that would not be required to be included in computing the income of the recipient or an employee or former employee under section 6 (read without reference to subparagraph 6(1)(a)(ii) or paragraph 6(1)(g)) does not cause a plan to be an employee benefit plan.

This amendment applies after October 31, 2011.

"foreign resource property"

The definition "foreign resource property" in subsection 248(1) of the Act is structured to parallel the definition "Canadian resource property" in subsection 66(15) of the Act, with the necessary modifications to reflect the location of the property outside Canada. This definition is amended, effective for property acquired after December 20, 2002, as a consequence of changes to the definition "Canadian resource property".

"former business property"

The definition "former business property" in subsection 248(1) of the Act describes properties the voluntarily disposition of which by a taxpayer are eligible for elections under subsections 13(4) and 44(1) of the Act to defer the recapture of depreciation and capital gains. Subject to certain exceptions, a former business property is generally real property or an interest in real property used primarily in a business. The definition is amended, applicable after December 20, 2002, to include a franchise, concession or license for a limited period that is wholly attributable to the carrying on of a business in a fixed place and that is the subject of a valid election under new subsection 13(4.2) of the Act. For further information, refer to the commentary to new subsections 13(4.2) and (4.3).

"listed international agreement"

The definition of "listed international agreement" is added to subsection 248(1) as a consequence of the amendments to subsection 231.2(1) and subparagraph 241(4)(e)(xii). The agreements included in the definition are the Convention on Mutual Administrative Assistance in Tax Matters, concluded at Strasbourg on January 25, 1988, as amended from time to time by a protocol or other international instrument as ratified by Canada and a comprehensive tax information exchange agreement that Canada has entered into, and that has effect, in respect of another country or jurisdiction.

This amendment applies on Royal Assent.

"qualifying environmental trust"

The French version of the definition of "qualifying environmental trust", in subsection 248(1) of the Act, is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

"qualifying trust annuity"

The term "qualifying trust annuity" is added to subsection 248(1) of the Act, and is defined to have the meaning assigned by new subsection 60.011(2). A distinguishing feature of a qualifying trust annuity is that the annuitant is a trust. Special provisions relating to qualifying trust annuities are set out in sections 60.011, 75.2, 148 and 160.2 of the Act. (Refer to the explanatory notes on those provisions for further details.)

"relevant factor"

Subsection 248(1) is amended to add the definition of "relevant factor", which is relevant for the purposes of subparagraphs 125(1)(b)(ii) and 125.1(1)(b)(ii), and clause 129(3)(a)(ii)(C). This definition is relevant in determining the amount that a corporation can deduct under sections 125 and 125.1, and the amount of a dividend refund that a corporation can obtain under section 129. Such determination is made by taking into the taxable income of the corporation, reduced by any portion of which that is foreign business income that benefits from a foreign tax credit (FTC). Business income that supported an FTC is measured by multiplying the corporation's business income FTC by a factor that reflects assumed Canadian tax rates. The limit for business income FTCs is based on the applicable federal corporate income tax rate without taking into account the provincial abatement, because foreign business income earned through a permanent establishment outside Canada is typically not taxable by a province. Under this definition, the factor for taxation years that end after 2002 and before 2010 is 3, which implies an assumed tax rate of 33.3%. The factor for taxation years that end after 2009 takes into account the "general rate reduction percentage" that applies to a corporation's taxation year as provided in section 123.4. For example, if a corporation's taxation year corresponds to the 2010 calendar year, its relevant factor will be 1/(.38–.10). or 3.5714. For taxation years that end after 2009, this definition takes into account the fact that a corporation's taxation year may straddle two calendar years with different federal general corporate income tax rates.

"scientific research and experimental development"

Paragraph (d) of the definition "scientific research and experimental development" in subsection 248(1) of the Act includes, for the purposes of applying that definition in respect of a taxpayer, certain work (listed therein) undertaken by or on behalf of a taxpayer if the work is commensurate with the needs, and directly in support, of work described in paragraphs (a) to (c) of that definition that is undertaken by or on behalf of the taxpayer. "Engineering" work is among the work listed in paragraph (d). The French version of paragraph (d) of the definition is changed, effective upon Royal Assent, to refer to "travaux de genie" instead of "travaux techniques".

