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

Published by
The Honourable James M. Flaherty, P.C., M.P.
Minister of Finance

October 2012

Preface

These explanatory notes are provided to assist in an understanding of proposed amendments to the Income Tax Act, the Excise Tax Act and related acts and regulations. These notes are divided into parts, the content of which is briefly described below.

Part 1 of these explanatory notes describes amendments to the provisions of the Income Tax Act governing the taxation of non-resident trusts and their beneficiaries and of Canadian taxpayers who hold interests in offshore investment fund property. These amendments are based on proposals announced in the March 4, 2010 Budget and released for comment on August 27, 2010.

Parts 2 and 3 of these explanatory notes describe various technical amendments in respect of the Income Tax Act and Income Tax Regulations relating to the taxation of Canadian multinational corporations with foreign affiliates. The amendments in Part 2 are based on draft proposals released on December 18, 2009. The amendments in Part 3 are based on draft proposals released on August 19, 2011.

Part 4 of these explanatory notes describes amendments relating to bijuralism.  These notes replace Part 2 of the notes released on July 16, 2010.

Part 5 of these explanatory notes describes a number of income tax measures proposed in the March 4, 2010 Budget. Most notably, these include amendments:

(a) relating to specified leasing property;

(b) to provide that conversions of specified investment flow-through (SIFT) trusts and partnerships into corporations are subject to the same loss utilization restrictions as are transactions between corporations;

(c) to prevent foreign tax credit generators; and

(d) implementing a regime for information reporting of tax avoidance transactions.

Part 5 of these explanatory notes also describes certain income tax measures that were previously announced. Most notably, these include amendments announced:

(a) on January 27, 2009, relating to the Apprenticeship Completion Grant;

(b) on May 3, 2010, to clarify that computers continue to be eligible for the Atlantic investment tax credit;

(c) on July 16, 2010, relating to technical changes to the Income Tax Act;

(d) on August 27, 2010, relating to the introduction of the Fairness for the Self-Employed Act;

(e) on November 5, 2010, relating to technical changes to the Income Tax Act;

(f) on December 16, 2010, relating to changes to the income tax rules concerning real estate investment trusts;

(g) on March 16, 2011, relating to the deductibility of contingent amounts, withholding tax applicable to certain interest payments made to non-residents, and certain life insurance corporation reserves; and

(h) on October 31, 2011, relating to technical changes to the Income Tax Act.

Part 5 of these explanatory notes also describes certain further technical income tax measures. Most notably, these include amendments:

(a) relating to labour-sponsored venture capital corporations;

(b) relating to the allocation of income of airline corporations; and

(c) relating to the tax treatment of shares owned by short-term residents.

Part 6 of these explanatory notes describes technical and housekeeping amendments to the Excise Tax Act, including an amendment to relieve the goods and services tax and the harmonized sales tax on the administrative service of collecting and distributing the levy on blank media imposed under the Copyright Act

These explanatory notes describe these proposed amendments, clause by clause, for the assistance of Members of Parliament, taxpayers and their professional advisors.

The Honourable James M. Flaherty, P.C., M.P.
Minister of Finance

These notes are intended for information purposes only and should not be construed as an official interpretation of the provisions they describe.

Table of Contents
Clause in Legislation Section  Amended Topic
1   Short Title
Part 1 – Amendments in Respect of Offshore Investment Fund Property and Non-Resident Trusts
Income Tax Act    
2 12 Income from Business or Property
3 51 Convertible Property
4 53 Adjustment to Cost Base
5 75 Trusts – Attribution
6 87 Amalgamations – Non-resident Entities
7 94 Non-resident Trusts
8 94.1 Offshore Investment Fund Property and Foreign Investment Entities
9 94.2 Investment in Non-resident Commercial Trusts
10 104 Trusts and their Beneficiaries
11 107 Application of subsection 75(2)
12 108 Trusts
13 122 Tax Payable by Inter Vivos Trust
14 128.1 Changes in Residence
15 152 Assessment and Reassessment
16 160 Tax Liability – Non-arm’s Length Transfers of Property
17 162 Penalties
18 163 Penalties
19 215 Withholding and Remittance of Tax
20 216 Deduction and Payment of Tax
21 233.2 Foreign Reporting Requirements
22 233.3 Returns in Respect of Foreign Property
23 233.5 Due Diligence Exception
Income Tax Amendments Act, 2000    
24 53 Inter Vivos Transfer of Property by an Individual
25 80 Disposition by Taxpayer of Capital Interest
Income Tax Conventions Interpretation Act    
26 4.3 Application of section 94 of the Income Tax Act
Income Tax Regulations    
27 202 Payments to Non-residents
28 5909 Prescribed Circumstances
Part 2 – Amendments in Respect of Foreign Affiliates: Surplus Rules and Other Technical Amendments
Income Tax Act    
29 53 Adjustments to Cost Base
30 88 Winding-up.
31 92 Adjustments to Cost Base
32 93 Disposition of Share of Foreign Affiliate
33 95 Foreign Affiliates
34 152 Assessment and Reassessment
35 161 Effect of Carryback of Loss, etc.
36 164 Effect of Carryback of Loss, etc.
37 256 Acquiring Control.
38 261 Functional Currency Tax Reporting
Budget and Economic Statement Implementation Act, 2007    
39 26 Budget and Economic Statement Implementation Act, 2007
Income Tax Regulations    
40 5900 Dividends out of Various Surplus Accounts
41 5902 Subsection 93(1) Elections
42 5903 Foreign Accrual Property Losses
43 5904 Participating Percentage
44 5905 Reorganizations
45 5906 Permanent Establishments
46 5907 Interpretation
47 5908 Partnerships
48 5910 Foreign Oil and Gas Businesses
49 8201 Permanent Establishments
50   Elections under Bill C-28
51   Consolidated Net Surplus Election.
52   Modified Consolidated Net Surplus Election
53   Assessments
Part 3 – Amendments in Respect of Foreign Affiliates: Reorganizations and Distributions and Other Technical Amendments
Income Tax Act    
54 13 Depreciable Property
55 14 Eligible Capital Property
56 18 Prohibited Deductions
57 20 Deductions Permitted
58 34.2 Partnership Stub Period Accrual Rules
59 39 Capital Gains and Losses
60 40 Gains and Losses – General Rules
61 53 Adjustments to Cost Base
62 55 Tax Avoidance – Dividends
63 85.1 Share for Share Exchange
64 87 Amalgamations
65 88 Winding-up
66 90 Dividends from Non-Resident Corporations and Loans from Foreign Affiliates  
67 92 Adjustments to Cost Base
68 93 Disposition of Share of Foreign Affiliate
69 93.1 Shares Held by a Partnership
70 95 Foreign Affiliates
71 96 Partnerships and their Members
72 113 Deduction in Respect of Dividend Received from Foreign Affiliate
73 128.1 Changes in Residence
74 152 Assessment and Reassessment
75 186 Tax on Dividends Received by a Private Corporation
76 258 Deemed Interest on Certain Shares
77 261 Functional Currency Tax Reporting
Income Tax Regulations    
78 5900 Dividends Out of Various Surplus Accounts
79 5901 Order of Surplus Distributions
80 5902 Subsection 93(1) Elections
81 5903 Foreign Accrual Property Losses
82 5903.1 Foreign Accrual Capital Losses
83 5904 Participating Percentage
84 5905 Reorganizations
85 5907 Interpretation
86 5908 Partnerships
87 5910 Foreign Oil and Gas Businesses
88 5911 Elections
Elections and Assessments    
89   Elections by Partnerships
90   Assessments
Part 4 – Amendments to the Income Tax Act Related to Bijuralism
91-168   Bijuralism Amendments
Part 5 – Other Amendments to the Income Tax Act and Related Legislation and Regulations
Income Tax Act    
169 4 Income or Loss from a Source or from Sources in a Place – Deductions Applicable
170 6 Employment Income
171 7 Employment Security Options – Definitions
172 8 Income from Office or Employment – Deductions
173 12 Income Inclusions
174 12.3 Unpaid Claims Reserves
175 13 Depreciable Property
176 14 Eligible Capital Property
177 15 Shareholder Benefits
178 18 Prohibited Deductions
179 18.1 Non‑application of Section 18.1
180 20 Deductions
181 37 Scientific Research and Experimental Development
182 38.2 Allocation of Gain on Gifts to Qualified Donees
183 40 Gains and Losses – General Rules