"short-term preferred share"

The definition "short-term preferred share" is relevant for, among other provisions, Part VI.1 of the Act. In particular, subparagraph 191.1(1)(a)(i) of the Act provides for a tax on taxable dividends, other than excluded dividends, paid on short-term preferred shares after 1987. This tax is to prevent a corporation from issuing equity with debt-like characteristics where the corporation is not in need of an interest deduction in respect of the debt (i.e., where the corporation is in a loss position for the taxation year).

Paragraph (f) of the definition "short-term preferred share" provides that a share of the capital stock of a corporation that is issued in circumstances where the existence of the corporation was, or there was an agreement under which it could be, limited to a period within 5 years from the date of the share's issue is deemed to be a short-term preferred share of the corporation.

However, in the context of a decision by a corporation to liquidate, if employees who were granted options under an employee stock option plan were only able to exercise those options following the corporation's decision to liquidate, any shares issued by the corporation in this situation would be deemed to be short-term preferred shares. This would be true even if the options were granted under the plan at a time when the existence of the corporation was not limited.

Accordingly, paragraph (f) of the definition is amended to provide that if a share of the capital stock of a corporation is issued to an individual after April 14, 2005 pursuant to an employee stock option plan, and if the existence of the corporation was not limited at the time the option to acquire the share was granted, then the share will not be deemed to be a short-term preferred share.

This amendment applies to shares issued after April 14, 2005.

"share"

The definition "share" is amended so that it applies except as the context otherwise requires. For example, if the context requires that the expression "share" refer to a portion of an amount or thing, then it would not carry the meaning otherwise assigned by subsection 248(1).

This amendment applies to taxation years that begin after 2006.

"specified proportion"

The definition "specified proportion" of a member of a partnership for a fiscal period of the partnership is currently found in subsection 206(1) of the Act. The apportionment that results from the definition is, however, useful for many purposes of the Act, and a number of other provisions apply the same concept. For simplicity, the definition is moved to subsection 248(1) of the Act. As a result, for all purposes of the Act a partner's specified proportion for the period is that proportion of the partnership's total income or loss for that period that is the member's share. If the partnership's income or loss for the period is nil, the proportion is computed as if the partnership had $1 million of income for the period.

This amendment applies after December 20, 2002.

"taxable Canadian property"

“Taxable Canadian property” (“TCP”) is a concept that is relevant primarily in relation to the taxation of non-residents and migrants. Paragraph (d) of the TCP definition was amended to effect an exclusion from its ambit of shares of corporations, and certain other interests, that do not derive their value principally from real or immovable property situated in Canada, Canadian resource property, or timber resource property (subject to a 60-month look-back rule).

Paragraph (d) is being further amended to ensure that the indirect or "look-through" rule does not extend through shares or other interests that are not themselves taxable Canadian property. For example, a non-resident may own, through a private holding company, shares of a Canadian public company that derive most of their value from real or immovable property situated in Canada. In such circumstances, it is possible that the shares of the private holding company could otherwise be TCP by virtue of the look-through to the real property, even though a direct holding by the non-resident of the public company shares might not be TCP. This amendment is intended to ensure the look-through rule does not, in these circumstances, apply where the public company shares are not themselves TCP.

This amendment applies in determining after March 4, 2010 whether a property is TCP of a taxpayer.

Non-Disposition Before December 24, 1998

ITA
248(1.1)

The definition "disposition" was added to subsection 248(1) of the Act by S.C. 2001, chapter 17, subsection 188(5) [formerly Bill C-22]. In general, that definition applies to transactions and events that occur after December 23, 1998. The former definition "disposition" was contained in section 54 of the Act, applicable to transactions and events that occurred before December 24, 1998.

New paragraph (n) is added to the definition "disposition" in subsection 248(1), applicable to redemptions, acquisitions and cancellations of certain securities that occur after December 23, 1998. For more detail, see the commentary to subsection 248(1).

New subsection 248(1.1) of the Act is added to deal, in a corresponding fashion, with such redemptions, acquisitions and cancellations that occurred before December 24, 1998.