184 42 Consideration for Warranties, Covenants or Other Obligations
185 43 Part Dispositions
186 44 Exchanges of Property
187 44.1 Capital Gains Deferral – Eligible Small Business Investments
188 49 Where Option Expires
189 52 Cost of Certain Property
190 53 Adjustments to Cost Base
191 54 Definitions – Capital Gains and Losses
192 54.1 Exception to Principal Residence Rules
193 55 Tax Avoidance – Dividends.
194 56 Other Sources of Income
195 56.4 Restrictive Covenants
196 60 Deductions in Computing Income
197 60.011 Application of Paragraph 60(1) to Annuity With Trust as a Annuitant
198 63 Child Care Expenses
199 66 Resource Expenses
200 66.1 Canadian Exploration Expense
201 66.2 Canadian Development Expense
202 66.21 Foreign Resource Expense
203 66.4 Canadian Oil and Gas Property Expense
204 66.7 Successor Rules – Resource Expenses
205 66.8 Limited Partners – Resource Expenses
206 67.1 Expenses for Food, etc.
207 68 Allocation of Amounts in Consideration for Property, Services or Restrictive Covenants
208 69 Inadequate Consideration
209 70 Death of a Taxpayer
210 72 Election by Legal Representative and Transferee re Reserves
211 73 Inter Vivos Transfers by Individuals
212 75 Trusts – Attribution
213 75.2 Rules Applicable With Respect to “qualifying trust annuity”
214 80.04 Manner of Filing Agreement
215 80.2 Reimbursement of Crown Charges
216 80.4 Shareholder Debt
217 81 Amounts Not Included in Income
218 82 Taxable Dividends Received
219 84 Deemed Dividend
220 85 Transfer of Property to Corporation by Shareholders
221 85.1 Share for Share Exchange
222 86.1 Eligible Distribution Not Included in Income.
223 87 Amalgamations
224 88 Winding-up of a Corporation
225 89 Taxable Canadian Corporation
226 91 Amounts to be Included in Respect of Share of Foreign Affiliate – Foreign Accrual Tax
227 95 Foreign Affiliates
228 96 Partnerships and their Members
229 99 Fiscal Period of Terminated Partnership
230 100 Replacement of Partnership Capital
231 104 Trusts and their Beneficiaries
232 106 Proceeds of Disposition of Income Interest
233 107 Interests in Trusts
234 107.2 Distribution by a Retirement Compensation Arrangement
235 107.4 Qualifying Disposition
236 108 Taxation of Trusts and Their Beneficiaries
237 110 Taxable Income – Deductions
238 110.1 Charitable Donations Deduction
239 110.2 Lump-sum Averaging
240 110.6 Lifetime Capital Gains Exemption
241 111 Losses Deductible
242 112 Deductions of Taxable Dividends Received by Corporation Resident in Canada  
243 113 Deduction in Respect of Dividend Received from Foreign Affiliate
244 115.2 Not Carrying on Business in Canada
245 116 Certificates for Dispositions
246 118 Personal Tax Credits
247 118.02 Public Transit Pass Credit
248 118.1 Charitable Donations Tax Credit
249 118.2 Medical Expense Tax Credit
250 118.3 Credit for Mental or Physical Impairment
251 118.5 Tuition Credit
252 118.6 Education Tax Credit
253 118.7 Credit for EI and QPIP Premiums and CPP Contributions
254 120.2 Minimum Tax Carry-over
255 120.31 Lump-sum Payments
256 120.4 Tax on Split Income
257 122 Tax Payable by Inter Vivos Trust
258 122.1 Specified Investment Flow-through Trust
259 122.3 Overseas Employment Tax Credit
260 122.5 GST Credit
261 123.4 Corporate Tax Reductions
262 125 Small Business Deduction
263 125.1 Manufacturing and Processing Profits Deduction
264 125.11 Resource Income
265 125.2 Deduction of Part VI Tax
266 125.3 Deduction of Part I.3 Tax
267 126 Foreign Tax Deduction
268 126.1 UI Premium Tax Credit
269 127 Deductions in Computing Tax
270 127.4 Labour-sponsored Venture Capital Corporations
271 127.52 Minimum Tax
272 128 Personal Bankruptcy
273 128.1 Changes in Residence
274 128.3 Former Resident – Replaced Shares
275 129 Private Corporations – Refundable Dividend Tax on Hand.
276 130.1 Mortgage Investment Corporations
277 131 Mutual Fund Corporations
278 132 Definition “mutual fund trust”
279 132.11 Taxation Year of Mutual Fund Trust
280 132.2 Mutual Fund Qualifying Exchanges
281 134.1 Non‑resident-owned Investment Corporations – Transition
282 135.1 Agricultural Cooperatives – Tax-deferred Patronage Dividends
283 136 Cooperative Corporation
284 137 Credit Unions
285 137.1 Deposit Insurance Corporations
286 138 Insurance Corporations
287 138.1 Rules Relating to Segregated Funds
288 142.5 Mark-to-market Properties
289 142.6 Mark-to-market Rules
290 142.7 Authorized Foreign Banks – Conversion
291 143 Communal Organizations
292 and 293 143.2 Limited-recourse Debt in Respect of a Gift or Monetary Contribution
294 143.3 Expenditure – Limitations
295 143.4 Expenditure – Limit for Contingent Amount
296 146 Registered Retirement Savings Plans
297 146.01 Home Buyers’ Plan
298 146.1 Registered Education Savings Plans – Conditions for Registration
299 146.2 Tax-Free Savings Accounts
300 146.3 Registered Retirement Income Funds
301 147 Deferred Profit Sharing Plans
302 147.1 Registered Pension Plans – Foreign Missions and International Organizations Act
303 147.2 Registered Pension Plans
304 147.3 Registered Pension Plans – Transfers
305 148 Amounts Included in Computing Policyholder’s Income
306 148.1 Eligible Funeral Arrangements
307 149 Exemptions
308 149.1 Charities
309 152 Assessment
310 153 Withholding
311 157 Instalments
312 159 Person Acting for Another – Personal Liability
313 160 Tax Liability – Non‑arm’s Length Transfers of Property
314 160.1 Where Excess Refunded
315 160.2 Joint and Several Liability – Amounts Received out of or under RRSP
316 160.3 Liability – Amounts Received out of or under RCA Trust
317 160.4 Liability – Transfers by Insolvent Corporation
318 161 Interest
319 162 Penalties
320 163 False Statements or Omissions
321 164 Refunds
322 170 Documents to be Forwarded to the Tax Court of Canada
323 176 Documents to be Transmitted to the Tax Court of Canada and the Federal Court of Appeal
324 181 Large Corporations Tax
325 181.2 Taxable Capital Employed in Canada
326 181.3 Taxable Capital Employed in Canada of Financial Institution
327 184 Additional Tax on Excessive Elections
328 188 Revocation Tax
329 190.1 Calculation of Capital Tax
330 190.13 Financial Institutions Capital Tax
331 190.16 Capital Tax - Transitional Provisions
332 191 Excluded Dividend – Partner
333 191.1 Tax on Taxable Dividends
334 200 Distribution Deemed Disposition
335 204.8 Reserve
336 204.81 Conditions for Registration
337 204.9 Transfers Between Plans
338 204.94 Tax on Accumulated Income Payments
339 206 Foreign Property Rules
340 207.31 Tax Payable by Recipient of an Ecological Gift
341 210 Tax on Designated Income of Certain Trusts
342 210.2 Amateur Athlete Trusts
343 211.7 Recovery of Labour-sponsored Funds Tax Credit
344 211.8 Disposition of Approved Share
345 211.81-2.82 Tax for Failure to Re-acquire Certain Shares
346 211.9 Refund
347 212 Taxation of Non‑residents
348 214 Deemed Payments
349 216 Alternative re Rents and Timber Royalties
350 220 Administration and Enforcement
351 227 Withholding Tax
352 230 Records and Books
353 231.2 Requirement to Provide Documents or Information
354 233.4 Returns Respecting Foreign Affiliates
355 237.1 Tax Shelters
356 237.3 Reporting for Tax Avoidance Transactions
357 241 Provision of Information
358 248 Interpretation
359 249 Taxation Year
360 249.1 Fiscal Period
361 251 Arm’s Length
362 252 Extended meaning of “spouse” and “former spouse”
363 253.1 Investments in Limited Partnerships
364 256 Acquisition of Control of a Corporation
365 260 Securities Lending Arrangements
366 Schedule Listed Corporations
367   Reassessment with Taxpayer’s Consent
Related Legislation    
368   An Act to Amend the Income Tax Act (Natural Resources)
369   Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act
370   Federal-Provincial Fiscal Arrangements Act
371   Income Tax Amendments Act, 1997
372-374   Income Tax Amendments Act, 2000
375   Keeping Canada’s Economy and Jobs Growing Act
Income Tax Regulations    
376 104 Source Deductions not Required – Home Buyers’ Plan
377 229 Partnership Return
378-380 Part III Prescribed Annuity Contracts
381 407 Taxable income earned in a province by a corporation
382 600 Elections
383 1100 Specified Leasing Property
384 1101 Franchise, Concession or License
385 1106 Prescribed Amount
386-387 Part XIV Life Insurance Policy Reserves
388-390 2000-2002 Political Contributions
391-392 Part XXIV Insurers
393 3501 Gifts
394 3504 Prescribed Donee
395 4600 Investment Tax Credit
396-400 4800-4803 Status of Corporations and Trusts
401 5907 Denial of Underlying Foreign Tax
402 6202.1 Flow-through Shares - Prescribed Rights and Shares
403 6701 Prescribed Labour-sponsored Venture Capital Corporation
404 6708-6809 Prescribed Wind-up Rule and Prescribed Provision of a Law of a Province
405 6802 Retirement Compensation Arrangements - Exceptions
406 Part LXXXI Transition for Financial Institutions
407 8500 Registered Pension Plans – Definitions
408 8502 Registered Pension Plans – Permitted Contributions
409 8504 Registered Pension Plans – Previous Employment
410 8514 Prohibited Investments – Multi-employer Pension Plan
411 8604 Prescribed Corporations
412 8901 Fiscal Period
Part 6 – Measures in Respect of Sales Taxes
Excise Tax Act    
413 81.25 Material Sent to Tribunal.
414 81.29 Material Sent to Federal Court
415 177.1 GST/HST Relief on Blank Media Levy Administration Services
416 225.1 Net Tax Calculation for Charities