New subsection 248(1.1) provides that a redemption, an acquisition or a cancellation, at any particular time after 1971 and before December 24, 1998, of a share or of a right to acquire a share (which share or which right, as the case may be, is referred to as the "security") of the capital stock of a corporation (referred to as the "issuing corporation") held by another corporation (referred to as the "disposing corporation") is not a disposition of the security within the meaning of the definition "disposition" in section 54 (as that section read in its application to transactions and events that occur at the particular time), if

New subsection 248(1.1) applies on Royal Assent.

Occurrences as a Consequence of Death

ITA
248(8)

The French version of subsection 248(8) of the Act is amended to correct a terminology error. In effect, the concept of "attribution" is replaced by "distribution" so that it is clear that the property is actually remitted to the trust's beneficiary and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Goods and Services Tax - Input Tax Credit and Rebate

ITA
248(16)

Subsection 248(16) of the Act provides rules under which amounts received by, or credited to, a taxpayer as an input tax credit or rebate with respect to the goods and services tax (GST) are deemed to be assistance from a government received by a taxpayer. As a consequence, such amounts are either included in income or reduce the cost or capital cost of the related property, or the amount of the related expenditure or expenditure pool, for tax purposes.

Subsection 248(16) also specifies the time at which the receipt (or credit) of an input tax credit or rebate is deemed to be received as assistance. With respect to input tax credits, subparagraph 248(16)(a)(i) provides that the assistance (i.e., the input tax credit) is considered to be received by a taxpayer at the time the GST in respect of the input tax credit was paid or became payable by the taxpayer if the GST was paid or became payable in the same reporting period under the Excise Tax Act in which the input tax credit was claimed. If a taxpayer does not claim the input tax credit in the same reporting period in which the GST was paid or became payable, subparagraph 248(16)(a)(ii) includes the amount of assistance in the taxpayer's income for the taxation year that includes the end of the reporting period in which the taxpayer claimed the input tax credit.

Subsection 248(16) is amended in three respects for input tax credits that become eligible to be claimed in taxation years that begin after December 20, 2002.

First, subparagraph 248(16)(a)(i) is amended to extend its application to cases where the input tax credit is claimed by a taxpayer in a reporting period that is subsequent to the period in which the related GST was paid or became payable if

In general, the change to this subparagraph means that an input tax credit of a taxpayer (who is a GST filer with a threshold amount greater than $500,000 for GST purposes) is considered to have been received at the time the related GST was paid or became payable, even though the input tax credit is claimed in a later GST reporting period. However, this is the case only if the taxpayer claims the input tax credit at least 120 days before the taxation year in which the GST was paid or became payable becomes statute-barred for income tax purposes.

Second, subparagraph 248(16)(a)(ii) is amended to provide that an input tax credit is considered to be received at the end of the reporting period in which it is claimed only if

Thus, subparagraph 248(16)(a)(ii) does not apply if subparagraph 248(16)(a)(i) applies. Where subparagraph 248(16)(a)(i) does not apply, subparagraph 248(16)(a)(ii) provides that the input tax credit is considered to have been received at the end of the reporting period in which it is claimed only if the taxpayer's threshold amount for GST purposes was $500,000 or less at the time the GST was paid or became payable.

Third, new subparagraph 248(16)(a)(iii) is added to apply in any other case. If applicable, that subparagraph provides that the input tax credit is considered to have been received on the last day of the taxpayer's earliest taxation year

Reference should also made to the commentary to new subsection 248(17.1) of the Act which provides a special rule in respect of the timing of a claim in respect of certain input tax credits assessed under the Excise Tax Act.

Quebec Sales Tax - Input Tax Refund and Rebate

ITA
248(16.1)

New subsection 248(16.1) of the Act provides special rules for amounts received, or credited to, a taxpayer as an input tax refund or rebate in respect of Quebec sales tax. Such amounts are either included in a taxpayer's income or reduce the cost or capital cost of the related property, or the amount of the related expenditure or expenditure pool, for tax purposes.

In general, an input tax refund in respect of Quebec sales tax may - depending on the circumstances - have to be included in a taxpayer's income in the taxation year in which the taxpayer may first claim the refund, rather than the year in which it is received. A rebate of Quebec sales tax is included in income at the time the rebate is received or credited. For a more detailed explanation of the application of subsection 248(16.1), reference should be made to the commentary accompanying amendments to subsection 248(16), which provides analogous special rules in respect of the timing of the inclusion in income of certain input tax credits and rebates assessed under the Excise Tax Act.

Subsection 248(16.1) applies in respect of Quebec input tax refunds and rebates that become eligible to be claimed in taxation years that begin after February 27, 2004.

Application of Subsection (16) to Passenger Vehicles and Aircraft

ITA
248(17)

Subsection 248(17) of the Act applies in the case of an input tax credit in respect of a passenger vehicle or aircraft claimable by an individual or partnership where the credit is determined by reference to capital cost allowance in respect of the vehicle or aircraft (i.e., where there is less than exclusive use in commercial activity). Subsection 248(17) is amended to reflect the amendments made to subsection 248(16) as described in the commentary to that subsection.

The amendments to subsection 248(17) apply in respect of input tax credits that become eligible to be claimed in taxation years that begin after December 20, 2002.

Application of Subsection (16.1) to Passenger Vehicles and Aircraft

ITA
248(17.1)

New subsection 248(17.1) of the Act applies in the case of an input tax refund of Quebec sales tax, in respect of a passenger vehicle or aircraft, claimable by an individual or partnership where the credit is determinable by reference to capital cost allowance in respect of the vehicle or aircraft (that is, where there is less than exclusive use in commercial activity). In general, this subsection defers the time the input tax refund is considered to be received for income tax purposes to the taxation year or fiscal period following that in which Quebec sales tax in respect of the property is considered as payable for the purposes of determining the input tax refund. This avoids circularity with subsection 248(16.1). The provision preserves the proper timing between the input tax refund entitlement and the adjustment to the capital cost. This change applies in respect of Quebec input tax refunds that become eligible to be claimed in taxation years that begin after February 27, 2004.

Input Tax Credit on Assessment

ITA
248(17.2)

New subsection 248(17.2) of the Act determines, in respect of input tax credits that become eligible to be claimed in taxation years that begin after December 20, 2002, the time at which an input tax credit is considered to have been claimed in respect of certain input tax credit assessments made under the Excise Tax Act (ETA).

This subsection provides that, if an amount in respect of an input tax credit is deemed by subsection 296(5) of the ETA to have been claimed in a return or application filed under Part IX of that Act, the input tax credit is deemed to have been claimed for the GST reporting period that includes the time the Minister of National Revenue makes the GST assessment.

Accordingly, the rule in clause 248(16)(a)(i)(A) of the Act relating to the time at which an input tax credit is considered to have been received cannot apply to an input tax credit to which subsection 296(5) of the ETA applies. However, the other rules in paragraph 248(16)(a) of the Act that determine the time at which an input tax credit is received are to be applied on the basis that an input tax credit (to which subsection 296(5) of the ETA applies) is not claimed by the taxpayer until the reporting period that includes the time at which the input tax credit is actually assessed - i.e., not the reporting period to which the assessment relates but the reporting period in which the input tax credit is deemed to be claimed for GST purposes.

Quebec Input Tax Credit on Assessment

ITA
248(17.3)

New subsection 248(17.3) of the Act provides that an input tax refund of Quebec sales tax, that is deemed to be claimed by section 30.5 of the Tax Administration Act (and before April 1, 2011, An Act respecting the Quebec Revenue Minister), is deemed to be claimed for the reporting period under An Act respecting Quebec Sales Tax that includes the day on which an assessment is issued to the taxpayer indicating that the refund has been allocated to the taxpayer. This change applies in respect of Quebec input tax refunds and rebates that become eligible to be claimed in taxation years that begin after February 27, 2004.

Repayment of Quebec Input Tax Refund

ITA
248(18.1)

New subsection 248(18.1) of the Act provides that an amount added in determining net tax of a taxpayer under An Act respecting Quebec Sales Tax in respect of an input tax refund relating to a property or service that had previously been deducted in computing such net tax is treated as assistance repaid under a legal obligation to repay that assistance. Such an amount could be so added under Quebec law pursuant to an assessment of Quebec sales tax. As a consequence, such an amount will either be deducted in computing income under paragraph 20(1)(hh) or will increase the cost or capital cost of the related property or the amount of the related expenditure or expenditure pool for tax purposes (as provided under subsection 13(7.1), paragraphs 37(1)(c) and 53(2)(k) and under the definitions "cumulative Canadian exploration expense" in subsection 66.1(6), "cumulative Canadian development expense" in subsection 66.2(5) and "cumulative Canadian oil and gas property expense" in subsection 66.4(5)). This change applies after February 27, 2004.

Transfers after death

ITA
248(23.1)

The French versions of paragraphs 248(23.1)(a) and (b) are amended to correct a terminology error. In effect, the term "attribué" is replaced by "distribué" so that it is clear that property of a taxpayer is actually distributed to the spouse, common-law partner or estate of the taxpayer and not simply set aside for him or her. This amendment will come into force on Royal Assent.

Cost of Trust Interest

ITA
248(25.3)

Subsection 248(25.3) of the Act applies where a trust (other than a personal trust or a trust prescribed for the purpose of subsection 107(2) of the Act) issues particular units of the trust to a taxpayer directly in satisfaction of a right to a qualifying amount payable from the trust in respect of the taxpayer's capital interest in the trust. In such a case, the cost to the taxpayer of the particular units is deemed to equal the amount so payable. Subparagraph 248(25.3)(c)(i) provides that in the case of particular units of a trust that are capital property, a qualifying amount payable is one that causes, or but for clauses 53(2)(h)(i.1)(A) and (B) would cause, a reduction under subparagraph 53(2)(h)(i.1) of the Act to the adjusted cost base of the taxpayer's capital interest in the trust.

Subparagraph 248(25.3)(c)(i) is amended to provide that, in the case of particular units of a trust that are capital property, a qualifying amount payable is an amount payable that does not represent proceeds of disposition of a capital interest in the trust.

This amendment applies to trust units issued after December 20, 2002.

Gifts and Contributions

ITA
248(30) to (41)

At common law, it is generally the view that a gift includes only a property transferred voluntarily, without any contractual obligation and with no advantage of a material character returned to the transferor.

In contrast, under section 1806 of the Civil Code of Quebec ("CCQ"), a gift in Quebec is a contract by which ownership of property is transferred by gratuitous title. However, it may be possible for a transferor to transfer property, partly by gratuitous title, without any material advantage returned (as a gift) and partly by onerous title (for consideration). It is therefore possible, in Quebec, to sell a property to a charity at a price below fair market value, resulting in a gift of the difference.

Under both the common law and the CCQ, it is generally accepted that a transfer of property is not a gift unless the donor is impoverished by the transfer to the benefit of the donee and it is the donor's intention to enrich the donee without consideration.

At common law the presence of a consideration of any value whatsoever makes a gift impossible. As such, at common law a contract to dispose of a property to a charity at a price below fair market value would not generally be considered to include a gift.

Nevertheless, there have been certain decisions made under the common law where it has been found that a transfer of property to a charity was made partly in consideration for services and partly as a gift.

Subsections 248(30), (31) and (32) are added to the Act to clarify the circumstances under which taxpayers and donees may be eligible for tax benefits available under the Act in respect of the impoverishment of a taxpayer in favour of a donee. In addition to the clarification provided by these new rules, on December 24, 2002, the Canada Revenue Agency released guidelines (Income Tax Technical News No. 26) that describe how it will apply the new rules to various situations and fundraising methods commonly used in the charitable sector. Subsection 248(34) provides technical rules regarding the repayment of debt that previously reduced the eligible amount of a gift. Subsections 248(35) to (39) provide technical rules, regarding the eligible amount of a gift or the value of property transferred and benefits receivable, that apply in calculating the eligible amount of a gift or political contribution. New subsection (40) provides that the rule in subsection 248(30) does not generally apply to inter-charity transfers. New subsection (41) deems the eligible amount of a gift to be nil if a donor fails to provide that information.

In general, these provisions are intended to reflect the policy that the amount eligible for an income tax benefit to a donor, by way of a charitable donation deduction or credit or a political contributions tax credit, should reflect the economic impact on the donor (before considering the income tax benefit) of the gift or contribution.

Intention to Give

ITA
248(30)

For the transfer of property to qualify as a gift, it is necessary that the transfer be voluntary and with the intention to make a gift. At common law, where the transf